Is a Bottoming Process Happening in the Real Estate Market?

On March 19,2007, I wrote a real estate article on "How to Know When Real Estate Will Recover" I had perfect timing on knowing when to sell my house based on my expertise in the stock market and real estate. Yes, the stock market can give you directions of the economy including how to price your home; if you pay close attention to it. One primary areas I mentioned for a real estate recovery was to watch the Home Builder's earnings. I'm here to tell you we have two things that could be a positive for real estate. Either we are going to plateau and not drop much more or a real bottoming process could be happening. I say "could" because it is just in the beginning stages to watch and we need some confirmation.

First, the home builder stocks are showing signs of a bottoming process. Now, it's too soon to know if that is a true bottom or just a short term bottom. In fact the other day we have had one of the best performances in these stocks in 3 years. I always pay attention to long term changes or moves. If those stocks are bottoming, investors or insiders are seeing a potential earnings improvement on the horizon and could be feeling there is a bottom here. That means money is flowing into home builder's stocks. Insiders are those that "know" what is going on within the company. Technically, they are not supposed to act on that information, however it does happen.

As I wrote in my report on March 19th, one of the first signs back in 2005 that told me that the real estate market had topped was home builders missing their quarterly earnings. For years, they had fantastic earnings improvement until the first builder (Toll Brothers) announced they "missed" their quarterly estimates. Toll Brothers is one of the largest builders in the U.S. The point here is to watch the home builders, (like Toll Brothers, Centex, Ryland Homes, etc.) the next quarterly earnings that will come out are in April. If earnings improve it might be supporting the bottoming effect in the stocks. If earnings are still not good nor if there is any good forecast from these builders going forward, then it might assume there is still a ways to go for even a plateau effect. Ryland Home's stock was one of the first builders to show signs of strength even while our markets were recently going down. You can monitor the next earning's period by clicking "here".

Next sign to watch, is the fact that mortgage rates have been lowered to historic lows again near 5 ¼% for a 30 year mortgage. If the stimulus package is passed, they will be increasing FHA mortgage amounts across the nation by 125%. That helps the lower end homes when it comes to qualifying the debt to income ratio for buyers and will give more leverage for a little more expensive home for these buyers. However, the other side of the coin is how long those rates can last? Low rates increase inflation which is already on the rise. It will be important that rates do not climb too high and stay in a low range to keep the growth going. For right now, these rates are great for any home buyer in the market. Combine that with big discounted prices and you have pretty low risk environment. Too many people concentrate on price only. However, leveraging is just as important. That means the lower the rate, the lower the risk if prices did drop some more. Hey, if the U.S buyer won't buy, don't be surprised if you see a lot of foreigners buying up our real estate with that low dollar effect.

Finally, watch your listings in your area for signs of inventory of homes decreasing. You can use Realtor.com by entering your zip code. Realtor.com does have duplicates sometimes but it is a good guide for your area. When you use Realtor.com, search only for residential homes. The number of listings appear before you click to the listings. This is how I sized up the inventory for my area. I would also include the zip code to your nearest large town as a benchmark if you live in a smaller town. Just write down the total listings on a weekly basis to watch a trend change. This is especially useful if you are in the market to sell your home because if we are having improvements, it might give you a heads up on how to price your home. With Spring approaching, this will be the real sign if buyers are coming out of the woodwork and a good time to track those listings.

Now, don't get me wrong, I do not believe we will see a sellers market for many years to come. I'm just thinking there could be more equilibrium in the real estate market between buyers and sellers if these signs are coming true.

Here is some good advice for you sellers. You must know how to price your home especially if it appears that there are buyers out there. When I was selling one of my homes in mid 2006, I got an appraisal and quickly dropped the price by 3% because I knew things were changing and I had to discount first before the rest of the sellers did. I received an offer in 2 weeks, while other homes in my neighborhood stayed on the market for over a year. Selling homes is all about price. There are buyers out there. You just have to lower to their risk level.

To summarize the signs to watch:

1. Earnings of home builders in April, including a better forecast going forward.

2. Spring buyers coming out to reduce those inventories.

If we don't have these two things happening, then we aren't there yet for a bottom or a plateau. Real estate is regional in location. However, we did have signs of our national average home decreasing recently. If all these signs that I mentioned continue to happen, you will see improvements in the real estate market before you hear it in the news and the fat lady could start clearing her voice. Just remember, we have a lot of emotions out there, and because of this we go to extremes when it comes to reporting news on real estate. If this year we do not see improvements with this stimulus package and low rates, then it's just going to get a lot worst going forward in the real estate market.