The secret of the housing market trend that the economists don't want you to know
As home buyers and sellers, we all want to know where the market is and where the market is going. We all want to know if there is technique or formula out there that can accurately predict whether the home market is going to continue to go up or is going down.
While predicting the exact timing of when the market will turn is almost impossible, however, housing market is much simpler to analyze than stock market. There are cycles and historical trends that we can study in order to make better decision for the future.
I am not going into too much technicality about how to calculate index or how to derive certain numbers to explain to you how to analyze your market, but I will talk in general, in an easily understood way, to explain to you what makes the real estate market go up and down. When it comes to home prices, the economist, the investors, the government all tell you different things. You as a future home buyer, just need to focus on researching this one thing in your market to make a better judgement, and that is:
Supply and Demand
Supply and demand is the most direct way of indicating the price of just about any commodities, especially houses. When there are more homes for sale and not a lot of buyers, home prices will go down, on the other hand, when there are less homes for sale and lots of buyers looking, home prices will surge.
So in a given market, what are the elements you must look at to understand the current supply and demand of houses? How to predict future supply and demands? Let’s look at the following elements:
Diversification of industry
The biggest reason why people want to buy a home is their wallet. The biggest factor that determines the size of people’s wallet is what kind of jobs does the city provides. The diversification of industry means that this city is not just all about manufacturing or tourism; it actually has various industries that support different professionals. The more diverse the industrial environment is, the less susceptible it is to economic downturns. Therefore by this standard, San Francisco Bay Area and Manhattan NYC are great samples of industrial diversification. Therefore, the housing demands in these areas are always strong, keeping its housing market less volatile. One the other hand, cities like Detroit and Las Vegas are too one dimensional, making the housing markets there much more likely to go up and down depending on the job reports.
The average income of the neighborhood
Even though there are things that are nationally true, when it comes to real estate market, you still have to look at things at a very local level. One of the most important things to look at in a local market is the demographics. In demographics, what you really want to know is the average income. It tells you a lot about whether this area can withstand housing crash or not.
You know that every city has upscale neighborhood and middle class neighborhoods. How these local markets react to the bigger environment is very different. On one end you have affluent neighborhoods like Beverly hills, Central Park of NYC, Pacific height in SF, Atherton,CA, Greenwich, Conn where most of their residence have recession proof career, be it entertainment business, high-tech business, banking, bio-tech, law practice etc, on the other end you have lower to middle class neighborhoods like Oakland,CA, part of San Jose, certain part of LA and majority of Midwest regions where most of their residence are living paycheck to paycheck, which is more susceptible to job losses when economic environment changes. When analyzing the stability of the housing market, you want to be closer to affluent side based on your budget. Places like Atherton, Palo Alto or even Beverly Hills do have their moments of downturns, but the difference is that they quickly bounce back when the economy changes directions again. On the other hand, places like Oakland, Hayward or even Las Vegas still hasn’t quite come back to their previous height.
This indicates that neighborhoods where the residences have more stable income and career security are better places to invest for long term. They are most certain will go up 10 years into the future. The neighborhoods similar to Oakland or Vegas are better suited for short term flip due to its volatility. If you can time it right, those are gold mines too.
Availability of land
In this supply and demand relationship, the supply not only means how many existing home owners are willing seller their own, it also means how much available land is out there for developing into new residential areas. This depends on a city’s geographical landscaping and climates, in other words, things that are hard to change. Take San Francisco Bay Area for incidence, the city and the peninsula not only have more jobs but also have limited supply of vacant lands. There is the bay on the east, and mountains on the west. Lots of homes are built on the slope and there are limited new home developments. Moreover, there are tons of big corporations around that bought most of the land, making it even scarcer. This is a good indicator that the homes in these areas are always going to be in demand, thus making the marketer more likely to appreciate.
Cities like Dallas, TX and Houston, TX on the other hand, have good industries but also have tons of vacant lands. Most part of Texas is flat, making it easier to build new homes. Therefore the homes in Texas don’t appreciate much and still remind cheap.
Schools
One buying a home, school district is always one of the most important thing buyers look at. But school district isn’t the most important thing that determines the housing market. It actually comes after the previous 3 factors.
When comparing home prices vs school district, you have to compare them within the same city, otherwise it is apple and orange comparison. Within the same school district, the home that’s closer to the school is more desirable
Future developmental plan for the city
A great city has to have great plans for the future for bringing more business, promoting better life styles and creating better living environments and adding more industrial diversification. Most of Las Vegas’ future plan is building more casinos and shopping center; this is great but doesn’t add more diversification to the city. Most of the cities in the silicon valleys are future plans of expanding its already diverse industry and therefore more schools, restaurants, gyms are going to come along too. One example is the BART station extending from Fremont down to North Valley San Jose. This is good signs of positive future of the region are housing market.
In summary:
When deciding whether buying a home is a worthy investment or not, you need holistic evaluation of the city’s industrial diversification, geographic landscaping, household income, school and future development plans. A great property that meets all criteria and is within affordable price range is going to highly demanded, and you will most likely have to invest extra money to get the property, but it will be well worth it because when you are selling your home in the future, you will enjoy the same demand as seller with appreciations.
