How To Foresee Real Estate Market

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– Buyer from New Jersey

“Prices are too high for us and we are very confused about when is a good time to buy a house now days … Do you think prices will go down a little or will they stay high and possibly go even higher?”

– California Renter

It’s the age old question -- “What’s going to happen with the market,” that fills my inbox quite regularly these days. Everyone knows real estate pays off in the long haul, but a lot of people are afraid to jump in when prices are escalating at a more than healthy clip.

Is there really a way to monitor interest rates and prices to eliminate your risks? First let’s start with real estate prices.

Like any other product, real estate prices are driven by supply and demand. Frankly, this is one of the basic principles that helped sustain many real estate markets across the country through this latest recession. While metropolitan areas such as Northern California and the Washington, D.C. region were growing their job bases through the 1990s, local jurisdictions were afraid of losing open space to houses -- so they passed laws to limit development.

I like what one developer said when arguments were flying high in defending the development of property for houses -- “Homes are where the jobs go at night.”

If a region’s economic development authority is bringing in more industry, then the local jurisdiction that wants those jobs and the prosperity that come with them, must allow for the development of property that will supply housing for the new employees. When they don’t -- prices start going up.

Thus, in a region where jobs have been lost, puffing up unemployment numbers -- how can sales outpace the year before and prices still inflate? Where there are not enough houses going up to meet the demand -- prices will continue to increase.

So -- indicator No. 1 -- where is your local economy headed? Listen to the local bean counters and prognosticators. If they are talking about a slowing down of the economy, then you have to be watchful for dropping housing prices -- IF -- and this is principal No. 2 -- there is an ample or oversupply of houses on the market.

In the Washington, D.C. region, for instance, we were hit with job losses just like many other regions this past recession -- however, we had not kept up with supplying those with new jobs with enough housing. So when the recession hit, many were put out of work, but those that had jobs still needed to buy houses -- thus, the prices kept increasing and sales were still brisk.

I’m watching the inventory numbers however. This year, they’ve been increasing by a rate of upwards to 50 percent compared to the same period last year. Are we headed toward a buyers' market? Not yet, but time will tell. And time is on the side of sellers, since we had such a scant supply of houses to start with, we may just be seeing a leveling out of where it needed to be in the first place.

So, lesson No. 1: Supply and demand -- on a local level -- determine housing prices.

Lesson No. 2 runs more on a national scale -- and it deals with the economy. Remember when the latest hot real estate market was heating up? It was during the Clinton years and interest rates were pushed up to around 8 or 9 percent -- but people kept buying. That’s because the economy was so hot.

The Federal Reserve alters the prime lending rate to manipulate the supply of money in the market. If the economy is slow, they lower rates so more companies will borrow money, hopefully, to invest in their businesses, thus increasing the need for jobs. When the economy starts heating up, rates start edging up to rein in the growth so that inflation doesn’t run out of control. The idea being that if the economy is hot, more employees are needed, the good ones demand more money and benefits, which eventually hit the employers’ payroll. Increases in payroll and expenses for manufacturers mean higher prices at the store.

To make all that investment money harder to acquire keeps companies from building up inflationary policies. Make sense? Now, here’s the funny part -- the prime rate has nothing to do with how much your interest rate will be on your home loan. However, it does affect the bond market where your interest rates are determined. It doesn’t affect the bond rate directly, it’s actually more of an emotional-based reaction to the market. If stockholders fear the economy has peaked and start selling, they’ll put their money in something more stable -- bonds. If bonds become more desirable, the rates increase -- and so do the home mortgage rates.

Did you hear that, economically speaking, the first quarter of this year was looking up? So did I -- right around the time that the rates were at their lowest level. Once the news hit the market that maybe we had actually surpassed the worst part of this recession -- bada-boom, bada-bing -- the bond rates edged up and our record level low interest rates vaporized.