Real estate market analysis is a valuable tool for any investor. It is important to successfully analyze the changing real estate market before making any investment decisions. Here are some steps to help you succeed.
Consider Commercial Tenants
Commercial real estate trends provide general insight into the state of things. You can look at property management factors such as occupancy of local shopping malls. If they have extended vacancies, then this is an indication things might be dying off in the area.
If there is a rise in new corporations moving head offices or branches to an area, that is a sign of growth. Other things to look for:
- Businesses in general moving in or out of an area (i.e., a Starbucks arriving)
- Banks coming or going
- High-end stores arriving
- The quality of services in the area
These demographics can provide insight into whether an area is well-established, up and coming, or on a downturn.
Google Trends is a free tool that offers insight into real estate trends. You can discover if demand is rising or falling in specific areas. The tool will let you know if decreased demand is related to seasonal issues. You can look for hot neighborhoods and the types of properties searched most often in an area.
Investigate Days on Market (DOM)
This number shows you how long properties are sitting on the market in different areas. This information is easy to find through NAR, the MLS, and other local associations.
However, you shouldn’t just look at one type of home or property, nor should you depend on one source. Instead, investigate all areas, including:
- Local property appraisers
- Offline sales
- Homes that didn’t appear on MLS
- Local FSBO’s
- HUD home auctions
- Craigslist and newspaper classifieds
A thorough investigation into DOM will provide insight into supply and demand.
Become a Mystery Shopper
Get a true feel for the market by becoming a mystery shopper. Show up at open houses, speak to real estate agents, and discover how people are feeling in general. Do agents seem confident at open houses or desperate? Do you see a lot of reduced prices on the market, or are there more cases of bidding wars? All of this information will be a window into the true state of any given market.
Months of Supply and Absorption Rate
This is a good indicator to determine if it is a buyer’s or seller’s market. A seller’s market will have less than six months of supply while over six months indicates a buyer’s market. Combined with the absorption rate, you can determine how quickly homes are selling.
An absorption rate of 20% or higher is a seller’s market, and low absorption rates indicate a market where there are too many homes on the market. In a seller’s market, property prices are elevated as competition between buyers rises. A buyer’s market lowers prices as there are fewer buyers available due to high inventory.
Five Key Indicators
You can also look at the factors that affect a buyer’s ability to enter the market. You can use five components of the economy that can provide insight into the state of the housing market, including:
- Mortgage rate: Mortgage rates can indicate how many people will be able to afford real estate purchases.
- Personal income: When income is on the rise, and the job market is tight, potential buyers have the money to invest in property.
- Delinquency rate: When the borrower delinquency rate is low, banks feel less risk in lending.
- House price trend: When housing prices trend upward at a moderate rate, it is good enough for sellers but not too scary for buyers.
- Homeownership rate: This rate should be at a sustainable level without any drastic rises that indicate too many people are being provided with mortgages. This can be risky when too many people are buying homes, especially when they are overvalued. When prices decline, the bubble will burst, leaving too many people underwater in homeownership.
The bottom line is that analysis of the changing real estate market is dependent on many factors, both foreseen and unforeseen. Understanding both the traditional and not-so-traditional tools to help you successfully analyze real estate market can help. You can learn to spot trends and warning signs as you become more familiar with the market. However, if you are considering a real estate investment, it often makes more sense to speak to the experienced professionals.
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