You might not admit it yourself. But it's probably true...
Three years ago, you probably believed "you can't lose money in real estate."
It's OK... just about everyone believed that. But once everyone believes that about an investment, it's time to sell!
Today, just about everyone believes bad times for real estate will never end. Once everyone believes that, it's time to buy... or close to it.
My friend, you might not believe it... But the terrible market in housing is almost over. It really is almost time to buy residential real estate. Let me show you why...
I track three main indicators to tell me the "health" of the residential housing market. They're all pretty simple to understand... and two out of three are incredibly good in their timing (the third is a good judge of value). Let's look at 'em, one by one...
First up: The number of new homes started by builders. After "housing starts" hit a bottom, home prices tend to bottom six months to a year later. Importantly... Housing starts are at a record low right now.
Builders start too many homes (when the blue line goes above 2,000) in good times. Prices peak soon after. In bad times, builders start too few homes (when the blue line goes below 1,000). A bottom in home prices follows.
Based on this chart, housing prices could bottom soon... possibly in the next 12 months.
Second: The supply of homes available for sale. This indicator is typically called "months supply." But it's really a ratio of the number of houses available for sale divided by the current rate of sales per month.
A high supply of new homes on the market causes prices to fall. (It's simple supply and demand.) Once the supply of new homes peaks and starts to come down, home prices bottom and start to rise.
Today, the supply of new homes is near a record peak, and it's coming down. So a bottom should come within the next 12 months.
Lastly: Housing "affordability." People buy homes when they're affordable. In technical terms, homes are "affordable" when the median family's income can afford the mortgage payment on the median home at current mortgage rates.
Right now, homes are more affordable than ever, based on this ratio.
Since houses have fallen so quickly in price and mortgage rates have fallen to record lows, housing affordability is at record levels. This is a great "value" indicator for housing... and value is great now.
Housing is not like the stock market. Cycles in housing move slowly. So we can wait on an uptrend to "confirm" the housing market is back before we move in.
We're lucky here... we have a few good "leading" indicators, with good track records. Of course, my indicators could deteriorate from here. But right now, they're at record levels and showing signs of improving.
It's not time to buy residential real estate... yet. But the time is darn close.
Good investing,
Steve.
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