Weekly Column #3: Is It A Good Time to Buy or Sell? Some Economic Indicators That Can Help
By Kristi Waterworth
At least once a year, without fail, I’m asked to write a piece about whether or not it’s the right time to buy a home, get a mortgage or sell a home. This is life in the fast lane when you’re a writer with a lending and real estate background. Everybody wants an answer to THE burning question--it appears in search constantly. Site owners want to be able to give readers something that can help them figure out their current financial picture (while encouraging them to click on said site link).
As I continue to advise, every year, at least once a year for many years, the right time to buy is when you’re ready to be a homeowner. This is a different situation for investors, of course, but we have to stop thinking about our houses as investments. They’re not. It’s been thoroughly proven that they can lose value due to a huge range of factors out of your control, from neighborhoods going into the toilet to interest rates hitting the ceiling.
Economic Indicators Hold Clues
The thing I normally don’t get to write, because it’s complicated and would take up too much space to explain, is that if you’re really determined to get a bargain today (that is, the house is a bargain today, tomorrow is never promised), there are some economic indicators that can help you forecast trends in housing if you keep an eye on them.
What I’m going to cover here is hardly going to be definitive, but it should get you started. Be patient with these indicators, what you need to be watching for are general trends, not a single point on the scale. For example, let’s say that housing starts slump one quarter, but they’re up overall--that’s still good for you as a buyer!
Right Now, Indicators May Not Help
I don’t intend to make this political, but before I get into economic indicators, I want to make sure I cover one peculiarity that may throw the old standbys off a bit: America’s current position on global trade.
We have long been buying more than we can export, resulting in a trade deficit. This isn’t what you think it is. It simply means that we import more than we export, which is fine when a global economy is healthy and working. Unfortunately, the American government has taken hard steps toward isolationism, which our country simply can’t survive economically, at least in the short term.
Because of this, the real estate market’s future performance is largely anyone’s guess. Indicators can still help you figure out what you should do with your longer term holdings, but try to keep it in perspective. I have a feeling that the short term will be rocky, at best.
A Few Indicators to Explore
There are hundreds of indicators that could help your analysis of the real estate market, some that have a direct effect and others that influence things and create domino effects. Get started with these and we’ll come back around to the dominoes later.
Rates are going up and the Federal Reserve promises they will go higher. This is actually a positive indicator for the real estate market, if you can believe that. As long as rates are within a realistic zone that allows buyers to afford the houses they want or need, the rising interest rate tide lifts all. When rates climb slowly, housing prices often drop slowly to even out the equation. This is a good thing if you’re a buyer.
New Home Starts
“Housing starts” is a term that refers to proposed new construction homes that have had a permit granted and are in the beginning stages of becoming houses. When starts are up, it means that residential contractors are feeling good about the economy and so are the banks that are backing them. A lot of housing starts can be good for a buyer wanting a new home, since the competition between builders can drive new home prices down a bit.
Existing Home Sales
The National Association of Realtors keeps track of how many existing homes are closed each month. These are homes that have been lived in, even if for just a few months. This one matters because it speaks to the confidence that sellers have that they can sell for enough money to buy their next home, as well as the demand for existing homes from buyers.
Typically, existing home sales start to trend upward when we’re pulling out of hard times, like a major recession. A word of caution here: at least for the moment: this year’s real estate market has shown time and again that there’s plenty of demand for existing homes, but sellers aren’t confident enough to sell. This is a bit unusual and bears watching. Normally the flush of above-asking-price offers would draw more sellers to the market, but that just doesn’t seem to be the case right now.
This indicator functions on a much more local level. You may be able to get these figures from your local Board of Realtors, but if you can’t, your Realtor certainly can. During the worst of the real estate market crisis, inventory was talked about in “years” rather than months in some areas. That wasn’t awesome, it caused prices to collapse and trapped people in their mortgages nationwide. A healthy market should have about six months of inventory. Less is also a bad deal since it results in a very aggressive seller’s market. Balance is best.
Less Direct Influences on the Real Estate Market
In the section above, I covered some of the most important economic indicators that come directly from housing data. In this section, I’m casting a wider net to show you how other numbers can affect housing: These are my dominoes, they fall and cause ripples in the market:
Gross Domestic Product
The GDP is a number that represents the value of all the goods produced in a place during a specific time frame. In our case, America and monthly or quarterly. This indicator is created using figures related to consumer spending, business spending, government spending, exports and imports. When the GDP is growing, the economy is growing. When the GDP is shrinking, the economy is shrinking.
You don’t want the economy to change too quickly, but steady growth is an indicator that consumers are spending more and are therefore less afraid of losing their nest eggs. Home buying typically increases with increases in the GDP, but again, if the supply is stagnant, you’re not going to see more home sales no matter what you do.
Employment levels should be a pretty obvious indicator. More people in more jobs means more people who can buy a home. It’s pretty straightforward. Right now many parts of the country are seeing a labor shortage that is pushing wages up a bit, bringing even more people into the extremely competitive real estate market.
Consumer Price Index
The CPI measures the cost of goods over time, which not only allows economists to track the price of just about anything across the ages, it gives a good idea about the state of inflation and how willing people are to spend. When the dollar buys more, the economic pressure is a bit lower and buyers tend to buy more stuff. As inflation creeps up, budgeting becomes a necessity, since your buck won’t go nearly as far. The Federal Reserve helps to keep inflation in check by modifying interest rates, among other things.
Wrapping It Up: Is Now a Good Time to Buy?
Yes, if you’re looking for a home.
The thing about the real estate market that most people don’t realize is that it not only cycles throughout the year, it cycles with the economy. Your buy today may be your $30k in instant equity tomorrow, or it could be your being underwater in two years. There’s no way to know beyond a shadow of a doubt what’s coming for the greater economy--homes shouldn’t be treated like investments.
Although we all like getting a good deal, it’s more important to get a good house. If you need to move your kids to a different school district, cut your commute down or just need a little more space for the triplets that are on their way, there are intangible benefits that come with buying when you need to buy rather than when you think the market is at its lowest.
The real estate market is on a general upswing at the moment, which is good for sellers. It’s not such a great place for buyers in many areas, including my own. However, the $250k house you buy today for $5k over market because of a bidding war can easily turn into the $300k house you sell in 10 years.
Tomorrow’s values are never promised. Always keep that in mind when you’re house-hunting.