Discover 3 simple factors that can help you better understand your local real estate market. You'll not only get a clearer picture of what is going on right now, but you will also be able to reasonably forecast what is going to happen in the next 1-3 years with your local housing market. So whether you are a real estate investor deciding on your next investment move, a real estate agent who wants to better educate your clients or are simply a renter trying to decide if now is a good time to jump into becoming a homeowner, these 3 fundamental factors can provide you with the local market insight you need to make smarter real estate decisions.
3 Factors to Help You Better Understand Your Local Real Estate Market
This advice is for the real estate investor who is trying to decide their next move, the real estate agent who wants to better educate their clients on the local market, and even the renters who are interested in buying a home and want to understand what is going to happen to their local market over the next few years. It does not matter which of these boxes you fit it in, because you are going to find this information very enlightening. These are all simple concepts that can help you have a better understanding of what is going on in your local real estate market.
Headlines with real estate as a topic on the national news are all based on a macroeconomic level. This means that they are based on real estate on a large scale model, and will not necessarily coincide with the economics in your local community. As you may have learned from a previous video called, "Are We In A Real Estate Bubble?", it is very difficult to predict major shifts at the macroeconomic level. Typically, you can gain a reasonable understanding of your local market to make judgments and forecasts on what the real estate market will do over the next one to three years. I would like to share how to better understand your local real estate market.
Do not worry about these three factors if you are a house flipper or wholesaler. The concept of flipping houses is based on the idea that you are purchasing the property for below market value and reselling near market value. House flipping and wholesaling work in any market under any market conditions, and at any time. It works, because you are acquiring the property below current market value, and selling it at market value.
These three factors are helpful for those looking to purchase a property for the longer term. I do not suggest getting too caught up in this, if you are a house flipper. I have apprentices all over North America that are doing great deals in good and bad markets. Flipping and wholesaling works everywhere. These helpful local market tips are for those looking to purchase a property, whether as an investment or a home to live in, and want to know what the local real estate market is going to do in the next couple of years.
Factor 1: Employment
Employment is how people afford their homes, so most people live near their jobs. When a location experiences an increase in employment, there will typically be an increase in the amount of people moving to that particular area. This could result in a drastic improvement the local real estate market.
For example, when oil prices rose, the middle of nowhere towns in the Bakken Shale area of North Dakota, saw a huge increase in employment because they have lots of oil fields. Employment rates rose so fast that the real estate market could not keep up the demand for housing. This resulted in the market rising as well.
Or if you were to look at places like Silicon Valley or Palo Alto, the tech industry has done so well that salaries and employment rates have increased drastically, causing their real estate market to boom.
On the other side of coin, you have areas that have suffered massive layoffs, factory closures, outsourcing, and other economic hardships, that have caused a very depressed real estate market. Employment plays a tremendous role in the local real estate market.
Finding the Right Information
To gain access to your local employment rates, you can visit a local government level office such as the county or municipality. If you are unable to locate the information at one of these local offices, you can usually access some sort of state level employment resources online or by phone. Understanding your local area's employment rates can help you determine the current local market trend and what it will do in the next few years.
If you can't gain access to your local employment rates, observe your town and what's going on around you. Pay attention to what people are saying and if they are complaining about the local economy or job rates. Look into the amount of people moving to or away from your town, because this is a big indicator of employment rates. Always be observant of what is going on around you, because that can be the biggest indicator of what is going on in your local community. Observing can actually help you find out more information than even an employment office can give you. If you read you local newspaper and see that a lot of people are leaving or coming into your town, then you know a lot of that has to do with employment.
Factor 2: Supply
Supply is the total amount of houses for sale or units available on the market right now in your area. The typical benchmark for this is six months, which is what investors consider a healthy market. If there is less than a six month worth of supply of houses, there is a potential for a shortage. A shortage could raise demand and potentially raise prices. If there is more than six months worth of supply of houses, then there could potentially be a surplus, which could cause problems or even slight price drops.
Segmenting Supply by Price Range
You can go a step further and get specific with a price range. I have a previous video where I describe how house flippers might be the last hope for first time home buyers. Most new home builders are priced out of the starter home market. If you look around your local or regional area, you'll see the majority of home builders are not building lower price range homes for first time home buyers. They're building homes for the medium or above luxury level market which is causing a shortage of new first time houses on the market. This is causing a lower supply in that specific price range, and that can indicate a huge opportunity, if you're buying for the long term.
Search a Specific Market
It is possible for there to be a shortage of starter homes in your area, but also a massive surplus of luxury homes. This is why you have to be specific, instead of basing your numbers off the total housing supply.
You can find information on the specific market in your price-range by using Google or your local board of realtors. In my area the local board of realtors send out emails with their monthly reports. Be sure to look at the current supply, and also the next few years. This will help you determine if the trend is going down where the supply continues to drop. What is interesting is that this trend makes it easier for house flippers or people who plan on owning a house long term and reselling years from now. Because there is a lower and lower supply, it is going to be more of a seller's market as opposed to a buyer's market down the road.
