How to Know When Your Real Estate Market is Getting Bad

10

“Real Estate is not a passive investment business. If you don’t add value, you fail”

-Marcel Arsenault

Value adding strategies typically surround increasing rents, decreasing expenses or repurposing the asset i.e. office to apartments. I would like to propose another value-add strategy, Market Trend Analysis,  that if used effectively can help you make and avoid loosing capital.

Market Trend Analysis is a value accretive strategy as it can help investors identify a downward or upward trending market so that they can make an educated decision as when to sell or buy an investment asset. For the casual real estate investor, the early market indicators are difficult to ascertain, as they may not have a research analyst on their investment team.  So, let’s simply use the indicators and the process. I am going to share 5 basic trend indicators that you can easily monitor to understand the direction for investment market based on a flip or buy and hold investment strategy.

Related: How Do Real Estate Markets Differ and Which Should You Buy In?

Flip Market Indicator Chart (Seller Perspective)

INDICATORS

WHAT IT MEANS

IMPACT

SUPPLY Consists of all the supply on the market consisting of active and new listings.

Growing: NEGATIVE

Shrinking: POSITIVE

DAYS ON MARKET Indicates the number of days it takes for an asset to sell.

Growing: NEGATIVE

Shrinking: POSITIVE

ABSORPTION RATE Calculated by dividing the total number of available homes/assets by the average number of sales per month. Breakeven point is 6 months for residential and multifamily assets.

Growing: NEGATIVE

Shrinking: POSITIVE

LISTING DISCOUNT Calculated as a ratio of sale price to active listing price.

Growing: NEGATIVE

Shrinking: POSITIVE

RENTAL ASK TO CLOSE PRICES Calculated as a ratio of closed rental price to ask rent price.

Growing: POSITIVE

Shrinking: NEGATIVE

The impact column will help an investor ascertain if the balances of the indicators are pointing in the right direction to either sell or buy investment assets. The exercise is both an art form and a science. Investors will be able to gain access to the raw data they will need for this analysis through their local MLS or through a Realtor team member.

Buy and Hold Indicator Chart (Seller Perspective)

INDICATORS

WHAT IT MEANS

IMPACT

CAP RATE Calculated as investment asset net operating income divided by sale price

Growing: NEGATIVE

Shrinking: POSITIVE

RENTAL ASK TO CLOSE PRICES Calculated as a ratio of closed rental price to ask rent price.

Growing: NEGATIVE

Shrinking: POSITIVE

SUPPLY Consists of all the supply on the market consisting of active and new listings.

Growing: NEGATIVE

Shrinking: POSITIVE

ABSORPTION RATE Calculated by dividing the total number of available homes/assets by the average number of sales per month. Breakeven point is 6 months for residential and multifamily assets.

Growing: NEGATIVE

Shrinking: POSITIVE

LISTING DISCOUNT Calculated as a ratio of sale price to active listing price.

Growing: NEGATIVE

Shrinking: POSITIVE

Both the charts above analyze the key indicators from a seller point of view. If you are a buyer, you can use the inverse for all indicators to help identify a market that is ripe for buying opportunities.

Market Trend analysis can be a powerful value-add strategy when monitored and utilized as a part of the overall investment business plan.

What do you guys think of Market Trend Analysis? Let’s discuss…

Happy Investing!

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About Author

Ankit Duggal(G+) is the Investment Director of a New Jersey Income Operating & Consulting Company . Ankit is a seasoned value investor who enjoys achieving a zen through surfing, hot yoga, and snowboarding.

10 Comments

  1. Thanks for sharing Ankit!

    I think the listing discount growing/shrinking values are backwards.

    If you look at final sale price divided by list price, a growing ratio would be positive…alternatively, the ratio description may be backwards :)

    • Michael

      Great catch. That was a fauxpa as that is the correct intent. A growing ratio is positive from a seller perspective as it means the market has more demand and it is compressing the bid and the ask closer to each other.

  2. Great article Marcel:
    This information is so important to know and understand, especially for the real estate investor. most people understand that real estate is all about location. understanding how to read the indicators helps to identify the locations that are best poised to create sustainable income, growth and returns. all those investors who lost their shirts during the past economic bust would have fared much better with this information.

  3. jeffrey gordon on

    Marcel, any comments on how you rate the individual results in tallying up the net market and how it impacts decision making. I would assume you take a longer/than shorter perspective, i.e. 90 or 180 day trends vs 7/30 day trends? Also the number of data units in the sample could have a big influence in the results–i.e. small number of units, a couple of out of range results could have a large impact on data–do youi have a sample size minimum you might recommend?

    I think being able to reduce instinctual response to a formula would help a lot of folks overcome a bit of noise in their market and come to understand if they should be getting in, getting out or staying put.

    thanks

    jeffrey

    • Thanks Jeffrey for reading. Regarding your questions:

      1. I work on normalizing data sets and taking out the outliers when i conduct my statistical analysis. Now i am not a statistician by training so there are much better of doing this than a simple outlier test from a frequency distribution standpoint.

      2. My view on trend is a 12 month, 6 month and 3 month balanced against each other.

      3. A minimum sample size would be determined by the depth of the market transactions. I would look for a minimum of 50 normalized data points to consider the results worthwhile in my analysis.

      Happy Investing

      Ankit

  4. I watch stats a lot. I even keep track of them for my own edification.

    What you said, sounds good on paper but stats look backwards and are seasonal. It’s easy to look back and say yep that’s when the market turned. Much harder to look forward and see what the market is going to do. Certainly if everything points in one direction you have some good confirmation that at least in the near term it’s likely to continue. But for how long?

    Each investment stands on it’s own merits with regards to your personal goals for investing. If you are long term doesn’t mater so much that things will go up or down in the next 6 months to a year.

    Obviously if you are short term like a flipper you have got to keep you eye on the ball. Make sure you aren’t reaching when the market is pulling back.

    • Well said BillS on it being easier to look back. Anyone can sound like an expert with hindsight, but it takes real skill to sincerely interpret real estate trends for the current and future market.

    • Competely agree Bill stats look backward. These stats need to be balanced with gap demand analysis coupled with a forecast analysis of demand and supply indicators. I completely agree that each investment stands on its own merits and a long term perspective will keep an investor out of a lot of volatility issue. My grandfather was a smart man when he told me that “a tidal wave leaves no man behind” so the goal of the stats is to help analyze when a trend is going against your target investment plan risk barriers more so than timing or judging the market.

      Thank you for bringing up the great counter and I would to learn more about the stats you follow as well.

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