Top Market Indicators Investors Need To Know
October 29, 2021
Generally, there have been some recent gains in the real estate market which are common indicators of a profitable housing market. That said, there are several signs which can further help real estate investors determine key areas ready for new growth. It’s more important now more than ever for investors to understand the factors which can help foreshadow the future performance of certain geographical areas. Prospective buyers should always perform an in depth due diligence before finalizing a purchase regardless of the location. Below we will look at a few of the top market indicators every investor should know before taking on a new property.
Rates Of Vacancy
Vacancy rates are also known as the percentage of rental properties which remain empty in a given area during a particular time frame. As property investors, vacancy rates can provide good indication of the overall health of a rental market. Typically, a vacancy rate of around 3 percent is usually considered a good market. Less than 3 percent vacancies means there are not enough rental homes available in the area. This likely means that monthly rental incomes are likely on the way upwards. To the contrary, vacancy rates above 3 percent could be a warning sign for new investors that they may have to contend with watching their rental properties sit empty for longer than planned.
The overall total of available listed properties in a given market indicate the level of demand a location is currently experiencing under the current housing market conditions. In turn, these two things indicate where prices are likely to go. Available inventory is often expressed in months and takes into consideration the average monthly demand for property. While there is not a perfect number, it’s generally accepted that six months of inventory equals a healthy real estate market. To the contrary, if there is less than six months housing supply in a particular market, buyers will generally experience upward pricing. If there is more than six months housing supply in a market, buyers will typically experience a downturn in real estate pricing.
Prior Capital Gains
Simply looking at up to date average prices in a particular area wont necessarily indicate much about the future of a certain market. It’s important to also look at historical data like the prior capital gains rates in order to help investors more accurately predict where housing markets may be headed. If an established area has past data available and it shows an average annual growth rate of 3 percent, an investor should not expect it to suddenly perform at over 12%, right? While anything is possible, with no meaningful changes to the data, there’s probably no reasonable not to mention statistical reason for such a large increase in returns to be expected..
It is critical to have a firm understanding of the average rental yields of a particular location if you are considering purchasing real estate in the area. Rental yield is a measure that expresses annual rent as a percentage of the property’s purchase price. So, for example, let’s say a half a million-dollar property rents for 500 dollars a week. That would mean it would earn 26 thousand dollars annually. So in this example the rental yield of the property is a little over 5 percent. Rental yields are typically at their lowest when an area is at the top of the property cycle, and yields are often at their highest just prior to an area moving back into its peaking market.
Days-on-market is another measure of supply and demand. As its name says, this measures how long it takes for a property to sell. This, combined with inventory level, could be a powerful tool to evaluate the activity in a particular area. Generally speaking, 2 months on the market is average in a healthy climate.
While there is no one key metric to look to when evaluating the overall health of a particular market, using the above indicators can help investors make a more informed decision when evaluating the overall health of a particular area.