How to Measure the Health of Your Real Estate Market
How healthy is the real estate market in your area? Get professional advice on how to measure the health of your real estate market - signs, ratios & more.
The best way to learn about your local market is to enlist the help of a knowledge real estate agent. You can do research on your own, but an agent is already closely following the market and will have access to information you won't be able to get. Below is a number of important factors that will get the discussion going and give you a good idea of how healthy the real estate market is in your area.
All Real Estate is Local
First things first - all real estate is local. When asked about measuring the health of a market owner of One Source Realty, Eric Bramlett said, "Buyers need to understand real estate is local. They have to know what is going on in their market specifically, not what's happening nationally."
In most cities you have to go a step further and focus on what's been going on in a specific neighborhood or area to correctly gauge the health of the market.
A Balanced Market is a Healthy Market
When it's a 'buyer's market' it may be a better time to buy but a balanced market is the best one to be in. A balanced market suggests stabilization, and stabilization suggests better security. Remember, buying a home is an investment. You want to get as good a deal as possible but you also want your investment to have the best chance at improvement.
If there haven't been huge swings up and down, if the number of buyers is close to the number of homes on the market and financing is offered at a reasonable rate chances are your market is balanced.
What is the Lending Situation Like?
As alluded to above, lending has a lot to do with the health of a real estate market. The recent recession, that was due in large part to a housing bubble that burst, is a clear indicator of how lending can make or break a market. Stephen O'Hara, Broker at RE/MAX Select One in Orange County, CA, stresses this point to his clients.
"I used to say that a 'good deal' is when the buyer and the seller are happy, however, now it is a 'four way' as there are two lenders involved that have the POWER to impact the market."
If lending is available to qualified buyers at a reasonable rate it will help keep the market healthy. However, if the barrier of entry is raised making it hard for most people to get a loan or lending is very loose and people are getting loans they can't afford, then the market will suffer.
Is There Area for Appreciation?
One of the biggest reasons for measuring a real estate market is to recognize a bubble before it bursts. Hindsight has made it clear that home prices were overly inflated in many parts of the country before the recession.
But just because prices are now much lower doesn't mean you automatically have built in appreciation that will help your market stay healthy. It's likely that homes were over-priced before and list prices are now closer to their actual valuation.
Melissa Rubin, Broker at Platinum Properties International, also gives buyers another word of caution:
"A cheap property doesn't necessarily equate to a great deal. The buyer should consider a variety of factors beyond the price including the financial status of the building (if a condo), location desirability, and upside potential. Buyers should know the home's history - if the property wasn't commanding high prices at the height of the market, it certainly isn't going to as the market recovers...at least for the extreme long-term."
Ratios to Know
Economists and real estate professionals have put a lot of effort behind trying to figure out how healthy a real estate market is and how it will move. Below are some measurements they have been developed to evaluate a market.
Price to Income Ratio - Ratio that measures the median house prices to the median disposable income of families. This ratio will estimate whether a housing market is overvalued or undervalued.
Deposit to Income Ratio - This refers to the minimum required down payment for a standard mortgage expressed in month/years of income.
Debt-Service Ratio - Also called the housing debt to income ratio, it is a ratio of mortgage payments to disposable income. A lower number is indicative of a healthier market where home owners aren't having to rely on rising property values to service the debt they have incurred.
Housing Debt to Equity Ratio - This is a ratio of mortgage debt to the value of the property. This is also called the loan to value ratio.
Ownership Ratio - The ratio of those that own their homes to those that rent. Homeownership will usually rise because incomes increase, there are lower interest rates which make buying a home more affordable or lenders are making home loans more freely to those with lower credit scores. Watch out for areas where there is a high rate of homeowners and an increase in subprime lending.
Affordability Index - This is the ratio of the actual cost of a monthly mortgage payment to the monthly take-home income. It's a more realistic measurement of affordability than the price to income ratio.
Final Thoughts
It's important to keep one more thing in mind - markets are always changing. Keller Williams Realtor® Sandy Segovia put it this way:
"As a real estate professional. . . I am able to be the communicator of how the market is at the moment with no guarantees of what it will be tomorrow."