Financial adviser Ray Martin explains as part of his regular appearance on The Early Show.
While the prices of homes continue to rise, so too does concern that there's a housing bubble about to burst.
With record sales of homes reported, and a surge in median home prices of 12.5 percent vs. prices at this time last year, paying attention to national reports would leave little indication of a future that includes a decline in house prices.
Rose Colored Glasses
If you listen to the experts, who observe national housing market trends, you'll come away with a sense of comfort in that most are not predicting a decline in home prices, but a cooling off in the rate of home price growth is more likely. But don't let this view of the national home market provide a false sense of security.
While it is true that there has not been a decline in median home prices since the National Association of Realtors began compiling data in 1968, there have been plenty of real estate boom-to-bust cycles in local markets.
For example, the condominium market in California and Boston tanked in the early '90s, the oil crises in the '80s affected real estate markets in Louisiana and Texas, and a fall-off in Japanese tourism hit real estate values in Hawaii in the early '90s.
Signs of a Market Peak
But there are signs of a housing market that have reached levels of buying exhaustion, and a fall off in sales activity and falling prices in many major markets seems more likely.
"We are continuing to witness record-pace home price appreciation in many markets without the necessary gains in income, home affordability and rent inflation," said Marco Van Akkeren, an economist with the PMI Group, a provider of real estate market risk data to the mortgage industry. "This is causing the current home price environment to diverge from long-term economic fundamentals, which cannot be sustained indefinitely."
In a study prepared by the PMI Group, in the 50 largest real estate markets there is a 21.3 percent chance that home prices will fall over the next two years. But looking more closely, in the top 10 riskiest markets that chance ranges from 42 percent to as high 55 percent. In six of the top 10 markets, their study indicates a 50 percent or greater chance of a decline in home prices in the next two years. The PMI Risk Index takes into account factors such as home price appreciation, acceleration in home prices, employment growth, unemployment and home affordability based on local incomes.
Price Bubble is a Local Matter
The key thing you should know is that the pace and direction of real estate prices is a local matter — and little if anything reported about national trends is likely to apply to your local situation. It is important to know how to spot which way your local market is headed before buying or selling to avoid paying too much or getting too little from your equity.
Here are some tips on how to take the temperature of your local real estate market:
Check Housing Market Activity:
How many homes have sold last month compared to the month before? If the pace of sales is slowing for two to four consecutives months, this could be a leading indicator of a slow down in the local market. Records of homes sold is available with local land records that are maintained. A local realtor with access to the Multiple Listing Service can also provide this information.
How Long Homes Are On The Market:
Pay attention to those "For Sale" signs around the neighborhood. How long has it been there? If the time from listing-to-sale for properties is getting longer each month, chances are that falling prices are in the future.
Check out realtor.com or ask a realtor for the listing reports from the Multiple Listing Service (MLS), and note the date properties are listed and the date the sale is closed. Compile a list of the number of months it takes to sell each property and look for trends where the time from listing to the sale is getting longer. Be careful to note that sometimes a property that sits on the listing for a longer time may be removed only to be re-listed again later. Ask for this information from a realtor if that is where you are getting this information.
Monitor Home Inventory:
Take an inventory of the actual number of houses for sale in your local market. Then compare this to the recent volume of homes sold. For example, if there are 400 homes for sale and the current sales activity is 100 homes sold per month, then the inventory or supply on the market will last about four months. The national average, according to the Census Bureau and the NAR is about four months, but the typical supply has averaged about six months. If you spot an increase in the supply of homes as compared to sales activity in your local market, price declines could follow.
Track House Pricing:
You'll want to track the median cost of a home and the percentage change from month to month. But keep in mind this is hard to do in an area where homes of varying value and share of the market. You can do this only by tracking homes of a specific size, price range and style of the home. Realtor.com provides a search tool for these specific criteria. Also check DQNews.com for an extensive list of median home prices and change for many local markets, which include specific lists for local zip codes within major markets.
Compare Mortgage Payments vs. Rents:
Check the rental market to compare what you would pay to rent versus the mortgage payment required to buy in your local market. One individual in a recent message board on realfacts.com summed up his view this way, "In April my wife and I decided to sell our primary residence in Tracy, CA and become renters for the first time ever. We sold our home in less than eight hours, and we are currently renting a brand new 2500 square foot home. The local Tracy newspaper is literally flooded with listings of unfurnished homes for rent."
When the mortgage payments required to buy a home is significantly more expensive than what you could pay for rent for a comparable home, chances are that its not a good time to buy in that area. You can find lots of information on local rents from searching the weekly classified ads in your local papers under "Homes for Rent." This data can also be found for regional markets at realfacts.com.
Speaking of rental prices. It's important to note that before buying a home as a second home or as an investment, there's even more pressure on the buyer to do their homework in the local market. An "at risk" area with a high number of rental properties is not a good combinat