Figuring Out Your Real Estate Market By Following Two Trends

The principles below can be applied to all segments of Real Estate, residential, commercial or industrial…follow the trending market and read the latest statistics.

I have been scouring the internet reading as much as I can absorb about the changes that are occurring in the real estate market. Much of the talk lately has been about the $700B Bailout of the U.S. financial markets, but I would urge readers to understand the difference between “Outside Influencers” of the real estate market and actual market supply and demand factors.

Supply and Demand Information Most Important In Long Term Real Estate

Unless you are trying to make a living flipping houses during this time of turmoil, you most likely are a homeowner who is concerned about the value of your real estate. I would encourage you to look at your real estate from a long-term standpoint. Our real estate history has shown cycles from the beginning of time and I suspect those cycles will continue long after I am gone.

The biggest key is to separate short-term cyclic events from the long-term cycles that drive the market. I have written about the short-term actions in a previous post and referred to them as “Outside Influencers” of the real estate market. They are real and they definitely promote activity in the housing market, but they are not to be confused with the long-term drivers of the market.

The long-term cycle drivers are supply and demand. Generally speaking, if an area is growing in population, then its housing market must be growing as well. New people who move into the area must live somewhere.

  1. New homeowners need homes to buy, and this is what spurs the new construction market. New homes are built, generally speaking, at the same rate at which the local population is growing.
  2. New tenants need homes to lease, and this also spurs the new construction market. Builders are either building for new owners or new tenants, but either way, a growing population only adds to the “Demand Side” of the real estate market.

How To Find Supply and Demand Data For A Real Estate Market

While there are many sources of historic home sales information, there is only one decent source that contains detailed information for both supply and demand. The REALTORs’ Muliple Listing Service  (MLS) features both homes for sale as well as home sold. Depending on the market that you are observing, the MLS most likely represents 40-65% of the activity in the housing market.

Once you have access to your local MLS, all you have to do is track the supply and demand data over time. What you are seeking is whether the market is balanced or leaning to one side or the other. The following real estate supply and demand graph shows a severe imbalance to the supply side, meaning that we know prices must drop to bring back stability to the market.

Real Estate Inventory Flow A Critical Component Of Market Condition

The other piece of information that I find critical is knowing whether or not the current trend is for growth or reduction in the number of homes for sale in a given market.  We know that ultimately, this market cycle will change when the supply of homes is greatly reduced, so it is imperative to know whether we are still growing or whether we have made the turn to reduction.

Two Critical Pieces of Real Estate Information

Just to clarify what we have covered, I believe that in order to know where the real estate market is going (as well as knowing its present condition), one must track the following two critical pieces of real estate information:

  1. Supply and Demand of homes as measured in the MLS
  2. The change trend in the supply of homes

Homeowners Need To Wait Until Home Supplies Drop

As stated at the top of this article, real estate ownership should be a long-term adventure. If you find yourself “thinking about” what you could get for your home, I would recommend that you let this short-term cycle pass. Home owners who must to sell their homes have to remember the four irrefutable rules of seller home pricing. This is not a real estate market for sellers with low motivation housing inventories are high and buyers have options. (credit to Joe Manausa)