Is This the End for Falling Home Prices?
Unfortunately, just as it's impossible
When a real estate market is experiencing falling home prices, everyone wants to know the same thing: "Have we hit bottom yet?" Homeowners want to know so they can stop reading the latest real estate news with a bottle of antacids and a full shot glass by their side. Homebuyers, whether first-timers or seasoned investors, are looking for the right time to get the most for their money.
Unfortunately, just as it's impossible to know exactly when a local market has reached its peak, it's equally improbable to know for certain when home prices have hit bottom. Like any mystery, however, even when there's not hard-core evidence showing the status of the market, there are always clues. These can help you decide to dig in your heels or proceed with conviction.
Taking stock of the market
"The most important indicator is inventory," says Daniel Herron, a Realtor with Keller Williams Advantage Realty in Denver, Colo. "Specifically, how many homes coming on the market versus how many homes that are coming off."
Inventory is simply the number of homes for sale. The inventory is often reported for the entire country, a region, state or city. Your Realtor can document the inventory in an area of your town, or even a specific neighborhood.
Think of a car lot. If a dealer has too many cars, then you know you can probably get a good deal. If you want a model that is particularly popular, such as a hybrid when gas prices are high, you are likely going to have to pay sticker price or even more. The same inventory model works for real estate.
To gauge where a local real estate market is headed, you should look at the last three months of inventory and compare that to the last six months -- "enough time to see a genuine trend," Herron says. Look to see whether inventory is rising or falling. A study in the Denver area, for example, showed inventory dropped 21 percent from May 2008 to May 2009, he said. More importantly, the supply of homes fell from six to 5.1 months.
Generally, a six-month supply -- this is a hypothetical situation where at the current pace of sales, there would be no homes remaining to buy after six months if no new homes were put on the market -- is considered a balanced market. Anything above six months is a buyer's market. In markets hardest hit by the downturn, the housing supply in some cities was 24 months or more.
Looking for a bottom
Herron says another key indicator to where a local real estate market is heading is the number of days houses are on the market (DOM) before they sell. If the DOM is falling, it shows that buyers are motivated to make a purchase.
Although it may not be ironclad, it's fair to assume a market has at least touched bottom if you can document a declining inventory over a three- to six-month period (supply falling) and there is a steady decline in DOM (demand rising).
It's important to compile these figures for the immediate area and home type you are considering because statistics from a larger area will be misleading.
The numbers in the study Herron sited were for the Denver area. But not every neighborhood was the same because the real estate market can vary considerably from neighborhood to neighborhood. He notes that in the Denver neighborhood of Green Mountain, for example, there was just a two-month supply of homes over the previous six months -- which was much lower than the inventory for Denver as a whole. Home prices in this area were at $250,000 or less. But homes in more expensive areas nearby, where properties were above $600,000, were taking 20 to 22 months to sell.
In this scenario, looking at too large an area could lead a buyer looking to purchase in Denver's Green Mountain neighborhood to not act quickly enough at the low end and too quickly at the high end.
Bill Garber of the Appraisal Institute, a trade organization for real estate appraisers, says another important real estate indicator is fewer seller concessions. These are "non-real estate items, carrots to buyers to make them purchase a house," says Garber.
When sellers are fighting for buyers, they sometimes offer everything from cash back to vacation trips to buyers, which would inflate the real value of the house. Buyers should talk to a couple of local appraisers and their agent to see if seller concessions are waning, which indicates a shift to a normal or even a seller's market.
"A $500,000 house is not a $500,000 house if it's sold with a new Lexus in the garage," says Garber.