Besides location, one of the most important factors in a residential property’s value is the health of its local real estate market. Appraisers should pay close attention to various current events that may indicate a softening or imbalanced market, or conversely, a robust, healthy real estate market. Similar to a doctor looking for signs of a patient’s health declining or improving, you have signs available to determine the health of a housing market. Below are a variety of market events that point to an increasing or declining real estate market trend—some of which could be early signs of a possible housing bubble or bust.
Signs of an increasing real estate market
Number of transactions increase
As the number of transactions increase, that’s going to be evidence of an increasing market. Many appraisers focus on home price increases, but don’t also examine the number of transactions. After all, it only makes sense that as buyer sentiment is good, transaction volumes increase as a result, and we observe an increasing real estate market.
Shorter marketing times
Shorter marketing times are also evidence of an increasing real estate market, typically due to supply lagging behind demand. Marketing time is shorter during a sellers’ market due to a limited supply of inventory.
Condominium conversions become more common
Conversions of apartment buildings to condominiums is an indication of a shortage of availability of properties in the marketplace to where it encourages property owners to make the capital expense necessary to convert their properties. This is an indication of an increasing market because investors are not going to take on this risk unless there is an indication that there’s a shortage in the market that would allow them to recapture the capital employed to make the conversion. Therefore, condominium conversions become more common in an increasing market.
Prices rise while incomes remain stable or are declining
When prices rise while incomes remain stable or are declining, it indicates an increasing market. Not only is it a sign of an increasing market, but it really gives strong evidence to a possible bubble. If income growth is not in sync with home price growth, many borrowers borrow against the bubble by increasing their household debt to purchase a home, especially if mortgage rates are low (keeping mortgage payments lower) and mortgage lending is relatively relaxed. Eventually, the rising home prices become unsustainable and the housing bubble bursts.
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Signs of a declining real estate market
We can measure how many homes or property types have been idle (vacant) versus actively occupied. Changing vacancies is one measure that can be used to analyze the market. When we see vacancies in single family homes increasing, that’s an indication of a declining real estate market (sellers sitting on vacant properties indicate little/lower buyer demand). You want to look at homes that are vacant and on the market or pulled from the market and sitting idle, not homes vacant due to seasonal activity, such as vacation homes or homes that are vacant while undergoing renovations.
Longer marketing times
A movement of increased marketing times may indicate that a market is softening and is a buyer’s market with an abundance of inventory. Marketing times should be compared not only month-over-month, but also year-over-year to account for typical cycles such as seasonal fluctuations. Longer marketing times is an indication of a declining market.
Increase in seller concessions
A change in the prevalence of seller concessions within the market provides insight into current and changing market conditions. An increase in seller concessions indicates that sellers have to provide impetus to buyers. That’s indicating that it’s a market with more sellers, less buyers. When you have more sellers and less buyers, then you’re going to have price competition which can lead to a declining market.
Job growth declining
Job growth and the real estate market go hand-in hand. When we see job growth declining, that is going to be evidence of a declining real estate market as there is less buying power in the market. In a strong job market, people are more likely to buy homes. In a market with declining job growth, they’re less likely to do so.
In general, it is difficult to recognize a bubble market while it is in progress. Likewise, it is hard to identify the point whereby a bubble market starts to stagnate and bursts. For more information, check out our post, 8 Signs of a Possible Real Estate Bubble or Burst.