What objective measures will tell housing bottom ?

[Delawaredave5]

What objective measures will signal the bottom of the housing market ? I'm tired of listening to people on TV and reading about how people think the market "feels"....

Here's wiki on bubble and affordability:
Real estate bubble - Wikipedia, the free encyclopedia

Several different ways to look at it:

1. Housing price versus long term trendlines (inflation + 1% or so)
2. Median house price to median income ratio
3. Housing "PE": price divided by rent less expenses
4. Housing value as a percent of GDP
5. Housing price versus replacement cost
6. Other metrics ?

When you research a stock - you look at ratios from a number of different "angles" - PE, P/CF, P/book , etc.

I'm trying to find/develop/understand similiar "rules of thumb" on real estate.

 

[audreyh1]

Who knows?

We sold our house in 2005 to fulltime RV for 10 years (unfortunately TX, so no huge capital gain for us!).

I am hoping that in 2015 or thereabouts, there will still be plenty of good deals for when we are ready to buy a fixed piece of property again. I guess that indicates things stay depressed for quite a while. I think they might. It took TX a loooong time to climb out of their real estate bust in the 1980s, and I suspect that was also the reason the TX real estate market did not take off in the 2000s like many other places.

I guess I expect to see a LOT more for sale signs everywhere, and lots of "ghost" undeveloped developments.

Audrey

 

[W2R]

From what I understand, the cycle is such that first the backlog of houses starts decreasing dramatically, and then the prices start rising again.

Like Audrey, I don't know of any objective measure of this but I would suggest that one based on the size of the backlog of houses would probably be more helpful than one based on prices.

 

[tryan]

If this cycle is anything like the last ... the bottom will be formed when investors can profit month to month by renting out thier purchase. Until then, alot of victims will be fooled by dropping prices .... jumping in toooo early because they're comparing todays price to a past peak. AND cash will be king ... the likes of Countrywide will be belly-up; unable to offer 100% financing at thier own auctions.

 

[ziggy29]

Magic 8-ball is as good as anything.

Seriously.

We could worry ourselves to an early grave trying to time every top and bottom. Diversify your portfolio to survive bad environments and thrive in good ones, and relax. Don't have money invested you will need in the next few years.

Remember that the foil-hatted, apocalypse-peddling, "sky is falling" crowd comes out every time the economy hits an air pocket. Maybe some day they will be right -- maybe even this time -- but given their track record of being wrong, I'm not going all defensive.

Diversify, invest only money that can ride for a decade or more, and relax. The more the doom and gloomers in the media send people into a panic, the more likely it is to occur.

 

[jIMOh]

From what I understand, the cycle is such that first the backlog of houses starts decreasing dramatically, and then the prices start rising again.

Like Audrey, I don't know of any objective measure of this but I would suggest that one based on the size of the backlog of houses would probably be more helpful than one based on prices.

This was closest to answer I was looking for.

I would base the decision on the market inventory. There is probably a metric to measure inventory, I would look at that (for existing houses). I also read about metrics for residential building permits (this is a forward looking indicator), and I think that makes sense too.

I would also look for the number of RE builders- like Ryan, Fisher, Drees etc... and see how many of these companies stay in business.

 

[tryan]

This was closest to answer I was looking for.

I would base the decision on the market inventory. There is probably a metric to measure inventory, I would look at that (for existing houses). I also read about metrics for residential building permits (this is a forward looking indicator), and I think that makes sense too.

I would also look for the number of RE builders- like Ryan, Fisher, Drees etc... and see how many of these companies stay in business.

Problem is, you'll have missed the bottom .... inventory will be near it's peak at the bottom. Question is how many measurements/cycles does one allow before the up-tick is established (could be years).

 

[W2R]

Frank is really good at this real estate cycle stuff, but I can't get him to post on the board regularly (I think he has posted twice). I'll try to remember what he told me, which seems to work in a local area that we use as a bellweather neighborhood for gauging local real estate cycles.

There are four stages of the real estate cycle, here. This is just for our local area and I hope my memory is correct.

Stage One:
Inventory for sale: low
Inventory for rent: low
(Prices are high, and houses are snatched up as soon as they come on the market, and such. Housing boom. Many owners would prefer to sell than to rent.)

Stage Two:
Inventory for sale: high
Inventory for rent: low
(Prices are still high, but sales have slowed.)

Stage Three:
Inventory for sale: high
Inventory for rent: high
(sales are sluggish, prices may be dropping but not enough, and owners are giving up and looking for renters)

Stage Four:
Inventory for sale: low
Inventory for rent: high
(sales are picking up and the inventory is small; times for prices to start rising soon)

Lather, rinse, repeat.

 

[tryan]

Interesting ... we're in Stage 2 (that's why I am still a seller).

 

[W2R]

Interesting ... we're in Stage 2 (that's why I am still a seller).

I am not sure how universal these stages may or may not be. Every few months we drive through every street in Faubourg Marigny, the neighborhood that seems to work best as a bellweather neighborhood. We tally the "For Sale" and "For Rent" signs, compare with prior tallies, and Frank assigns the appropriate stage. It usually will apply to the whole New Orleans metro area but is easiest to see clearly in the Marigny for some reason. The Marigny has all social classes and a large proportion of out of state owner/speculators. Katrina has muddied the cycle here, and we seem to be waffling between stages, but I think we may be in stage three. He/we have been doing these drive through tallies for many years.

