In Part 5 we began the "top down" look at the market, providing the reader with a community level overview. Next we'll introduce the economic indicator matrix (over the short real estate cycle) so the reader can better recognize the area's dynamics and trends. - Patrick Egger
"What is the Matrix? You have to see it for yourself." (from the movie The Matrix)
Developing a matrix with key economic indicators and their relationships provides perspective of trends and shifts in the market. Key indicators measure the local economy. Identifying relationships between the indicators makes it easier to spot trends. Including observations will help the reader follow your logic and lead them to similar conclusions, which after all, is the goal.
- Employment is the key component of any market. Jobs are everything to the community, especially to the housing market. Jobs make the economy move, generate tax revenue, fund home purchases, increase retail spending and are catalysts for travel and tourism.
- Population migrates to jobs, increasing housing demand. Understanding demographics helps you comprehend demand, buyer/seller profiles, etc. Migration patterns into and out of an area tell a story.
- Taxable sales are a measure consumer spending patterns. If sales per capita are increasing or decreasing, it's a sign of consumer confidence levels.
- Housing statistics, including the total housing stock (single family, apartments, condo, mobile homes, etc.), home sales (new and resale), inventory, permit activity (for single and multi-family), apartment and single family rents and vacancy, each provide clues to the direction of the housing market.
- Performance indicators for the area's major industries reflect the state of the base employment segments.
For example, in Las Vegas, tourism related statistics such as gaming revenue, visitor volume, hotel room construction, room occupancy levels, etc., are indicative of the health of the local economy since much of it is tied to gaming. As gaming and tourism revenues increase, more rooms are added, creating jobs, housing demand, etc.
Add indicators that you consider barometers of the local economy and relate to housing. The key is to discover what makes the community work and use the matrix to graphically portray trends and make it easy for the client to follow your conclusions.
Relationships – Marrying up the stats
Ratios between the indicators are important for identifying the norms and understanding the trends. If you tack indicators over time, you'll see that some relationships remain constant, while others shift with changes in the market.
Take a look at the chart below. (click image to enlarge) The relationships between population and housing stock or housing stock and employment are constant. At the same time, the ratios between home sales and population or employment and home sales shift with interest rates. Economic statistics, housing market indicators, industry trends, etc. are tracked at the local, regional, state and national levels. Data and overviews are often available from local development agencies, planning departments, chambers of commerce, universities, along with local, state and federal agencies.
Charting historical indicators over many years will provide a good picture of a market and how it reacts to events or shifts in the economy (interest rates, shifts in median prices, etc.). Displaying 5 or 6 years of data along with the current year to date will provide a reasonable overview of the current direction. You can use a year to date column to compare the current year to the prior year and indicate the trends. Adding the ratios helps to tell the story.
Look at the chart below on the Las Vegas economy. (click image to enlarge) The increasing visitor volume, hotel occupancy rates (well above normal) are catalysts for hotel expansion, increasing jobs. While the "for sale" housing segment is down, apartment rents and occupancy have improved; population is increasing. With the matrix, the appraiser can easily communicate many factors impacting the economy.
While a chart like this may seem to be time consuming, the data is generally available from a variety of sources and once entered into a spreadsheet, it can be updated monthly (as new figures are published) and reused for multiple assignments. You can add several lines on key industries for your area to provide an overview of the local economy.
In another market, such as Los Angeles, tourism is important, along with import/export activity, the film industry, healthcare, etc. In Seattle, maritime related businesses, technology, manufacturing, etc. Look at the major employers in the area and focus on those industries. If a large segment of the population is employed in several industries, any shifts in those areas will impact the housing market.
Keep it consistent
One important factor to consider is "consistency" of the data. Population, employment, housing sales, etc. are estimated by different agencies for different reasons and using different methodologies.
Its very important that you:
- Find a good reporting source that has tracked the data over a long term
- Understand how and when the estimates are made and what comprises the numbers
- Stick with one source for the data or indicator selected.
Summarizing the data and trends
After you have completed the matrix, including your comments or conclusions complete the picture. A few short paragraphs will summarize the data and provide the client with key observations related to the local economy, housing and trends.
Since the information is community wide, develop the addenda as a template for reuse with other assignments. The matrix can be linked to an excel workbook to automatically update your data. Additionally, you can develop graphs from the data for use in special assignments or when you need to illustrate a specific point.
Tracking data on your market in a spreadsheet will make it easy to test relationships using simple formulas. A long-term display (20-30 years) of such data will provide a good view of shifts that occurred as a result of major and minor events in the economy, such as interest rate movements, recessions, loss in a major employment sector, etc.
Knowing how the market reacted in the past may be a good barometer of what shift may take place as a result of current or foreseeable events. In the words of Winston Churchill, "The farther backward you can look, the farther forward you can see."
About the author: Patrick Egger is a Certified General Appraiser located in Las Vegas, NV. He teaches continuing education classes on the housing market, appraisal issues for real estate agents and appraisers. He can be reached at lvreqa@cox.net
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