2. New Construction Permits: Increasing or decreasing? Permits start to drop before a recession, and increase prior to an expansion. Permits for new construction in SW Florida (especially Cape Coral) are steadily increasing, and by a significant number in 2015 and 2016.
Cape Coral had 937 new home permits in 2015, a 58% increase from 2014, and a big leap from the bottom of our market when we averaged only 200 permits a year. Based on U.S. Census Bureau reports, Cape Coral alone needs about 3,000 permits a year for the next decade to keep pace with expected demand of new residents. Construction on freshwater canal lots and off-water lots started to increase last year, as existing home prices rose for the fifth straight year. Because the cost difference of new homes versus existing homes has shrunk to 15 – 20% (from 40% - 50% during the Recession), more homeowners are now opting to build. Builders and investors are taking advantage of the low inventory and building spec homes, which oftentimes sell before completion.
3. Supply of Home Inventory: 6 months’ supply is a level playing field. Under 5 1/2 months is a seller's market and prices will rise. Over 6 1/2 months of inventory is a buyer's market and prices will decline proportionally to the number of months' supply of homes. In 2015, we averaged 4 1/2 month's supply of homes in Cape Coral/SWFL, and at one point dropping to as low as 3 month's supply. We will keep a watchful eye on this important indicator over the next year and report accordingly. If we have too many months of 3 - 4 months of inventory I'm concerned that home prices will spike well over 10% per year.
4. Mortgage Default & Foreclosures: Two things to look for - are the default/foreclosure numbers traditionally high or low, and more importantly, is the number increasing or decreasing? Defaults and foreclosures have decreased dramatically over the past three years, and there are not many homeowners in SWFL who are still “underwater”. Although we will not see many new foreclosures, banks still have an decreased inventory of existing foreclosures that they will gradually release over the next year or two. Banks have noticed the dramatic increase in home prices, and are in no rush to sell off their foreclosure inventory in this rapidly rising market. I feel that a slow stream of foreclosures will somewhat help keep a healthy balance of inventory, which will prevent local property prices from rising even faster than they have for the past five years.
5. Days On Market (DOM): This stat provides a big clue as to what the market is doing. 90 days on the market is neutral. Over 120 days means it’s a down or declining market, and you can expect prices to drop. Under 70 DOM means it is a very strong seller's market and prices will rise, and will likely rise significantly. Over most of 2015, SWFL homes averaged 65 - 70 DOM. This is down significantly from the bottom or our market when homes were on the market for 130 -150 days, with many homes lingering on the market for over a year. Near the next peak we'll drop below 50 DOM, and that is not necessarily a healthy place for our market. I'm quite content with 65 -70 DOM.
6. Interest Rates: Again, there are two aspects of this indicator to monitor. Are interest rates relatively high or low, and are rates rising or dropping? Interest rates, which are in the 4% range, have risen about 1/2% from historical lows. Rates are predicted to rise to 4.5 – 5.0% over the next 12 months, but this is still well below historical interest rates. Any negative aspect of interest rate increases should be offset by the lending industry’s gradual loosening of borrowing requirements, which were quite stringent following the housing bust. Also, many borrowers are now “out of the penalty box”, meaning they now qualify for loans again after going through a foreclosure or short sale several years ago.
These 6 Vital Indicators Have Preceded Every Boom Or Bust - DON’T IGNORE THEM!
The 6 Vital Indicators was gleaned from one of the best books I have ever read on real estate investing: Timing The Real Estate Market. Below are invaluable quotes and advice from this book, with my own notes in blue.
A Few More Real Estate Market Indicators:
Listing Price Versus Sales Price: An average differential is 5%. If the gap falls below 4% we are in a seller's market and prices will increase. If the spread goes over 6%, it's indicative of a strong buyer’s market, and prices will keep falling. There is currently a 3% Sales vs Listing price gap in SWFL, indicating a seller's advantage. Well-priced homes are selling at over asking price, and overpriced homes are selling at 5 - 10% off asking price. Lower priced homes sell the fastest and the closest to asking price.
Unemployment, Consumer Confidence, Population Trends and Changes In Tax Laws are other secondary indicators that you should monitor. However, the Six Vital Indicators will be your road map to real estate timing and investing.
• Trust What You See (especially the 6 Vital Indicators), not what you feel. Be particularly wary of what the media reports. The media is usually far behind the curve on real estate cycles.
• Don’t follow the herd mentality. The herd is almost always late and wrong regarding real estate cycles. I keep my customers informed so they stay ahead of the herd.
• Location, Location, Location is no defense or consolation against financial loss when you buy or sell in a great location at the wrong time. Please burn this sentence into the financial part of your brain.
• Knowing when to sell is probably even more important than knowing when to buy. Nobody rings a bell when the market peaks or hits bottom. Buying near the cycle bottom can make you rich, and buying near the market peak can make you poor. It's as simple as that.
• By observing the Six Vital Indicators, you have a three to six-month window to sell near the peak or buy near the bottom. Market Trends last three to five years, both on the upside and downside. The longer a down cycle lasts dictates how long the up cycle will last (usually 1 1/2 to 2 times longer). Because the down-cycle was so long (over 4 years), historical trends suggest we should have an up-cycle of 7 to 8 years, and we are currently at 6 years. I feel we are only a little more than half way in our current real estate cycle.
• Over 90% of real estate buyers and sellers do not have an established guideline as to when to buy or sell. They simply conduct their real estate activities based on "gut instinct" or worse, they “follow the herd”. Following proven historical guidelines is far more likely to lead to successful investing than following gut feelings.
• Like the weather, real estate markets should be looked at locally, not nationally. Southwest Florida historically precedes the rest of the country in the real estate cycle by about two years.
• At the bottom of every cycle people have always predicted that “we will never again in our lifetime see the price levels of the previous peak”. When the following peaks arrived, prices always surpassed the previous peak prices, often by huge margins. Tom: if we don't reach our previous peak (January 2006 for SWFL), it will be the first time in recorded history.
• Savvy Investors sell when the market is hot, and buy when it's not.
• The media and the general public feed off each other at market cycle extremes. It's almost as if the media provides the "Herd" their oats and hay.
• There are no bad pieces of real estate, only good pieces that are owned at a bad time.
• Once a real estate cycle has reversed a trend, it will continue in that direction until it hits the other end of the cycle. It doesn't zigzag like the stock market.
• Real estate is like horseshoes...you can score with near misses. You don't need to be perfect in your timing. Just be close to the top or bottom of the cycle.
• The greatest profits are achieved in the last year or two of the market up-cycle. The majority of losses occur in the last few years of a down-cycle.
• Because real estate is not a liquid asset, you would rather be out of the market wanting in, than in the market wanting out.
• The biggest secret in real estate isn't what or when to buy. The greatest secret is knowing when to sell.
• Rising real estate markets are what make you rich. Avoiding bad markets is what keeps you rich.
• The 6 Vital Signals are the language of the real estate market. When they talk, LISTEN.
• Just as a great baseball hitter only swings at good pitches, a good investor should only be investing in a good cycle trend.
• During rising markets, even poorly located properties go up in value. During falling markets even prime location properties go down in value.
• 90% of millionaires acquired their wealth through real estate, not through their jobs or other forms of investing. And they certainly didn't "Buy High and Sell Low", or follow the herd. They were very astute at market timing.