First Time Home Buyer Series: Is Now the “Right” Time to Buy? A Look at Market Conditions

Market Conditions

As you would expect, each regional market, as well as areas/neighborhoods within the regions are distinct and unique. The old real estate adage is “location, location, location” after all.

Home prices differ vastly from San Francisco to Omaha, and are also very different from Mountain View to Oakland. So what are some of the key factors that will help you know if prices are likely to increase, remain flat, or decrease over time? Economics will help us better understand the likely answer – over the mid-to-long term (short-term speculation can make prices go awry).

If you want an answer for your area, whether you’re a first time home buyer, or a real estate investor, going through this exercise will likely help you in the long run.

Note: This analysis needn’t be overly burdensome – with this framework in place, a few hours of Google searching should get you the answers you need. Considering the size of investment, I would say it’s worth your time. Some things you really do need to get right the first time.

One more thing, I would highly recommend that you take screen shots of the key information (as I’ve done below) as you go and save it in a file in order to save yourself re-work later on. Alternatively, hand written notes also work fine 🙂

There are many approaches to analysis, and this is just one. Let’s look at a market together to see how I would approach it.

How about we look at…Cleveland, Ohio.

Part 1: (Some) Demand Side Factors that Impact Long-Term Housing Prices

1. Population Trends
2. Economic Outlook & Job Market
3. Cost of Living
4. Affordability of Interest Rates
5. Affordability of Home Prices Relative to Income
6. Ease of Getting a Mortgage
7. Level of Speculation (Including Rental Yield, Short Term Vacation Rentals, Property Flipping Etc)

1. Population Trends
(Est. Time Required < 2 Minutes)

Google search for “Area/City/County population” or something to that effect. Should take you 10 seconds for the 30,000 foot high level view. Will answer the question, how is the area population trending over time.

But let’s say you’re not really planning on living in Cleveland, but in a nearby suburb. Same approach.

The point I want to make here is, in real estate, often times micro/local is king, so be specific to the exact area you are looking to live in.

In this example, we see that Cleveland Heights, a suburb of Cleveland, is experiencing a similar population decline. However, the rate of decline is less than Cleveland (a quick eyeball check is sufficient, we’re looking to be directional here, not precise).

So far, we can say that while the population of Cleveland Heights is also declining, it is declining less rapidly than the City of Cleveland, and therefore, we would expect property prices to hold up more in this area.

If you want to get fancy/go more in depth, you could look at the demographic trend of people moving in and out of the area.

The thought being that, if a younger age group is moving in, it could mean that the area is indeed attractive, and that housing prices for the type of housing stock (not all homes are created equal) are likely to increase.

Assuming you know the area, this may not be as relevant for you, or you may just not care. If you do want to go into further detail, just know that it will take a lot more time and effort.

2. Economic Outlook & Job Market
(Est. Time Required ~ 15-30 Minutes)

Google again is your friend.
Search for “Area/City GDP”, “Area/City Per Capita GDP”, “Area/City Personal Income”, and “Area/City Unemployment Rate”

The purposes of looking at the overall area economy is to get a feel for its health and vibrancy. You want to know if the area is on its way up, if businesses are doing well, if you wanted/needed to sell your home that there’s a good chance someone would be able to afford it, or as another indicator whether you should buy or continue to rent.

See here for a refresher of the below definitions with informative articles if you feel inspired to do so.
GPD
GDP Per Capita
Unemployment Rate

Two sites that I would recommend are FRED, economic research from the Federal Reserve Bank of St. Louis, and Open Data Network.

Observation on GDP for the Cleveland area is that interestingly, it was on a downswing prior to the Great Recession, but has managed to recover in recent years to exceed its 2005 high.

Observation of the Unemployment Rate in Cleveland-Elyria area here is that it has been progressively declining since 2010 just after the Great Recession. This is positive for economic stability, and a potential negative for housing prices (i.e. it would support price inflation).

Another quick search will tell us that the U.S. National Average Unemployment rate is currently 4.8%, with Cleveland-Elyria area coming in at 3.2% in October 2019.

If you were comparing living in say, Columbus, Ohio, another quick search would tell you that unemployment there is 3.7% for the same period. You would also note that the highest unemployment rate of 9.7% for Cleveland and 9.6% for Columbus is comparable.

A quick look at GDP Per Capita for the area also shows us that it is on the upswing. As the population has been decreasing, and the economic output (GDP) increasing, this is no surprise.

