John M. Lee: How to Tell Market Bottom

I was asking my financial advisor this past month if the stock market had bottomed out yet, and if this was the right time to invest in stocks. He turned the question around on me and asked if we have seen the bottom of the real estate market yet. His whole investment strategy has been to diversify a client's assets and he needed to know how to advise his clients properly.

We all know that real estate, like every other investment vehicle, operates in cycles and they are all inter-related to a certain extent. When the stock market goes down, the public feels poorer, the economy suffers, and buyers do not want to commit to a large financial obligation like a mortgage. The real estate market usually slows down as well.

Typically, real estate is a lagging economic indicator, meaning we can watch the leading economic indicators, such as the stock market, consumer confidence polls, housing starts, factory orders and employment rates, for directions as to how the real estate market will behave.

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, despite all the bad news you read in the news, the National Association of Realtors reported that median prices in about a third of the country's metropolitan areas are actually higher than a year ago! So be careful and focus 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 supply and less demand, prices go down. So look at the listing inventory. We know that in areas of high numbers of distress sales, such as foreclosures and short sales, the number of homes for sale goes way up, leading to more competition and lower prices.

Median home prices - Look at median home price trends. Before the market can rebound, the rate of price decreases should be slowing 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 slower market and most likely lower prices.If homes sell quickly, there is more demand, resulting in higher prices.

Affordability - With interest rates hovering where they have been for the past couple of years, and median home prices dropping, the affordability index (defined as the percentage of households in the area that can afford to purchase the median price home) has been going up, meaning that a larger proportion of the population can now afford to purchase a home. Most people prefer to own rather than rent, thus there is usually a positive movement toward purchases.

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 up, we probably have not hit bottom yet. With the availability of jobs, people will will feel more secure and start looking for homes to live in.

If we examine these five factors in our area currently, we see a mixed bag. Our listing inventory is lower than at the beginning of the year, homes are more affordable, and median prices are falling a little. However, it does take a little longer to sell a home and the unemployment rate is rising slightly.

Overall, our indicators are not so bad, meaning we may have seen the worse of this economic downturn in real estate. Most of the experts I have spoken to agree that we will either hit bottom in late 2009 or early 2010, when our nation gets through this subprime mortgage problem.

But, with every problem there are opportunities, so take advantage of this real estate cycle. Enhance your investment strategy by buying low and selling high. There are opportunities in the market right now.

John M. Lee is a broker at Pacific Union, specializing in the Richmond and Sunset districts. For questions about real estate, call him at (415) 447-6231 or e-mail johnlee@isellsf.com.