Identifying and understanding market trends in real estate is important if you are going to buy or sell successfully. For sellers, getting stuck in a downward trending market and not realizing it, can be very painful, especially if they are slow to react. The opposite is true for buyers who enter the market when it is trending up. They will watch available inventory sell to other more aggressive buyers who appear to know something they don’t (very likely), waste time making offers that get rejected and wonder why they are finding fewer and fewer opportunities.
So how does one work to identify and understand these market trends?
Start On The National Level
The overall health of the market is generally not difficult to gauge on a national level. There are several aspects of the market that many independent and governmental agencies report on monthly and annually, the main ones being Price, Sales Volume, and Supply & Demand. When you read these reports or see the headlines in the in news, you can quickly assess the general state of the market.
Focus On The Local Level
Locally, you want to focus on Supply & Demand, Sales Rate (absorption), Median Price and Months Supply of Inventory - not much different than on the national level. This information is readily available through trusted broker channels.
- Supply & Demand: Considers the number of properties for sale, under contract and recently closed. You can analyze this on the basis of month to month, quarter to quarter or year over year (s).
- Median Price:
You can track the Median Price of active listings for sale, listings
under contract and recent sales, to see how overall market pricing is trending.
- Sale Rate (absorption): Measures the ratio of recent sales and current listings under contract versus the total amount of active listings on the market, on a percentage basis. If these numbers are increasing that means properties are selling at a faster rate.
- Months Supply of Inventory: As the term suggests, this is the total number of months it would take to sell through the current supply of inventory. Historically, 1-4 months of supply denotes a seller’s market, 5-6 months is normal and 7+ months favors buyers.
When analyzing this information, remember that it is typically a collection of historical data. Real estate markets don’t usually shift very quickly but a lot can happen in 1-2 months. Sellers could look to capitalize on an improving market and end up flooding it with product and buyer demand can suddenly drop off a cliff for any number of reasons.
So, know your market, understand what impacts buyer/seller sentiment and work to identify and stay ahead of trends so you can invest successfully.