Is It Time Yet?
Buyers Can't Predict Market's Future, but Neighborhoods Hold Clues

By Terri Rupar
Washington Post Staff Writer
Saturday, April 5, 2008

Your neighbor, your sister-in-law, the person in line at the grocery store: Everybody is happy to share an opinion about what's going on with the housing market.

If you wait a year, that house you're eyeing will be $100,000 less.

There has never been a better time to move from renting to owning.

Every house and condominium in that neighborhood is due to take a big drop; buy in that other one, and you'll be golden.

Unfortunately, there's no magical formula to determine the future of a real estate market.

When Keith Gibbons was looking for a house about 10 years ago, he was frustrated by how little information was available and how much he had to rely on his real estate agent. There wasn't an easy way to analyze data such as price per square foot. So in 2005, when Google opened up its mapping technology, he saw an opportunity. He started collecting D.C. home-sales information and posting it online. His Web sites DCHomePrices.com and DCCondoPrices.com map the data. He also has a blog at DCHousingPrices.com, where he analyzes the numbers and other news on real estate indicators. He has 67,000 records in his database and looks at sales volume, dollar amounts and average prices since 2005.

"Personally, I find it pretty empowering," Gibbons said of the data. He pointed to a Dupont Circle condo he recently wrote about on his blog. In October, it was listed for sale at $1.6 million, but Gibbons crunched his numbers and decided it should have been priced $150,000 to $240,000 less. Then in January, it sold for $1.43 million, within his valuation range.

Aggregating and analyzing data, Gibbons said, has given him knowledge about the D.C. market and a better idea about what's overpriced. For now, he continues to rent in Tenleytown.

If you don't want to set up your own 67,000-record database, how do you figure out when and where to buy? Economists and others who study the real estate market say you can look at the neighborhood and the economy for clues.

· A major indicator: the number of houses for sale in a neighborhood and the number of days they have been on the market.

If lots of houses in a neighborhood have been for sale for more than a few months, then prices are probably going to come down. If they don't, the houses won't sell.

For instance, Michael Simonsen, founder of the real estate research firm Altos Research, said that in a hot market, houses will be listed for an average of a month. If they start hanging around for 100 days or more, Simonsen said, the market is leaning in buyers' favor. It opens up the opportunity for them to negotiate.

In Loudoun County in February 2005, for example, houses stayed on the market for an average of 30 days, according to data from Metropolitan Regional Information Systems. Last month, it was 120 days. In Montgomery County, houses stayed on the market for an average of 37 days in February 2005 and 121 days last month. Similar data are available for all local counties at http://www.mris.com.

Separately, the National Association of Realtors releases monthly national and regional statistics on existing-home sales, with the inventory of houses for sale and how many months' supply that equates to. Through most of the boom, that was about five months; in January, it was more than 10 months. An increase of that magnitude also indicates a buyer's market.

· Economists also point to a city's growth in population, income and jobs and the diversification of the economy. Housing prices in Rust Belt cities that are losing much of their population probably aren't going to rise much, but in areas that are attracting people and jobs, the chances of prices rising are better. Read the newspaper or check out neighborhood Web sites or e-mail lists to get an idea of whether companies are coming or leaving. Information on wages and employment can be found at the Bureau of Labor Statistics Web site, http://www.bls.gov, under "Wages, Earnings & Benefits."

· Another factor is whether it's hard to build new housing. If land is plentiful and permission from local governments easy to get, then house prices cannot rise above the cost of building comparable new homes, said Todd Sinai, an associate professor of real estate at the Wharton School at the University of Pennsylvania.

Or at least not for long. When developers see that the cost of buying a house is higher than the cost of building it -- that is, they see they can make money -- they'll build. That helps explain the construction booms in South Florida, Phoenix and Texas, Sinai said. (He points out, though, that Texas didn't have the big price run-ups that South Florida did.)

For a more local example, Richard Kent Green, an economics and real estate finance professor at George Washington University, pointed to Loudoun County, where there is plenty of land available. In the first half of this decade, it might have seemed as if prices would keep rising, but the growth wasn't sustainable, he said. Supply would eventually catch up with demand. In the District and closer-in suburbs such as Bethesda and Arlington, there's less space to build, limiting supply and indicating that growth in prices is more supported.

· Experts say to watch the news. Many buyers' behavior will be dictated by emotion, said Chip Case, an economics professor at Wellesley College. If columnists are full of doom and gloom, other buyers and sellers might be, too, making it more of a buyer's market. Sellers will probably be more willing to lower their prices, and buyers will be wary of purchasing homes where prices have been falling.

So now you've looked around, and you might have found a house. The average number of days on market in its county has skyrocketed, new businesses are moving in nearby, and newspaper columnists are less than positive on the housing market. What do you do?

Slow down, experts said. The most important factor, especially for first-timers, is whether you're ready to buy.

"It's easy for economists to say 'in general' and 'in the long run,' " Sinai said. But when it comes down to it, no one can say how quickly prices will change. "Predicting short-run volatility is really, really hard."

Sinai said part of the decision has to do with your appetite for risk. If you don't buy, you're basically betting that prices will continue to fall.

It might overly sound simple, but if you find a house you want to buy and you're willing to pay the listing price, "then it's worth it to you" to buy, he said. If a house is listed at $500,000 and you're not willing to pay that much for it, then wait. If it goes down enough, you can make an offer. If it doesn't, you haven't taken a risk that makes you uncomfortable.

Case recommended thinking about housing as more of a consumer durable good than an investment. In that way, a residence is like a car, not a stock. "The dividend of investing in it is you live in it," he said. The value may rise and fall, but you still get to live there.

Sinai also pointed to the roof-over-your-head factor. If you're staying put, it doesn't matter much whether the value of a home goes up or down, he said. It's still the same house whether it could sell for twice as much or half as much as you paid for it.

If you don't need to sell and the probable selling price drops, your main problem is regret that you could have bought the house and more stuff, Sinai said.

"You're probably better off not trying to predict where housing prices are going to go," he said.

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