Posted by ray@lcorn on December 09, 1999 at 13:33:40:
I’m a little confused as to how a market can be at once overvalued AND sluggish. Seems to me that the two conditions are mutually exclusive. If values are high, then the market has supported that level and sustained them, as is the case where houses in the northern CA market, and other places routinely sell for more than the list price. If the market is sluggish, then that is a function of the asking prices being too high to find support, therefore indicating that the high valuations may be headed for a correction. The caveat is to not get caught holding high priced, depreciating properties during the long downward slide of a correction, as anyone who dealt with properties in California or Texas in the eighties and early nineties can tell you. So maybe you should first determine where your market is really headed. I know nothing about Honolulu, but can guide you to the sources that have the information you need. I have done market research all over the Southeast over the years, and there are some fairly easy ways to get an accurate read on local conditions.
To paraphrase an old saw, all real estate is local. No real estate is national. Prices and activity in any market depends almost entirely on your local economy, and may have very little to do with the national economy. But that is not to say that what happens on a national or global level won’t have an impact. One example is if the price of oil goes up to forty dollars a barrel, then interest rates will rise, and you can bet your real estate market will slow down, and you may have a problem selling a house. But for the most part, what is happening in your local economy will determine prices and activity. A growing, or rising economy, usually will result in an appreciating real estate market. Conversely, a falling economy will result in falling prices in real estate as well. There are some key indicators that you can watch that will give you a very good estimation of market conditions in your area.
The best and quickest indicators for the state of a local economy are the employment levels for the area. You can usually get that number from the local economic development folks, the local planning department, or the Department of Labor. If employment growth in your community is stronger than the national average, then your economy is up. If it is weaker, your economy is down. If it is significantly below the national average, then your economy is in bad shape. The numbers to look at are the job growth, defined as the numbers of new jobs created, and the level of unemployment as a percentage of the work force, commonly called the unemployment rate. Make the comparisons on an annual basis only, as seasonal and monthly fluctuations are generally always present, and gain relevance only when evaluated in terms of one year to the next.
The next number to gauge is population growth. Again, the local planning department will most likely have the data, but it can also be obtained from the Census Bureau. If your area is experiencing net population growth, that is generally good news for the local economy. The exception to this is in some older cities where services may be strained by an increasing low/no income population. If population is declining, then the local economy is probably suffering as well.
The next numbers to consider are comparative figures on homes for sale and homes sold. The local Board of Realtors will have this information and should share it with you directly, or in some cases would give it to a member agent acting for you. Compare the number of listings and the number of sales on an annual basis. If the number of listings is going up relative to the number of sales, then the market is going down. If the number of sales is going up compared to the number of listings, then the market is going up. Again, make the comparisons on an annual basis. Seasonal and monthly variations have no meaning by themselves. For example, in most markets, you would expect June to be a better month than February, the relevance only appears when you look at June or February this year compared to the same months last year and the year before. (I prefer three years of numbers.) I don’t put a lot of stock in the number of new housing starts. It can be reflective of an economy, but just as often it can be wildly skewed from one year to the next by other factors. I tend to rely more on the actual sales and listing info.
One last thing that I have used in evaluating markets over the years is the local newspaper. Take a look at the “help wanted” ads in comparison to the “autos for sale” ads, again on a year-to-year basis. In many (not all, this isn’t an exact science!) cases, they will run counter to each other, depending on the state of the local economy. If the number of help wanted ads is going down, and the number of auto ads is going up, the economy is slumping. When the number of big ticket items for sale are increasing, it is a sign that the economy isn’t doing well. I don’t use this as an absolute measure, but more as a check for the other numbers. If you’re not from the area and can’t watch the ads regularly, the newspaper will often give you some comparison numbers as long as they know what you’re going to use them for. Don’t be surprised if they get interested and do a story on being your own economist!
Once you know what the trends and pressures are within your local market, you can then begin to form a strategy as to how to best profit from the conditions. Money is made on economies going in both directions, but only if you understand the actual direction.
Hope this helps,
As to your question regarding my background and experience, I have been in some segment of this business all of my life. I started in my father’s mobile home sales business when I was a teenager, got into modular housing as a contractor after college, then into residential development. I went broke in contracting in the eighties, and then got into commercial development. I presently head the family company founded by my father, and owned with my three brothers here in the Blue Ridge Mountains of Virginia. We deal only in properties we own (no brokerage) and are involved in the development and operation of a diversified portfolio of properties that includes hotels, apartments, mobile home parks, and retail commercial projects, as well as commercial and residential development. Over the years we have been involved in hundreds of properties, maybe more. To tell the truth, no one counted.
As to John Reed, the man has opinions and has developed a forum to express them. For that I admire him. As with most folks I read and discourse with, I agree with some of his opinions, and I disagree with others. Irregardless of mine or anyone else’s opinion of him, he has the tenacity and the drive to share his thoughts with any who care to listen, and the market will determine the veracity and value of the effort. It is immutable natural law that in the matter of anyone who presents his or her thoughts as a path to follow, if the information is true and valuable, it will last.
Ralph Waldo Emerson observed that in each generation there are but a few who fully understand the work of the Greek philosopher Plato (I’m not one of them!), but his works continue to be published throughout ages because the essence and truth of his thought demands it be preserved for those few who are to come. Not to say that any of our ramblings about real estate are on a level with Plato, but I think the same premise holds true. What is true and has value will last in the face of all that attack it. That which is based on falsity, or flawed in its construction, will collapse from its own defects.
As a professional and as an individual, I am much more troubled by a person who has no opinion on issues, than the one who has an opinion that differs from mine.