What metrics do you use to determine market conditions?

Question

I’m 32 years old with 2 investment properties and I’m looking at buying my next. My stepdad said “be careful, we might be headed for a downturn soon.” So I started researching the real estate market cycle. That research brought me to this question: what metrics do you like to use to determine the health of the real estate market now and in the near future? Where do you get your data?

Art Perkitny · Answer

@Nathan Shankles

One way of beginning to gain an understanding of your market it by looking at the relevant data.

Data sources such as the American Community Survey, also known as the annual Census, can help you judge a location by considering key market indicators, which I list below.

Whether you are interested in long distance investing or looking to buy in your backyard, this information is invaluable.

Some of the metrics that the survey provides and that I find valuable to understand are:

- Population Total

- Population Age

- Home Values

- Household Incomes

- Rental Vacancy Rate

- Homeowner Vacancy Rate

- Poverty Rate

- Educational Attainment Rate (High School/GED & Bachelors)

- Number of Housing Unit

- Rent to Income Ratio

- Rent to Price Ratio

- Population on SNAPS (supplemental nutrition assistance program) percentage

- Property Tax Rate

- Median Age of Buildings

- Number of Structures by Units (SFR, Duplex, Triplex, Quadplex, etc...)

- Median Rents by Number of Bedrooms

- Unemployment Rate

- Employment Sectors Percentages

- Number of Building Permits Issued

- Foreclosure Rate

- School Ratings

- Crime Statistics

Also take into consideration the direction in which each of these market indicators are trending. This will better help you get an understanding of not just where market is today, but also where it may be heading.

That being said, it's very difficult to predict market cycles.

I recommend reading a book titled Emerging Markets by David Lindahl if you are interested in learning more on this subject

Here is a link: Emerging Real Estate Markets: How to Find and Profit from Up-and-Coming Areas

Hope this helps!

Thomas Psipsikas · Answer

No problem.  You can also talk to local agents/property managers that lived through the last recession and see how the local market fared.  It's not a clear predictor of future success, but gives some sense of how the city performed during a serious downturn.  After all, some of the markets that got hit really bad back then may have much stronger fundamentals today than they did in 2008.

Nathan Shankles · Answer

@Thomas Psipsikas thanks Thomas!

Nathan Shankles · Answer

@Art Perkitny much appreciated art! Thank you!

Thomas Psipsikas · Answer

I think Art offers a lot of excellent and important data points, but I’d recommend starting with a few of the key ones first then dive into the additional data he recommended.  This way you can get more familiar with what story they tell and build upon that. Data can become overwhelming if you look at too much without understanding what it means and lead to analysis paralysis.  I recommend you determine your ideal thresholds for metrics like Unemployment, Population Growth, Poverty, Median Income and Median House Value to start.  It could be that you will never invest in lower income areas with Poverty well above 15%, while others prefer that model.  The thresholds are for each investor to decide based on their comfort level and business model, but I recommend developing your criteria for these.

Art’s absolutely right about looking at trending.  Look at these data through tools such as city-data.com or censusreporter.org, evaluating the most recent data along with trends over the past 5 or more years.  I like Censusreporter.org as you can search by a specific address, but you get less data points than city-data.com.  The nice thing about looking at the trends is that if you see incomes have increased over the past few years while house prices haven’t yet, there’s potential for more discretionary dollars to drive up the house prices in the near future.  This is where using multiple data points can become really interesting to tell a more complete story.

I recommend looking at not only the city level, but the census tract level when you evaluate for “Recession Resistant” areas.  I generally don’t like evaluating on zip code as this can include far too large of an area that could include many rougher neighborhoods along with really great ones.  The blend of the two can cloud the reality on the ground.  Census Track (and block level) is nice as it gets down to the details of the sub-neighborhood.  I believe this is a useful predictor of future results for specific properties.

Look at the macro/city level as a baseline and be sure to evaluate at the sub-neighborhood as that could significantly impact your ability to weather a downturn on a specific property.

Of course, nothing beats having great boots on the ground in the form of agents and property managers to tell you the real story, especially as a sub-neighborhood emerges and no longer fits within the mold of the census data.

What metrics do you use to determine market conditions?

Most Popular Reply