Insider Secret #7:
How To Read The BROAD Real Estate Market To Find Deals & Profit From Hidden Trends.
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We'll talk about four things here:
a.) Is real estate a national or local trend? What economic engines exist in different areas?
b.) Is the media correct or biased, in their reporting? Five month lag on reports = BAD data!
c.) Four types of markets and how to get the BEST deal in each market type.
d.) List/sale ratio - a critical 'insiders' tool in determining current state of market and changing direction of the market.
Now let's take a larger overview of the Real Estate markets. Here we're going to describe how to read the broad real estate market to profit from the hidden trends.
Real estate trends are never national trends, even though you'll read and hear in the media, "Oh, the real estate market's up. The real estate market's down." That is absolutely and totally irrelevant to you ...
Real Estate is Always Local!
There are many cities and markets that are going up in value at the same time other markets are going down in value. You can even see these disparities within different areas of the same city.
So it's critical for you to understand what drives these increases or decreases in prices. There are different types of economic engines that will facilitate these market changes.
What are economic engines?
Economic engines are large industries or segments of jobs. It's what brings jobs in or takes jobs out of an area. And, it's the job market that will bring people in or out of an area, too. This, in turn, changes the demand for housing. It's all about supply and demand.
Sometimes you'll get information from the media that says sales are up this month. That can be false or misleading information. Let me give you an example.
Let's say it's the month of May, and a media report has just come out that says real estate sales are down 10%. People start to think, "If I am in the market to buy or sell a home then that's affecting me directly right now."
That's an incorrect report to begin with, because the data is lagging by 4 - 5 months. When people buy houses, they go shop, they find one and then write a contract to buy it. Yet, they often don't go to final settlement for an average of about 45 days -- after they've written the offer to purchase the house.
Let's say it's January 1st, and a couple goes out and writes a contract to buy a house. They don't go to settlement until February 10th. That's pretty typical. They've got the financing to obtain. They've got to move. They've got to get inspections done. They've got to get a lot of things taken care of before the final settlement date.
So, they settle on the house on February 10th, and they move in after that. The settlement date is actually the day they bought the house, even though they contracted to buy it back on January 1st.
After all of the homes have settled and the buyers have moved into their properties, then all the information starts to get compiled for all the sales stats. That's a February settlement. Come March, technicians will start to gather all the information and data for all of the different jurisdictions and all of the thousands and thousands of home sales.
They generally have it put together by the end of March and sometimes into the month of April -- and then it's given out to media outlets to report. So quite often, it isn't until April, or the beginning of May, that you'll hear this data and the media report that says, "The real estate market's down 10%."
Well, it might have been down 10% when those buyers contracted to buy that property back in January, when they were actually "in the market to buy a home."
But, it's not down 10% now. As a matter of fact, it might actually be UP in the month of May, but you won't hear that information being reported until September or October. And that's far too late for your purposes since you're ready to buy now, and you need the inside scoop on what's happening in the market right now, so you can capitalize on any trends or changes.
As you can see, if you made a decision to buy or not to buy in May, your decision would be based on incorrect assumptions and old data.
Four Types of Real Estate Markets ...
There are four types of markets in Real Estate that you need to know and to understand, in order to get the best type of deal:
- Buyer's market.
- Seller's market.
- Buyer to seller transition market.
- Seller to buyer transition market.
These have always been the four types of real estate markets, and always will be the four types of markets.
In a buyer's market, it means that the buyers are in control. There are more homes for sale than there are buyers, on a ratio basis. Therefore, buyers have more to choose from. Sellers are more anxious.
But, in a seller's market, it's the opposite. In a seller's market, sellers have control. Prices are usually going up in value and there are fewer homes for sale than there are buyers, who want them.
In a seller's market, there are way too many buyers chasing too little inventory, which pushes prices up.
A seller to buyer transition market means that a particular regional housing market has already gone up in value. The ratio of buyers to sellers has evened out more.
There are many other aspects that go into making a seller to buyer transition, but we don't have time to discuss it. However, suffice to say, the ratio has averaged out, and now prices are NOT going up. They are actually going down.
Generally, a seller's market can last 3 - 5 years. A buyer's market can last for even more years, sometimes up to 15 years. Buyer's markets generally last the longest.
A seller to buyer transition market generally only lasts for a matter of months -- maybe as much as 1 or 2 years. And finally, there's the buyer to seller transition market.
The buyer to seller transition market is when it used to be a buyer's market, but inventory is rapidly being depleted, and sellers are starting to gain control again. Then, we'll start to see prices firm up and possibly even start to move up.
A buyer to seller transition market is generally a pretty short market as well. It can last only a period of months. The misnomer is that people think that any buyer's market is when prices are falling, but it's usually not.
Once you're in a buyer's market, the prices have already come down. Now, they are generally pretty stabilized. They're dragging across the bottom for a long time, but they're generally not falling a lot.
