OfflineAn article this week over at Norada.com by David Campbell speaks to his methodology for predicting real estate prices. His concept of course takes the supply/demand influence into account, but he throws in something else … “capacity to pay.”
Demand Factors
Population growth fuels demand for housing. Job growth fuels population growth. This is true for the vast majority of normal market areas. However, in vacation and resort markets there is outside money in play. The money to buy in these markets comes from other areas. When job growth is stagnant in most areas, you can still see housing price increases in markets that enjoy outside money influence.
Supply Factors
Supply is influenced by many more factors because man’s interference in pure supply factors can change the dynamics. Availability of land is one supply factor we’re all aware of, the “there won’t be any more of it” thing. Geographic factors that bound areas, such as water or mountains, influence the supply factor as well. Economic influences, such as development capital and investment interest can drive supply creation. Finally, political factors like permit fees and restrictive development policies can create impediments to new supply.
Capacity to Pay
Even if supply is constricted and demand is high, it doesn’t mean that there will be buying. If the majority of the demand is from those who can’t afford the higher prices, there will be little buying activity. The Affordability Ratio is taken into account.
Median Home Price / Median Income = Affordability Ratio
The author of the article compares two divergent area situations. In San Francisco/Oakland, the median home price is 9.2 times the median income. In Rockford, IL, that number is 1.7. While residents in San Francisco need roughly 70% of their income to afford a home, mortgage and ownership costs, in Rockford they need only 13% of their income.
So, this methodology leads the user to have a negative outlook on the actuality of continued rising of prices at a high rate in San Francisco. However, in Rockford, there is a far greater chance that more people will be entering the market as buyers, and they can afford to accommodate higher prices.
It’s interesting, but we’ve all seen how crazy prices in markets like San Francisco can get. However, you may decide to take a look at the affordability component in your future investment valuation decisions.
How to Predict Real Estate Prices - Maybe
Posted on: Wed, 03/12/2014 - 15:14
How to Predict Real Estate Prices - Maybe
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Dean, as usual, you are so awesome!!
I found the above information very interesting and valuable, thanks for providing it.
It's interesting how the Rockford vs. San Francisco information reflects not only on the income of the two areas, but also the perceptions in a particular area as to how much people are willing to commit from their income to pay for the house that they live in.
Perceptions are colored by our experience, our surroundings, our families, friends, etc. They are also colored by our region. I live in an area where less than 1% of the population would be willing to spend 70% of their income on their housing--let alone being able to qualify for that. This would be true in Rockford, IL as well. But in San Francisco, many people with sizeable income are willing to do so. The problem is that most of those people are already paying that amount and those who cannot are not going to see their incomes increasing to the point where they can afford that.
When an area reaches its capacity in terms of capability to pay, there are only two realistic results, and one follows the other: 1) Peaking; 2) Declining. The people who have purchased these expensive homes are not going to like it, investors aren't either. I've mentioned this before in this forum--we as investors have an obligation to the area that we are investing not to leave the area worse off as a result of our being there. The philosophy of "take what you can and the he** with anyone else" is the same attitude that carpetbaggers had in the south at the end of the Civil War, and for many of them, the reward that they received was to be lynched.
I feel an obligation to our industry to teach and lobby against practices that I believe are illegal, immoral, or unethical. I want to see healthy growth in our economy, and a responsible nation that is watching out for the future, and not depleting our resources, natural or manmade in the name of huge profits. I want to see the next generation have an easier time in making money through real estate investing because we were here, rather than us destroying the industry and leaving it in a shambles for future generations. Please be a responsible investor and help us to keep other investors on the high road.
Dallin Wall
Real Estate Training Team
Forum Blog Location--A collection of my
"Best of" posts:
http://www.deangraziosi.com/blogs/dwall
really it is very nice thanks for sharing it
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jbischoff
Dean -
Congratulations on a great website you have here!
I'm the author of the article you quoted above. I'm glad you liked it and thanks for the shout out!
Marco at Norada Real Estate liked my article so much, I gave him permission to repost it on his site. I'm also glad you and your readers found it valuable information.
Your readers can read the original article in its entirety "How to Predict Real Estate Prices" on my blog at:
http://www.hasslefreecashflowinvesting.com/how-to-predict-real-estate-pr...
All the best to you and your readers,
- David Campbell, Author / Real Estate Investing Strategist
www.HassleFreeCashflowInvesting.com
David Campbell
Real Estate Investing Strategist
866-931-9149 x1
www.HassleFreeCashflowInvesting.com
Hi all,
Just wanted to point out that the correct address for Norada's website is:
www.NoradaRealEstate.com
They also have a great podcast at Passive Real Estate Investing.
Continued success!
Marco Santarelli
Norada Real Estate Investments
(949) 218-6668
(800) 611-3060
www.NoradaRealEstate.com
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because it is an int article & that is what they teach us at our reia's in san diego, bruce norris a seasoned succesful investor teaches that the affordability rate is the predictor he believes for timing the market.
in san diego where i live we are at 20 roughly on the scale, and Bruce teaches that when we get to 17 that markets start to correct. thx for posting.
Tony
Go faster do more! GFDM!