This question is actually much easier to answer than you think it would be, and you don’t need a crystal ball. What you need are solid facts and numbers that you can analysis to tell you what direction the market is heading in your area. There are many factors however let’s review the best indicators and you will have a better understanding of what direction your real estate market is actually trending, not where people think it is headed.
Inventory levels – this is the single biggest indicator of where the market will head in the future. Analysis the real estate market is simple and has to do with the economic principle of supply and demand. To quickly explain this when supply equals demand values are stable. When demand is higher than supply then values will appreciate and finally when demand is lower than supply values will depreciate. The easy way to tell if inventory levels are high for area or not is to look at prior years and compare to same month and day of current year. For example let’s take a mythical town called Utopia. January 1, 2008 there are 150 homes on the market, January 1, 2009 there are 185 homes on the market, January 1, 2010 there are 200 homes on the market, and finally January 1, 2011 there are 225 homes on the market. You can clearly see by just that data alone, that obviously the market continues to have increased inventory and supply is growing every year. Therefore what do you think values are doing based just on this fact alone? Most likely declining, correct? If inventory levels where declining then values would most likely go in the opposite direction.
Interest rates – This is a big indicator because if you think about it the higher the interest rates the more money it costs for buyers to borrow money. This essentially means that the higher the rates the less house they can afford. In reverse the lower the interest rates the cheaper it costs to borrow money and the more house a buyer can afford. So are rates falling, stable or increasing? If rates are at historical lows then they can only remain stable or increase most likely, correct?
Financing abilities – This is another big factor, consider times when all you needed was a pulse and you could get a loan. When this is the case the market is filled with buyers on every corner, however when banks and the government tighten up loan requirements this means less people can obtain financing. What does this mean? Simple as loans are harder for buyers to obtain then there are less potential buyers, meaning less demand. Less demand with stable or increasing inventory means values have no choice but to decline until supply equals demand. When reviewing the current real estate market find out ease of borrowing money.
Unemployment levels – when unemployment levels increase it is pretty evident that less people will be able to buy homes and or keep their current home. This puts pressure on inventory levels and supply increases making values decline. However as unemployment levels decrease the opposite is true and more people are able to purchase and less people are forced to sell making inventory levels decrease and therefore values will go up.
Population growth/decline – looking at a communities growth or decline in population gives you a great picture if your area is being overrun with more potential buyers or losing potential buyers. Obviously if lots of people are moving to the area then there will be a higher demand for homes and values will increase. However if people are leaving the state by the truck load then there will be far less demand and values will decline. Again it all comes down to simple supply=demand principle.
New housing developments – if you go to your town or cities planning board you can find out what small/large projects are on the horizon. This can give you a great indicator of what the market will do. Think about this for a second if there is a 500 unit condo complex about to be built then what do you think will happen to the condo market? Most likely with the influx of 500 new units supply will increase and unless there are 500 new people to fill those units the market will do what? There is no direction it can go but down. Are you beginning to see how simple it is to know what direction the market is actually heading?
Large company influence – for example if a car company that employed 15,000 people goes out of business or moves to another area, then what will most likely happen to the area? With the loss of a major company the market will obviously decline. There would be less economic development and therefore less jobs and demand for that particular region. This would make cause the region to depreciate. However what would happen to the community that is now all of a sudden the new home of a large car company that employs 15,000 employees? That community would obviously have an increase in demand and values would correspondingly appreciate.
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