5 Tips To Help Evaluate Your Local Market
By Paul Esajian on October 27, 2017
Real estate investing is market specific. Something going on across the country has little to no impact on your local area. In some cases, there can be a dramatic impact in price and demand even within the same zip code. Going just a few miles in either direction may completely change the makeup of the market. It is important to stay informed and updated on whatever market you invest in. National numbers and trends may get your attention, but they are not nearly as relevant as you may think.
It is no secret that better investors are more in tuned with their local market. They are always one step ahead rather than a few steps behind. By doing this they get better deals in better locations and ultimately net a higher profit. Every investor should take constant inventory of where they invest. Here are five tips to help evaluate your local market.
- Price. The strength of any market is partially judged on supply and demand. Markets with higher demand will see a gradual uptick in price. Higher prices alone don’t make a market attractive but is some indicator of where it may be headed. Your starting point for market evaluation should be the average sales price. Look at sales over the last three years but be sure to give more weight to last 90 days. Where many investors get in trouble is relying too much on outdated information. Where a market was twelve months ago has little to do with where it is headed. Break each sale down to see if there were any extenuating circumstances such as a foreclosure or short sale. If the sales price numbers have improved, try to get to the bottom of why. Markets may take a short term jump but the improvement can be unsustainable, and the market should be avoided. Start your evaluation with sales price data and go from there.
- Volume. A few high-priced sales can alter the average price. It is more important to look at the median sales price rather than the average. With your sales analysis you also need to evaluate the volume. How much interest is there in the market? More closings mean that demand for the market is there. With volume you want to look at the last 30 & 60 days. Anything too far past that doesn’t give you a real indication of what is going on. If the inventory is flying off the shelves and sales are closing you know that demand is there. Even if it is not currently reflected in the price you can assume that it will eventually catch up with demand. Increased volume means that you can feel comfortable buying in this market knowing that you should not get stuck with a property for too long. This doesn’t mean that every deal will be a home run, but you are far less likely to get stuck with a property you can’t sell.
- New housing permits. Changes in sales price and volume do not tell the whole story. There are markets with old inventory that need to turn over. The strongest markets have an assembly line of new houses coming to the market coupled with old ones leaving it. It is always a good idea to look at the number of new housing permits. This information typically is available online or with a simple trip to town hall. New housing permits means that builders find the market appealing and buyers most likely feel the same. It also means that there will be a short-term influx of properties in the coming months. This can further help you evaluate the demand and where the market may be headed. It will also give you an idea of what buyers may be interested in as far as housing style and amenities. Without new properties hitting the market buyers will get bored with current inventory and start looking elsewhere.
- Days on market. The quicker a home is sold the greater the demand. The more days a house sits on the market the less interested the public becomes with it and eventually a seller will lower their price. If a home sells in 45 days, it is a sign that an offer was accepted in the first week it hit the market. It also shows that the seller may have had their choice of offers and was able to take the strongest one. Both show that demand is high, which is a great sign for sellers. There are always extenuating circumstances for any sale, but you need to look at the number of days a home was on the market prior to selling.
- Miscellaneous demographics. There are many miscellaneous factors that influence demand in a market. There are many buyers who look at the strength of schools in the area and go from there. Some buyers look for towns with the lowest taxes to get more bang for their buying dollar. Other markets are affected by unemployment data as well as foreclosures. Something as seemingly innocent as a new restaurant opening downtown can influence the outlook of an area. On the flip side a large employer shutting down has the same negative impact. Before you make any buying decision you need to dive into as many demographics as possible, so you know exactly what you are getting.
No two markets are exactly the same. Markets change with every sale and every new listing. How well you can evaluate where a market is will directly impact your bottom line.