How To Determine If Your Market Is Worth Buying In

In 2002, Robert M. Campbell dedicated his book, Timing the Real Estate Market, to the millions of home buyers and sellers who every year regretfully say, “if I had only bought (or sold ) a year or two earlier, I would’ve made a killing.” Just as cash-flow is more important than appreciation to most Real Estate investors, market research and timing is much more important than, “Location, Location, Location.”

So, the real question is: are we approaching an ideal “BUY Time” in the current Real Estate market? I agree with Robert as to the relevance of his five vital signs of when to buy Real Estate. Let’s look at the five signs and how they apply to today’s market:

#1 Existing home sales

Existing home sales are picking up. According to the National Association of Realtors, the housing market is up an overall 10.3%, and in the North East where I’m located is up 6.8% from last year.

#2 New home building permits

If building permits increase for six months in a row you have to start to think we’re on an uptick. It’s saying builders are gaining confidence to fill orders. The National Associate of Home Builders’ data shows that privately owned housing starts in April were at a seasonally adjusted annual rate of 853,000. This is 13.1 percent (±5.1%) above the April 2012 rate of 754,000.

#3 Mortgage loan defaults

First-time delinquent home loans have fallen to 0.84 percent of the 50.2 million mortgages in March, the first month below 1 percent since 2007, according to Bloomberg.

#4 Foreclosure sales

Foreclosure activity in the U.S. has dropped to a 6 year low, RealtyTrac reports.

#5 Interest rates

They have been favorable for real estate investing and really don’t have anywhere to go but up. Falling or rising rates don’t really predict the real estate trend just the momentum or strength of the trend.

Since the downturn in the overall real estate market in the United States, of which Real Estate drives up to 1/4 of our economy, I had shifted many of my investing strategies over to paper assets backed by Real Estate largely due to unfavorable mortgage financing. But recently I was privileged to see Jeffrey Otteau, an information provider on real estate trends who’s been a contributor to the New York Times, the Wall Street Journal, CNBC, Bloomberg and NBC, and to listen to some of his insights and other factual data that he provided.

Current economic trends:

– It’s anticipated that the Fed will be taking their foot off interest rates.

– 10% overall increase in the Real Estate market

– The United State will need income increases and job increases for housing increases to continue

– Since the recent collapse, 9 million jobs are lost, 6 million are back, and 3 million are not coming back. These jobs aren’t likely coming back largely due to the collapse of the Soviet Union. Even though this happened over 20 years ago, it has taken this long to see the effects of jobs being exported oversees to many low-paid workers, that upon the fall of the Iron Curtain, entered the global workforce.

– Technology has impacted the business world. Manufacturing only requires one-tenth the number of workers. Kodak employed about 140,000 people. Instagram, 13. Now that may be a drastic example, but these changes aren’t likely to stop anytime soon.

– Corporate profits are high but we still have high unemployment and income is decreasing.

– In my market of Philadelphia, we’ve only recovered 50,000 of the 130,000 jobs lost.

Residential trends:

– Homebuyers starting to feel a sense of urgency – the fear of interest rates going up (which is the only way they can go at this point), plus there is less supply.

– Negative equity will start to go away, Otteau estimates by 2017 equity will be at comparable levels to what it was before the crash.

– Foreclosure discount rates have fallen from 55% to 5%

– 60% of baby boomers don’t have enough money to retire

– Senior rental housing needs are increasing

– 80% of households are 1 to 2 people

– 7 out of 10 households have no one under age of 18

– Vacancy rates are approximately 3%, creating more of a demand for rentals meaning rents are expected to increase.

– There’s trouble for boomers down the road with “McMansions” over 4000 square feet because fewer buyers need or can afford these in the future with the shift in the job market and the increase of debt for the average person.

Commercial trends:

– Increase in warehousing near ports in the Gulf and on the East Coast due to the Panama Canal widening completion in 2015. Also, there is more demand from online sales meaning an increase in warehouse space, but a decrease in retail space.

– Retail space has been and will further be in dangerous territory. For example, in my market, currently there is 33,000,000 square feet of retail space available in my area with an absorption rate of only 2,000,000 square feet per year.

So what does it all mean?

Depending on your area of business and where and when you plan to invest, current market trends could be a serious consideration to take into account when buying or selling. There was a time when I just invested for the long haul and didn’t pay much attention, but today I’m always looking at trends so I can reduce my risk. Now with the current trends and data, it’s starting to look like the time to jump back in and pick up some more hard Real Estate to take advantage of the next “up” market. So, what are some trends and factors that you on BiggerPockets look at before investing?

Photo: House of Joy Photos

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.