NEW YORK (MainStreet) — Some U.S. cities and towns have officially recovered from the housing market collapse. But how can you tell? One housing industry expert says three indicators – jobs, rentals and foreclosures – can prove whether a community’s housing market has hit bottom.
It’s important to know, since U.S. home prices are down in the dumps and relief could be a long way off. According to the economic analysis firm Capital Economics, U.S. home prices likely won’t rise again for at least two years or more.
“We expect house prices to fall a further 3% this year, resulting in a 5% decline in the year as a whole,” Capital says. “Although prices may find a floor sometime next year, a chronic lack of demand will probably mean they won't rise consistently until 2014.”
Two-and-a-half years is a long time, so how can you tell in the meantime whether your city or town has reached a market bottom?
David Crook, author of the The Wall Street Journal Complete Home Owner's Guidebook, wrote in the June 20 Wall Street Journal that some markets like Cambridge, Mass. and Denton, Texas are already stabilized and recovering from the housing slump. Both cities are showing home prices at 2004 levels, whereas the national average has U.S. prices down at 2002 levels, according to housing site Zillow.
Cambridge and Denton are not only geographical opposites, but cultural opposites. Still, they’re on the same page when it comes to housing recovery, and it’s worth noting the similarities both cities share.
Using Cook's “three keys" as a litmus test, here's how to tell whether your city or town is on the road to housing health:
The jobs picture. Local unemployment is the first and perhaps most important factor in determining a community’s housing status, Crook says. Unemployment rates in both Cambridge and Denton are at least 2% below the national average. That is reason number one why both communities are way ahead of most in getting their housing markets back on their feet. It helps if your city or town has a decent academic presence as well (Cambridge certainly qualifies with Harvard and the Massachusetts Institute of Technology), but Crook adds that a military presence like an air force or army base can also help keep unemployment down and home values up.
The rental picture. Look to lower price-to-rent multiples to figure out whether your local housing market has hit bottom. Rents will be lower in areas where housing prices haven’t fallen so much. But if rental prices get too low, that’s a big red flag to Crook. He says that if local home prices average under 15 times annual rent, then the housing market should be relatively stable. To get the exact figures in your area, use BankingMyWay’s Rent Versus Buy calculator.
The foreclosure picture. If your town is overrun by foreclosures, that’s an indicator that housing prices are still falling, and won’t rise again until that foreclosure picture clears up. Crook points to Las Vegas, where the foreclosure rate was more than 12% in 2010, about 10% higher than the national average. That’s why Las Vegas is light years behind places like Cambridge and Denton.
Crook makes a good case for how these three factors feed into a housing recovery in some U.S. cities and a continued housing bust in others. Apply the three criteria to your hometown to see whether your market is in recovery--or not.
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