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:

  • Gold - Ready to Spring Another Surprise
      Sentiment Extremes Below is an update of a number of interesting data points related to the gold market. Whether “interesting” will become “meaningful” remains to be seen, as most of gold's fundamental drivers aren't yet bullishly aligned. One must keep in mind though that gold is very sensitive with respect to anticipating future developments in market liquidity and the reaction these will elicit from central banks. Often this involves very long lead times.   Blackbeard's...
  • Modi’s Great Leap Forward
      India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions.   India’s Pride and Joy   Indians are...
  • Global Recession and Other Visions for 2017
      Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations.  The New Year is here, after all.  Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad.  But what else will happen?   Image of a recently discarded vision... Image by Michael Del Mundo   Here we begin by closing our eyes and slowing our breath.  We let our mind...
  • The Great El Monte Public Pension Swindle
      Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years.  There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island.  El Monte, California, is one of those places.   Advice dispensed on Interstate...
  • A Trade Deal Trump Cannot Improve
      Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things.   Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
  • Pope Francis Now International Monetary Guru
      Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated.   Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
  • Trump’s Trade Catastrophe?
      “Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute -  Larry Summers is wrong about almost everything. Could he be right about this?   Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
  • Where’s the Outrage?
      Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
  • Money Creation and the Boom-Bust Cycle
      A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:   I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
  • Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
      Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action.   Photo via thedailycoin.org   The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices.   Prices of gold and silver...
  • Trump’s Plan to Close the Trade Deficit with China
      Rags to Riches Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.   Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
  • Side Notes, January 14 - Red Flags Over Goldman Sachs
      Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold.   The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

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]

 

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

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com