But is the increased GDP Per Capita translating into increased wealth for households?
Are people earning more than before?

The methodology here is a bit different, as we’re using the county vs the city, so it isn’t a perfect apples-to-apples comparison, but again, we’re aiming to be directional here.

From this perspective, it appears that incomes in the area have been on the rise after the Great Recession. This is another positive indicator that matches with the GDP Per Capita information we saw earlier.

3. Cost of Living
(Est. Time Required = 20-30 Minutes to start)

Unfortunately, it takes quite a bit more time to dig through these numbers if you want a historical perspective vs. a recent snapshot. If you want to go in-depth here, expect to spend a lot more time.

In fact, I wasn’t able to find exactly what I wanted in a comparison, but by breaking down the cost of living down into specific elements, such as rent and gasoline, data was more available for comparison. Another approach I took is to use comparisons of different areas to see how much more/less it would cost to live there as a proxy.

Rents have increased slightly in the 3 year period observed, similar to the U.S. National trend. Note that this is for apartments in Cleveland, and not homes.

Using the above tools, you can get a feel for what it would cost to live in Cleveland, Ohio. If you wanted to invest the time, you could also dive into each of these categories in more depth to see how it has changed over time.

I also looked at the CPI (Consumer Price Index) provided by the Bureau of Labor Statistics, but as many of you know, it doesn’t include some key household items such as food and energy because they are too volatile. Well, those are some of the largest components of a household’s budget! So, take the CPI info with a grain of salt.

Overall though, it would appear as if prices have been fairly stable in Cleveland, given almost flat apartment rent, a low CPI and gasoline prices that are at similar levels to a few years ago.

Although not definitive, it would appear that Cleveland is better off than it was several years ago and that the situation is continuing to improve.

4. Affordability of Interest Rates
(Est. Time Required 5 Minutes)

Looking back to the start of the year 2000, we can see that interest rates for the 30-Year Fixed Rate Mortgage have come down significantly. If you go back further, this is more pronounced.

Thus, in a historical context, we can see that interest rates in 2019 are at or close to historic lows. So, we’re in a favorable environment for home purchases.

On a side note, I thought I had a great deal on the home I purchased at 3.25% interest rate, but my friend in Hamburg, Germany told me that he is financing his at 0.9%!! Borrow in Euros if you can 🙂

5. Affordability of Home Prices (Relative to Income)
(Est. Time Required = 30-60 Minutes)

This graphs gives a national reference point for the price of homes, looking at the Case-Shiller Housing Index. We can observe that prices have been on the recovery since the first half of 2012. Note that the recession “ended” in June 2009, but housing prices continued to decline for another 3 years…

The homeownership rate nationally has been in the 60-69% range for many years, and is now back to 2014/1995 levels.

But I digress, back to our example of Cleveland.

We can see that homeownership rates have been steadily decreasing in the area.

Let’s take a look at what the market for housing and rentals is doing.

If we take into consideration the rising economy (post Great Recession) combined with low interest rates, it also isn’t surprising that home prices are increasing as well. This is the median sale price for Cleveland back to 2012 (more detail on what median home sale price means here).

We do see a significant increase in the median sale price of homes in Cleveland. In just a few years, the median price of homes has doubled. This doesn’t necessarily mean the price of all homes has doubled, but it is an indicator that the cost of housing is rising.

If we combine that info with the below Average days on Zillow, it is clear that the days from listing to sale is trending down significantly. This suggests that it is a sellers market (sellers hold more bargaining power than buyers).

If we also compare the cost of rent for all types of homes, we see a similar trend. However, we want to dig a bit deeper, because otherwise we’re lumping in 5 bedroom homes with studio apartments and duplexes. So let’s take a look at how that breakout differs by type of housing.

As you can see, we get a very different picture between Studio Apartments vs. Single Family Housing and 4-bedroom units. However, we have to take the information provided with a grain of salt, because the studio apartment data is only available back to December 2018.

Some additional resources you might reach out to in order to dig deeper:

• Local Realtors association
• County Tax Department for home values
• Experienced and trustworthy Real Estate Agents

In conclusion, we see that the affordability of housing in Cleveland will depend on your specific needs (studio vs. say a 3-bedroom unit).

If we go with the single family unit example (very similar to the 3-bedroom unit), we can observe that:
– Rent increased in recent years, but it hasn’t been a straight line
– Home prices have increased significantly from a few years ago

A house that would have cost $40,000 a few years ago, is selling for $60,000+ today. That’s a 50% increase. No small amount.

