I work with buyers and sellers every day across the Twin Cities metro. Often times I will be asked “when will the market bottom out?” While none of us knows for sure as to when the bottom will be in for our market, I can tell you that inevitably most buyers will miss the bottom.

Many buyers are skittish today. No one wants to get hurt by their real estate purchase. The last thing someone wants to do is buy a home at $400,000 only to find out six months later it’s worth $360,000. That’s an unlikely scenario especially in the Twin Cities where we have seen much more moderate rates of growth and decline in home price appreciation compared to the coasts. However, that’s the psyche of many a buyer today.

But here’s the challenge in finding the bottom of the housing market. We won’t know when the bottom was put in until two to four months after the bottom is in. What do I mean? The only way we know the market has turned officially is to look backward at the home sales statistics. For instance, the best number to track to understand the state of the housing market is to look at the home builders confidence levels and new home sales. Builders have to sell their homes. A seller who has his/her home on the market often doesn’t have to sell. If they aren’t getting their price, they can take their home off the market and try it again in a few months or years. Builders don’t have that option. They are in the business of moving inventory. They will discount and provide enough incentives to sell the homes. We have certainly seen this here in the Twin Cities with Lennar.

Take a look at the Builders Confidence levels. On a national level, the wheels started to come off the real estate boom in June 2005. Since then, their confidence has crashed – literally.  (For a broader look at the index, see here). No one that I know of called the top in the market. It wasn’t for several months that we started to hear stories by the Wall Street Journal, New York Times, Business Week, ABC, NBC, CBS, CNN, Fox News etc about the slowing real estate market. In fact, if my memory serves me correctly we didn’t start hearing a lot about it until nearly the spring of ’06. Remember, 2005 was a record year for real estate sales by volume and yet the builders confidence started to deteriorate in June ’06 – fully seven months before the year closed out as the greatest year for residential real estate in U.S. history. Consider the home builders the canary in the mine.

Another thing we will hear more about is the rise in foreclosures. But it’s important to remember that foreclosures are a lagging indicator in the market. You read all the foreclosure stories at the bottom of the market. In the state of Minnesota, it takes one year to foreclose on a home. So when you hear the statistics today, those homes in foreclosure started the process in 2005. The Wall Street Journal just published an article November 29, 2006 entitled, “Distressed Real-Estate: Price to Sell.” In the article they talk about 2007 should be a good year for investors to get back in to the market to buy up the real estate being sold at a discount by banks. If you see a home listed as an REO property, that’s short for Real Estate Owned (by the bank). Most of these homes are marketed by real estate brokers.