Part II: How To See A Local Housing Cras...

Editor’s Note: Hal Cranmer has had a wild past. Born in India, he’s lived all over the world and started his working life as an Air Force Special Operations and Commercial airline pilot. After 9/11 brought him down from the clouds, he entered the corporate world and rose to the level of running a $36M machining plant. Yet from 2006 on, he caught the passion for real estate investing. He flipped a bunch of houses in Minneapolis and still owns several multifamily rentals there. Lately, he is into assisted living, and owns 5 assisted living homes in the Phoenix area. He loves to follow real estate trends, both locally and nationally.

As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Cranmer provides us with his own unique, lively and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out our other super-helpful Market News Updates. For now, enjoy...

From Hal Cranmer...

In Part 1 of my 2-part mini-series, we covered some indicators of potential problems in the real estate market across the US.

Now let’s narrow down the focus a little…

Everyone knows the 3 most important factors in real estate:

Location
Location
Location

That’s why so many very successful real estate investors focus on just one or two markets. They study them carefully and may take a long time to purchase their first property.

Once they understand the market, though, they may be off to the races in buying properties. They may see a niche nobody else does, or they may seem a dramatic upturn coming.

Chances are it ain’t just luck that got them there.

So, here are some indicators I have looked for in my 12 years of investing in real estate to determine if a local market is ripe for the picking.

Month’s Supply of Inventory

This is a measure of, on average, how long houses are sitting on the market. The more days on the market, the more likely homeowners will be willing to lower their price.

inventory To calculate the month’s supply: divide the number of listings on the market by the number of homes sold per month on average during the previous 12 months.

For example, say there are 60 active listings in your area and 240 homes sold in the previous years…

So 240 divided by 12 months = 20 homes sold per month. Then 60 active listings divided by 20 homes per month means there’s a 3-month supply of inventory.

Or it takes 3 months to sell a home on average.

The standard deviation for this measurement can be huge. A middle-class home that is all tricked out, staged and priced right may sell a lot quicker than a very high-end home that has the 1970s calling for its decorations back, priced above what it’s worth.

Any homewill sell in any market at the right price.

The right price just keeps dropping as time goes on.

Numbers of Building Permits Issued

The local authorities very often will advertise what your competition is doing. Especially in boom times.

Lots of housing starts means:

More tax revenue
People might think the local government is growing the economy

You can find this information at your county offices, online or in the local newspapers. If housing permits are being handed out like candy on Halloween, it will probably be more difficult to find a good deal.

permit The competition is heating up.

On the other hand, when permits are way down, there may be a ton of good deals waiting to be plucked. The big homebuilders may be pulling out, which means the area is dropping and the good deals are increasing.

If the permits are down, but the numbers are starting to pick up, it may be a very good sign...

The big boys – the national homebuilding companies – have entire departments devoted to research, looking at places that are up and coming. You can benefit from the services of this research without paying a dime for it.

The permit increase can tell you.

General Economic Conditions

Pay attention to what’s going on in your area. It can really help to attend a Chamber of Commerce meeting or two. Talk to people at your local Real Estate Investor’s Association. And pay attention to what’s going on in the local newspapers.

As we discussed in the first lesson, real estate is all about supply and demand. When companies move into an area, the demand for real estate naturally goes up. And vice versa.

Besides the obvious of the company employees that need housing, there is a ripple effect. Each of those employees has families.

The families need:

Groceries
Schools
Recreation
Transportation
Other stuff

All of those goods and services must be supplied by other people. So as a company moves in, there will be a multiplication factor of jobs available and people needing to live close to those jobs.

economy Likewise, if there is an exodus of families, they may very well drag other families with them.

Be careful jumping on good deals in an area that is becoming economically depressed. Understand what is going on. Is it a temporary thing like an national downturn, or is it something much deeper about the area?

There are actually many towns in middle America that haven’t recovered from downturns in the 1970s.

Research is the key…

Stay on top of what is going on both nationally and locally. Part of that research is going to look at what is selling and what is not selling.

Is the market so hot that the meth lab down the street is going for a ton of money?

Or…

Do you have to lower the price on that gorgeous house in a perfect location to attract any buyers who can qualify?

Or something in between.

I went through about 30-40 houses in different areas around Minneapolis before I could settle on what I thought was a good deal for a flip back in 2006. A lot of the reason I saw so many was anxiety about buying my first one. But it also taught me what constitutes a good deal in my market.

Research and these indicators should help you make good investing decisions.