Real Estate Advance Indicators

Most of the commonly used real estate indicators are "interesting" but what do they actually tell you? Nationwide data such as new and existing home sales combine unrelated market conditions. For example, there is very little correlation between Detroit, Phoenix, Houston or San Diego. Mixing up all these statistics is called a “national average”, which may be useful for glossy reports but is of no practical use in real life.  Furthermore, housing-related  data tend to report the past and have little predictive value for the future.

In order to see what is ahead, customized indicators are often necessary. Good data is typically localized to very small markets. Sometimes these localized indicators may be applicable to other markets, often they are not. If you are interested in, say, Las Vegas, there is very little need to understand market conditions in Atlanta. Back in the subprime era, around 2005 or 2006, I devised a few indicators to track the San Diego market. I first started following the percentage of vacant listings as an indicator of excess supply. I also looked at short sale and REO prevalence as an indication of imminent market collapse. Those indicators were invaluable in trading the subprime lenders who are no longer in existence.

 

Real estate is far more confusing today, as a result of government and Fed intervention. Are we at a bottom? Are we well on our way to recovery or are we blowing up another bubble? Since the announcement of QE infinity back in September of 2012, the Fed has purchased $335.5 billion worth of RMBS, at an annualized rate of $872 billion. How do we measure the effects of these unprecedented "throw-money-at-it" strategies?

At the moment, I am watching two indicators which should give us a hint regarding future market conditions:


1. Mortgage Rates.  This is a very easy indicator to follow. Mortgage rates are posted daily. The Mortgage Bankers Association reports weekly loan application estimates.  Combining the two, we should be able to see if “QE” is successful in keeping rates low, and the effects on the mortgage market. The following chart is available daily at the
Mortgage News Daily website. By the way, MND is an excellent source of industry related information from the ground level.

 


 

rate vs apps

Mortgage rates versus applications – click for better resolution.

 


 

I believe that if mortgage rates remain stable and fluctuate in a tight range, the stimulating effect of the low rate will be over and loan applications should fall gradually. If it they don't, then I would call it a very bullish signal. On the other hand, if rates start to go up, loan applications should drop abruptly, especially for the refinances.  Once again, if the applications rise anyway, I would consider it a very bullish signal. Finally, the last scenario is for rates to fall, with or without new QE efforts from the Fed, and loan applications to  drop as well. That would be so bearish that we may well see a repeat of the Lehman collapse.


2. Single family vacancy rate.  This is a far more difficult indicator to follow, since no one has ever collected these data. The Federal Reserve has some type of a number in its quarterly Z.1 Flow of Funds Accounts but it is hopelessly outdated and meaningless for specific markets. I may have to rely on unquantifiable surveys or other anecdotal observations for this indicator.

Using Las Vegas as an example, during the last four months, there were 17,254 sales. Almost exactly half of those were sold to investors while just over 50% of the transactions were for cash. Vegas is a second home market, so a number of these absentee buyers may have no intention of ever renting out their purchases. However, according to Dataquick:

 

“There were 44 buyers in December 2012 that each purchased three or more homes, but only eight of them bought 10 or more. Combined, the eight buyers who purchased 10 or more homes in December 2012 acquired 185 homes, or about 36 percent of all homes bought by multi-home buyers. In December 2011, two purchasers bought more than 10 homes, buying a total of 38 properties.”

 

How many of these purchases are flips? The current market condition is simply not strong enough to make flipping profitable, especially with such high volume. Therefore, there could be over 1,000 single family homes added to the rental pool every month if this pace continues, maybe even more. How many can Las Vegas absorb?  Here is the problem, there is no source for consistently reliable data so we have to rely on rough estimates, using what is available. Single family rentals may be handled by a real estate broker, a professional property manager or simply by a sign in the front yard put up by the owner. According to this Realtor's website, there are 4,782 single family homes, respectively condos for rent in Vegas, not counting apartments. That is a lot of rentals for a population of just over half a million.

