To Figure Out Where Real Estate Is Headed, Start Driving

To Figure Out Where Real Estate Is Headed, Start Driving
Metrostudy gets the lowdown on the market through firsthand observation of new home developments (Photograph by Patrick T. Fallon/Bloomberg)
Photograph by Patrick T. Fallon/Bloomberg

Metrostudy, a real estate consulting firm based in Houston, analyzes the health of the residential market in metropolitan areas across the U.S. and issued prescient warnings about the coming housing bust as early as 2004. One of its main analytical tools is what makes Metrostudy interesting: drive-bys.

Employees drive through newly built—or still being built—home developments and start observing. Are there toys on a house’s lawn? Good sign: A family has moved in. Families mean stability. Is there a garden hose attached to the side of the house? Another good sign. The house is not only occupied, it has an owner who cares about his or her property. A welcome mat is always, well, welcome.

A bad sign: no curtains in the windows. That means the house could be unoccupied—and unsold. Two others that trigger alarms are a high number of empty lots and newly completed but clearly empty houses, both indicators a developer may have badly overestimated demand and could soon be choking on inventory.

Analyzing all this data streaming in from Boston to Miami is Brad Hunter, chief economist of Metrostudy. He was one of the first to observe signs of life in the residential market in 2009, saying home sales would show staying power even after the end of President Obama’s tax break on residential sales.

Now, Hunter is forecasting double-digit increases in new home prices for the rest of the year; the latest number released on July 30 shows a jump of 12 percent. “People are buying homes to live in them,” says Hunter. That wasn’t always the case at the height of the frenzy last decade, when speculators financed by ultracheap mortgages and zero down payments bought newly built, unoccupied homes—and sometimes empty lots—to flip to the next buyer.

Hunter sees the speculative excess gone from the market—well, mostly gone. Developers are buying lots again in desirable central locations, driving up prices. The once-hot exurbs still have unsold homes and empty lots aplenty, but developers are shunning them for now.

Next year, says Hunter, will be different: He predicts new home prices will grow only 6 percent in 2014 as interest rates keep rising. “Mortgage rates could pose a challenge to affordability,” he says.

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