Timing the Market: Indicators to Determine Market Phase
Real Estate Agent · Denver, CO · Member since 2011 · 19 posts · 8 votes
Hey Folks,
Curious as to what indicators savvy investors use to determine the market cycle phase? I'm using the framework described in David Lindahl's book 'Emerging Real Estate Markets': Buyer's Market Phase 1, Phase 2, Seller's Market Phase 1, Phase 2. He discusses using quantitative factors such as:
Demand:
1. Employment Growth (driven by commercial incentives and strong local leadership)
2. Affordability (correlation between price and income)
3. Absorption Rate
Supply:
1. Building Permits
2. Vacancies
I'm getting a gut feeling we're seeing seller's begin to flood the market (at least in Tampa Bay) and we're at the early stages of a Seller's Market Phase 2. That's just a feeling though and I'm really looking to put together a cohesive investment thesis to pitch to potential investors.
What metrics do you all use to help you see the bigger picture? Also, where would you obtain the necessary data?
Thanks in advance!
My simple analysis is to count 'warm bodies'. By that I mean that population growth is going to mean that there will be people available to rent to. As for up or down markets/buyer seller market, like the stock market you can make money either way if you focus on the fundamentals.
We always look for a competing property in a market that is out performing the other comparables. That usually tells us if there is upside and if there are renters willing to pay the higher rent. Sometimes we just cannot offer the same amenities as the higher priced property but the delta is a good barometer of the strength of the market.
As for all those other factors you have listed, they are very important but you need to put together an algorithm that you can understand so that you tract any trends. I would take a lesson from the Wall Street guys an look for corollaries. The problem with most real estate data is that it is dated and by the time you get the info, the market has moved. By developing corollaries, you can become more predictive and less retrospective. (in case you are wondering what corollaries are, think of the idea that when there is a power outage, nine months later there is an increase in children being born)
I am unable to predict markets and my plans do not permit sitting on the sidelines; so, I try to purchase investments that cash flow similarly in up or down markets. Fortunately, my market allows that.
My simple analysis is to count 'warm bodies'. By that I mean that population growth is going to mean that there will be people available to rent to. As for up or down markets/buyer seller market, like the stock market you can make money either way if you focus on the fundamentals.
We always look for a competing property in a market that is out performing the other comparables. That usually tells us if there is upside and if there are renters willing to pay the higher rent. Sometimes we just cannot offer the same amenities as the higher priced property but the delta is a good barometer of the strength of the market.
As for all those other factors you have listed, they are very important but you need to put together an algorithm that you can understand so that you tract any trends. I would take a lesson from the Wall Street guys an look for corollaries. The problem with most real estate data is that it is dated and by the time you get the info, the market has moved. By developing corollaries, you can become more predictive and less retrospective. (in case you are wondering what corollaries are, think of the idea that when there is a power outage, nine months later there is an increase in children being born)
@Account Closed Thanks for the feedback! And yes, putting an algorithm together and finding those corollaries is my main focus. There are plenty of lagging indicators in this business, it's quite a bit trickier to identify the leading indicators. The nice part about real estate trends though is that they're typically slowwww. I firmly believe we can see these trends happening and react with enough anticipation.
For instance, for the last two years the gap between development and demand in Denver and DC is rising (two of the cities with the most Millennial growth in recent years). We're starting to see landlords offer more and more incentives to tenants to fill vacancies. Pulling the permits issued from Denver shows us there is roughly double the amount of building happening in that market than before the last recession. Of course this is driven by Demand (fueled by large Job Growth and Pop Growth), but since Real Estate is an inefficient market with so many suppliers of inventory, it's predictable that with any jolt in Demand, there will likely be Over-Supply.
Plus, thinking through Demand, we're beginning to see a lot of retailers (like the Colorado based Sports Authority) default - PacSun, American Apparel, Aeropostale... what this says about the larger economy, I don't know. From what I understand, much of the growth in cities like Denver and DC are driven by Tech Sector jobs, but we're also starting to see a decline in Venture Funding over the last two quarters. If this is actually the beginning to a downward trend in VF, then we can make the relationship that Tech Sector jobs will likely slow, therefore slowing RE demand in high-tech cities - gotta tangibly define those elusive and pesky corollaries though!
A market that is definitely already experiencing Over-Supply is Miami - a notoriously volatile coastal market. Last I checked, they're experiencing 29 month inventory for their condos. Over 3K condos are developed and on the market. Of course media is trying to tell Sellers to be patient and hold on, but these figures are just saying to me "little upside, huge downside". Eerily similar to pre-recession and 'bubble-like' qualities.
I 100% agree, you can make money in any market if you focus on the fundamentals. As @Mike Dymski mentioned, cash flow is #1 priority. If buying in a Seller's market like today, I personally would just do a bit of forecasting to ensure the property would still be profitable with lower rents and higher vacancies. Personally, during the last recession, I saw properties furthest away from Tampa Bay's Economic Zones take the biggest hit, so I'd be extra careful to have appropriate forecasting based on that location factor as well. Sam Zell is taking the approach to liquidate his many of his suburban properties as well.
OK. RANT OVER. Need many more hours to appropriately flesh out this thesis. Even then, there will always be infinitely more unknowns than knowns. Many thanks for helping to think through this, just trying to best prepare and identify the biggest opportunities in the next few years!
I drove around of Tampa and Brandon area those few month to familiar with the areas. what are the major businesses of Tampa or surrounding area? Except tourists and retiring population related health care. I found some on Wikipedia but like to hear from local professionals.