Each business has its metrics. With the looming number of foreclosures, we are hearing these real estate metrics in news reports, but why do they matter?
Real estate is in the news again. You will hear about the lenders, and the problems with how mortgages are handled during the foreclosure process. Most of the news stories have focused on the lenders, but interspersed with these stories are items dealing with the effects on the real estate market. The outlook for the nation does not seem to be too good. There are other factors than misleading lending practices leading to this new crisis though, so some localities, like Houston, may fair better. To better understand the news stories, we should comprehend the importance of metrics such as months of inventory and homeownership percentage.
First, homeownership percentage is the number of people who own a home. This metric is broken down by region, and we also look at this rate amongst different groups. In the news, we are hearing the number for all Americans. The number sounds great when we hear that over 60% of the population owns homes. Efforts by the federal government to increase this percentage lead to the housing bubble. Why encourage your population to own a home? Yes, the American dream is tied to the idea, but having a population in apartment complexes is not horrible is it? The desire to increase the homeownership percentage stems from the knowledge that home purchases is an economic engine that goes beyond the real estate market. I read a remark that posited that 85% of a building’s cost over its lifetime arises after the building costs. This was meant for commercial buildings, but the number may well apply to residential construction too. When I purchased my home, I had plain ceiling fans. My wife and I began to decorate the home, so ceiling fans were switched out for other models. Being an older home, new kitchen appliances were installed. My wife had to buy a trampoline. We also had the tools for maintaining the yard and home. None of these purchases, or others that we made, would have happened if we had been in an apartment. The purchases probably would not have happened if we were renting a home. Do you see home renters remaking the gardens? By having more people own their homes, we are ensuring that more purchases will be made in areas that have nothing to do with real estate. That is why this real estate metric is watched by many industries.
The next metric is months of inventory. This number refers to how long it will take to clear all of the homes available for sale from the market. Simple idea that takes a bit to calculate. Sellers will look at this number, since the metric can indicate how long it will take to sell their home. The number can also help to indicate if the market favors sellers or buyers. This becomes tied into the determination of home prices. If the home prices are lower, appraisals go lower, which leads to lower property taxes. Homeowners can be happy, but local governments will struggle to find the funds to provide the services that we expect. This inventory factor does not play the major role in these other aspects of the real estate market, but this number does touch upon so much. That is why real estate professionals pay attention to this metric. Different builders will look at this number to make decisions for their business model. Construction industry jobs will not return if this number stays high. Months of inventory does not have the direct link to the economy as homeownership does, but this metric touches upon other factors that do.
What are good values for homeownership percentage and months of inventory? That is a bit harder to state. We saw that trying to increase homeownership with loose lending practices led to the housing bubble. Having this percentage over 70% would be great for the economy, but the working public needs to be able to afford the home. Although homeownership should be still a part of the American dream, we should focus on creating jobs that pay people well enough to afford those homes. Otherwise, we may need to look at other economic engines. If there is a massive amount of buyers, the months of inventory can go higher. As buyers are fleeing the market, we will want lower months of inventory. How many months? Probably below six months of inventory will be the number to achieve. If the number is above six months, coupled with low numbers of buyers, we will see other factors that will mean tough times ahead.
Hopefully this will give you an idea as to why these numbers are coming up in the news, and maybe why you should pay attention to them. In the end, I am going to repeat myself. I have often told people and written in other articles on this bog that real estate markets take years to recover. Years means in the neighborhood of ten years. Houston did not see such a decline in our housing market, because we had our own bubble long before the burst in 2008. These metrics will be ones to watch, but really the nation is focused on the jobs numbers. Once unemployment is decreased, we will begin to see changes in these real estate numbers, but we also need to understand that we have to focus on how much they are making. Mortgages will be harder to obtain, so we need a financially sound public to improve the housing market.