The Housing Market: Indicators and Impacts

There are so many facts and figures that get mentioned when discussing the housing market, but what are the actual indicators? How does the housing market impact other sectors, markets, and the economy? Riley Adams, Founder and CEO of WealthUp joins Cassidy Clement, Senior Manager of SEO and Content to discuss.

Summary – Cents of Security Podcasts Ep. 57

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Cassidy Clement 

Welcome back to the Cents of Security podcast. I’m Cassidy Clement, Senior Manager of SEO and Content and Interactive Brokers. And today I’m your host for the podcast. And our guest is Riley Adams, CPA, and he’s the founder of wealthup.com and youngandtheinvested.com. Those are a pair of websites designed to help people of various ages educate themselves on all things money and make more informed decisions about their personal finances, including investments, taxes and retirement planning.  

He also recently launched a financial advisory business with Investment Advisory Services through NewEdge Advisors, a registered investment advisor. So welcome back to the podcast, Riley.  

Riley Adams 

Thank you so much for having me. It’s great to be back.  

Cassidy Clement 

Sure. So today we’re going to be talking about the housing market indicators, and there are so many facts and figures that get mentioned when discussing these and the housing market in general, but you know, we’re going to talk about what the actual indicators are and how those indicators impact other sectors. 

Not just the housing market, markets themselves and then the broader economy. So I guess just to kick off, in our last podcast we talked about real estate investment, you know, as somebody in finance, what are some experiences you’ve had with your research in housing market indicators?   Are there certain places you go to or certain things that you really pay attention to when the time comes? 

Riley Adams 

So in my case, I was an independent landlord. I had four units at any one time, so I was definitely not a big fish in any sort of market. So when I was doing research for when I should be buying property, it was very localized. I was not too keen on looking at trend reports for new home sales, single family home permits, nothing like that. 

That in my own world never entered into my own calculus. It was more just trying to understand where I lived, because I only wanted to have property I could physically touch in my city.  

In my city, though, I was looking for what are areas that are good for having rental property, meaning they’re in desirable areas with stable or growing rents, they’re affordable houses. Different things that would go into like a very micro view. 

So that’s, in my own experience, how I use different real estate measures. But if you’re a much bigger real estate, let’s say, investment trust, like a REIT, or some large real estate focused company, you’re very interested in these state, regional, even national trends that are reported in all of these different surveys, reports, what have you, that get released monthly.   

But those are the ones that are very, very important for that type of investor. For me though, like I said,  I really was not dialed into these, but I do follow them as an investor and just someone who’s interested in markets generally.  

Cassidy Clement 

So of course in this channel, as you know, we’re kind of looking at our audience as introductory to some of these concepts or just investors who are interested in a new sector. 

So when it comes to the housing market as a term, because that’s thrown around in media and journalism all the time, what exactly is included in the term housing market? 

Is it just houses being built? Is it just houses that are already built? Or does that include like apartment buildings and condos or single-family homes, things like that? 

Riley Adams 

Yeah, so generally speaking, the housing market can be separated into two main segments. The first one is single family homes. The second one is multifamily homes. Single family homes is pretty straightforward. It’s pretty easy to understand. They’re either attached, meaning they are one family living in a home, but it is physically attached, or it goes up to the property line of another house. 

Then there is the classic detached home, white picket fence, your own yard type situation. That’s single-family homes. I had one single family home that I rented, and then there is the second multifamily market, and that is as it sounds, multiple families can live in the property. And that can mean it’s something like a double or a duplex, triplex, quadplex, it can go on and on. Or apartments, condos, things like that. 

But essentially it is one piece of property or several pieces of property that have several residences within. And I also owned a multifamily property as well, so I owned one of each of those. Those are the two main segments, but as far as like, new versus existing, yeah, there are definitely a lot of different ways to measure progress in both of those new versus existing, leading indicators, current indicators, all these different things that we’ll get into a bit later here. 

Cassidy Clement 

So what are some common indicators that investors, analysts, or even economists look for in the housing market?  

Riley Adams  

It’s probably best to break these into two different groups, and that is in the sense of like how an investor might look at things. So I like to break it into the first one for investors more interested in leading indicators. 

