Understanding the larger real estate market is critical if you’re looking to invest. The guide can give you the foundation you need to start your investments on the right foot.
By: Aly Yale
Whether you’re investing in student rentals, looking to fix-and-flip, or just buying a home for occasional Airbnb use, understanding the larger real estate market is critical.
The truth is, real estate is always in flux. Home prices, interest rates, and market trends evolve daily, and understanding these ebbs and flows can help make you a smarter (not to mention richer) investor in the long run.
Not sure where to start? Begin right here. This guide breaks down everything you need to know about the real estate market, the state of housing, and the trends you need to be aware of as you choose your next investment.
Though you can certainly look at nationwide stats like median home price, sales volume, or the number of homes on the market, the truth is real estate is local. Every city, county, and state has its own unique marketplace, with its own unique buyers, sellers, and trends. There are even different rules and regulations to contend with in each area.
Because of this, real estate markets vary greatly depending on locale. In San Francisco, for example, the median listing price comes in just under $1 million — a far cry from the budgets of most average Americans. In Cleveland, Ohio, though? You can find a spacious, single-family home for less than $190,000.
If you’re planning to invest in, buy, or sell real estate, it’s important to be tuned-in to your local market — not just what’s going on nationwide. While the overall economy, mortgage rates, and other trends will play a role, your purchase will be most influenced by the factors at work in your specific marketplace.
There are three types of real estate markets you can find yourself in locally: a buyer’s market, a seller’s market, or a balanced market. The exact market you’re in should inform your approach as you choose investments, make offers, and negotiate deals.
Here’s what these markets look like:
A buyer’s market is one in which there are more properties for sale than there are buyers. This means home buyers have the upper hand and enjoy more choices in properties, as well as more negotiating power when making a purchase. If you’re buying a home, this is the ideal market to do it in.
In a buyer’s market:
A seller’s market is the opposite. In a seller’s market, there are fewer listings than there are buyers, and buyers face stiff competition among themselves. Because of this, they may encounter bidding wars or their home search might take longer than expected. If you’re looking to sell a home, a seller’s market is the best time to do it.
In a seller’s market:
In a balanced market, buyers and sellers are on even ground. The number of homes for sale is on-par with the level of demand, and neither side has an upper hand. Balanced markets tend to last for shorter amounts of time than buyer’s or seller’s markets, and they usually occur between the transition from one market to the other.
In a balanced market:
|BUYER’S MARKET||SELLER’S MARKET|
|Demand||More sellers than buyers||More buyers than sellers|
|Negotiating Power||Lies with the buyer||Lies with the seller|
|Competition||Little buying competition||Stiff buying competition|
|Sales speed||Homes sell slower||Homes sell faster|
|Pricing||Homes sell for less||Homes sell for more|
You can’t talk about the real estate market without looking back a few years. Though the housing crash and Great Recession occurred more than a decade ago, the crisis is still very much on American’s minds — especially those looking to enter the real estate market.
More than 7 million Americans lost their homes during the housing crash, which occurred between 2007 and 2009, amidst the Great Recession. The problem stemmed from a few issues occurring during this time period:
Naturally, the fear of another similar event has many worried, especially with recession predictions running rampant. Fortunately, lending standards have been tightened since the years of the crisis, and thanks to the Dodd-Frank Act, the Home Mortgage Disclosure Act, and other new laws, there are more protections in place than ever. The Federal Housing Finance Agency was also created to ensure these and all mortgage regulations are adhered to.
So, is a recession on the way, and if so, does it spell another crash for the housing market? According to many economists, a recession is probably coming within the next few years. In fact, Robert Shiller, who correctly predicted the last recession, said there’s a 50-50 chance that one occurs next year. Fortunately, most people believe real estate will weather the storm.
