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Understanding the housing market

Who knows where the market is going. Many of us have heard scary stories about people losing tens of thousands of dollars on their homes. They all read the same news papers regarding the housing boom just to be part of the headlines when the market busted. So if someone wants to buy or sell a house today what kind of information would help them understand what the market is doing today and how it will be tomorrow? This page has some simple answers.

Below are some simple factors that affect the housing market along with a description of how you can do your own analysis.

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Watch the Interest Rates

The first and easiest factor to watch that has a tremendous affect on home prices is the interest rate. It is usually the first thing a buyer thinks about when looking to buy a home because it will eventually determine whether or not s/he will be able to afford a particular home. However, sellers should be watching the interest rates as well because of its affects on home buyers purchasing power. In simplest terms, the higher the interest rate the lower the home price.

It’s not a popular idea but the following statement is more or less a fact - its not how much your home is worth it is how much a buyer can afford. How much a buyer can afford is determined by how much the bank is willing to lend the buyer.

So how much is a bank willing to lend? They will allow up to 28% (called the ratio) of a home buyers monthly income to go towards the monthly payment. How do you find the monthly payment of a loan? It’s involves the interest rate.

Now let us use some examples from the perspective of a home buyer. The first will assume the home buyers income is $50,000 (median income for Wisconsin) with the current interest rate at 5%. The second will assume the buyers income not changing but the interest rate increasing to 5.5% (which can happen overnight).

  1. $50,000 / 12 months = $4,166 X 28% (bank ratio) = $1,166 available for loan payment. Now to dividing the loan payment by the interest rate we get a max loan value of $217,200.
  2. The total income allowed for the loan payment for our buyer is still $1,166. Now if we plug in the new interest rate (5.5%) into the loan payment we will get a new maximum loan amount of $205,400.

See the affect on interest rates? If incomes are not rising with the interest rates (see Track the Unemployment Rate below) then a seller can see about $12,000 go out the window overnight! If interest rates fall, say 4.5% then following the same assumptions the seller could see the home price inflate to $230,000 (increase of $13,000).

Track the Unemployment Rate

Now it looks like we are getting into fancy economics. Well, not necessarily. We will just use some common sense.

Today the unemployment rate is around 8%. Another way to look at the rate is as gage of salary change. If the unemployment rate is low (4.5% is considered full-employment) then an employer will have to raise salaries to attract new hires as well as existing employees so not to lose them. With that said, how do we use the unemployment rate to know how the housing market is doing? Two simple but insightful ways.

First, when the rate drops more people have jobs. When more people have jobs they usually move out of their apartment, roommates place, or even their parents house and buy a home.

Second (more importantly), as the rate drops then salaries tend to rise. This is important not only because of the obvious increase of disposable income they can use to qualify for a loan but the increase of salaries can help limit or even overcome any increase of the interest rates.

Now let’s go back to the assumptions in “Watch the Interest Rate.” If salaries increase by 5% in Madison Wisconsin then the average home buyer will qualify for an $216,000 loan. This will effectively nullify the .5% increase in the interest rates.

Yes, higher interest rates can lower home prices but with a dropping unemployment rate the increase in salaries can hopefully keep up or even exceed the rate which the interest rates are rising. Such an even will increase home prices to the benefit of the home seller.


DISCLOSURE: These are only assumptions that try to make sense of complicated market dynamics and there are other factors that play into home prices. Even though these tips are a real and simple way to anticipate where home prices are headed please do not rely any one tip but seek out the advice of a licensed professional.

Check out housing trends

Caution, not all housing trends are the same.

Listening to the news, one can get very excited about the huge increase in home sales from one month to another and make the assumption that the market is back and its time to buy. But, the very next statistic given by the news anchorperson is that home prices are still falling. How can this be?

No doubt it’s easy to get confused with all the statistics out there; but the one everyone is really looking for is the “median (or mean) home sales price”. Most specifically, the median home price for your specific area. Housing prices could very well be sky-rocketing in Green Bay and plummeting in Madison at the same time.

