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Top 5 Real Estate Economic Factors



– Did you know the second to last week of March 2020, marked the 24% decline in mortgage applications from the same time the previous year.

This is the worst drop since January 2009 during the great recession. With buyers backing away and COVID-19 still impacting the United States, what does it mean for the real estate market? Well, my name is Ariel Herrera, and welcome to the AnalyticsAriel channel. In this video, I’m going to share with you five factors that affect the real estate market. This way you have the right clues to know what actions you should take in real estate. But first, make sure to hit that thumbs up that way YouTube shares our video. And subscribe so that you don’t miss out on the latest content of real estate and tech.

When I first tried to understand what drove the real estate market up or down, I was overwhelmed by all the available metrics like money supply, employment statistic, gross domestic product. It was never-ending and I was over-whelmed. As a real estate investor, all I wanted to understand is when should I buy and when should I sell. So I read two books to really hone in on the key economic metrics for real estate. “Recession Proof Real Estate Investing” by J. Scott and “Timing the Real Estate Market” by Robert Campbell. I consolidated both authors’ tips into top five real estate economic indicators that I’m going to share with you right now. But first I want to make a clear distinction that all local markets are different. You can’t depend on national statistics that summarize information across all markets, because you can have one market that is booming and another market with slower growth. For example, when I was working my first job in New York City, I went to a realtor to look for a place to rent in Hoboken, New Jersey which is on the outskirts of New York City.

I listed the places I wanted to see and the real estate agent quickly gave me a perspective on some listings and told me, “Any place that is still on the market after seven days, means there already could be someone making a deposit as we speak.” And if it was still on the market after fourteen days, something is wrong with it and run as fast as you can. So to contrast in a suburban town where a rental unit could actually be on the market for over 2 weeks and it could be completely normal. So local markets are not always alike so don’t make your analysis based on national stats. Now that we’ve made that distinction, I’m going to use Toyota as a use case for two different markets. Back in 2014, they moved their U.S. headquarters from the greater Los Angeles to Plano, Texas. It impacted over three thousand jobs and we’ll use this as an example to understand economic indicators going forward.

So the first economic indicator is home sales. If more homes are selling in a given period, that’s a sign that the market is following an upward trend. Conversely, when home sales slow it’s a warning sign that the market could be in a cycle of decline. When Toyota moved to Plano, Texas, we could expect that the home sales increased as employees moved their families into the town. The best way to compare this data is month-over-month to get an indication of where the local market is trending. Housing supply, also known as days on market, is the average amount it takes to sell a house in a local market. If there is more demand for housing, like in the case of Plano, Texas, we can expect that houses are selling faster. So they are on the market for less days. This is also a good indicator to estimate whether a market is a buyer or seller’s market. If properties go from, say 100 days on the market to the next month 90 days and 80 days, and keep decreasing month to month, it shows there is more demand from buyers than houses to supply and therefore, it’s a seller’s market. Are less home building permits being issued in your market this year than last? If so, that could be an indicator that builders are less confident that their homes will sell.

And why should you care? Well, the corporations building these new homes actually do really heavy research on market conditions to make their own predictions on whether or not their new builds will actually generate profit. So they’re not gonna just built in any random town. They really put a lot of work into it. So for example, with Toyota’s headquarters I can imagine there are probably houses and developments that we’re occurring as soon as they heard the news, or maybe they even knew the news a little bit before it came on to public data. So it would be important to look at those trends and then possibly follow where new construction is arriving. Notice of defaults and foreclosure sales can help you predict where the market headed. When defaults and foreclosure sales are high, it’s a sign of economic instability that indicates property values and home sales could continue to drop. So what if the employees from Toyota could not uproot their families and move to Plano, Texas? Maybe they get lucky and score another job right away, or they don’t. This could lead to unemployment, the inability to pay their mortgage and thus resulting in foreclosure.

So this would show that, that area, that local market is trending downwards. With interest rates, you want to focus on the 30-year fixed mortgage rates. These rates are what people typically look for, especially for single family and multi-family properties when trying to predict market trends. Low interest rates make it easier for consumers and investors to borrow money. Rates tend to be low during the recovery and expansion phase of the economic cycle. This is when the government is trying to feel economic growth. Conversely, if rates are high borrowing becomes much more expensive and it makes it difficult for buyers to purchase a home. Let’s put this into perspective. Say before taxes you make 60k a year and have no other debt. If you can afford to put 20k down at a 5% interest rate, that means you can afford a home that’s worth 212k. Now, if interest rates are 10%, so from 5% to 10%, You can only afford a home that’s worth 138k. That’s a 70k drop just based off of interest. So, it really shows how interest affects the buying power. You may be wondering, “Where can I find these economic indicators for my local market?” Unfortunately, the data is not in one spot, which I’ve learned the hard way through lots of Google search queries.

However, I’ve found some awesome publicly available data sets which I plan to share in upcoming episodes.

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