When the real estate market went into a tailspin in 2007 and the number of foreclosures began to rise, some U.S. neighborhoods started to look like ghost towns. Stories about abandoned homes and vacant condo buildings filled the news, painting an eerie picture that's been hard for the market to shake off. And, if you live in an area that was hard-hit by the crash, you may be wondering what your house is worth now, and what it might be worth in the future. Luckily, the clues to determine when your area will start seeing an upswing after an economic downturn are all around you.

Getting the Lay of the Land
Before you can look for the light at the end of the tunnel, however, confronting a housing recovery and an economic recovery will involve addressing two problems. Alan Greenspan, former chairman of the Federal Reserve Board, suggested that these issues are falling home prices and increased inventory. Falling home prices decrease personal equity. Overall, mortgage payment defaults occur when personal debts exceed personal comfort limits. The increased inventory only makes the problem worse. Too many unsold single family homes can reduce prices even more. (To understand mortgage payments, read Understanding the Mortgage Payment Structure.)

Basically, when these housing prices plummet, homeowners' wealth takes a hit, capital at financial institutions is impeded, and liquidity is restricted at banks, making recovery an uphill battle. The federal government is likely to step in with a recovery plan and mortgage programs to prevent a hemorrhaging economy from bleeding out.

Signs of a Real Estate Recovery Near You
Begin watching the areas hardest hit by the downturn for improvements. Frequent purchases made by investors and first-time home buyers are good signs. Watch for an increase in the sales of newly built homes versus discounted foreclosed properties; better sales will increase housing construction. The improved flow of credit, indicated by banks lending to home buyers, will give further implications that the recovery is likely to last.

Recovery Indicators
Several key indicators can provide signs that the economy is picking up. Here are eight indicators that will help you keep tabs on what's happening in your area:

  1. Affordability Index
    The Affordability Index is released by the National Association of Realtors. It measures whether a typical family could qualify for a mortgage loan on a typical home. A "typical family" is described as one that earns the median family income as indicated by the U.S. Census Bureau. When the value is 100, a family with the median income has the right amount of income to qualify for a mortgage. To simplify things, a low index lets you know that housing isn't that affordable. A higher index means housing is more affordable.
  2. Existing Homes Sales/Months' Supply Existing
    The Existing Homes Sales is considered "the premier measurement of the residential real estate market," according to the National Association of Realtors. The realtors group provides the statistics on sales and prices of existing single-family homes, including condos and co-ops, for the nation and the four regions - Northeast, Midwest, South and West - every month on the 25th. This indicator provides general information regarding the real estate market and can be implemented for forecasting procedures. (To learn more, see Economic Indicators: Existing Home Sales.)

  3. Housing Market Index

The National Association of Home Builders produces the Housing Market Index, which is weighted and adjusted seasonally. It comes from ratings for present single-family sales and single family sales in the next six months. Both these ratings are determined on a scale of "good," "fair" and "poor." Another component of the index is the "buyer traffic." This is measured on scale of "high," "average" and "low." A score of 50 means the amount of good responses builders received is even with those that are negative. This indicator allows a buyer to obtain a sense of the demand for new houses.

Mortgage Rates
Freddie Mac collects mortgage rates in its Primary Mortgage Market Survey, generally Monday through Wednesday. It asks lenders around the country each week "the rates and points for their most popular 30-year fixed-rate, 15-year fixed-rate, 5/1 hybrid amortizing adjustable-rate, and one-year amortizing adjustable-rate mortgage products." The responses are presented on Thursdays. The survey has been around for more than 35 years and is considered a reliable metric for determining the credit policies of financial institutions.

New Residential Construction Index
The New Residential Construction Index provided by the U.S. Census Bureau is comprised of two surveys: the building permits survey and the survey of construction. The building permits survey looks at the amount of permits given out for new housing units each month from a sample of permit offices. The survey of construction takes monthly estimates of housing starts and completions. Census representatives will sample individual permits within a sample of permit offices and then ask builders or owners about completion dates, the sale date, and the size and number of bedrooms.

New Residential Sales Index
The U.S. Census Bureau provides information about the New Residential Sales Index monthly on specific dates based on a sample of houses selected from building permits. The sale is considered the deposit taken or sales agreement that was signed. This can occur before the permit is even issued; therefore an estimate of prior sales is calculated into the sales figure.

Purchase Application Index
The Purchase Application Index is provided weekly and is typically made available on Wednesdays by the Mortgage Bankers Association. This index lets you know how confident people are about their financial standing and ability to buy a home. This has a "ripple effect" because an increase in applications at mortgage lenders helps promote more construction jobs, and brings revenues to homebuilders, lenders and home furnishing companies. It is important to note that this index should reveal a similar pattern to the New Residential Sales Index. In fact, all of these indicators must be examined both in isolation and in tandem with the others.

U.S. Foreclosure Index
Foreclosures.com examines the number of formal notices, such as default, foreclosure auction and Real Estate Owned statistics, filed against a property during the foreclosure process for its U.S. Foreclosure Index. (To learn how you can save your home, read Saving Your Home From Foreclosure.)

The Bottom Line
Another thing you can watch out for is the general movement of the S&P 500 or the performance of specific REITs. This will let you know about the strength of the economic recovery. An economic recovery may be underway, but among the best ways to identify how it's affecting you is to keep an eye on those areas hardest hit and key economic indicators.

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