Gauging Your Local Housing Market

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The housing market appears to be perking up, with sales of existing homes hitting the highest levels in two years, according to a Nov. 23 report by the National Association of Realtors.

The news should cheer both sellers and buyers. Sellers are obviously glad to see more buyers, and buyers should worry a bit less that a home bought now could fall in value.

But nothing’s guaranteed, and the housing market, despite low mortgage rates, could be undermined by rising unemployment, foreclosures and tougher lending standards. Nearly a quarter of U.S. homes are worth less than their owners owe on the mortgage, according to real-estate information company First American CoreLogic, and some experts think the market will not really turn around until 2011.

For any individual home, it’s the local market that counts, not the national or statewide statistics. So, how can a buyer or seller gauge a neighborhood’s health?

Local real estate agents are an obvious information source, though they have an incentive to talk up a market’s good points because they are paid by commission. Still, an agent can provide revealing statistics. You don’t necessarily need a broker from a big firm like Prudential (Stock Quote: PRU) or Re/Max, just someone who has worked in the market for a number of years.

Ask how many homes are for sale in the local market, and how does that compare with previous years? The basic laws of supply and demand say that prices will be held down if there are more sellers than buyers.

A related statistic shows how long it would take to sell all the homes on the market at the current pace. The shorter the time period, the better since it shows sales are moving at a good clip. A period of more than six months is worrisome.

Of course, driving through the neighborhood should give you a sense of how many homes are abandoned, careworn or for sale. Keep in mind that in some areas, such as condo developments, for-sale signs are prohibited.

It would be valuable to know how many homes are “underwater,” or worth less than the owners owe their lenders, though this is a hard figure to nail down. Studies show that homeowners are much more likely to stop making payments on underwater homes, leading to foreclosures that depress neighborhood prices. Owing more than 120% of the property’s current value seems to be a trigger for walk-aways.

You can look up an individual property on Zillow.com and compare its current estimated value to the price the last time it sold. If the sale price was higher, there’s a good chance the property is underwater. That’s especially true if the sale was in the past few years, as the owner has had little time to pay down the loan.

Underwater properties are more common in areas that saw big spikes in home prices earlier in this decade, since many people bought at the peak.

In the end, there’s no sure-fire way to know whether a local market is on the rebound or ready for a new downturn. Given the uncertainty, a prospective seller is wise not to put money down on a new home before having a contract to sell the old one.

Buyers should proceed with caution, too. Even if the market does perk up, it’s not likely to rise quickly. There will probably still be good deals in six months or a year, and mortgage rates don’t seem likely to rise.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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