Watching Out for the Turnaround
Posted on October 28, 2008
Filed Under Real Estate
It’s the oldest and most important rule in investment - buy low, sell high. So with inventory soaring and housing prices dropping, many people out there are wondering when’s the best time to buy a new home? Here are a few signs to look out for if you want to know just when the market is about to turn around.
Keep in mind that real estate is local. What is happening in one market may not necessarily reflect changes in another market. If home prices are turning around in Texas, that doesn’t mean we’re there yet here in Central Florida. So pay attention to the local market when looking out for these signs.
One of the most important things to look out for is changes in the local job market. Higher unemployment, of course, leads to fewer potential home buyers and even more homes added to the market as people move to more job-rich areas and try to get out from under their mortgage payments. High unemployment also leads to more foreclosures, raising housing inventory even higher and dropping prices even lower. Watch for a sudden surge of new jobs being created in an area. Maybe a new resort is going up, bringing in construction jobs and the need for service workers. A new factory, a town center, or a whole new community can all lead to an upsurge in jobs and in nearby housing prices.
Watch the housing stock in your area. It’s simple supply and demand - when you see the amount of houses on the market start shrinking, the demand is getting higher and prices will soon be on the rise again. The sale of homes is a seasonal thing, people tend to buy property more at certain times of the year, so don’t compare the numbers from one month to the next, compare them to the same month from a year ago. Your real estate agent can help compile and read these statistics. When the housing stock starts to shrink and the prices start to rise, you’ll know we’ve gone around the corner.
It’s also a good sign when the average price of homes starts falling at a slower pace. Even as prices continue to drop, watch the rate of descent. If the rate starts to slow, prices are leveling off and we’re nearing the bottom. Again, talk to your agent about this. Because real estate figures can vary drastically depending on the season, it’s best to get a wide timeframe of statistics so that you can see trends more easily.
Find out the rent-to-own ratio in your area. The math is pretty simple. Find out how much it would cost to buy a home, then talk to your real estate broker and find out how much it would be to rent a similar property. Divide the two to get your rent-to-own ratio. Normally, a good ratio would be around 15 or lower but this can vary somewhat depending on the market you’re in. In the first few months of 2008, the rent-to-own ratio in Orlando was 22.2, already down from the peak ratio of 26.7 and continuing to drop.
Finally, check the affordability of homes in your area. The National Association of Home Builders keeps what it calls the “housing opportunity index” - a list of affordability levels in hundreds of metro areas. A home is considered affordable if 28% or less of the median family income for the area is required to pay for it. Nationally, the average is 53.8, meaning that slightly more than half of the homes in the area are considered affordable. In Orlando, the rate is 48.1 currently, a little less than half. Again, since real estate is more local, it might be useful to compare this number to the affordability rate of past years rather than comparing it with the national average. Your agent should be able to help you find these figures. When affordability rates start going up, the housing market is turning around.
Once we hit the bottom, buyers in Central Florida will find themselves faced with a huge buying opportunity. We may not be there yet, but we can see it getting closer and closer. Some of the signs are already starting to show. Our stock of homes is shrinking slowly but surely. The affordability rate is continuing to go down. New employment opportunities are around the corner with new projects and communities going up, including Florida Hospital’s ambitious 172 acre Health Village scheduled to start construction next year! We’re nearing the bottom and you’re going to want to already be looking up when we get there!
