Your Guide to the Housing Market

 Devon Thorsby
  30th-Jul-2018

How’s the housing market these days? It’s a question almost as common as asking about the weather, and you’ll hear it at a networking event, on the phone with your out-of-town cousin or while chatting with a real estate professional. But do you really know how the housing market is these days?

If you’re looking to buy or sell a house, you should. The ebb and flow of activity in the real estate market is a major factor in your ability to make a successful offer on a house or find a buyer fast, and it may even affect how lenders valuate a property leading up to closing on a deal.

To be able to leverage all the details you need to make a confident, smart decision in a transaction, a little bit of knowledge on the current state of the real estate market is a must. But if you’re just throwing out common industry terms like "seller’s market" or arguing about buyer preference trends without any additional knowledge to back up your arguments, you’ll likely see your bluff called.

You want to have an understanding of not just how the typical housing market cycle works, but also how your local market is functioning relative to the national market. To help you out, we’ve compiled the basics when it comes to understanding common real estate market lingo, current trends and how to examine the state of housing in your area.

Housing Market Basics

Buyer’s market definition: A buyer’s market occurs when there are more properties for sale than buyers actively shopping, giving buyers the upper hand. Homes for sale can be on the market for a few months before the right buyer comes along, and it’s more likely that the seller will be inclined to give in to concessions the buyer requests, such as paying for a new roof or covering closing costs, in order to get the buyer to the closing table.

Seller’s market definition: A seller’s market occurs when there are more buyers than properties available, leading to competition among buyers that brings about bidding wars, buyers placing offers on properties sight unseen and buyers experiencing pressure to put more cash down to get the seller’s attention. In some seller’s markets, the competitive spirit can at times cause prices to inflate beyond the rate of property value growth. When this happens, lenders may catch an inflated price during appraisal and refuse to lend the full amount. In other situations, the market may endure a price correction in which buyers hit their price limit and activity slows until prices return to a more normal level.

Balanced market: Between a buyer’s and seller’s market is a balanced market, where there’s between three and six months’ of home inventory listed, depending on the area, at any given time. Because real estate tends to run in cycles, a balanced market is most often seen as a transitional period between a buyer’s market and a seller’s market, or vice versa, but it typically lasts for a shorter period of time than either extreme.

The local versus national housing market. Real estate is a highly localized industry, as a result of wide variations among property values, economic statuses and real estate laws that differ from state to state. The housing market in Los Angeles functions very differently from the market in St. Louis, which is why it's important to pay attention to your local housing market if you're looking at factors that will make the biggest impact on your real estate deal.

Looking at the national housing market, you can see overarching trends that take place in many parts of the U.S. and commonalities among the most populated parts of the country. If you’re looking to understand the relative value of your home, though, you should focus your research on your local market.

Also keep in mind that a reported property value is based on the asking price of properties currently on the market or reported appraised values by real estate appraisers. Reported median or average price, on the other hand, is based on properties that have recently sold, which means it is more likely to be accurate when determining what your house can reasonably sell for.

Factors lending to market changes. Because an individual’s ability to buy or sell a home is heavily influenced by his or her personal financial situation, the overall market is often influenced by changes in the job market, consumer confidence, lender regulations and zoning laws.

But with houses being as big and highly valued as they are, real estate typically doesn’t see snap-judgment changes like the stock market does. The relatively slow-moving nature of real estate transactions helps prevent the housing market from crashing on a regular basis.

What happened in the housing market crash. Of course, the housing market can crash – and it did in 2008. After years of lenders issuing mortgage loans with little regard for the appraised value of the properties or the likelihood the borrowers would be able to keep up with payments, the adjustment of interest rates led to mass foreclosures. During the Great Recession, 7 million Americans lost their homes, and many more owed more on their mortgage than their home was worth.

Because the housing market crisis was so widespread, it remains vivid in the minds of many people as they prepare to buy a house, sell a house or invest in real estate. Some in the real estate industry note similarities, like sale prices, in the current housing market to years like 2005 or 2006, which led to the bubble burst. But they also neglect to note the regulatory differences for lenders that are aimed at keeping subprime loans and predatory lending from becoming the norm again.

The Housing Market Now

throughout the calendar year

Housing marketing trends. On a national scale, the yearslong trend of buyer demand outpacing the number of homes on the market continues.

However, the second quarter of 2018 appears to show glimmers of a possible change, as the inventory of properties for sale grew by 12.2 percent compared to the first three months of the year, according to a report by real estate information company Trulia.

“We’re starting to see signs of hope with this quarter-over-quarter spike, especially in these metro [area]s that are rebounding from inventory decreases last year, and these really unaffordable metros that are finally seeing some inventory increases,” says Alexandra Lee, a data analyst for Trulia. Those pricey metros she refers to include New York City, Miami and San Diego, where inventory saw year-over-year growth of 1.1 percent, 3.1 percent and 22.1 percent, respectively, according to Trulia data.

A necessary answer to the inventory shortage is for the construction of new homes to increase. But issues with zoning to allow for new homes to be built or redeveloping existing properties slow the process down, in addition to labor shortages in the construction industry and tariffs on Canadian lumber imposed in late 2017 by President Donald Trump's administration.

The Trulia report notes Nashville, Tennessee, and Salt Lake City have historically high numbers for construction permits, indicating especially high building rates, which contribute to their 52 percent and 48.6 percent increases in inventory, respectively, in the second quarter of 2018 compared to one year prior.