And that means obviously what you see, it’s leading information. So you will see what is to come in the months ahead. There are three reports I’ll talk about for leading indicators. And then afterwards, there are a handful of reports that are, I would say more current, meaning it’s like close to real time data that’s happening in the market that’s not necessarily something that is indicative of future results. 

It’s just saying this is what happened during this month, take it as a data point. Obviously you can put it in as a trend, see if there’s one that forms, but it is really meant to be more of like a real time way of looking at the housing market. So the three reports that I really think are the most important for the leading indicators   segment. 

First one comes from the Census Bureau. It’s their monthly construction spending report, and it really looks at just national construction spending activity, and it measures it by a dollar value, so you can see over time how the actual amount of money going into residential and nonresidential spending in this specific report from the Census Bureau. 

So, it’s just a good sense of understanding, like, is construction picking up? Is it slowing down? It’s a decent size of our economy. I want to say it’s probably like mid-single digit as a percentage of the entire economic activity.  

So it drives a lot of value in the economy. So following this report is useful, not just for the real estate market, but it’s just, broadly speaking, good to understand for the economy at whole. 

Then getting into like actual real estate, the residential construction report that comes out also from the Census Bureau that talks about housing permits and then housing starts.  

It is a measure nationally of how many permits were issued for new housing, and then the housing starts is you have a permit that was issued and then construction has begun on those permitted houses. 

So obviously you would think that it’s an important thing for the market and the economy as a whole if you see that housing permits are just slowing down, that’s not the best idea that the economy is going to continue growing, but, you also have to sometimes take a step back and realize there can be seasonality to these reports. 

For example, I wouldn’t imagine housing permits and housing starts would be very high during the winter months. It’s just hard if things are cold, it’s snowing, things freeze. So there’s some seasonality to these reports. That’s why it’s best to look at these things relative to a year ago, or even two, three years ago, because you can see trends over time about whether housing starts and permits are going up and down. 

That’s a really important report that a lot of people look at for just understanding what type of activity we’re seeing in the residential construction market. The last one that’s really also a leading indicator is from the National Association of Home Builders and it’s done in conjunction with Wells Fargo and it’s their housing market index report. 

It’s a monthly report and it looks at the confidence from home builders, specifically the single-family housing market and it takes a pulse of how different home builders feel about the current level of sales that they’re seeing, as well as buyer traffic. Also, this is why it’s a leading indicator. 

It assesses their sales expectations for the upcoming six months. So it’s a really valuable report. Let’s say see into the future, give an indication of where the markets might be headed, and it’s just a really valuable data point that gets reported each month.  

Cassidy Clement 

You mentioned in the last podcast a little bit about the positive indicators when you were talking about some of the investment pieces that you look for. We’ll say specs or specifications for what you’re looking to invest in when it comes to real estate, and you mentioned it a little bit here, but what would you say is a good indicator? 

And then, like, what would be a bad indicator? I think, like, an easy soft toss would be a good indicator would be you see a lot new, a lot of new houses being built and a bad indicator would be you see a lot of for sale signs and nobody’s buying. But, you know, other than the most basic, which is that, which most people driving through a neighborhood can gather themselves, what are some other indicators, whether it’s from these reports or literally on foot that you can gather when you’re looking at the housing market, either locally or?  

Riley Adams 

When I was doing like a localized view of how areas in my city were desirable for landlords to buy. First of all, I had to know did I have enough money to buy a home in these areas. So that meant I had to have money saved up ahead of time and then some sort of lender would be willing to loan me money to buy a house. 

So that’s obviously first one. That’s your initial screen. If you don’t have the money, probably not going to get a house. But once you’ve got that initial savings there and you’re looking in areas that you can afford to buy, one of the metrics that I really lived by as a landlord was understanding that the amount of money I would get each month in rent was ideally at least 1% of the total investment I was going to make into the house. 

And that includes the full loan amount, your equity, and then any sort of capital improvements, maintenance, O&M, whatever you might have to get the house ready and have it available for rent. So I always would target 1% as like my minimum threshold I needed to see to get a good return. 

That’s on a monthly basis. So for example, if you find a house and you renovate it, everything all in cost is $100,000 and you can rent it for $1,000 per month, that meets that 1% requirement. Obviously with time you want that to grow as your rents go up, probably have a let’s say fixed term mortgage, fixed rate mortgage. 

