Finding the Hot Real Estate Markets
©2007 by Wendy Patton and Justin Ryan of Investing Tours, Inc.
Donald Trump’s name is synonymous with BIG PROFITS in Hot Real Estate Markets. He speaks at huge conventions about getting motivated, he writes books, appears regularly in the news. But he doesn’t talk about how he finds his deals. Donald Trump is one of the best known real estate investors in the world, but he doesn’t tell us where to invest.
In our article on Emerging Market Investing we talk about the real estate adage “Location, Location, Location.” This is a critical component of finding where to invest. But just as important as location is TIMING. Timing, Timing, Timing. Donald Trump doesn’t know just where to buy but he also knows WHEN to buy.
Most people, the media included, will tell you that you should be buying real estate when it’s going up – buy when everyone else is buying. Nothing could be farther from the truth! Donald Trump and other EXPERIENCED Investors will tell you that more money is made in down markets than can be made in up markets. If you buy when everyone else is buying you will also be SELLING when EVERYONE ELSE IS SELLING. Does that sound like the formula to great wealth? If you are selling when everyone else is selling, there is a name for that. It’s called a BUYER’S MARKET. That’s a market when conditions favor the BUYERS not the sellers.
Does this mean you want to buy when a market is on its way down? Rarely. The optimum time to buy, the critical TIMING component of real estate investing, the time that Donald Trump buys, is when a market has already gone down and is poised, on the brink, of going back up. This kind of market is still a buyer’s market. Conditions favor the buyers not the sellers. That’s what we want as investors, don’t we? Conditions that favor us!
The reason we buy when the market is poised to go back up and not on the way down, or already down and languishing in being down, is because we as investors want to make a profit and we don’t want to have to wait a decade to make it. When a market is going down or is hovering at rock bottom, we don’t always know how long it will be there.
We at Investing Tours, Donald Trump and other experienced investors put a lot of effort into finding these markets that are poised to go back up, these Emerging Markets. Unlike Donald Trump though, we are going to tell you about how to find the proper timing.
The secret to finding the proper timing is the market indicators.
The secret to finding the proper timing is the market indicators.
All real estate markets go through cycles, upwards & downwards, peak and rock bottom. The market indicators tell us the WHEN, they tell us what part of the cycle any given real estate market is in. Donald Trump uses them, we use them, savvy, experienced investors use them.
Let’s take a look at some of the key indicators that tell us where in the cycle a market is in.
Sales of Existing Homes
Sales of Existing Homes
This indicator will allow you to feel the pulse of the local market. It is one of the most critical indicators. Existing homes sales is a statistic that shows how many homes have sold in a given month, and it tells us how many buyers are coming to the market. By looking at monthly sales data you will be able to determine when a sales slump has started to turn. What you are looking for in this data is a trend over time, adjusting for seasonal changes. A brief spike of sales in one month is not going to make for an emerging market.
Permits for New Home Construction
Real estate construction is the largest industry in the United States. It affects the national and local economies tremendously. Construction companies, especially the larger ones, are very tuned into real estate markets. As such when they perceive that a market slump is starting to turn for the better they will increase their building, consequently pulling more building permits.
As demand for homes increases they will continue to build more and more. Like existing home sales you are looking at the trend over time, adjusting for seasonal changes.
Months Supply
This indicator tells us how many months it would take to sell all of the homes that are currently on the market at the current sales pace. Typically when the months supply is below 5 ½ months (i.e. it would take 5 ½ months to sell all of the homes on the market at the existing sales pace) a market is experiencing high demand. If the supply is greater than 6 ½ months the market is experiencing low demand. By tracking the supply data you can watch as the trend moves to dropping below the 5 ½ month supply level. This will tell you when to buy.
Foreclosures
Mortgage foreclosures run towards the opposite of the other indicators. When the number of foreclosures reach their peak in an area it means a market has hit rock bottom. As the volume of foreclosures starts to decline it means the market is turning and moving back upwards in the cycle.
Days on Market
The number of days on the market is the amount of time it takes for a home to sell from the day it’s listed until the day it receives an offer. In some areas it will be the time until the actual closing occurs. If the average number of days on the market is long, say 120 or more days, this indicates that the market is moving slowly and it takes time to sell homes. If the time on market is 60 days or less then homes are selling quicker. By watching the days on market trends you will be able to watch as a market shifts from homes selling slowly towards homes selling quicker, indicating increased demand and price appreciation.
To determine where a market is in its cycle of upwards, downwards, peak or bottom, we need to evaluate all of this data together. Donald Trump doesn’t just say “Foreclosures are down in Tucson, it must be a good time to invest.” We need to look at the aggregate data. It is important to note that market data doesn’t all line up neatly in one month either. We may see foreclosures starting to drop, then a couple of months later existing home sales creep upwards, followed by the months supply moving downwards a few months after that.
There are times too when market indicators contradict each other. Houston Texas recently gave us a perfect example of this. Foreclosures were on the rise in Houston but permits for new home construction and existing home sales were also up. In this case home values were going up despite the rise in foreclosures.
This market indicator data, along with other key data is what helps us to determine WHEN it is a good time to buy in a market. You can be sure that experienced investors take this data into account as they choose the markets they plan to invest in as does Donald Trump.
NOTE: Whether you are an investor, a buyer or a seller, we (your Star Valley Home Team) believe your real estate agent should have this information readily available to you so that you can make informed decisions!