Of course, because real estate is so local, there are some cities more at risk than others. Redfin’s economists say the risks of a housing crash are highest in the West and South. Here are the brokerage’s top 10 cities with the highest risk of a housing downturn. According to Redfin, these are all cities that have volatile home prices, high loan-to-value ratios, and a large share of home flippers.
|CITY||LOAN-TO-VALUE RATIO||HOME PRICE VOLATILITY||FLIPPER SHARE OF SALES|
|San Diego, California||65.6%||16.9%||5.9%|
|Providence, Rhode Island||70.6%||16.8%||4.4%|
|Las Vegas, Nevada||61%||16.7%||8.3%|
|Los Angeles, California||62.6%||15.7%||7.7%|
|San Antonio, Texas||65.4%||15.7%||5.8%|
If your city isn’t on this list, it doesn’t mean you can go buying properties left and right, though. Understanding the larger real estate trends that are at work, as well as the unique ups and downs of your local market, is critical if you want a profitable property investment.
Here are some general real estate trends you’ll want to keep in mind as you making your next investment move:
Home prices have been rising for some time, though the pace at which they’re increasing has started to slow. According to the Federal Housing Finance Agency, home prices jumped 4.6% between August 2018 and 2019. They rose the most in the Mountain region of the U.S. (6.5% over the year), which includes states like Idaho, Montana, Wyoming, Colorado, Utah, and Arizona.
The most recent data has existing home sales down, with completed sales dropping 2.2% between August and September 2019. Sales are actually up 3.9% over the year. Sales on new construction properties are up both monthly and annually, according to the U.S. Census Bureau. They jumped 7.1% from July to August and 18% year over year.
Mortgage rates have been on a steady decline since the end of 2018. Though they’ve experienced the occasional minor jump week-over-week, the overall trend has seen rates spiraling downward. As of mid-October, Freddie Mac shows interest rates have dropped 1.16% over the year on 30-year, fixed-rate loans. They currently clock in at 3.69%. On 15-year fixed-rate loans, they’ve dropped 1.11% to 3.15%.
Housing inventory is still low, but data shows a glimmer of hope. According to the St. Louis Federal Reserve, August 2019 saw about 5.5 months of inventory on the market. That’s way down from the 12-plus months seen in 2009 (in the midst of the housing crisis), but it’s up from the four-month averages we’ve seen over the last few years.
It appears homebuyer competition is on the rise. Real estate brokerage Redfin shows bidding wars edged up in September, bucking the trend of seasonal declines we usually see in the fall. According to Showingtime, overall property showings were also up for the month. Competition appears to be highest in the West, where buyer traffic jumped 8.9% in September 2019.
For investors specifically, competition is definitely up. Data from Realtor.com shows investor activity was up 5.6% in the second quarter of the year, accounting for 7.1% of all sales. That’s the highest Q2 share since 2013. Realtor.com’s analysis also shows that investor sales are outpacing overall sales, largely because more homes are being advertising as “investment opportunities” in listings.
Flipping activity is up in 70% of major metros, with Raleigh, North Carolina seeing the biggest jump (72% year over year). The downside here is that flipping returns are on a dwindling. ATTOM Data Solutions’ Home Flipping Report shows flipping profits at a nearly eight-year low. (Fortunately, some markets are bucking this trend.)
Mortgage foreclosure filings have been declining for some time. In Q3 2019, foreclosures were down 6% from Q2 and 19% over the year. They’re significantly below pre-recession averages for the 12th quarter in a row.
Single-family housing starts are on the rise, jumping 9.3% between August and September. Permits for single-family properties were also up for the month.
The average mortgage payment has declined in recent months, actually falling 6.1% between June 2018 and June 2019. It also declined 3% in May — the first time mortgage payments slid in nearly three years.
Keep in mind that these are national trends and they may not speak to the exact market you’re looking to invest in. Make sure to study up on data specific to your region before making any investment decisions.
If you’re looking ahead to next year’s investments, a number of industry forecasts can help point you in the right direction.
Here’s what experts are predicting for 2020 as of mid-October 2019:
Freddie Mac predicts 2020 will average a 3.8% interest rate on 30-year, fixed-rate loans. Fannie Mae predicts a 3.6%, while the Mortgage Bankers Association predicts a 3.9%.
According to Fannie, Freddie, and MBA, home sales will rise compared to 2019, though at a slower pace than this year.
