How to determine where the real estate market is headed

"Since the market tends to go in the opposite direction of what the majority of people think, I would say 95% of all these people you hear on TV shows are giving you their personal opinion. And personal opinions are almost always worthless … facts and markets are far more reliable."

                                               --William O' Neil, founder of Investor's Business Daily

Beginning of every year in my home country, people go to palm readers and psychics to 'consult' about the future. Predictions range from who's going to die, celebrity pregnancies and economic trajectory.

Even as a young boy I got a kick out of watching people take their advices to heart. It seems like there's a perpetual yearning in all of us to see a glimpse of the future. Even if it means bypassing common sense.  And people pay them good money, too.

In the real estate market market there is no shortage of psychics either (if not more), they just dress better and use fancy words.  They yell their predictions through different forms of media, often drowning out the whispers of common sense.

I personally do not believe in psychics and future tellers. 

But is there a way to determine market direction without tapping a crystal ball and sounding like David Copperfield?

I Believe so.

And all you need is plain common sense and some simple market facts.

In 2006, I called an emergency meeting after I saw this:

The Reno real estate market collapsed on August 2005.  NOBODY could have exactly predicted that August 2005 was the date the market went over the cliff. BUT....

We don't have to know the exact time and date.  We can be one year late, as I was (along with my top investors), and still make money (or significanty cut losses).  It's what we do after we find out the market is headed downhill, that's the most important thing. 

Do we face the brutal truth and make the tough decision or do we run away from what the market is clearly showing us to do.  In times like these, it's no longer a Win-Win situation, the rule of the game changes to survival -- cutting your losses short.  Will you be ready to lose 10 thousand now in order to save $100,000 later? 

Where do you start?

Existing home sales.  Demand leads the market.  When you see demand plumett over a period of 3-8 months, that's a red flag.  But what about prices Joe? Home prices in my opinion, is not as dependable because it takes more than a year or two before we really see the prices go down. 

Back in 2007, two years after the Reno market crashed, majority of people were still in denial about the health of the real estate market.  Many thought that it was just a fluke, "it'll go back up again."

But if you look at the facts, it was clear the market was overheating:

The second thing you need to pay attention to is the builders (residential construction industry).  Home builders keep their ear to the ground in regards to demand for the homes they build.  They are also very uncharacteristically honest in their view of the real estate market when times are bad--Telling it as it is.  They do this to set expectations low for their investors, and to explain why their stocks are struggling.

If you want to dig further, look at some data for housing starts and building permits.  This is what I saw just as the Reno real estate market was going down:

Pictures speak louder than words, here's another one:

It can't be any clearer than that.  Builders are invested or they're not; spending a lot of money with researchers to analyze market data to determine housing demand.  It's worth listening to them (and the numbers they release) at market changes.  If you want to check nationwide housing starts and building permits numbers go to:

• Briefing's Economic Calendar

• Realtor.org's Housing & Economic Indicators

It's interesting to note that foreclosures in Reno didn't significantly go up until 2008.

By 2008, almost everyone was already sufferring from the effects of the market collapse.  It took 3 years.  By that time, we were already talking short sales and foreclosures.  

In summary, there will never be a crystal ball, but like our body's immune system, the market is fairly quick to warn us of upcoming sickness. It's up to us if we pay attention to the symptom or turn a blind eye.  In these times, choosing the right road to take (often the road less traveled) makes all the difference in the world.  Pray for wisdom.  It's won't be easy.  But it's going to be worth it.