They normally fall in a seller to buyer transition market, and that's where the confusion comes in. You'll find the biggest drops and the biggest increase in prices mostly in the two transition markets.
What constitutes a good opportunity or a good buy?
Well, here's how it works. In a seller's market or a buyer to seller transition market, if you buy a house for $200,000.00 and your neighbor bought his for $200,000.00, three months prior to your purchase -- then you got a good deal.
The reason is because you didn't pay any 'appreciation' in market price. You didn't pay over what he paid, even though the market went up in value in that three month period.
So, if you can imagine a chart or graph starting from the left side, with a 'Value Line' sloping upwards to the right side, this would represent the home value changes as time progresses. By the time you buy that home, you should be paying $205,000.00 or $210,000.00.
But, by paying only $200,000.00 (which is what your neighbor paid a few months prior), you actually bought below the new market value (below the value line) ... which has gone up in value within that time period.
Now in a buyer's market, if you pay what your neighbor paid ten months prior ($200,000.00) ... that's pretty much to be expected. Because in a buyer's market, as I said, the market value usually remains stable.
And that price graph, depicting the change in home values, does not show a 'value line,' sloping upwards from left to right. No, it’s line just stays flat over time. So if you bought below what your neighbor paid, then you would be buying below market value (below the value line).
But if you paid the same, you would have been buying right at the market value of the property.
In a sellers to buyers transition market -- when housing prices are falling and quite rapidly -- if you paid $200,000.00, yet your neighbor paid $200,000.00 a few months prior, you actually bought above market value, even though you paid the same as he did because the market value has dropped.
If the market value line in the previously mentioned graph dropped to $190,000.00, then you actually overpaid by $10,000.00. So it's really important to understand the types of markets and how market value plays a role within those markets.
Real Estate 'Insider' Prediction Tool ...
The 'list to sale ratio' is another critical tool in understanding the real estate market -- and how you can profit from these hidden trends. The 'list to sale ratio' is our barometer of when the market's going to change.
You now know the four types of markets, but when do they change? And how can you tell when they're going to change?
Here's an example. Let's say there are 100 homes on the market for sale in a particular jurisdiction. Let's say ten of those homes sell in a month. The 'list to sale ratio' is always calculated monthly.
So that's a '10% list to sale ratio.' This means that 10% of all available listings went to sale. That's generally considered a buyer's market. Anything below 15% or 20% is a buyer's market on a list to sale ratio scale.
Now conversely, if 50% of the listings sell in a month, in a particular jurisdiction, that's a '50 % list to sale ratio.' That's considered a very, very strong, white hot seller's market.
A seller's market almost never gets to 100%, by the way -- because many of the listings are overpriced. Many of them are ugly. Many of them are pure junk. And many of them shouldn't be on the market in the first place. So if 50% sell in a month, that's quite impressive, indeed.
If we're in the middle of a buyer's market and all of a sudden, the 'list to sale' ratio changes from 15% to 30%, that's an indicator that we might be coming into a changing market.
Now markets don't change in a month in real estate. It's a lumbering market place that doesn't move along or change as quickly as the stock market changes.
However, if we have a trend, and we see a consistent uptick or downtick in the 'list to sale' ratio over a three month period -- we have formed a trend. And trends rarely reverse in real estate. They generally lumber along and merge into the next market type.
When you see trends changing, that's a good opportunity to jump in the market and buy -- if you can 'time your purchase.'
I'll give you an example. If a house sold for $200,000.00 in January, and there is a 15% 'list to sale' ratio in that marketplace, and it's been holding at a 15% 'list to sale' ratio on average for the last couple of years ... then all of the sudden, you see a 25% 'list to sale' ratio the next month of February. And then following that in the month of March is a 28% list to sale ratio, followed the next month by 26% list to sale ratio in April... then you have confirmed an established trend.
After such a confirmed trend, it would be a great opportunity to buy the house, even at $200,000.00 in January, because you would be buying below market value. The reason it is below market value at $200,000 is because prices are starting to move up since the time that home sold in January. So if you bought the house three months later, in April you'd likely be paying $210,000 or $215,000 because of the new price appreciation in the upward moving buyer to sellers transition market. But instead you only paid $200,000.
So you've actually bought below the market value by just 'timing your purchase', and made $10,000 - $15,000. Remember to be wary of a 1 or 2 month 'list to sale' ratio change, without a 3rd confirming month of that ratio change, as they could just represent anomalies.
This is not a game for the novice to apply on their own. Reading markets takes a lot of experience, so don't be afraid to ask your buyer agent, before you agree to work with them, if they have this skill set. If they don't -- then find someone who does!
If you'd like to get much more detailed information on specific trends in the Northern Virginia and ask your own, specific questions about your homebuying needs ... you may want to register to attend my FREE, LIVE Online Webinar in N. VA.
To conclude ...
As you can see, by understanding market trends, you can better 'time the market' to get the BEST deals in buying your home. But, you need a real estate insider, who understands the N. VA market ... inside and out.
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Until next time,