FOUR FUNDAMENTALS YOU NEED TO KNOW
Track these four fundamentals and you’ll keep your team out of bubble trouble.
by Larry Kendall, chairman of The Group, Inc. and author of Ninja Selling
“Are we experiencing a real estate bubble?” This is a question we’re being asked more and more by customers, investors, media and even our team members.
Dr. Lawrence Yun, chief economist for the National Association of REALTORS® doesn’t see a bubble at the present for three reasons:
- A shortage of supply in both new and resale housing. Bubbles are usually the result of oversupply,
- Interest rates are lower now than in the bubble years of the mid-2000s resulting in better affordability,
- There is no sub-prime lending causing people who are unqualified to buy housing and then default.
But real estate markets are local and cyclical. A local market can experience a bubble while the national market is cruising along just fine. Even sub-markets such as condos, apartments, office or retail can experience bubbles within a strong overall real estate market.
Do you know how to forecast the real estate cycle in your market? There are four fundamentals you should be tracking. As a leader, you need to be the first to spot the changes so you can put your team and your customers in a position to exploit the inevitable. Here they are:
ONE – Employment. Employment is a leading indicator of a real estate market cycle by 12 to 18 months. This is your earliest warning signal of change. Contact your state employment office and get on their mailing list to receive the monthly employment numbers for your county (or go to their website). Watch for a change in employment (either up or down). Compare the number of people employed last month to the same month a year ago. Is the number rising or falling? This is your best crystal ball, giving you a 12 to 18 month head start.
TWO – Appreciation. Go to the government website http://www.fhfa.gov and download their quarterly “House Price Index” report. This is a long report (usually 75 pages), so scroll down to the charts that give you “House Price Appreciation by State” and 300 individual metropolitan markets. These charts show the house price appreciation for the last year, the last quarter, the last five years , and since 1991. Want to see if a market is speeding up or slowing down? Take the quarterly change in prices for a market and annualize it (multiply times four). Then, compare this number to the annual price change. Some markets are seasonal, so be careful about jumping to conclusions based on just one quarter. Start tracking each quarter, and you will spot the trends.
THREE – Affordability. The three components of affordability are house price, household income and interest rates. Ultimately, home prices and real estate activity are a function of people’s ability to pay. Track these components to see if the median household income can afford the median-priced home.
FOUR – Supply and Demand Ratios. Tracking supply and demand for your various sub-markets will also give you a clue as to whether a sub-market is overheated and a bubble is building. Here are two examples: A six-month supply of homes is considered a balanced marlet. In our market right now, the price range under $400,000 has a 1.8 month supply (seller’s market) while the price range over $700,000 has a 13.3 month supply (buyer’s market). We have both a seller’s market and a buyer’s market at the same time depending on the price range. Here’s the second example: Apartments are experiencing a 1 percent vacancy rate and double-digit rent increases, making apartments one of the hottest segments. To get to a balanced market (5 percent vacancy) we need to add about 1,500 apartments in our market. There are currently 1,739 under construction with another 2,165 approved for construction. We see a bubble in apartments a year from now and are warning our investors.
Real estate is a cyclical industry. Knowing where you are in the market cycle is a critical skill. Track the four fundamentals, and you will keep your customers and your team out of the bubble trouble.^
This article originally appeared in the August 2016 issue of the REAL Trends Newsletter is reprinted with permission of REAL Trends, Inc. Copyright 2016.
The Minnesota REALTORS® is the largest professional trade association in the state with more than 17,000 members who are active in all aspects of the real estate industry.