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Should We Act on What We Hear in The News About Real Estate?

by David Rodriguez on April 13, 2014 · 8 comments

  
REI in the News

We are interested in selling. We look around for comps and set our best guess for a price. And then … nothing. Do we just drop it an arbitrary dollar value regularly until someone bites or is there a better way?

Let’s Discuss…

My goal for a recent article was to see if national or local announcements and issues relating to real estate caused any movements in listing prices. An example would be whether the announcement of the Case-Shiller actually has an impact on the market. Another would be does a report on lending rates moving up or down have an immediate response in the market. What about building permit announcements, unemployment or even the prime rate? Is any of this macro and micro level information even relevant or is it just used as filler in the news hour.

The question I was trying to answer is does anyone that actually participates in the market (sellers, brokers, investors) actually respond to any of these as reflected by price; should they? Since I am licensed in Illinois I am limited to this real estate data which is where I pulled over 11,000 residential properties that sold in Chicago. These properties had over 12,000 unique price changes to analyze with respect to announcements.

Related: Home Prices: Déjà Vu All Over Again?

The Breakdown

The breakdown of the events I looked at to see if the real estate market responded to them is outlined below. I effectively looked at whether these 886 events relating to real estate impacted real estate prices.

daverodriguez

The 886 events, which encompassed nearly all that I could get my hands on, did not explain much of anything. In other words the prices in the market were not impacted. The 12,000 unique price changes that I mentioned earlier were simply not influenced by these reports. So why does the media pay so much attention to these figures when the immediate real estate market doesn’t even seem to care?

What Explains 12,000 Price Changes?

I am truly not certain.

My next step is to determine whether it is a geographic issue. In other words do prices ripple out from one block to the next? We all know the significance of location in real estate so my hope is that I can identify patterns based on area. If there are any veteran investors out there, HELP.  If you have an idea on why prices are moving in your area that you think I haven’t considered let me know. I am always up to try and see if the numbers agree.

This post is a rough summary of a recent article.  If you are having trouble sleeping you could read the full 20+ page article I had published on this.

You may be asking why I waste my time on this type of work but the reason is two-fold.  The first is that I have been an active investor for the past 10 years, and I am always trying to see what’s missing and if profit can be made with better information and analysis. In other words I am always looking for ways to monetize findings. The other reason is I “have to” as an academic.

What are your thoughts? Let’s discuss in the comments below…

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{ 8 comments… read them below or add one }

Galya April 13, 2014 at 1:13 pm

What is positive and negative in your table? Is it instead of saying “responded”/ “not responded”

Reply

David Rodriguez April 13, 2014 at 1:58 pm

Gayla,

The table is classifying any and all announcements that I could find to help explain price movements. For example, a negative Case-Shiller reported was marked as a negative event that prices could have responded to negatively. In the same way a downward shift in rental rates was a negative event and “should” have caused these multi-unit prices to move down.

The problem was that after playing with this data for months none of it helped explain the daily movements.

Reply

Royce Kemp April 13, 2014 at 2:12 pm

I don’t think you can treat real estate transactions like stock market transactions. For starters, many people buy homes because they provide a basic human need of shelter, not strictly because they are an investment vehicle. Second, real estate transactions take much more time and energy to complete and would not be so susceptible to ongoing market data noise. Plus rate locks would temporarily suspend any care about what the loan market is doing.

Reply

David Rodriguez April 13, 2014 at 4:36 pm

Royce,

In an attempt to control for primary home buyers concerned with shelter and all of the emotion that revolves around them I only included multi-unit properties. However, this is of course not a guaranteed control.

After looking at all of the different events and the lack of reaction across the board I agree that the noise is not immediately accounted for. I should say that I also lagged the announcements by up to two weeks in an attempt to see if the impact was delayed, it wasn’t. This tends to imply that this market is exceedingly inefficient. I am not sure that this is correct either. At this point I am going back to the drawing board to find the “right” variables.

Thanks for the comment

Reply

Sam Lepore April 15, 2014 at 6:56 pm

Hey Dave-

Interesting way to look at things. I like the chart but how do we exactly know that these items were in direct correlation to Real Estate transactions going higher or lower? Was it caused by some other metric? Tough to say!

Reply

David Rodriguez April 20, 2014 at 4:45 pm

Sam,

I agree entirely. While I can state these events didn’t result in any noticeable price movements I am certain I missed certain metrics. I am hoping when I look at proximity it will be more telling. In other words does movement occur as a result your immediate surroundings? Stated differently do prices respond to price adjustments based on proximity rather than any publicized reports? (I am leaning towards this but won’t know for a few more weeks… hopefully)

Reply

Kevin Vitali April 20, 2014 at 10:41 am

While it is important to get a general sense of the real estate market, I think it is more important to look at the purchase of your primary residence as a home and not an investment. If you buy for the intermediate to short term you will generally be far better off then renting.

You have to live somewhere and it certainly can be frustrating trying to follow whether the market is good or bad or whether it is a good time to buy or sell….

Reply

David Rodriguez April 20, 2014 at 4:49 pm

Kevin,

You are correct that your home is not an investment and I would not encourage a primary buyer to watch the market in the same way you or I would. While I often hear individuals say their house is the best investment they have ever made I am hard pressed to consider it such. This is why I steer clear of researching primary home purchases since it is not an “investment” and buyers are much more emotionally drive in this market.

Thanks for the read.

Reply

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