Fundamentals That Drive Housing Market Performance

With home prices continuing to fall at a rapid rate, everyone wants to know when the housing market will reach bottom and when prices are expected to recover. Although nobody can predict the future and both good and bad times seem to continue longer than they should, a solid understanding of the fundamentals can serve as a leading indicator for price appreciation or depreciation in your markets.

We don't consider any of the 20 largest housing markets to have healthy fundamentals, and — no surprise — several major markets are performing at their worst levels in the last 27 years. The market fundamentals in the Dallas and Fort Worth, Texas areas each receive a grade of C due to their solid levels of demand and good affordability, despite heavy levels of supply. On the other end of the spectrum, abysmal demand and supply issues plague the F markets such as Riverside/San Bernardino and Chicago. We would also consider Miami, Fort Myers, Fla.,

Housing is cyclical and market fundamentals fluctuate over time. Because markets do not necessarily cycle together, an average across all metros is not particularly telling, but we have come across some overarching themes. As shown in the graph on the next page, the average market fundamentals were worst in the early 1980s, mostly due to poor affordability as the result of very high interest rates, and best in the late 1990s, as demand and affordability fundamentals peaked together.

Those who are the most informed are prepared to make the best decisions. When the fundamentals are improving, take on more risk. When the fundamentals are eroding, take on less risk. Focus on those drivers of demand, supply and affordability to position your company to embrace the opportunities in the cyclical housing business.

To see the latest grades for major housing markets across the country and for more analysis of understanding housing market fundamentals, visit www.realestateconsulting.com.