Home prices will rise no matter how you slice it, but the pace at which they’ll rise is up for debate. Freddie Mac’s forecast predicts home prices will grow 2.7% in 2020, dipping from this year’s 3.4% jump and 2018’s 4.9%. MBA predicts home price growth to slow to 2.2%, with the year finishing out at a $276,300 median price point for existing homes and a $327,300 price for new homes.
A forecast from property data firm CoreLogic expects something different, predicting home prices will actually jump 5.8% in 2020.
Both MBA and Fannie Mae predict single-family housing starts to jump in 2020. Fannie expects a 2.7% jump across the year.
Remember that these are just predictions and not any sort of guarantee. Real estate and economic conditions can change quickly, so it’s important to stay informed as your market evolves. You should also take into account any variables or risks in your own financial situation as you prepare to invest in real estate, as these will impact your investment options as well.
No matter how much you know about the housing market, mortgage rates, or the Federal Reserve’s next move, there’s really no way to perfectly time a real estate purchase. Sure, we’d all like to snag a deal of a property with low interest rates and rising home values, but the fact of the matter is, it’s unpredictable.
Most experts agree that while being educated about real estate is critical, trying to time the market isn’t best. Though market factors are certainly important in a real estate purchase, your personal finances and the timing in your life matter more in the long term — especially if you want to stay afloat on your mortgage or ensure those investment returns.
The long and short of it? You want to buy a property when the timing is right for you, not for the market. Specifically, this means:
With that said, there are some statistically better times than others to buy a house. Research from Realtor.com shows that the first week of fall offers the best homebuying conditions of the year, with listing prices down 2.4% and buyer competition dipping 26.2% overall. (This varies, of course, by market.)
Mid-October, most of August, and early February also rank among the best weeks to buy, according to the analysis. Though you shouldn’t abide by these completely, they can help inform your overall purchase or investment strategy.
Since real estate is so local, the best places to invest in real depend on your overall strategy and goals. If you’re looking to snap up foreclosures, you might want to look to places like Delaware, New Jersey, and Maryland, where ATTOM Data reports foreclosure rates are currently the highest. Metro-wise, New Jersey’s Atlantic City and Trenton, as well as Rockford, Illinois, claim the highest foreclosure rates.
If you’re looking to fix and flip a property specifically, Realtor.com recently ranked the top 10 markets to do it in. These include:
If you’ve got your eye on more up-and-coming markets, property management platform Buildium ranks Atlanta, Georgia, and Austin, Texas as your top options. Austin was also recently named the top city for real estate investment overall by the Urban Land Institute.
Your best bet is your local Realtors organization, the metro-level data at Realtor.com, or Zillow, which allows you to search individual cities and markets. You can also check with local real estate brokerages. Many offer market reports on either a monthly or quarterly basis. Sometimes, title companies also offer these sorts of resources.
If none of these options pans out, you can always reach out to a local real estate agent. They’ll be able to pull comps and fill you in on the latest market data. (Plus, it never hurts to have an agent on your side if you plan on numerous investments.)
Buying physical properties (and renting them out or fix-and-flipping them) is just one of the many ways you can invest in real estate. You can also invest via REITs (real estate investment trusts) or via crowdfunded deals. If you’re interested in diversifying your portfolio with either of these strategies, check out our REIT and real estate crowdfunding advice now.
In seller’s markets, the sellers have the upper hand, and they typically have their pick when it comes to buyers. If you’re planning to buy a property under these conditions, then you’ll need to put in the work to stand out. That often means: offering more money than other buyers, waiving contingencies, offering all cash, or including a personalized offer letter to sway the seller. Having a good agent on your side can also help here.
You can use an online mortgage calculator to give you an idea, though your best bet is to go ahead and get preapproved for your loan through a mortgage lender. This will give you a rough price range to work with, as well as inform you of your expected monthly payment, interest rate, and other details.
There are many ways you can reduce your risk and safeguard your real estate portfolio if a recession hits. Increasing your liquidity, diversifying your strategy, and branching out into safer arenas like multi-family and student housing can all be good options.
When it comes to the real estate market, there are a lot of moving pieces, and predicting what will come next can be pretty difficult. As an investor, the best thing you can do is be informed about your local market, reduce your risk by diversifying, and make sure you’re on solid financial footing before taking that next leap.