When you check into the latest listings in Monrovia and the surrounding areas, however few they may be, you come away with an accurate snapshot of our current market. But when you are thinking of the future and where values might be headed, it’s also useful to think nationally.
Useful, yes: but be careful! There is a tendency to mentally equate the equities market averages – Dow Jones, S&P, NASDAQ – with the real estate market. They are certainly related: one of the causes of the 2008 Dow plunge was the collapse of the subprime mortgage market, which led to the glut of foreclosed homes. Yet, the two markets are far from identical.
According to Yale University professor and economist, Robert Shiller, the number one driver of the value of real estate is momentum. If the prices of homes are following an upward trend, they are not likely to head into a sudden crash. The stock market is much more susceptible to rapid run-ups and downturns. When there is a great deal of volatility in the stock market, consumer confidence might experience a dip, which might in turn cause a drop in home sales – but disregarding the time differential would be a mistake.
Shiller also points to a second key driver of the real estate market: the unemployment rate. When unemployment is high, people are less likely to buy homes -- so the prices you find for listings tends to drop. A long-term bear market can itself create upward pressure on the unemployment rate, since companies hesitate to spend precious capital on hiring new employees. Yet, when that trend reverses, employment rates may improve ahead of the curve.
Another takeaway is that while the stock market does not directly correlate with housing prices on your street, consumer confidence levels can. It is most realistic to be aware of all the above factors – especially the true relationship between the equities and real estate markets -- when developing a home pricing strategy.
One last note - if you haven't heard, business magnate, Warren Buffet, just made a rather large investment in a well-known real estate firm. My guess is that when one of the richest men in America is investing in real estate, it's a good indication that the market is ready to heat up! Stay tuned!