Factor 3: Affordability
Ultimately, your local real estate market is going to be predicted on the people's ability to afford the homes. You could live in absolute paradise, but if people can't afford the homes, there's a problem. For example, Puerto Rico, is one of the most beautiful places on earth with some of the nicest people in the world, but the unemployment rate is staggeringly high, and more than 50% of their people live below the poverty level. Their largest employer is the Puerto Rican government and they just filed the largest "state" bankruptcy in history. Even though Puerto Rico is paradise, their real estate market is a complete train wreck.
3 Components to Affordability
There are 3 components to affordability...
- 1. House Price: As we discussed, house price can sometimes be largely due to supply. As supply drops house prices go up, and as supply increases, the house prices either stay the same or slightly decrease.
- 2. Household Income: This is the amount of money the people living in the house are earning, which is closely tied to employment. You can find the median household income for your area by Googling for it.
- 3. Interest Rates: Current interest rates are published and easy to determine, however the future of where interest rates are going is a little more difficult to forecast. The Feds and most experts, predict that rates will rise slowly overtime in order to curb inflation.
You can call a mortgage broker or use an online tool like Zillow Mortgage Calculator to find out how much a buyer can afford based on the median household income and current interest rate.
Then take the max mortgage amount a median household can afford and use the Zillow Local Market Overviews tool to find out the median house price.
If the household income median can't afford the median house price, then there is a local problem with affordability.
Local markets can defy affordability in the short term. In Silicon Valley outside investors from China are buying and sitting on houses instead of renting them out. In the short term, Silicon Valley is defying Affordability, but only in the short-term.
I have also seen this happen years ago, just south of Nashville, in a town called Laverne. There was an enormous subdivision being built with hundreds and hundreds of new homes called Lake Forest. The majority of people buying those homes were not people that lived in Middle Tennessee. Instead, they were outside investors from California that were buying the homes and renting them out. Many builders were selling "turn key" properties and just kept building and building. This resulted in a massive oversupply and a complete lack of affordability. Eventually, these basic 3 factors won out and I witnessed that subdivision plummet and house prices hit rock-bottom. Houses that had been selling for $150-175,000 three years beforehand, were now selling for $60,000 or $70,000.
The lesson here is that short-term, affordability can be defied, but over the long haul, it catches up with itself.
Evaluating the 3 Factors Together
When you put these three factors together, you are able to much better understand your local real estate market. For investors or homeowners that are buying right now, what you're looking for in your local marketplace is:
(1) Strong employment with more jobs on the way
(2) Less than 6 months supply
(3) Median household incomes that can easily afford the median house price.
Sonia B says
Thank You, Phil, for being so transparent and teaching the good and bad ways of real estate investing. I am learning so much about evaluating the local market condition to identify opportunities. I am loving this! Rock On 🤘
Jose Rivera says
Great article/video Phil !!! You mention that real estate in Puerto Rico is a train wreck yet in the disclaimer it says not to worry about the three factors if you’re flippers. Is PR good for fix/flip???
Phil Pustejovsky says
Yes, it is good for fixing and flipping; especially waterfront properties.
Thanks Phil. What is 6-month supply? Could you break that down?
Freedom Mentor says
Evaluating your local market conditions (Employment, Supply and Affordability) can help you identify opportunities in areas you are considering.
Ali sadighi says
Thanks for your fantastic video.
Brian Richards says
Phil, I loved your digression on the Puerto Rico real estate market. I own a beautiful historic house near the central plaza in Ponce (South Coast), and there is great value just because the real estate is unwanted. And I have a friend who bought an apartment complex very cheaply, and although it is slower to fill than on the mainland, it will be filled and the cap rate will be somewhere around 20. There is actually great opportunity in PR. The Federal Government is not going to let it disappear into chaos, but there is bound to be a long period of stagnant prices and growth.But consider the clean air, abundant water, the good soils, spectacular beaches, fine architecture in the central historic districts, diving, mountain climbing, the caves, the waterfalls ,the even climate zones, and many other natural attractions, and eventually people will realize the value inherent in Puerto Rico. It’s a much more quiet, rich life there, so please keep telling people that it’s a disaster. Thanks.
Phil Pustejovsky says
Debra Brittenham says
You are awesome Phil! 🙂 Thank you for being here.
Such informative info.Thank you
Awesome info.Thank you very much
felix mlaki says
Thank you for the great article.
Mr. Pustejovsky. This is definitely an area of RE investing that is rarely covered by most Guru’s.
I applaud you for being so forthcoming and thorough in your discussion. Having read this article
three times, I must apologize to you RE my question. That question is this;
What is meant when you state, “A housing supply that is rising above six months”.
I thank you in advance for your clarification on this matter for a less than adequate homo-sapien!
Joe C. says
I agree. Recently, there was a REI group in my area that had a speaker that did a presentation on this very subject- and it was 4 hours long!
I left early because I couldn’t stay awake any longer, it was so drawn out and boring. And yet, Phil did it in less than 15 min. Thanks, Phil. I learned a lot more from your video than I did attending a live presentation.