 

[ziggy29]

Interesting ... we're in Stage 2 (that's why I am still a seller).

I'd argue that some of the hardest-hit markets are well into Stage 3 (though probably not completely through it).

I'd also argue that not all markets are close together in the cycle. The housing market where I am, and also in the nearby Austin metro area, *might* still be in a late Phase 1 approaching Phase 2. Homes are still selling nearly as quickly as a year or two ago, and prices are still at least flat if not slightly higher.

It largely depends on how much of a bubble a local market has experienced. Texas didn't experience a raging Phase 1 market, so it's unlikely its Phase 3 will be as long or as deep.

 

[tryan]

yeah, any local market may be in a different stage .... "we" in my prior post, is north of Boston. Rental market is excellent for SF (rents are a bargin compared to ownership) ... but there's a glut of houses for sale (as owners come to grips with the reality of dropping prices).

 

[DblDoc]

As mentioned this is going to be a very regional phenomenon - especially if we toss in a recession. Our area would fall into the stage 2 category. Much of what is for rent here is owned by people who were probably trying to flip. They bought relatively recently and had the property up for sale soon thereafter at a steep mark-up. Its not sold so now up for rent.

DD

 

[twaddle]

What objective measures will signal the bottom of the housing market ?

Watch what the builders do. Housing starts are considered a leading economic indicator. Falling starts predicted our current recession, and rising starts should be predictive of an improving economy.

But prices generally continue dragging along the bottom for years even after the economy improves. So "the bottom" is not necessarily a great time to buy.

 

[Notmuchlonger]

5 years things will be back to normal. I was going to put that in my news letter but I thought I could share that little tidbit.

 

[Art G]

Watch what the builders do. Housing starts are considered a leading economic indicator. Falling starts predicted our current recession, and rising starts should be predictive of an improving economy.

But prices generally continue dragging along the bottom for years even after the economy improves. So "the bottom" is not necessarily a great time to buy.

To take this a step further, watch what Home Depot stock does. While Lowe's tends to be the preference of the housewife, HD tends to draw the professional home builders. You could probably add WY to that as well and I'm sure many others.
Anyway, the answer to this question is dependent on your location and whether or not you are buying real estate to live in, or as an investment piece. If you plan to live there, then interest rates should be equally important to watch for the next home buying boom. However, if you want to be a flipper, I'm going to predict you're going to be waiting a while. Most of the areas that saw house flipping profitable, have found their homes waaaaaaay overpriced now. Compare it to the dotcom stocks of the 90's. I believe we've got to go through a cycle of large bankruptcies and repossessions of homes and lease cars.
Of course I'm fortunate enough to have a built in indicator. When my mother calls me to tell me she wants to sell everything, it's the bottom.

 

[tryan]

But prices generally continue dragging along the bottom for years even after the economy improves. So "the bottom" is not necessarily a great time to buy.

Definately true of the last bottom (early 90's). Took ~3 years before the excess was sold off. Another indicator is banks REO/OREO lists. When this pool runs dry ... the market will move up.

Of course if you have a positive cash flow ... who cares (how long it takes).

 

[Spanky]

Signs of nearing bottom:
Financial stocks such as banks and lenders begin to recover
Foreclosure rate declines
Inventory reduces

 

[aenlighten]

Depends on which cycle you mean

There is a real estate activity cycle that is driven by volume and a real value cycle that is driven by inflation and price. Volume leads price and rising volume will signal activity is picking up. This will stabilize nominal prices, but they can still fall in real terms so missing the pickup in volume doesn't mean missing the low in real value. For a few years, people will detest housing and won't want anything to do with it. Many will be underwater, lack funds, have bad credit, and won't be in a position to buy. Rents will rise preceding the bottom of the real value cycle. Eventually owning becomes close to renting and prices start taking off again. Owning in most circumstances will command a premium to renting due to control over the property and over cost increases. The premium will vary with local supply and demand and growth.

 

[JPatrick]

Simple measurements:

*I've got two kids in the 25 to 34 age bracket. When they and their friends start to get giddy about the great bargains out there it will be a very good sign. As best I can tell right now, the current brain washing has them believing that it is just a touch too risky to jump right now.

*When you start seeing stories on the 5 o'clock news about how the local realtor is getting busy as opposed to the "end is near" stories we now hear nightly.

 

[CuppaJoe]

... Rents will rise preceding the bottom of the real value cycle...

Being a renter, I can relate to this. After the dot.com bubble burst, I remember landlords were still trying to push rent prices higher; but lowered them a bit when they had no takers.

 

[Ronstar]

If this cycle is anything like the last ... the bottom will be formed when investors can profit month to month by renting out thier purchase. Until then, alot of victims will be fooled by dropping prices .... jumping in toooo early because they're comparing todays price to a past peak. AND cash will be king ... the likes of Countrywide will be belly-up; unable to offer 100% financing at thier own auctions.

Its starting to happen already - I know of groups of investors buying foreclosed properties for prices that cash-flow from rents

 

[Tiger]

Before the bubble burst our town (a suburb of NYC) was a hot area for housing and some houses were sold the same week they went on the market. We are keeping a close watch on the situation because we will be putting our house on the market next year in preparation for our move west. According to our realtor, at the moment the turn around time for selling a house is 83 days. The length of time it takes to sell a house will tell me when the right time is to put out the for sale sign.

 

[jazz4cash]

Washington Times Friday Home Guide

has nice format for the local market. Sales chances =sales/inventory