Real Estate

Real Estate: John M. Lee

Will the Real Estate Market Stay Hot?

I was speaking to my financial advisor recently because the stock market has gone straight up for the last 12 months. I asked if the stock market has peaked and if this is the right time to sell stocks. He turned the question around on me and asked if we have seen the peak of the real estate market yet and asked if this the right time to get rid of real estate investments?

We all know that real estate, like every other investment vehicle, operates in cycles and they are all interrelated to a certain extent. When the stock market goes up, the public feels richer, the economy improves, and buyers feel comfortable committing to a large financial obligation like a mortgage. Thus, the real estate market will move up as well. It has been amazing for me to watch both the equities market and the real estate market go up during this pandemic. And now with the vaccines, and our economy opening up, will the markets continue to go up?

Typically, real estate is a lagging economic indicator, meaning we can watch the leading indicators such as the stock market, consumer confidence, housing starts, factory orders, and employment rates for directions as to how the real estate market will behave. During this COVID time, these factors are more a function of how the market deals with the problems caused by the coronavirus.

But specifically, if we were to analyze real estate data, what should we be watching out for? Real estate is very localized, so the statistics must be examined for different areas. For example, the San Francisco Bay Area normally leads the real estate recovery before the rest of the nation. So be careful and focus in on the location you are interested in for analysis. Following are some signs you should watch out for:

Listing Inventory: Real estate is all about supply and demand. With more demand than supply, prices will go up. Currently we have about one month of listing inventory, meaning it will take about a month to sell all the inventory on hand. Historically, that an extremely low number.

Median Home Prices: Look at the median home price trends. Before the peak, the rate of price increases should be going down with every reporting period.

Days on the Market: Examine how long it takes for a home to be on the market before selling. If it takes longer, it is reflecting a slowing market. If homes sell quickly, there is demand and it is demonstrated by the shorter time it takes to sell.

Affordability: With the median price increasing and mortgage interest rates staying about the same, the affordability index – defined as the percentage of households in the area that can afford to purchase a median-priced home – has been going down. That means a smaller proportion of the population can now afford to purchase that home. 

Unemployment: If people feel uncomfortable with the security of their jobs, they will not feel comfortable purchasing a home. So, if the unemployment rate is going down, we probably have not hit the peak yet. With the vaccine getting into arms and our economy opening up, the unemployment numbers have been dropping.

If we examine these five factors in our area currently, we see four positives and one negative. Our listing inventory is very low; median sales prices have gone up; the number of days on the market is about the same; and the unemployment rate is lower. The only negative is that affordability is lower as prices are higher.

So overall, our indicators are still very positive for short-term growth. My belief is that our real estate market will continue to do well for the rest of the year, with perhaps a slight slowdown in the summer months as more people will be traveling, resulting in less activity. We will see how this plays out for the rest of 2021!

John M. Lee is a broker at Compass specializing in the Richmond and Sunset districts. For real estate questions, call him at (415) 465-0505 or email john.lee@compass.com.

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