Look Ahead with Leading Indicators
Anyone involved in real estate would be happy to have a crystal ball which would allow them to predict future trends in the market place. In order to do well as investors we need to see ahead, but the statistics we hear most are all about the past. While it is nice to keep up on your facts and figures, you should be most interested in what the future holds.
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Trailing vs Leading Indicators
For the most part, real estate statistics are trailing indicators. Whether we consider average prices, annual price appreciation, sales transactions, the sales to listing ratio, cap rates, vacancy rates or any number of other statistics, we are generally looking at trailing indicators. These stats can give us an idea of the current market state and provide some insight into the direction of current trends, but they fall short of leading indicators in terms of predictive value.
On the other hand, leading indicators have much greater predictive value. What do I mean by leading indicators? I mean things that drive the real estate statistics. The same things that drive the economy drive real estate values. If the economy is doing well, the real estate market tags along for the ride.
3 Leading Indicators You Should Watch
1. GDP Growth
When the economy does well, so does real estate. GDP (Gross Domestic Product) is the sum of the market value of all final goods and services produced within a country in a given period of time. By keeping an eye on forecasts for GDP growth (or contraction) you’ll understand where your country’s economy and real estate market are headed several months in advance. If you can drill down further to get estimates on economic growth at the state or provincial level, you’ll begin to paint a picture of the future in your specific region.
2. Job Creation
When GDP grows, the economy expands, capital starts to flow, new businesses are formed, existing businesses expand, and new jobs start to pop up everywhere you look. Keep an eye on the headlines in your area for announcements about new companies setting up in your area, plant expansions, or other signs of capital flowing into the area. If you start to hear of layoffs, downsizing or reduced hours, bad news is soon to follow in the real estate market. When considering job creation, consider the quality in addition to the quantity since high quality jobs will provide the greatest benefit to the real estate market.
3. Population Growth
Population growth tends to occur in areas with great income potential. With everyone looking to increase their standard of living, people follow economic growth and job growth. If an area is booming economically, new jobs arrive, incomes will be on the rise and people will be drawn to that area. Watch for new development and other signs of population growth. Look to invest in areas with long-term potential where all the incoming people are likely to settle and stay for many years.
People drive just about everything when it comes to our real estate markets, so you have to understand what they want. Understand that they’ll chase higher standards of living and flock to areas which offer good, stable, high paying jobs. As people move into an area, the demand for housing benefits investors with higher prices, lower vacancy rates, and better quality tenants to choose from. Keep your eye on the indicators to figure out where people are headed, and stake your claim before the bandwagon arrives.
photo credit: manorgraph