8/20/2012 2:15 PM ET|
Signs your home value could fall
Keeping an eye on certain numbers can help you make an educated guess about where your local real-estate market is headed.
Economists have made a hash of forecasting real-estate markets lately. Most failed to call the peak in home values, and many predicted we'd be in recovery mode by now.
Instead, home prices fell 3% in the first quarter, the steepest drop since late 2008, according to real-estate website Zillow.com.
"Economists are trying to get at the underlying supply and demand (for housing), which hasn't been easy," said Zillow.com chief economist Stan Humphries, who now predicts a 7% to 9% drop this year, with no bottom nationally until 2012 "at the earliest."
If the experts don't know what's next, it may be too much to ask the rest of us to figure it out. Still, a lot of people would like at least an educated guess about whether prices in their area will keep falling, including:
- Potential homebuyers who want to know if they should wait to get a better bargain.
- Home sellers concerned about whether they should delay their sale or grab what they can now.
- All those homeowners who are "underwater" -- more than one in four homes with a mortgage is worth less than its loan -- who wonder how much worse it can get.
I can't give you a crystal ball, but I can point you to some of the indicators you can examine to see what might be next for your local market.
First, the obvious: Real-estate markets vary widely, and even neighborhoods in the same area can lose or gain value at different rates. But some factors -- what economists call macroeconomic trends -- affect markets pretty broadly, so you'll want to keep them in mind. Such as:
"External" forces. Plenty of factors can interfere with normal supply and demand. The federal first-time-homebuyer tax credit, for example, helped to boost demand for homes across the country. Once it expired, home prices, which had been on the rise in many areas, tanked again. The most recent S&P/Case-Shiller indices showed prices in February once again approaching their April 2009 lows. There's not much support for renewing the credit, though, so don't expect Uncle Sam to ride to your market's rescue.
Meanwhile, various moratoriums on foreclosures have slowed down the normal process that would have ushered these homes onto the market, leading to an overhang, or "shadow inventory," that economists worry could further depress prices.
Lending standards. Stricter lending standards also have taken a toll, making it harder for potential buyers to get loans. Just as loose lending standards helped inflate the bubble, tighter lender criteria helped deflate it. You can track general trends in lending standards by checking out the Federal Reserve's Beige Book, which monitors economic trends in its 12 districts across the country. If you see indications that lenders are loosening up, it could be good for home prices. Even-tighter standards, not so much.
Interest rates. This is the macroeconomic trend most likely to make a broad difference in the coming months. Rates are still well below historical norms, and that has helped make homes more affordable, propping up what little demand there is. If rates rise very much, that could change.
"It's reasonable to expect that we will be looking at higher interest rates soon," said economist Dean Baker, a co-director of the Center for Economic and Policy Research and author of "False Profits: Recovering From the Bubble Economy." "And that will be a depressing factor on home sales."
Even if macroeconomic trends turn against real-estate markets in general, your market could be one of the exceptions -- or it could be one that suffers more than most. Here are some signs to check to see if housing prices in your area will keep falling:
Employment. High or growing unemployment is a worrisome sign for your area's general economy, but the more important figure to examine is job growth. If your area is creating jobs, demand for homes is more likely to grow. Similarly, your area may have lower-than-average unemployment but still have dismal prospects because the job market is stagnant or shrinking, and people are giving up looking for work or leaving for better prospects. You might want to peruse "Best Cities for Job Growth 2011," prepared for Forbes magazine by two professors at NewGeography.com, to see where your city ranks.
The buy-versus-rent ratio. This ratio compares the cost of buying a home to renting a similar property for 12 months. Generally, the lower the ratio, the better the news for housing demand. Which makes sense: If buying is not much more expensive than renting, more people are likely to consider buying. When renting is a lot cheaper than buying, more people are likely to stay renters. A ratio of more than 20-1 could indicate prices have further to fall, Baker said. (This ratio doesn't work as a predictor in cities where rents are kept artificially low, through rent-control laws, for example.)
"If you're in a city that doesn't have rent-control protections and the ratio is over 20-1, that is not a good sign" for home prices stabilizing, Baker said.
Real-estate website Trulia calculates a rent-versus-buy ratio for 50 cities, while Zillow includes a rent estimate for many homes. You also can get a seat-of-the-pants number simply by asking a real-estate agent what a recently sold property would fetch in monthly rent. Multiply that figure by 12 and compare it to the sale price to figure the ratio.
Foreclosures and the shadow inventory. The number of other homes for sale has a big impact on your own home's value. A ton of for-sale signs means your property has a lot of competition, and competition tends to force down prices, everything else being equal. A lot of foreclosure activity in your market is even worse, because lenders typically slash prices of the houses they own to sell them quickly.
What constitutes "a lot" is a bit squishy, but you can be pretty sure that if more than half of the listings are foreclosures, that's a pretty bad sign. Both Trulia and Zillow can show you how many homes are for sale in your ZIP code, as well as how many are foreclosures.
That's not all you have to worry about, however. Economists also are concerned about the shadow inventory -- the homes in some state of delinquency that are likely to wind up in foreclosure but aren't on the market yet. Various foreclosure moratoriums, many prompted by the "robo-signing" scandals that revealed improperly processed foreclosures, have helped this number grow, and Humphries estimates it's now more than 5 million homes -- compared with the 3 million currently on the market. The greater the shadow inventory in your area, the longer it likely will be before home prices start to recover.
RealtyTrac may be able give you some idea of the size of this "pre-foreclosure" backlog, but in general, the more foreclosures on your market now, the more you'll see in the future and the further away a home price recovery is likely to be. (RealtyTrac's website includes "pre-foreclosure" listings in some markets when users search by ZIP code.)
Home price trends. What's happened recently often, though not always, indicates what will happen next. So keep an eye on sale trends in your ZIP code and in your specific neighborhood. Zillow, Trulia, RealtyTrac and other real-estate sites can help you monitor sales and prices.
Trulia's Ginger Wilcox recommends that armchair forecasters also look at price reductions -- how quickly home sellers move to cut their prices and how big a cut they make. Viewing those trends over time can help you determine if home prices are likely to continue to decline. When a growing percentage of home sellers reduce prices, values may have further to fall.
In December, for example, 26% of home sellers in Fresno, Calif., chopped their asking prices, compared with 12% a year earlier. Home prices in the area dropped 10% in March, compared with a year earlier.
All these data can give you some idea what might happen next for your market, but remember to take your own prognostications -- like those of the experts -- with a grain of salt.
"We have no national precedent for something like this," Humphries said. "This is new territory."
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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