Similarly, investors are purchasing about 30% of the Southern California market with cash transactions reaching 35% in December. In what is perhaps the hottest market of all, Phoenix, investors are buyers in about 37% of the  sales, while cash transactions are now over 40%.

Even though the demand for single family rentals should be rising as a result of economic conditions and demographics, this demand is finite. If the price of gasoline is lower, consumers may drive more. For housing rentals, if the rent is lower, renters may rent a bigger house, but still have no reasons to rent two or three houses. In my opinion, the current demand for single family rentals is far below the current pace of conversions from owner-occupied homes to rentals. Will bulk investors cannibalize each other by lowering rent, hence not meeting their yield projections? Will bulk investors stop buying, or will they keep going as long as OPM* is available?

In summary, the combination of investor purchases and mortgage rates should continue to dictate market conditions in the immediate future. I believe both are unsustainable, but just like with the subprime bubble, it can take a while before funds are exhausted from the bulk buyers and QE is proven to be ineffective in keeping rates low. By keeping an eye on the above indicators, we should have some advance signal that should tell us if the recovery is real or a new bubble.

 

* for the uninitiated: “OPM” = “other people's money” [ed.]


 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to “Real Estate Advance Indicators”

  • daddy warbucks:

    Just when you thought real estate was begining to re-bound, got property?

    “Additional costs will be added to how new homes are built, whereas the sales of older homes can be stopped in their tracks until they meet stringent government codes.”

    “The new federal EPA, HUD and DOE home regulations filter down to local inspectors who are required by law to impose them or fail the home inspection. Unnecessary and unreasonable code can be imposed on homeowners who find they “can’t fight code.” There is virtually no appeal.”

    “…the Environmental Protection Agency will have power to force many homeowners to virtually rebuild their homes to meet stringent environmental requirements before they can sell them. Living in a house that does not meet the EPA’s “green” regulations for roofing, windows, doors, insulation or heating and cooling systems will be slapped with fines. Electrical companies are now installing “smart monitoring systems” to track usage of energy by residents.”

    This is part of a much bigger plan, when thousands of people are forced to ‘walk away’, and that includes the hedge funds like Blackstone that have been buying thousands of single family homes, the federal government will ‘have no choice’ but to seize the properties (Agenda 21). IMHO