So, what does the really mean to your monthly expenses?
Required downpayment etc.

If you’re paying 20% down on a $60,000 home
– Downpayment of $12,000
– Monthly Expense of $506 on a 30-Year Mortgage

If you’re paying 20% down on a $40,000 home
– Downpayment of $8,000
– Monthly Expense of $415 on a 30-Year Mortgage

That’s a $91 difference/month in expense.

Why only $91? Because home insurance cost is the same in both scenarios as calculated in Nerd Wallet’s Mortgage Calculator.

At those price points, there isn’t much difference from an absolute dollar perspective, however, it is a 22% increase in monthly cost ($91/$415), which is substantial. Over the course of a year, that’s $1,092.

However, while we have observed that prices are increasing, that doesn’t necessarily make it “unaffordable.” If the mortgage payment is manageable for you today, and is expected to be so in the future, then it may make sense.

To read more about understanding affordability for your specific situation and not just rely on Internet calculators, take a look at this other article in the First Time Home Buyer Series, How Expensive of a House Can I Afford?

6. Ease of Getting a Mortgage

There are many ways to look at this, but one accepted index published by the Mortgage Bankers Association, measures the credit availability for home buyers. Here is an exerpt from their website which goes into more detail

“The MCAI is calculated using several factors related to borrower eligibility (credit score, loan type, loan-to-value ratio, etc.). These metrics and underwriting criteria for over 95 lenders/investors are combined by MBA using data made available via the AllRegs® Market Clarity® product and a proprietary formula derived by MBA to calculate the MCAI, a summary measure which indicates the availability of mortgage credit at a point in time.”

Mortgage Bankers Association

Taking a look at the trend from 2011 on, we can see that the availability of credit to homebuyers has increased significantly.

Interestingly though, when we look at this same index in a broader historical context, it becomes clear we are far below the housing boom era levels. No wonder there was a housing crash! Wish we could look back to the 90’s and before to see where we are at in relation to longer term levels.

Thus, the observation here would be that access to credit has increased significantly compared with recent years, and has likely contributed to the increase in the price of housing, but that it is still below housing bubble era levels.

It is also important to note that this is a national index and not specific for the area. Your individual access to credit will depend on your credit history, stability and type of income as well as age among other factors.

Tip: One of the best ways to know what your personal access to credit is like is to ask for a pre-approval on a home loan. This will familiarize you with the documentation required, and how lenders view your credibility.

7. Level of Speculation

There have been many studies done on speculation in the housing market after the housing boom. Here are some of the key factors that have been identified.

1) Low Interest Rate Environment – allowing for less expensive speculation on future housing price escalation

Referring back to 30-Year Mortgage Interest Rates discussed earlier in this article, we can observe that we are at long-term lows. This low interest rate environment has been contributing to the rebound of the housing market and rising real estate prices.

2) Portion of non-owner occupied homes – second or third vacation homes or investment properties. The higher the number, the greater the likelihood of significant speculation

A study published in June 2018 by lendingtree, looked at the cities across the U.S. with the highest portion of non-owner occupied homes.

For our example, Cleveland was second to last for the amount of non-owner occupied homes at 5.7% (first place was Oklahoma City at 15.4%).

3) Credit expansion to populations that previously didn’t have access to credit – in the previous housing bubble, this was subprime mortgages, in which the owner need not live in the home being purchased.

For subprime mortgages, looking back from the third quarter of 2001 through the end of 2008, an average of 20% of all mortgages originated went to people with subprime credit scores (lower than 660). In the third quarter of 2018, subprime borrowers received just 9% of all mortgages. Thus, it doesn’t appear that this is a group that will be a risk for the near term. However, that doesn’t mean that another group won’t come in to take its place.

Market Conditions: Housing Demand Side Conclusion

As you can see, there isn’t a perfectly clear answer here. If there was, investors would all jump on board and bid up the price of real estate if the price was too low. Conversely, if the price was too high, you would see that homes wouldn’t sell, average days on market would increase etc.

Here is a summary of the Cleveland market Pros and Cons based on the Demand Side observations documented above.

Pros:
+ Economic outlook greatly improved (GPD Per Capita and Household Income Trending Up, Unemployment Rate Trending Down)
+ Interest rates are historically low
+ Access to credit (loans) is easier than in recent years, but still far below the housing boom years
+ Cost of living excluding housing appears fairly stable

Cons:
– Population is declining
– Housing prices & rents have increased, which could be caused by speculation

Part II: Supply Side Factors that Impact Long-Term Housing Prices

1. Housing Supply
2. Rate New Homes are Being Added
3. Rate Existing Homes are Being Sold

1. Housing Supply

According to Realtor.com, there are 1,713 homes for sale currently in Cleveland, Ohio. This is our starting point for housing supply.

