Understanding what the local real estate market is doing is remarkably important for everyone involved. Homebuyers and sellers need to know whether homes in certain price ranges are staying on the market for months — or clearing within days. Real estate firms need to be aware of what’s going on, in order to offer the best advice possible to clients, as well as position themselves properly.
So what should you look for, in order to determine the strength of the market ? And what are some of the warning signs that the market is nearing a downturn?
1. Absorption Rate
The most important statistic to follow to gauge the strength of the local market is the absorption rate. That is the number of available houses divided by the number of under-contract properties. This calculation provides the number of months it would take to sell off the existing inventory at the current sales rate. The lower the number, the hotter the market is in favor of sellers. If sales are slow, the absorption rate will take many months, and it indicates that it’s a buyer’s market.
2. Increased Capital Flow
To me, the surest sign that a local real estate market is heating up is when capital (both debt and equity) flows pick up dramatically without regard to property fundamentals. When lenders and equity investors start taking unwarranted risks for lesser and lesser returns, that is typically the beginning of the end.
3. Frequency Of Inbound Calls
Typically, the frequency of inbound calls will quickly signal that tenants are out in the market looking for space. We don’t rely on inbound calls to support our business; however, it’s a clear indication that decision-makers are feeling confident about their business and are ready to expand their operations.
4. Broker Communication
In order to successfully invest in manufactured housing, you need to keep your finger on the pulse of the market. To do so, it is imperative that you establish relationships with brokers in your target market. Brokers speak to both buyers and sellers on a daily basis and will be able to shed more light on where prices are trending.
5. Increased Retail Leasing And Rents
Increased retail leasing activity, increasing rents, and especially new single and multifamily development entering the market are clear signs. The last part is especially important because developers work on two- to five-year time periods, so if something is under construction, it means a developer believes the market will be better in the coming years.
6. Active Days On Market
The best ways to tell that the real estate market is heating up are active days on market and the prices of real estate. Typically, as a market is starting to heat up you will notice a dramatic decrease in ADOM and prices starting to trend up. In a market that is heating up , you will observe ADOM dropping to less than 30 days for homes in the market ’s median sale price. Prices will begin to trend up typically 3% to 10% per year, and the demand will begin to outpace the supply of homes available on the market.
7. Look At Net Migration
If you are in a market with many jobs in the service industry, that can be dangerous when the economy slows down. I want to see a very diversified employment base. Avoid markets that have a high job concentration in a single industry (e.g.: service, oil, and gas, etc). Additionally, I want to look into net migration. Are people actually moving in or out of that area?
8. Consistency Of Prices
A local real estate market is due for a correction when home prices consistently increase at a rate significantly higher than the average median income for several years. Prices will inevitably fall to a true fair market value if well-employed local citizens are unable to afford to live in their market.
– Is The Local Real Estate Market Heating Up?