    Homeowners vs. EPA Home Invasion

    Posted: 11 Feb 2013 04:02 PM PST
    By: Sharon Sebastian

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • How to Survive the Winter
      A Flawless Flock of Scoundrels One of the fringe benefits of living in a country that’s in dire need of a political, financial, and cultural reset, is the twisted amusement that comes with bearing witness to its unraveling.  Day by day we’re greeted with escalating madness.  Indeed, the great fiasco must be taken lightly, so as not to be demoralized by its enormity.   Symphony grotesque in Washington [PT]   Of particular note is the present cast of characters. ...
  • Credit Spreads: The Coming Resurrection of Polly
      Suspicion isn't Merely Asleep – It is in a Coma (or Dead) There is an old Monty Python skit about a parrot whose lack of movement and refusal to respond to prodding leads to an intense debate over what state it is in. Is it just sleeping, as the proprietor of the shop that sold it insists? A very tired parrot taking a really deep rest? Or is it actually dead, as the customer who bought it asserts, offering the fact that it was nailed to its perch as prima facie evidence that what...
  • The Strange Behavior of Gold Investors from Monday to Thursday
      Known and Unknown Anomalies Readers are undoubtedly aware of one or another stock market anomaly, such as e.g. the frequently observed weakness in stock markets in the summer months, which the well-known saying “sell in May and go away” refers to. Apart from such widely known anomalies, there are many others though, which most investors have never heard of. These anomalies can be particularly interesting and profitable for investors – and there are several in the precious metals...
  • A Falling Rate of Discount and the Consumption of Capital
      Net Present Value Warren Buffet famously proposed the analogy of a machine that produces one dollar per year in perpetuity. He asks how much would you pay for this machine? Clearly it is worth something more than $1.00. And it’s equally clear that it’s not worth $1,000. The value is somewhere in between. But where?   We are not sure why Warren Buffett invoked a money printing machine of all things – another interesting way of looking at the concept is by e.g....
  • Business Cycles and Inflation – Part I
      Incrementum Advisory Board Meeting Q4 2017 -  Special Guest Ben Hunt, Author and Editor of Epsilon Theory The quarterly meeting of the Incrementum Fund's Advisory Board took place on October 10 and we had the great pleasure to be joined by special guest Ben Hunt this time, who is probably known to many of our readers as the main author and editor of Epsilon Theory. He is also chief risk officer at investment management firm Salient Partners. As always, a transcript of the discussion is...
  • What President Trump and the West Can Learn from China
      Expensive Politics Instead of a demonstration of its overwhelming military might intended to intimidate tiny North Korea and pressure China to lean on its defiant communist neighbor, President Trump and the West should try to learn a few things from China.   President Trump meets President Xi. The POTUS reportedly had a very good time in China. [PT] Photo credit: AP   The President’s trip to the Far East came on the heels of the completion of China’s...
  • Is Fed Chair Nominee Jay Powell, Count Dracula?
      A Date with Dracula The gray hue of dawn quickly slipped to a bright clear sky as we set out last Saturday morning.  The season’s autumn tinge abounded around us as the distant mountain peaks, and their mighty rifts, grew closer.  The nighttime chill stubbornly lingered in the crisp air.   “Who lives in yonder castle?” Harker asked. “Pardon, Sire?” Up front in the driver's seat it was evidently hard to understand what was said over the racket made by the team of...
  • A Different Powelling - Precious Metals Supply and Demand Report
      New Chief Monetary Bureaucrat Goes from Good to Bad for Silver The prices of the metals ended all but unchanged last week, though they hit spike highs on Thursday. Particularly silver his $17.24 before falling back 43 cents, to close at $16.82.   Never drop silver carelessly, since it might land on your toes. If you are at loggerheads with gravity for some reason, only try to handle smaller-sized bars than the ones depicted above. The snapshot to the right shows the governor...
  • Business Cycles and Inflation, Part II
      Early Warning Signals in a Fragile System [ed note: here is Part 1; if you have missed it, best go there and start reading from the beginning] We recently received the following charts via email with a query whether they should worry stock market investors. They show two short term interest rates, namely the 2-year t-note yield and 3 month t-bill discount rate. Evidently the moves in short term rates over the past ~18 - 24 months were quite large, even if their absolute levels remain...
  • Heat Death of the Economic Universe
      Big Crunch or Big Chill Physicists say that the universe is expanding. However, they hotly debate (OK, pun intended as a foreshadowing device) if the rate of expansion is sufficient to overcome gravity—called escape velocity. It may seem like an arcane topic, but the consequences are dire either way.   OT – a little cosmology excursion from your editor: Observations so far suggest that the expansion of the universe is indeed accelerating – the “big crunch”, in...
  • Claudio Grass Interviews Mark Thornton
      Introduction Mark Thornton of the Mises Institute and our good friend Claudio Grass recently discussed a number of key issues, sharing their perspectives on important economic and geopolitical developments that are currently on the minds of many US and European citizens. A video of the interview can be found at the end of this post. Claudio provided us with a written summary of the interview which we present below – we have added a few remarks in brackets (we strongly recommend...
  • Precious Metals Supply and Demand
      A Different Vantage Point The prices of the metals were up slightly this week. But in between, there was some exciting price action. Monday morning (as reckoned in Arizona), the prices of the metals spiked up, taking silver from under $16.90 to over $17.25. Then, in a series of waves, the price came back down to within pennies of last Friday’s close. The biggest occurred on Friday.   Silver ended slightly up on the week after a somewhat bigger rally was rudely interrupted...

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com