Taylor Marr, senior economist for national real estate brokerage Redfin, says home construction doesn’t necessarily meet housing needs right away, since more buyers need entry-level price points while newly built homes tend to cater to higher sale prices. “Builders would have a challenge meeting starter home demand,” he says.

At this point, it’s a matter of waiting to see whether construction is able to ramp up in enough markets to make a difference. “We can keep tabs on construction and see if it does correlate with inventory on the market,” Lee says.

Housing market predictions. As you examine the status of your local housing market, keep in mind that market predictions aren’t a guarantee. As long as you are making a well-informed decision regarding a home purchase or sale, including taking into account the potential for changes to your financial situation in the near future, a prediction should not have a major impact on your deal.

Rather than guarantees on prices going up or down, you can expect consumer preferences to continue to change how homes are presented, with a growing focus on the community outside the property lines. Reasons behind this include the fact that consumers prefer that walkable, Main Street setting, and also because housing prices now take the greater community into account.

For Adam Davidson, president and CEO of Nashville-based builder Davidson Homes, the rising cost of real estate in general and the cost to build a house is likely going to change the way his company does business.

“We are working in a direction where once [cost] hits a breaking point, we’ll need to deliver a slightly smaller product, so we’re going to cut some square footage. But we’ll still be able to offer the same amenities that the buyer demands,” Davidson says.

The decision to cut square footage over community amenities didn’t come lightly, but ultimately customers reported they would be willing to lose a bit of size on their homes if they were able to still enjoy community features offered by the builder, whether it's sidewalks consistent throughout the development, parks or even a clubhouse and pool in the neighborhood for residents to enjoy.

In a similar way, entire towns and neighborhoods in larger cities are working to rebrand their areas to attract that same level of preference for community over a focus on an individual house. Marr says individual consumers and even employers are reconsidering their location based on walkability, ease of access and the ability for people to feel at home in the area outside their own property – and it’s something you can expect to continue going forward.

Even in college towns, where the rental market is always healthy and job availability tends to be consistent, Marr says the goal has shifted from a strictly university focus to developing the local economy to “even retain people who go there for school.”

Common Questions About the Housing Market

When is the best time to sell a house? All other factors aside, most markets throughout the U.S. see the highest level of active buyers in the spring. A market that sees four seasons, like Detroit, will likely experience peak activity in spring, early summer and early fall. A hot climate like Phoenix, on the other hand, is more likely to see continued activity throughout the winter.

To determine the best time to list your house, however, place your needs first – whether it’s waiting for the kids to be out of school for the summer, listing in winter to meet your financial needs or putting your home on the market with little notice during the fall because you were transferred for work.

Listing your house in winter or at the height of summer doesn’t mean your house won’t sell, it may just need to be more aggressively priced, or you may have to wait a bit longer for the right buyer to come along.

Is it a buyer’s or seller’s market? Looking at your own real estate market, check the current housing supply to determine if you’re experiencing a buyer’s or seller’s market. Local real estate associations, like your regional or state chapter of the National Association of Realtors, often release quarterly or monthly reports that touch on how to decipher whether your local market is in a buyer’s or seller’s market.

Keep in mind that being in a buyer’s or seller’s market won’t prevent you from selling or buying a house. It may simply take more patience to find the right house, or you might have to be more flexible with the price.

For homebuyers who struggle to compete with other bidders in today's market, Davidson offers the reminder that newly built homes are an option in “just about every price range they could be looking in,” at least where his company builds around Nashville.

What will the housing market look like in five years? A weather forecast for the next 10 days tends to be unreliable, so don’t expect a five-year housing forecast to be 100 percent accurate. However, based on some general trends in building and buyer preference, there are a few bets you can consider likely.

Inventory will return slowly. The Great Recession essentially halted construction, and developers and builders have struggled to keep up in the years afterward to meet demand. New generations are reaching adulthood and financial independence, which means more households continue to form throughout the U.S., but construction still can’t meet demand.

While construction activity in markets like Dallas and Nashville is above the historical average, expect inventory growth to be a slow, long-term development. “These places have been so inventory-starved for so long, one or two quarters of inventory growth won’t really affect prices so much because they’re still catching up to demand,” Lee says.

Expect more Main Street developments. People like a walkable community, even when they can’t afford to live in the heart of downtown. Marr says mixed-use communities, which combine residential with offices, retail storefronts and common space for people to gather, are being built in the suburbs of major metro areas to help those who can’t afford to live downtown still feel connected to a community.

This “surban” development – combining suburban and urban – is able to provide housing and commercial space where there was previously undeveloped land or underused buildings, “largely because of the lack of inventory in the inner city,” Marr says.

When will housing prices drop again? Buyers in areas where home prices have been rising rapidly may be hoping and waiting for a drop in prices, but an actual drop would mean there’s something going wrong in the economy. Either locally or nationally, home prices drop when there’s suddenly not enough buyers shopping for houses and more houses going up for sale, often caused by a halt in income growth or job loss.

In an ideal world, home prices drop suddenly, allowing you to buy the house you want with the money you have. But that’s an unlikely situation because if home prices suddenly drop, there’s a possibility you’ve been affected by the declining economy as well, which is a greater threat to your ability to become a homeowner.

For buyers who feel squeezed out of buying a home in their metro area due to high prices, the better alternative is for the rise in prices to slow down, allowing you to catch up. More homeowners willing to sell, more new houses being built and fewer buyers with more money than they need help price growth to slow down, while still making homeownership less treacherous.

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