How to Read the Real Estate Tea Leaves

Hardly a day goes by without someone in Washington weighing in on the housing market. If it's not that, it's a housing report that sends investors into a tizzy. And the news is often downright confusing.

Just last week we learned existing home sales slid 2.7 percent in October from September. That seemed reasonable enough given the recent rise in interest rates, which are expected to reduce home sales. But the next "official" housing tidbit was that new home sales, as calculated by the Commerce Department, actually surged in October, rising 13 percent compared to September.

The findings seem to contradict each other unless you understand that the two reports measure very different things. The upbeat report from the Commerce Department report essentially tracks sales of new homes. A "sale" can be counted if a contract is signed or a small deposit is put down -- even if there's no home to speak of.

Furthermore, the Commerce Department report is infamous for having regional glitches that often lead to revisions later. In fact, the chief economist of the National Association of Builders said the October report likely "overstates the true pace of home sales because of well-known statistical deficiencies." Translation: Don't bet the ranch on this report as a true sign of a still torrid housing market.

I'd put more weight on the existing home sales stat because it actually tracks bona fide sales, not possible sales. And that stat tells me that housing is indeed cooling down a bit -- not falling apart, merely slowing down from its incredibly strong performance.

But, the real question is this: Do you as a homeowner need to bother yourself with these reports at all?

If you live in your home and don't use it as an investment property, I suggest you tune out all the data. If your house is truly your home, then its value isn't solely about what some real estate agent says you can get for it tomorrow. If you don't plan on moving in the near future, why get all wrapped up in whether your home is worth $3,000 more today than it was six months ago?

Your home's value today transcends its dollar value; it involves the lifestyle it allows you and your family to enjoy. Your home's value includes the intangible worth of being in a community you love, near good schools, good shopping, and the cultural activities you enjoy.

Sure, over the long term you want it to be a solid investment. That's logical and attainable, but it doesn't mean you need to sit on the edge of your seat each month waiting for the latest report on the housing market to hit.

If you own a house as an investment, you do indeed need to pay attention to what is going on, but forget about the national stats coming out of Washington. Pay attention to your neighborhood instead.

If you rent out the home, then all you need to worry about is whether rents are going up or down and how long homes sit in the classified section before they get rented out.

And make sure you have a handle on what is going on in the local economy. If there's a dominant employer in the area, keep a close eye on its financial situation. Right now I wouldn't want to be a real estate investor in any of the towns that are targeted for General Motors plant closings.

The smartest approach for an investor is to anticipate what would happen if your current tenant moved out. Can you handle the mortgage payment if you don't have any rental income? Or can you financially afford to lower the rent so you can get a paying tenant in the property faster?

If you can't afford to carry the house on your own for a short period or you are betting that rents will never soften in your area, you shouldn't be in the landlord business. Housing is a good, long-term investment, but that doesn't guarantee it's going to be a fabulous investment each and every year. You must be prepared to weather periods of market softness.

If you're not willing or able to handle intermittent downturns, now might be an especially smart time to sell. Prices are still strong, and you are most likely sitting on some nice gains.

Good advice.

I might add that I saw a report somewhere a few weeks ago that cited quite a slump in new building permits being issued and in new housing starts. Both of those are better leading indicators in the new housing market.

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