You would assume then as rents go up and your costs mostly stay the same, your percentage you would make each month would go up. But at that 1% threshold, you’re looking at an annual return, just to simplify, of 12%. And that’s a pretty good return for the risk and the amount of time you ‘re having to invest in the property. 

So when I was looking for local opportunities, my initial screen was like, is this neighborhood that I want to buy in? Does it look like it’s on the way up? Is it kind of staying the same? Is it turning for the worse? I wanted to make sure I was buying in a place that I could hold this property for at least a decade because that was my initial plan at the time. I knew I wanted to hold this property for a while. 

I did not want it to become a headache. I wanted it to remain an asset. So, just looking at if you can afford the house, is the neighborhood, the area of the city desirable, and just, was I able to get a good return on my money? 

So those are my initial screens. Remember though, I was an independent landlord. I was not looking nationally. 

You can go through alternative investment platforms that allow you to buy properties in other cities, other states. But you could also do real estate investment trusts, and those are just large investment vehicles that are managed by professional fund managers, property managers, and they go out and select different properties based upon the stated objectives of their funds. 

That was what I used to find the right properties for me.  

Cassidy Clement 

When we mentioned some of these fits, you could say, like you said, that was for you and maybe if you’re looking for a different style of investment, most people, when it comes to real estate, will be using some type of a housing market report or housing market indicator to help you out with making your decision. 

But some people don’t think about how much further that can go in terms of financial analysis. And what I mean by that is, is that like most things do, they don’t just impact their own industry in a bubble.  

So from your perspective, how do these various indicators, both locally, like you mentioned, and then broader within those reports, really impact the day-to-day investor? 

Maybe COVID, and inflation, and all of these different things that ebb and flow. Not COVID, that was kind of a shock, but inflation and investment interest, those can sometimes ebb and flow and sometimes it becomes a little bit of a shock to some people because they don’t think that mortgages can impact their stock investments, but in some ways it can. 

Riley Adams 

I’ll separate it into real estate investors. So people who are actively looking to engage in direct ownership and operation of rental properties, and then just broadly speaking, like market investors. And I mean that like stock markets, bond markets, whatever, not necessarily just real estate. So the first prong for real estate investors. 

I think a really good measure here, which I haven’t had a chance to touch on, but a good measure that I personally will always look at is the measure of available supply on the market. And it’s usually reported in number of months. You could have the existing demand purchase all of those homes without new supply coming onto the market. 

So, to put it in perspective, the national average is 300,000 homes get purchased per month, and there are 1.8 million homes available for sale. That is six months of inventory available of housing on the market, and it affects pricing. 

It’s laws of supply and demand. If the amount of inventory available is decreasing, and it’s very limited, prices are going to go up because the demand typically is static, but the supply is what varies here. 

Vice versa, if the supply of homes is really going up, but the demand is staying constant, you’re going to have, as a buyer, more pricing power, more ability to negotiate with those sellers because they know inventory is going up. These buyers have more options. So that’s one really powerful kind of shorthand way of looking at what the balance is of leverage between the buyers and the sellers in the market. 

So I think that’s a really important measure. And that’s important, not just for investors, but honestly, people looking to buy a primary residence is understanding like, is it a good time? Like when I go into these markets and I’m looking to buy a home, like, am I going to be able to have a competitive bid? 

Am I going to have to bid over asking? So where I own property was in New Orleans and I’ll tell you it is a much slower, easier going market in New Orleans just because there’s not tons of turnover there. I’m now in the Bay Area and it is crazy. I can’t even tell you. When we were buying a house we got so lucky. We bought it just before COVID. 

And we went to these open houses, of course, masked up with all of our gloves, all of our feet coverings, all this stuff, and there was no one. It was a ghost town. No one was at these home showings, and when we would go put in bids, no one was bidding against us, and that was so unlike the Bay Area and fast forward six months after the vaccine comes out and these same homes are getting like 20, 30 bids because it’s just a crazy market here.  

So I think understanding how much inventory is available is a really good way of understanding who really holds the power here.Is it the buyer? Is it the seller? 

So if you’re looking for value, it’s probably better to look in markets that have a lot of available inventory or just not a lot of demand. That’s a great place to get those real value opportunities. But just the same, like in the Bay Area, home prices, I mean, it’s like almost an upward ramp. 