Next, let’s take a look at new housing construction starts. This took a bit of digging into the U.S. Census Building Permits Survey data that can be found here (by looking at the Permits by Metropolitan Area – Annual).

This may be a bit small to read, but it says that there were 2,733 new building permits issued in 2018 for 1 unit residential buildings (think Single Family Home). Looking through the website for prior year data sets for 2017, we see that there were 2,749 new building permits issued, and 2,618 new building permits issued in 2016.

2. Rate New Homes are Being Added

Looking at MLS (Multiple Listing Service) data will get us a look here. For the Cleveland region, Yes-MLS provides data that we can use to observe the state of housing supply.

Let’s take a look at November 2019.

We see that New Listings are down 4.9% from the same time last year in November. The Average Sale Price has also increased 5.8%. Year-to-Date (YTD), we can see that the housing supply has increased slightly at 0.8%, and the average price has increased 6.9%.

Now if we compare the number of new construction permits to the number of new listings (realizing that it is a rough comparison because some units would be completed in the year the new building permit was issued, but others would get pushed over into the next year), we observe that.

For 2019 YTD through November (look at the monthly data here),
– 2,371 new building permits for 1 unit residential buildings
– 20,012 new listings
– Around 12% of all new listings may have been actual new construction vs existing housing stock being re-sold (again, very rough)

For 2018,
– 2,733 new building permits for 1 unit residential buildings
– 20,877 new listings
– Around 13% of all new listings may have been actual new construction

In other words, around 1 in 8 new listings could be from actual new construction.

Looking at 2018 vs. 2017 YTD figures, we see that New Listings is a modest 1.2%, and that the Average Sale Price has increased 6.5%. I’ve purposefully used December in 2018 vs. November in 2019 to highlight that seasonality can come into play for the real estate market, so please keep that in mind.

You may want to look through several reports over time to how how the housing supply has changed, but a quick look tells us much of what we need to know. There hasn’t been a massive increase in housing in 2019 vs. 2018, nor in 2018 vs. 2017. This supports the increased sale prices observed due to the law of supply & demand.

3. Rate Existing Homes are Being Sold

Looking at the same MLS data set, we can observe:

Sold Listings in November 2019 were 1.4% higher than prior year, and that YTD they are 3% higher.

For 2018 full year vs 2017, Sold Listings were essentially flat.

We aren’t seeing a massive increase in the number of homes sold, but fewer homes coming onto the market vs 2018 is supporting higher housing prices.

However, we also want to understand how quickly it takes for the homes that are on the market to sell and how that trend has changed over time.

We can see that the Average days on Zillow metric has been trending down since 2011, varying between 64 to 112 days since 2017.

Market Condition: Housing Supply Side Conclusion

• New residential building permits represent around 1 out of every 8 homes that is a “new listing” on the MLS
• New listings are increasing at a rate less than 1% for 2019 YTD November
• Sold listings has increased 3% for 2019 YTD November
• Average days on Zillow has been decreasing over time, with observed seasonality

Based on the above, we can conclude that:
– The housing market does not have excess supply/inventory of homes
– One would need to call the Planning Department to find out the future outlook of new building permits
– If we use 2018 & 2019 as a measure of the near future, the housing supply is likely to remain tight, supporting higher prices

So…what’s the overall conclusion then?

• Supply is contracting for 2019 (new listings 0.8%, sold listings 3%)
• Interest rates are at historic lows, and unlikely to rise significantly in the near future
• Area economy appears to be on the upswing, but no guarantees for the future
• City population is declining

Based on the above, it really depends on:
1) Your personal situation
2) Your outlook on the future economic outlook

Regarding point 1, that deserves a more in-depth look, which is the topic of another blog post.

For point 2, most people won’t do the above analysis (if you’re read this far, you’re obviously not most people), but I think it is important to have a general feel for the direction of things. Inflation is real and has an impact on asset prices.

Is now a good time to buy? It depends on how you interpret the above. In my humble opinion, it really does come down to your personal situation (which I cover in Part 2 of this post here). But it would appear that depending on the type of home you buy, and with some thorough due diligence, 2020 could still be a good time to buy.

What do you think?