How One Market Factor Can Tell You It’s Time to Invest or Sell
In my conversation Jeremy Lovett, who is a mortgage loan originator, as well as a flipper, custom home builder, and condo investor, he provided an uncommon market factor that he tracks, which enables him to determine whether or not he should invest in a certain area and if he needs to sell off part of his portfolio: the housing affordability index.
Jeremy’s best real estate investing advice ever was to “pay attention to your market.” It is not so much about the individual deals you are doing, but more about the entire direction of your target market. If you pay enough attention to your market, then you can make sure that you are buying when buying is smart and that you are selling when selling is a necessity.
The main market factor that Jeremy watches is the housing affordability index. According to the National Association of Realtors, the housing affordability index “measures whether or not a typical family could qualify for a mortgage loan on a typical home,” which is defined as the “national median-priced, existing single-family home.” The affordability index can be interpreted as follows:
- Affordability index of 100 – A family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index
- Affordability index above 100 – A family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home
- Affordability index below 100 – A family earning the median income doesn’t bring in enough income to qualify for a mortgage loan on a median-priced home
When looking at the affordability index’s historical data leading up to the 2007-08 real estate crash, it was totally out of control. It got to the point where almost nobody could afford the homes that they were living in.
Therefore, as long as the affordability index is high such that the overwhelming majority of a population in an area can afford to live in the median-price home range, then Jeremy is comfortable investing in that area. However, if the affordability index gets to the point where half of the people living in a given area cannot afford the median-price home, then he gets worried and knows that he is going to stay away, in regards to buying. If he owns properties in the area of a declining affordability index, he will look into unloading those properties while it is still possible
Jeremy uses local resources to track the affordability index. He doesn’t look at the national index because that doesn’t make any sense – the affordability index is best used at the local level. Therefore, you want to either find a local resource or a national resource that breaks it down to the local level. The best way to find your target market’s affordability index is to search “(insert target market) housing affordability index” on Google.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.