It seems like there’s going to be a bubble that pops eventually, but it hasn’t really happened except for maybe like the Great Recession recently that prices have gone down here. So that’s a good market if you’re looking to buy and hold for the long term. You probably have good capital appreciation potential, but that’s an individual decision to go through that. 

It’s also an investor’s decision to go through that, but those are good things to look at. It’s just the supply and demand and who has the leverage in those negotiations.  

Cassidy Clement 

When we’re talking about more people bidding, after 2021, once the first kind of wave of people getting adjusted to whether it was work from home life or pandemics, in some cases, post pandemic, depending on where we’re at in the timeline, there were a lot of people asking, when do I enter the housing market? 

Like, and why? And then also, where do I enter the housing market? Because like you said, there’s places that had such an upward momentum that it was just like unprecedented. People in small, two-bedroom houses were getting unreal returns on their homes.  

So if you were speaking to somebody who said, hey, like, I’m just looking to get into the housing market, whether it’s for themselves or maybe a condo investment or a multi-family home, what are some things that are positive indicators about times to enter the housing market? 

Riley Adams 

It’s funny you should say that because it is definitely a market-based decision, but it’s also like a personal finance decision. First of all, you need to decide, do I want to own a home or should I rent? Are you planning to be where you are for the next five to ten years? That’s definitely a push probably more towards, I should consider buying a home. 

But then you also have to wonder is where I’m wanting to buy a home a market that will go up in value? Because buying a home is great. I get it. It’s the American dream. It’s what everyone wants. But at the end of the day, like if you’re investing all of this money and you can’t really expect a lot of appreciation in your home, it’s probably a better idea for you just to consider renting, pocket the money you would have saved by buying a house, and take the headache off your life. 

Because it seems like everything’s beautiful in a home when you buy it, and then you sign the contract, and wait, what are all these things that I have to fix and replace? 

And as a tenant, you don’t really have to worry about that. But as the homeowner, that’s all on you. And that’s the first thing. You have to just make a personal finance decision. Does it make sense for me to buy a home? And let’s assume you’re wanting to stay for ten plus years, wherever you are, and you have the money, you know, that that’s definitely an important consideration. 

We’re in an elevated interest rate market right now. It’s helping to bring down inflation, but it’s also slowing economic activity, which is kind of the point.  

But right now, it looks as though interest rates are going to be going down based upon the latest readings on inflation and what we’ve been hearing from different Federal Reserve members. 

It seems as though, next six months, there will be some downward movement in interest rates, which means mortgages should become more affordable. And that means more people, theoretically, can enter into the housing market to try to find that home to buy.  

But you have to balance that against the fact that if more people can afford to buy a home, you will then be bidding against more people. 

So, housing affordability will depend on your area. Interest rates will make mortgages more affordable, but likely home prices will rise as more people are bidding. So, it just comes back to can you afford a home? Yes, but should you buy a home? It kind of depends on a lot of different stuff and you just need to make sure you understand what’s involved in home ownership and that rates are going down, but you might be paying more for a house. 

Cassidy Clement 

That’s a really good point when it comes to, I guess you could call them personal finance indicators. You know, how is your credit? Can you take on this burden of way more than just the mortgage payment? You are now maintenance so anything that goes wrong, you have to take care of. 

Down payments and additional payments are another thing. After you sign, you’re right. We did another podcast on this, I think, about se curing a home loan, and we went through all of the unexpected expenses that you can run into just immediately upon contract signing. It’s very nice to have your own space and have your own domain to do what you need and what you want. 

But it does come with a price and hard work and time and effort. So it’s definitely not an easy thing to achieve and consistently keep. Also, you hope that investment  grows, because it is an investment at the end of the day if you’re looking to buy it. That’s at least the hope for most people. It’s either investment that gets passed down or that you can eventually sell. 

But thanks so much for joining us again, Riley.  

Riley Adams 

Oh, absolutely. It’s been a pleasure. I really appreciate the opportunity to come back again and I hope to speak to you again soon.  

Cassidy Clement 

Yeah, thanks. So as always, listeners can learn more about an array of financial topics for free at interactivebrokers.com and ibkrcampus.com. Follow us on your favorite podcast network and feel free to leave us a rating or review. Thanks for listening.