We're seeing a lot of media reports questioning what is happening with the housing market. The data seems to be confusing, and often looks good one month, then ends up being revised downward the next. So what is REALLY going on out there?
The market data is simply not all that clear when you look at general national averages, because it's like being in an airplane at 30,000 feet. You can make out the shape of things on the ground below, but it's very difficult if not impossible to see any details. But when you get down on the street level, you can see all of the details in one particular spot, so your view is much clearer, but much more focused on one specific area as well.
This is why David Lereah, former Chief Economist at the National Association of Realtors, the Fed, Treasury, Fannie, Freddie, big banks and big investors all failed to recognize the coming market crash that was very apparent in many neighborhoods as early as 2006. The so-called "experts" were up in the "airplane", flying at 30,000 feet, trying to figure out what was happening on the ground. But in reality, while they could see something down there that did not appear to be normal, their data contained a distant view, so at their "altitude" they simply could not see what was really happening on the ground.
The primary reason market reporting appears to be conflicted and confusing when viewing the general housing data is because real estate markets are very much a local phenomenon. While the media tend to latch on to these monthly reports posted by the National Association of Realtors, or other agencies responsible for general housing sales analysis, the simple fact is you can't get a detailed picture of local fundamentals.
The reality is, some markets are doing pretty well, some are doing very badly, and some are in between. It all depends on your local market fundamentals. After years of analyzing thousands of properties in a wide variety of cities and neighborhoods, I can tell you that fundamentals such as location, supply - demand ratios, employment sectors, and housing prices are highly localized. They are best viewed clearly by collecting data on the fundamentals for your specific area. In large cities, this data can vary markedly in just a 5 mile radius. National averages are simply not that helpful.
I worked with a coaching client in early 2011, who was in Wyoming. Due to high paying employment caused by an energy boom, and demand for housing that was pressing on the supply of homes, his city, Casper, had seen little of the foreclosure wave, and housing prices there were stable to rising, even as other cities were making headlines for falling prices and record foreclosures. Because of the fundamentals in his market, his investment options were totally different from those of investors in other markets.
Las Vegas on the other hand, is among the highest foreclosure rates in the nation, heavily over-built and then subjected to a downturn in tourism driven employment, because of the recession. The result was the home buyers who bought in 2006 got slammed, paying peak market prices, and then watching those homes lose as much as 50% of their value in less than three years. Yet the media reports in 2006 had the Las Vegas housing market flying high, with no indication that it was about to slam into a mountain that was not on the radar.
Investors and owner occupant buyers can clear up most of this confusion by simply focusing on what is happening in your local market. And I mean really local. What is happening within 10 miles of the area where you want to live or invest? And further, what is about to happen? Is there a new medical facility under construction? Is that military base that's been there for 60 years about to be closed to accommodate a cut in the defense budget? This stuff has major local impact, yet does not show up on monthly housing reports.
In any large metro area, there are some neighborhoods that experience high demand, and low or no loss of value, while other areas experience high foreclosure rates, slow sales, and loss of value as high as 50%. The key fundamentals driving this are the proximity to high paying employment and the convenience factor. (i.e. location)
Neighborhoods that are located near a wide variety of essential activities like medical facilities, educational institutions and shopping, are seeing more demand. Neighborhoods farther out in the burbs tend to be less convenient, have longer drive times, and can be impacted significantly by rising gas prices. They tend to have higher foreclosure rates, lower demand in a recession, and this usually results in a greater loss of value.
Miami, Florida has had it's problems with over development, but hey, it's at the beach! and it's warm year round. People want to go there, and will if they have the means to do so. Coastal areas suffer much shorter downturns than areas located "out in the boonies" where it's less convenient. Even with hurricanes, the memory of such bad events fades quickly in the face of such highly desirable location or good paying jobs.
San Francisco, California has had some of worst earthquakes in history, but prices there are still high relative to most other cities. The proximity to high paying jobs and beautiful scenery adds fundamental value and higher demand to an area, even if it is threatened by something as ominous as a major earthquake.
Detroit, Michigan on the other hand, has had the worst of both worlds. A crumbling job market in the once dominant auto industry, combined with harsh winters in their northern location. They are having to tear down houses in Detroit, as some of them were priced as low as $1 and still did not sell. It's hard to justify buying a home to live in, or a property for investment, when there are few jobs and thousands of vacant homes with no takers.
It's a well worn saying that the three most important things in real estate are "location, location, location". This is a hugely important fundamental. And it's one that is difficult to incorporate into those general monthly reports that cover the entire nation.
Jobs are the other big local driver. Areas with employment in medical and educational sectors have been stronger during the recession, and over all, have been relatively stable compared to neighboods where a significant number of the residents were employed in construction, trades or manufacturing industries that were supported primarily by home building.
The average real estate investor or home buyer does not need a 30,000 foot view of the national real estate picture. When it comes to making smart investing decisions or choosing a home to live in that will hold or increase it's value, it's much more important to know what is going on right down the street.
Donna S. Robinson is a 16 year veteran of the real estate industry and a staff writer for RealtyBizNews.com. She is an active real estate investor who also provides coaching and consulting services. Contact her at [email protected] or call her office at 888-915-9968 to inquire about coaching or consulting, or to request a free copy of her latest book.