The statistic that throws many a curve ball is the “existing home sales volume”. This statistic is more frequently reported than any other statistic in the housing market. What it tries to convey is the amount of homes sold from one period to another. Again, it can be tricky, the sales volume for a particular city could be skyrocketing at the same time that the median home prices could be plummeting.

These two statistics together, the median sales price and existing sales volume, can be very effective at analyzing where the market is headed.

If the home prices are falling but there is a constant high volume of sales, home prices could be leveling off or ready for a brief spike up. If the falling home prices are not coupled with high volume, then home prices could continue its fall. Of course, the opposite is true with increasing home sales prices.

Other trends to consider collectively:

These are a few things to check out; but, considering the overall trend of the housing market it wouldn’t help contacting a real estate professional like Madison Pro Realty.

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Make your own strategy

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Consider what you already know

Your gut feeling. It always serves you well.

Consider what is happening in the real estate market and what you already know about it. What has been your experience when you talk to your friends, neighbors, and family about the real estate market. What stories have you heard? This can very well override everything you have quantifiably analyzed about the market and put you in a great position economically.

Ever heard of the saying, “if everyone was jumping off a bridge, would you do it to?” Well, that rings true economically as well. During the housing bubble, everyone was buying a home, investing in real estate, and getting crazy loans with no down payment and low interest rates. Yes, and they all fell together after to long of doing it. The moral of the story is not to avoid what the masses are doing but don’t be the last one to join. So, if your gut says that you missed it, go with it.

The advise of your closest friends and loved ones is perfectly mingled with desire for your prosperity and caution for your preservation. Your gut knows that very well.

Weigh external factors (foreclosures, migration, politics, etc.)

When researching your local housing market don’t forget to look globally. Looking at external factors will really help put all the pieces together and help solidify your economic decision to buy or sell your home.

Everyone knows that foreclosures affect home prices; but, believe it or not, what happens in another country (Greece for example) can have a significant affect on your housing price. The president’s economic ideology, state taxes, and stock market are just a few examples of external factors that have huge implications on your homes value.

Looking at the global bond market is really useful because it is tied to our housing market. Taking another look at what happened to Greece when they experienced a huge fallout with their sovereign debt. Greece has pulled the European Union (EU) into its mess because of its membership. All this caused international investors to seek United State Treasury Bonds as a safe harbor. Such a influx of cash has pushed Treasury Bonds interest rates to all time lows. So how does it connect? Home mortgage interest rates are tied to the US Treasury Bond yield. What a small world!

So look at everything that is going on and you will be surprised at how many things around the world affect your small world you call home.

Our Market Summary

Over all things look good for home buyers. And if your a home owner there is some hope as well.

Flat Out FREE always believes that buying home is usually a safe bet as long as you can sustain the mortgage paying with reasonable market rents and hold the property for a long time. In short, if you don’t have a job to pay the mortgage, someone else will; and in 30 years, you will gain back any losses plus inflation (barring some unknown catastrophe).

We see a lot of economic factors that need to be worked out before the market stabilizes. For instance, the Federal Reserve needs to let interest rates increase, the huge inventory of foreclosures banks have need to be sold, and any pent-up inflation needs to experienced. Only then will the true market trend be realized.

For home owner, we forecast that any equity loss due to the housing crash should be recouped in about ten years. This will be primarily through inflation tempered by the rate in which employee salaries rise.

For home buyers, it is a good time to buy a home. Flat Out FREE estimates that the housing market has almost reached bottom and should do so in the next 16 months. A home buyer will experience great interest rates and a very affordable home. However, Flat Out FREE is putting out the “NO FLIPPING” warning. If you are buying a home to flip in the next couple of years, you might get sunk by the anticipated inflation that will increase interest rates and push your home value through the basement.

Our advice? BUY AND HOLD for 5 years.

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