Are you wondering what decisions to make about your real estate? Not only because there are too many experts providing different forecasts, but also because most of the publicly available market forecasts are limited to larger regions, it is very difficult for a normal person to make the right real estate decision.
As I mentioned in the last blog post, I am going to briefly share how you can predict a specific real estate market where you want to buy or sell. Unfortunately, 100% convincing predictions are impossible from this method (like other real estate market forecasts). However, if you know how to apply collected data to your forecasting, you can make a smarter real estate related decision in the future.
First of all, before we get to the main point, I would like to review the supply and demand curve, which is the basic principle of the economy.
1. Supply and demand curve
The most important concept for forecasting any market, not just real estate, is the supply and demand curve.
Like all trades in the world, the price of each property is formed where supply and demand meet. Therefore, while demand remains the same, if supply increases, the price falls due to competition among suppliers, and the buyers' market is formed (the left graph below). On the other hand, while supply remains the same, if demand increases, the price rises due to competition among consumers, and a seller’s market is formed (bottom right graph)
Conversely, while demand remains the same, if supply decreases, the price rises due to competition among consumers. Eventually, it will become a seller’s market (the left graph below). While supply stays the same and demand decreases, it will become a buyer’s market (right graph below).
It is pretty obvious, right? This obvious theory goes for the real estate market as well. If there are many sellers, it becomes a buyers' market that is advantageous to the buyer, and if there are many buyers, it becomes a sellers' market that is advantageous to sellers. So how do you forecast a real estate market based on this principle?
2. Real estate market forecast
Again, the method below is my own so that it cannot be your absolute solution. However, if you have this very basic concept in your mind, it will be much helpful for you to make a wiser decision for your future real estate transaction.
Set a target market
First of all, you must set a target market where you will buy or sell real estate. I would like to recommend you set your target market smaller than one zip code area because there can be multiple different markets in one zip code area. For me, I usually set a market by the same price range of one elementary school district in the same zip code. And if the sample size is small, I expand my market’s boundary gradually.
Data collection
Now, it is time to collect relevant data. As I mentioned earlier, the most important question of market analysis should be, "How will each collected datum affect the supply and demand of the market?”. The more you collect relevant data, the more precise your analysis would be. Try to get data from various angles.
If you can get the following information at least, you can predict a certain market pretty accurately. (The list order below is not by a priority.)
1. Months of supply (inventory)
The formula is
Total number of “for sale” properties in the market divided by the average number of monthly “sold” properties in the market for the last 12 months
The result of the formula is the number of months to sell all the existing houses in the market. Usually, the threshold is 6 ~ 7. If the number is lower than that, you can say it is currently a Seller’s market. If the number is higher than that, it is currently a buyer’s market.
The best resource for this information should be your realtor. If your realtor is analytical enough, he/she can get you the MOS at detailed levels such as MOS of the same number of bedrooms and baths houses, etc.
2. Population trend and new constructions
If there is no or only a few new constructions but if the population is increasing in a market, the market will most likely become a seller’s market soon. So, please visit your target market and drive around to check if the market will have new properties soon.
At the same time, check the Census and review the population trend of the area. Also, you can reach out to local schools to check how many new students registered compared to the last period or year.
If you can figure out why the people are moving in or out of the area, it will be even greater for you to predict your market.
3. School scores
According to the 2017 National Association of Realtor’s survey, 96% of home buyers cannot compromise the school quality when they buy a house. This implies a big thing. This 96% of people will more likely stick to the market even though the economic condition is bad. That means the market is stabler than the other areas with lower school scores.
Especially, if the price range of your target market is about the middle in the school area, your market must be healthy. We can simply assume that 96% of the people will stick in the school area no matter the economic condition is good or bad. If the economic condition is good, more people in the lower price range will move up to the higher price range house. If the economic condition is bad, there will be people from higher price range will move down to the lower price range houses. So, the mid-price range house in a good school boundary is always the most stable.
You can get the school scores from greatschools.org.
4. All other information about your target market
Get all the other information about the location. For instance, any company will move in or out, or even close, will property tax increase, any government facility will be built, if divorce rate changes, if unemployment rate changes, will a new Starbucks or wholefood will open, etc. You can simply analyze if the demand/supply will change from the information as well.
5. Any specific government policy
For example, we had a great real estate market this year due to the low-interest rate. You can review the policy and assume the supply/demand of your market.
You can get all the information listed above from your real estate agent. If your analysis goes too complicated, ask your real estate agent for help. A good agent can not only provide all the data you need but also help you analyze the market more precisely.
Like how you work with professional stockbrokers or fund managers, it would be better for you to work with a real estate agent who can professionally analyze your market and help you make the right decision.
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