How To Read The Market Indicators

A good friend of mine is getting his house foreclosed on. Robert is a real good guy. A Christian. A family man. He is in his early forties. However, he bought his house in the height of the real estate market. He paid top dollar for his brand new five thousand square footage house. He got a fixed three year ARM (Adjustable Rate Mortgage) at only 3.75%. Now, he just lost his job, he has been late in couple of accounts, and it is time to refinance this ARM.

Robert is faced with another problem: the market. The real estate market is not what it was back then. For instance, Andre Agassi and Stephi Graff just sold their Californian house three million dollars less than what they've paid for it just five years ago. It is true that as real estate investors we can profit from a rising and falling market. But first you must know your market so you can plan your investing strategy to fit that market.

So what is "The Market'?

Real estate market is not like the stock market. We don't say, we're in a bear market or a bull market. There are facts and figures that the media reports on the housing market on a regular basis, most of which are really confusing to the average real estate investor. Let's discuss each of those indicators and see how they affect the market. We also will talk about how to adjust your investment strategies.

New Home Sales

Sales of new homes is a indicator used by many economists to measure the strength or weakness of the housing market. This data is found by checking the permits submitted for new home constructions. This data is relevant because it can show how strong is the demand for new homes. In metro Atlanta for instance, the sale of new homes in lower in the inner city than in Gwinnett county where I live. The reason is that, in Gwinnett, land is plentiful. This may result in oversupply. Conversely, the supply in inner city for new constructions may be lower than the demand. So, you should micro analyze the data a little closer before drawing any definite conclusion. In case of inner city where there is shortage of new homes, the Home Re-sales data will be a more accurate indicator of the market. It shows how many properties have been sold.

Rental Vacancy Rates

When interest rates are low, home buying goes up simply because it is cheaper to make mortgage payments than rent payments. Conversely, when interest rate goes up rental for apartment and single family homes is also up simple because it's cheaper to rent than to make mortgage payments. My friend Robert whom I talked about at the beginning of this article would certainly rent a house.

This is a good indicator for real estate investors to know that we're getting in a buyer's market. When the rental vacancy rates indicator is going down you should start selling. Put it another way: when interest rate is going up start looking also at the rental vacancy rate. If you're in the single family home market look only at single family home rental indicator. Not the condo rental vacancy rate indicator. Compare apples to apples.

Default Loans

This is a clear indicator that foreclosure is looming. Bear in mind that part of the foreclosure is the result of bad lending practices. Take the sub prime market for instance. Lending 100% of the loan to an OK buyer is definitely taking some risk. The market will correct itself.

When defaulted loans are high you can use two different strategies.
1. Buying the property itself
2. Buying the defaulted loan at a deep discount (this is also called short sale the note). Then if you want to own the property you have to go through the foreclosure process. In both cases you end up owning the property at a fraction of its value.

If you're in a high interest rate market you should expect the rental indicator going up. You can rent the property and wait for the market to correct itself then sell the property at huge profit. I've seen many investors playing the buy and hold game too long. Everything is for buy and for sell. You should get too emotional about it. Buy low, sell high. Buy low, hold for a while, sell high. Buy low, sell low quickly. Control high, sell high.

This last strategy works well when the default rate is high. For a few thousand dollars you can control a good piece of property (by getting the deed or having an option on the property) and turn around and sell the property to someone else with a better term than the rental market. My hope for you is to look at the real estate indicator and apply some buying and selling strategies.

Jacques Coquerel