One of the truths in real estate is that markets always get worse, and they always get better. What steps can you take to identify what’s ahead for your market?
Part 1 of this series outlined how to use the months of inventory to recognize the early warning signs of a market downturn. What other telltale signs should you look for to determine whether a storm is brewing in your market?
1. Builders: Your early warning system
National builders actively monitor where the market is heading. When housing starts increase, you can expect a seller’s market with upward trending prices.
In strong markets, builders seldom offer incentives. In contrast, declining housing stats coupled with builder price reductions, extensive upgrade packages and interest rate buy-downs suggest rocky times ahead.
In a downturn, builders also increase commissions or offer other incentives to attract more agents.
2. A major harbinger: Web traffic
The research consistently says that today’s buyers begin their search for their next home approximately 12 to 18 months before they are ready to transact.
You can track these numbers using your personal, company and MLS listings. If pageviews are steadily rising, chances are your market is improving. If pageviews are steadily declining, sales will probably fall as well.
3. Multiple offers
The hallmark of a seller’s market is multiple offers with prices exceeding the list price. When a market is shifting from a buyer’s market to a seller’s market, prime properties are usually the first to experience multiple offers.
So be especially wary when the multiple offers decline or disappear entirely. This is an early warning sign that the market is slowing down.
4. List-to-sell price ratio
As multiple offers disappear, properties no longer sell over asking price. Consequently, if properties are selling at 100 percent or more of asking price and they drop to 98 percent or 99 percent of asking price, you are already in the midst of a market decline.
5. Days on market
An easy way to spot market shifts is to track the MLS days on market (DOM). Check this statistic monthly because it normally parallels inventory changes.
When there are substantial changes in this statistic, it’s time to re-evaluate your marketing strategy. For example, declines in inventory normally result in a lower DOM coupled with upward pressure on prices.
Decreases in DOM often indicate that the market might be moving into a flat, transitional or stable phase. If DOM continues to increase over a long period, the market will shift to a buyer’s market.
When these numbers change, it’s important that you adjust your marketing and prospecting activities to accommodate the types of clients who will be most likely to transact.
6. Flipping slows down or disappears
Flipping (buying a property, fixing it up and selling it for a profit in a short period) comes to a grinding halt in a buyer’s market.
Flipping rates generally hit their maximum just before the market peaks. The rates begin to slow as flippers try to sell and are unable to make money from the sale.
Their projected profits dwindle away as their property sits on the market month after month. When you see an increase in vacant, remodeled properties sitting on the market, this is often a sign of a market slowdown.
7. Changes in the foreclosure rates
When people are unable to sell their homes in a heated market, this often means the market has peaked. For example, the foreclosure rate in California began to rise in March 2005.
The market was still exceptionally strong, but this was one of the earliest concrete signs that a downturn was beginning. Six months later, in September 2005, the red-hot seller’s market in both San Francisco and Southern California began to slow.
While properties were still selling quickly, the double-digit appreciation, multiple offers and the one- to two-day market times virtually disappeared.
8. The rate of second-home sales shift
If your market area contains a large number of second homes or investment properties, you might experience a slowdown sooner than other areas.
When people with second homes become over-extended, they are more willing to cut their price to rid themselves of the additional carrying costs.
If there is a glut of vacant investment property, investors are often willing to sell at a loss rather than continue to hold a non-performing asset. Conversely, when second-home sales increase, there are usually better times ahead.
The bottom line is that tracking what is happening regarding your particular market’s statistics can give you a leg up against those who fail to follow these numbers.
While they are caught flat-footed by market shifts, you will see these shifts coming and already be on track in coping with them.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles and two best-selling real estate books. Learn about her training programs at www.RealEstateCoach.com/
