Here is what they are, and why they matter
The following article is written by Andy Bates (pictured), junior partnerships coordinator at RCN Capital.
In times of change or less than favorable market conditions, investors and even mortgage professionals often don’t know where to look. It can be simple to say, “just look at the economy”, but not quite so simple to know what it is being presented or even where to find it.
The following is a list of economic indicators useful all who work in real estate with context on their usefulness and applications.
Gross domestic product
Gross Domestic Product, or GDP, is a metric which takes into account the value of end-user goods and services in a given survey period, whether quarterly or annual. It can be calculated in three ways by focusing on production, incomes, or expenditures and it is used to provide insight to the size of a country’s economy and its rate of growth.
A Strong GDP, a larger economy, historically corelates to a strong real estate market denoted by increased property values and rental demand. This makes it a reliable and accessible first glance at market conditions and overall strength.
Inflation rates
Inflation has three primary means of reporting through the U.S. Bureau of Labor Statistics: the Consumer Price Index, Personal Consumption Expenditures, and the Producer Price Index. All of these come together to provide an account of the rate at which the cost of goods and services change over time.
When it comes to real estate investing, Inflation has a noted impact on how an investment Cash flows. Cash Flow is especially relevant in the case of held rental assets where the monthly and annual costs of a property come up against rental income to determine the return on investment.
Interest rates
Interest Rates change as a result of Federal Reserve (central banks) policy decisions. Keeping an eye on the Federal Fund Rate is the most direct place to look for interest rate information. The Fed Fund Rate is range set by the Federal Open Market Committee whose meetings are scheduled in advance, making it easier to anticipate when significant changes to rates may be imminent.
Lower interest rates have a stimulating effect on lending/borrowing and higher rates tend to have the inverse effect. While interest rates rise and fall in a relatively uniform manner across institutions, it’s important to remember that rates will still vary between them. Conventional, non-qualified mortgages may provide lower rates on average than private funding even in the same rate environment, yet those private lenders compensate for marginally higher rates with services, flexibility, and speed that conventional lenders often cannot provide.
Although Interest Rates may be one of the first places to look in consideration of the real estate market, it certainly should not be the last. It’s important to remember that rate environments have been worse at times, and yet profit is always possible despite them. Using interest rates as a tool amongst other indicators can distinguish savvy and successful real estate professionals from those who have had to shutter their doors.
Housing starts, permits, and home sales
Permits and starts represent the initiation of new construction for residences. Building permit numbers indicate the overall number of construction projects which have been approved by local municipalities, but do not take into account which projects have begun construction. Housing starts, on the other hand, consider which construction projects are underway and can be expected to be completed in a reasonable timeline.
Housing starts and permits speak to new inventory being added to the residential real estate market by area. It can be an effective strategy for both the builder and buyer of newly constructed residentials to have the sale in place even before construction is completed. Being aware of current projects and their estimated dates of completion can help investors source new deals ahead of their competition.
Home Sales are a straightforward indication of the residential market. Organizations such as the National Association of Realtors produce national home sales reports on a monthly basis and these are about as close to a real-time indication of market activity as possible.
Consumer confidence
Consumer Confidence is as direct a metric as it sounds. It is a means of gauging pessimism vs. optimism amongst active players in the market. This may seem hard to quantify, but organizations like non-for-profit The Conference Board research consumer sentiment on things like current and projected condition in the economy and labor market. This data is then synthesized into an index that is both legible and accessible.
There are other resources available from the perspective of investors as well. Investor sentiment indices, like those produced by national lender RCN Capital in conjunction with C. J. Patrick Company, can provide similarly valuable data from coming from those active in the real estate investment space.
Understanding consumer confidence in the real estate market, and the economy overall, can help to pre-empt trends in the market and allows real estate professionals to keep a finger on the pulse and make savvy business decisions.
Employment statistics
While people always need a place to live, employment rates speak to how many people can actually afford one. In times of increased and stable employment rates, demand for housing increases with people’s ability to afford it through stable income. At times when unemployment is on the rise, demand for housing by end-users tends to drop with their inability to afford it.
In this way, housing demand can follow trends in employment data. These conditions can have an impact on investor exit strategy so it’s important for those looking to flip or sell off a property in their portfolio to keep an eye on demand for housing and Employment statistics are a valuable metric for doing so.
Indications, not incantations
There is no one magical metric which can predict the market. While indicators provide valuable insight, you’ll always want to supplement your findings. There truly is no replacement for boots-on-the-ground investigation into the markets of your choice so, be sure to compare data from these indicators to targeted, area-market research.
