3 Secrets to reading housing data for the real estate investor: Looking beyond the trend

Nov 03, 2009 0 Comments

Note: this is part 3 in a 3-part series entitled “3 Secrets to Reading Housing data for the real estate investor”. Part 1 was about seasonally adjusted data. Part 2 was about understanding margin of error.

Part 3 – Looking beyond the trend

Once you as a data analyst have determined a trend (and I’m assuming for purposes of this article that this is a real trend and not wishful interpretation of “noise”), that’s when it really gets interesting.

It’s often not enough just to say that a key indicator is going up or down. Rather than use that as a conclusion, it is important to use that a starting point for a series of other questions that will help you understand better the matter at hand. Some of these questions might include:

The trend you are seeing, is that the effect of other phenomenon, or is it a cause?As an example, this summer we have seen an uptick in sales volume and a stabilization in home prices in many parts of the country. What does it mean? On the one hand, one could argue that it signals greater consumer confidence and optimism about the general economy, about spending cash, about taking on a loan, and about the long-term outlook for their equity position, — in other words, that rising sales is a cause of these phenomena.Then again, one could argue that people are looking for any signs of hope, and therefore, seeing these rising sales, people feel more confident about the economy.In fact, both answers may be right, but it’s important to go through this thought process to understand your metric.

Does it help you predict that something is coming, or does it just confirm something that you already have a good idea about?As an example, we generally agree that something like the manufacturing orders is a leading indicator about the health of an economy, whereas something like unemployment levels are a lagging indicator. So, figure out whether your own statistic is leading or lagging to other phenomena.

If it is driven by something else, what are the factors that influence your figure?Getting back to our rising home sales, we said earlier it could be caused by increased optimism about the economy. Yet, we could also say that some short-term economic incentives — like the first time homeowners tax credit — put in place by the government also must be playing a heavy hand. Again, the answer is that probably both of these factors are driving the home sales.While that may seem like a facile conclusion, it’s important to go through this exercise to determine the relevant influence of each. For example, everyone right now is trying to predict the impact on the housing market of the expiration of the tax credit. If the housing market goes down again after the tax credit expires, the tax credit will have had no lasting effect on the economy, despite being such a high-profile public policy tool, and it would mean that increased confidence per se wasn’t driving the home sales. Like when managing a marketing campaign, the process of optimizing your results begins with understanding which of the many probable factors have the greatest impact.

What is the context of those figures?Let’s take again the example of a trend of year-to-year rising sales in your local area of interest (or, for example, year-to-year decreased rents). You might ask yourself what are all the relevant elements, and recall that a giant condo complex was recently built. In this case, the inventory situation now is so different from the inventory situation a year ago that you can’t really draw a fair comparison and the trend is not very meaningful.

So, the bottom line is, you should get into the habit of using the apparent trend to ask yourself more questions and drill deeper into your subject.