3 Factors to Better Understand Your Local Real Estate Market

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 and not at all complicated. These are all simple concepts that can help you to get a much better understanding of what is going on in your local real estate market.

You will often see headlines with real estate as a topic on the national news, but those are all based on a macroeconomic level. This means that they are all headlines 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 and use what you’ve learned to make judgments and forecasts on what its 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.

 

Disclaimer:  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 then reselling it at or near market value. House flipping and wholesaling work in any market under any market conditions, and at any time. It always works, because you are acquiring the property below the current market value, and then selling it at or near market value. These three factors are incredibly helpful for those that are looking to purchase a property for the longer term, but 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 bad markets, awesome markets, and everywhere in between 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

 

People live where there are jobs, because employment is how people afford their homes, and 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, which will drastically improve 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. With employment rates rising, the real estate market could not keep up with the high demand for housing, so the market rose 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 are unable to gain access to your local employment rates, you can just observe your town and what is going on around you. Pay attention to what people are saying and if they are complaining about the local economy or job rates. Also 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, into 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 six months worth of supply of houses, then that means there is a potential for a shortage, which 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

If we were to go a step further and get more granular about this concept, then you can 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. I made that video because 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 typically 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 and lower supply in that specific price range, and that can indicate a huge opportunity, especially if you’re buying for the long term.

It is entirely possible for there to be a shortage of starter homes in your local area, but also a massive surplus of luxury homes on the market. This is why you have to go a step further and get more specific, instead of basing your numbers off the total supply of housing in your market. You can get access to information on the specific market in your price range by using Google or calling your local board of realtors. The local board of realtors in my area actually send me emails with their monthly reports, but you want to be sure to look at not just the supply today, but the supply int the last year or two as well. 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, oftentimes 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 themselves, who set interest rates, as well as most experts, predict that rates will rise slowly overtime in order to curb inflation.

Calculating Affordability

You can call a mortgage broker to assist or use an online tool like  Zillow Mortgage Calculatorto find out how much a buyercan afford based on the median household income and current interest rate.

Once you have figured out the max mortgage amount a median household can afford in your area, then 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.

Defying Affordability

In the short term, local markets can defy affordability. Take Silicon Valley for example, where outside investors, especially from China, are buying houses and literally just sitting on them and not 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. What happened was the majority of people buying those homes were not people that lived in Middle Tennessee that were moving in. Instead, they were outside investors from California that were buying the homes and renting them out. Many builders were selling “turn key” properties and they just kept building and building until there was 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 in the 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.

 

If your local real estate market has an employment rate that is dropping, a housing supply that is rising above 6 months, and the household income can no longer afford the median house price; then you know that it is in trouble!

Comments

  1. Jean-Paul says:

    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!

  2. felix mlaki says:

    Thank you for the great article.

  3. Awesome info.Thank you very much

  4. Such informative info.Thank you

  5. Debra Brittenham says:

    You are awesome Phil! 🙂 Thank you for being here.

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