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5 Factors To Judge Current Market Conditions
The past has gone by and the future hasn’t happened yet. Only the current is reality.
If you believe the above statement, then historical real estate records will not play a significant role in how the market might head towards in the near future. And predictions and forecast for the future should always be taken with a grain of sale as there is no telling whether things might turn out as everyone expected.
Visionary investors tend to look far into the future and make the bets accordingly. And they tend to get the most plaudits when they turn out right.
Yet not every investor has the patience for profits and cash flow that only turn up in the long term.
Some are not at a favorable age, some have more immediate financial goals to achieve, and some simply don’t have the investment intuition.
In view of this, investing based on current market conditions is the safest bet.
Here are key factors in evaluating the current condition of the market.
1) Average prices a year ago and today
Comparing average housing prices of 12 months ago to the current day gives you an indication of where property values are heading.
Up or down?
Opportunists with an eye for cheap acquisitions might prefer to see prices decreasing.
But ideally, from the standpoint of making investing decisions based on current market, you’d want to see values going up.
Getting into the market at the start, or just before the start, of a rising trend is what you should be targeting.
If houses have already been transacting below market value for years, grab the average prices and average values for the last 5 years and tabulate the difference.
Is the gap expanding or narrowing?
A trend of year-on-year narrowing would be a good sign that demand is slowly catching up with real estate values in the area.
2) Average difference between transaction and asking prices for last 12 months
For a start, there is a difference between value, asking price, and transaction price.
Property value indicates what a property is worth. Asking price refers to how much the seller is asking for. Transaction price is the final price agreed for the deal to close.
By default the asking price can never fall below the final transaction. Seldom, if ever, would a buyer pay more than what is asked for by a seller.
And usually transaction price will be below asking price due to negotiation.
The difference between transaction price and asking price will show whether the market is currently more of a buyers market or sellers market.
As a percentage, if the gap between the two is small and getting smaller, it shows that sellers are yielding more in the market – A sign of a rising market swing.
Whereas, if the gap is getting bigger, it indicates that homeowners and landlords are getting more and more desperate to let go.
3) Average time on market
This refers to the average number of days a house takes to sell.
A credible real estate agent should be able to easily provide you will this data.
If not, consider firing him.
If houses have an average time on market of 60 days a year ago, and 40 days today, the shortening of this critical period shows that buyers are taking a much lesser time to close.
A sign of high rising demand or a lack of supply.
4) Housing supply
If you want to see examples of how demand and supply affects a market, real estate is where you should look at.
High demand tends to cause housing prices to sprout quickly while oversupply tend to depress housing prices.
On average, a healthy real estate market that is slowly growing progressively will have an inventory of up to 3 months demand.
This means that numbers indicating supply of more than 3 months will mean an oversupply.
5) Development activity
Builders and developers take on projects worth millions of dollars.
They are comfortable enough to take such risks because they have done extensive market research pointing to strong demand.
It won’t even be surprising that they have held high level talks with government officials about master plans and government support.
If construction activity for new homes is at a high level, it is a good sign that is strong demand or that demand is on the way.
If developments have been halted halfway into construction, or there is hardly any new developments, the big players in the industry probably knows that they would just be wasting their money.
While the above 5 factors should provide you with strong signals of where the market is heading to assist you in decision making, take note that they are all quantitative factors.
Qualitative factors also play a huge role in real estate investing.
It will be up to you to make judgment calls in order to harness a midas touch in real estate.