Everyone who buys or sells a home engages in real estate investing. That means you must consider several factors. Will the house rise in value while you live in it? If you get a mortgage, how will future interest rates and taxes affect you?
Many people do so well with investing in their homes they want to buy and sell homes as a business. There are many ways to do that. First, you can flip a house. That’s where you buy a house to improve then sell it. Many people own several homes and rent them out. Others use Airbnb as a convenient way to rent out all or part of their homes. You can rent vacation homes using VRBO or Home Away.
Before you do that, make sure you know what’s the current business cycle. You don’t want to start potentially risky investing if the real estate market is going to crash.
You can also invest in housing without buying a home. You can buy stocks of homebuilders. Their stock prices rise and fall with the housing market. Another way is with Real Estate Investment Trusts, called REITS. These are investments in commercial real estate. Their stock prices lag behind trends in residential real estate by a few years.
What New Home Statistics Tell You About the Real Estate Market
Statistics about new home construction are important leading economic indicators. That means they will give you a heads up on the future of the housing market.
Each of these indicators tells a little different story about the health of the homebuilding industry. For example, say home starts are steady, but housing starts decline. That will take a toll on home sales. Many buyers might not want to wait longer than a year. It also means there’s a shortage of lumber, concrete, or construction workers. Those shortages could drive up costs, and sales prices. That would further decrease demand for new homes.
If mortgages are declining, the homebuilder will end up with an inventory of unsold homes for sale. It also means demand is high, but homeowners can’t get mortgages. Rising home starts might seem like an indicator of housing strength. But it might be a bad sign. Declining home closings mean the housing market is weak.
The new home sale is the first step in a nine to twelve-month process. If new home sales pick up, then you know closings will rise in about a year. However, all of the remaining three steps must be completed.
A new home sales is when the buyer signs the paperwork and gives the homebuilder a deposit. That’s because most new homes are not constructed until there is a buyer. The exceptions are spec homes that are used as model homes. The Census Bureau releases monthly estimates of new home sales. They are given as an annual rate.
Two months after the paperwork is signed, the local housing regulators grant the permit. It is an early indicator, but not always accurate. Builders can go bankrupt and never build the permitted units. They can change the number of units built in a multi-family. In fact, 22.5% of multi-family permits aren’t built, or are changed to single-family units. Finally, developers often receive permits for a large portion of a complex that could take months and month to build.
Three months later is the new home start. It occurs when the builder breaks ground. The National Association of Home Builders reports on this monthly. It’s very accurate because the new home start only occurs when the builder is confident enough to break ground.