How To Predict Real Estate Prices
Tips For New Real Estate Agents
How To Predict Real Estate Prices
Do you want to know what prices are going to do in your city over the next year? With these tips for real estate agents, you can put yourself in the best position possible to estimate what will happen with real estate prices over the next year. Of course, there are unforeseen circumstances that can impact the real estate market but with these tips you can increase the chances that you will be able to accurately forecast the direction of the market.
As a successful real estate agent, you should be looking at market indicators to help advise your clients and assist them in getting the best prices. In this article, you will learn a few of the best market indicators to watch to help you predict real estate prices in your city.
The Power of The News
Love it or hate it, the news has power over the real estate market. When the news reports on the real estate market, buyers will react to what is said. Even if the news is reporting on regional or national levels, your city market can still respond.
The news impacts consumer confidence and this can become a self-fulfilling prophecy. The challenging side to this is the news reports can be sensationalized versions of the market conditions.
Make sure you watch the news because your clients are watching, and they are responding.
Keep an eye on what is happening with employment in your city. Naturally, employment levels will impact buyers’ ability to purchase but it impacts the overall economic conditions in your city. Focus on year over year changes in employment as there can be seasonal adjustments.
Most cities will have data on employment levels on a monthly and yearly basis.
Months of Inventory
Months of inventory is one of the most power statistics to watch when looking at prices changes over time. Reason being is months of inventory takes both inventory and sales into account.
The calculation is Total Inventory/Monthly Sales = Months of Inventory
The widely accepted breakdown:
>6 Months: Buyer’s Market
4-6 Months: Balanced Market
<4 Months: Seller’s Market
That said, if you have been in a market that is 5-6 months this can still “feel” like buyer’s territory.
Watch months of inventory over time to see if it is increasing or decreasing. As with employment, looking at this year over year is important because these numbers can change with the seasons.
Keep a close eye on builder starts and development permits in your city. These are clear leading indicators plus they highlight builder confidence. Some builders have full departments dedicated to watching the market behavior and predicting future prices, so these numbers are important to follow.
As a real estate agent, watch the builder starts and development permits but make sure you combine these numbers with other market indicators. If you just watch starts and see an increase, then yes, prices might be going up, but if the other indicators point at slower sales, then you could be in for increased inventory.
Affordability in real estate has three legs: home price, home costs, and income. You need to look at these three factors together to understand affordability. For example, if home prices and income rise proportionately, then there is little impact on affordability. However, if everything stays the same but home costs increase, then affordability decreases and there is downward pressure on prices.
Home costs include the monthly costs required to maintain the household. The main factor to watch with affordability is interest rates. If interest rates increase, then affordability goes down even with home prices staying the same.
Keep a close eye on interest rates as well as home ownership costs. Also watch income levels in your city.
As a real estate agent, a powerful leading indicator is the number of showing requests. If you are seeing a decrease in showing requests, then you can assume that there are fewer buyers and prices could adjust.
To draw any meaningful conclusions from showing requests, you need to look at a large sample size. If you are only looking at a handful of listings, then your data will not be meaningful. If you don’t have the inventory to look at showing request trends, as if you office has these data or your real estate board.
There are certain indicators that you can use as a real estate agent to help you predict the direction of the market. Make sure you keep up to date with the news and consumer confidence. Also, watch employment numbers and months of inventory in your real estate market. You can also look at builder behavior, affordability, and showing request.
[00:00:00] Hello and welcome to Rev Real Estate School. The podcast with quick tips and actionable advice to help you sell more real estate in today's world. And now your host Michael Montgomery.
[00:00:11] Hello and welcome to another episode of Rev Real Estate School. My name is Michael Montgomery. Now do you want to be able to determine where prices are going over the course of the next year or slightly over a year? If You do stick around this episode is for you. We are going to look at six leading indicators that you can use and you can watch in your real estate business to determine what's going to happen with prices over time.
[00:00:38] So right off the bat no we can't magically determine exactly where prices are going to go. We know this but there are certain things that we can watch that will speak to us. And there are certain indicators that we can watch it will speak to us. That doesn't necessarily mean it's 100 percent going to happen but these items that we are talking about do have an impact on real estate. Now one of the perks or drawbacks depending on how you look at it about real estate is there is a lag period. We know this in our business. So even when we're out there talking to clients these people typically aren't going to transact with us right away. Oftentimes there is you know that three month lag period between when the conversation starts and then potentially when a contract is signed. So shifts in the real estate market because of this don't happen overnight. They can but it's a very very rare. There are these long term trends and these trends will usually start to play out over the course of 8 months, 12 months, 15 months in there. So what you're seeing now when you were looking at these leading indicators they will have an impact down the road. This leading indicator if you have one month of increased inventory that doesn't necessarily mean that prices are going to drop the next month. And I think most of us know this. But if this happens month over month it is something we really need to be watching. So let's jump into the six leading indicators.
[00:02:03] Number one and this one can be one of the most frustrating things for people in the real estate industry myself included. It's the power of the news. The news is all about their headlines. They're all about letting people know in an exciting way what is going on in the community. Now if prices are slightly on a downward trend or there's indicators that prices are on a downward trend the news may blow this out of proportion. Not always but they may and love it or hate it. What people are reading and consuming in the news will impact their buying behaviors if they hear that this year prices will decrease by X amount. Then buyers may not buy until later this year thereby having a self-fulfilling prophecy where prices start to trend down. And it's all because of what was been released through the news. That's not to say the data isn't accurate in the news. It's just sometimes if there is a slight decrease in sales then the headlines might twist this and make it sound like prices are just falling at a dramatic rate. So just look at the news because the news can be a leading indicator on consumer and buyer behavior.
[00:03:17] Next is employment and specifically employment numbers versus unemployment. And what you want to look at with employment is year over year be mindful of the monthly changes. And most communities most cities will have these statistics readily available for you. So a quick Google search or even just looking at your city's Web site you may be able to find some of this information. But what you want to see with employment is you want to look again at trends. So month over month year over year trends what is happening specifically though you do want to look at monthly trends but compared to the previous month the last year. What do I mean by this and why do we do this. The reason is as the year moves on. There are different employment trends from a month to month standpoint the employment trends in December will be different from you know the summer time or something like that. So we want to look at the same month year over year and see what's happening. If we see an increase in employment then chances are we may see prices start to increase as these people get out into the world and start buying properties. Now if we see a decrease of course chances are prices could come down if you'd like some more information on this and to look at some graphs and seeing prices over time with regard to these leading indicators.
[00:04:33] Head to this show notes or just go to revrealestateschool.com And head over to this episode and have a look at some of these graphs and price trends over time as it compares to leading indicators.
[00:04:45] Next number three months of inventory. This statistic I oftentimes tell sellers that it's basically one of the ones that can predict the future for you. It's a statistic that all of us should know in any time that we're going into a listing presentation or dealing with a buyer. We should have an understanding of months of inventory really quickly months of inventory is when you have a certain number of properties that are within a community or city or whatever you like and then you divide that by the number of properties over the last month that have sold or left the market. And this shows you how many months it's going to take. Given the previous month to mop up the inventory why this is such an amazing leading indicator. Because if you are seeing months of inventory trend upwards then that basically means one of two things either inventory is going up or buyers are going down and because it takes time to mop these things up it can be an amazing leading indicator for prices. If you're looking at months of inventory typically four to six is balanced six plus months is a buyer's market and less than four months would be a seller's market. But I will say if you are towards even if you're four to six or five or six months although on paper that might be a balanced market. It may not feel like a balanced market.
[00:06:02] Next we want to look at builders and what is happening with them. We want to look at the trends of the housing starts over time and we also want to look at development permits. There is usually some great data on what's happening with builder behavior within cities and looking at this can be a huge leading indicator for you. Some of the larger builders may have full teams dedicated to understanding the market. So watching what they are doing great leading indicators that's with regards to starts and then building permits as well.
[00:06:36] Next is affordability and the affordability as far as the housing is concerned. So there's three parts to this. Number one is the cost of the house. So what it costs to buy the house. Number two is what it costs to keep the house going basically. So your mortgage utilities these sort of things and then the third piece is the income. So if income goes up and the other two remain stable then your affordability increases and prices could go up. Now if it's opposite. So if incomes going down then of course you may have prices that decrease. The interesting part of this is what it costs to run the house. So this is what's happening oftentimes. This is part of it is interest rates. So as interest rates go up your affordability goes down because it costs more to run the home. And with affordability decreasing prices will very likely follow.
[00:07:32] The final one you can use and you can look at depending on your own listings are depending on people that you know in your office that might carry a few more listings. It's looking at showing requests over time and you need to get pretty granular with this. So if you do see a decreased number of showings chances are the market could be softening or it could be something to do with the property of course. So you have to look at a certain amount of data you can't look at an isolated home because it could be the home it could be the price of the home it could be a number of things. But when you look at it on a grand scale and look at somebody who's potentially carrying a number of listings or you combine data from listings then you really start to understand what's happening with showing requests.
[00:08:17] So there you have it six ways that you can predict the future with regards to real estate prices. This one was a little bit longer but very important to understand these leading indicators especially if you are in a shifting market because sellers want to know this. And by knowing these things you were already differentiating yourself as a real estate agent. Now if you have a quick second today I would really really appreciate I'd be super grateful if you ran over rate and reviewed this show you 100 percent get a shout out on the show. Plus you get a free coaching session if you head over to rev real estate school dot com slash free dash coaching or just head over to the website. You will find it there and there's nothing to sell on the call. It's just a human to human conversation about real estate. And I will help you through whatever it is that you are working on at that time. We have a handful of these every single week. So feel free to head over there and have a look at what's involved. Thank you so much for listening to this episode.
[00:09:10] And we will catch you on the next lesson this episode of Rev Real Estate School has come to a close. Thank you for tuning in and we will see you at the next lesson
Follow Up Reading
Question: what other numbers do you watch when determining the direction of the real estate market? Let me know in the comments below.