Economists advise: How to read market indicators
Every day email inboxes around the industry are filled with articles and reports on the housing latest data. Starts. Consumer confidence. Kitchen trends. At times, it can seem overwhelming. With an economic indicator for nearly every viewpoint into housing, which ones should you pay closest attention to?
The short answer: there’s no one solution. Every economist, every developer, every builder, every architect creates his or her own strategy. But there are regular reports that the experts themselves swear by — and some that can be taken with a grain of salt.
Ask the expert
The good news is that the industry has a handful of experienced economists who know how to study the range of available data and parse out what everything means. So, by and large, follow the analysis of a couple of trusted organizations or individual economists with a proven track record for forecasting and look to them first for guidance and analysis.
Indeed, the job of analysts at John Burns Real Estate Consulting is to help make sense of the numerous economic indicators for its clients. Along with publicly available data, John Burns conducts its own in-house monthly survey of 300 builders around the country, using the same group to help establish year-over-year patterns. It also conducts a quarterly count of communities in the country's 33-largest metro areas.
If you have a builder, architect or real estate group in your area, check in with them to ask if they have localized data specific to your market to supplement national forecasts. For example, the California Association of Realtors has a blog with perspectives on local economics and trends.
Robert Dietz, chief economist for the National Association of Home Builders, compares the amount of housing industry data available to a fire hose that never stops. His job, and that of his team, is to analyze it all, figure out what it means, and relate that meaning to the past, present and future of the housing industry. “The value we provide is highlighting what’s important,” he said. “As a consumer, you want to look at it through the lens of our analysis.” The NAHB offers some of that analysis on its Eye On Housing economics blog.
What to watch for
Dietz recommends that homebuilders looking to dig into the data should narrow their focus to a few key indicators. Watching those data points on a monthly or quarterly basis will reveal patterns and trends.
For example, the Housing Market Index, a builder-level pulse of the single-family housing market put out by the NAHB and Wells Fargo, offers a metric for how the industry is reacting to all the data.
Housing starts are a critical reference point as well, “not just for the industry but in that it feeds into government estimates for GDP,” Dietz said, noting that both starts and new and existing home sales can be looked at quarterly. And both fluctuate, so patterns and trends are more visible by taking in data from several months at a time rather than reacting with each monthly spike or dip. For example, the new residential construction figures released monthly by the Census Bureau show that a few months’ worth of single-family starts looks like an EKG, but the data reflect a continued upward trajectory when pulled back to a broader timeframe.
Rick Palacios Jr., director of research at John Burns, pays close attention to permits. “That’s the best leading indicator to give you an idea of how things are going in the construction of single-family as well as multifamily [housing],” he said.
"The value we provide is highlighting what’s important. As a consumer, you want to look at it through the lens of our analysis."
Chief economist, National Association of Home Builders
Another key indicator is monthly job growth, Dietz said, considering both the unemployment rate and the labor-force participation rate, as low unemployment sometimes may only indicate that people have exited the market. These figures typically come from the Bureau of Labor Statistics.
Palacios also looks at employment data with a critical eye. “It’s important to pull the layers back to see what kinds of jobs they are,” he noted. The quality of those payroll positions will indicate whether those workers will likely be able to afford to buy a home.
Along with government data, Palacios studies quarterly stats put out by payroll giant ADP, which provide an apples-to-apples comparison of the same people and the same job in the same period each year. It’s an approach Palacios says gives a more accurate view of wages, since the BLS doesn’t adjust for the shift in people entering and exiting the labor force.
He balances qualitative data with anecdotal information, such as the kind that emerges during public builders’ quarterly earnings calls. “I like to find nuggets that most people aren’t looking at,” he noted. A local builder may be able to glean market-specific insights from such discussions of how the national builder operates in the same market, as they may highlight areas of strength or weakness, or localized trends and data.
Pricing is also important to monitor, but Dietz stressed that while national price indicators are helpful, the more local you can get, the more useful the data will be for your individual company. Local pricing data can be found using the Census Bureau's American Community Survey or from local real estate analysts for more real-time tracking.
Frank Nothaft, senior vice president and chief economist at CoreLogic, said he prefers the CoreLogic/Case-Shiller Home Price Index as compared to median sales prices because the latter can be affected by the composition of homes that happened to trade or sell that month, which may not reflect broader trends.
Timing is everything
Like starts, other indicators are best evaluated over longer periods of time. The Consumer Confidence Index from The Conference Board is one of those, Dietz said, because it measures how people felt two to three weeks ago rather than what they are expected to feel like in the future.
Increased consumer confidence is a proxy for financial security. “If you as a consumer feel that your economic well-being is better and is likely to continue, then you’re likely to be more willing or able to go out and buy something really expensive like a car or a house,” Nothaft said. Following economists’ reporting on consumer confidence data is one way to help determine what is driving an upward or downward trend.
Homeownership rates and household formation are best examined across a multi-year spectrum because the quarterly headlines don’t necessarily tell you whether the data present a positive or negative trend without knowing other factors. In particular, the homeownership rate looks at households but doesn’t consider the variety of living arrangements within that indicate more potential household formations in the near future — multiple economically independent housemates, for example, or young adults living with their parents while getting started in their career.
For population evaluation, Dietz likes to look at demographic tables, such as how many people are in various age groups, which can be telling when preparing a 10-year view. For instance, current data indicate that the peak age of the millennial generation today is roughly 27, a comfortable age, at least traditionally, for first-time buyers to make a move — though data show that the trend playing out in markets across the country is much different. On a local level, a builder may use such stats compared to the type of housing being built to determine if there is a gap in supply and demand upon which they can capitalize.
For builders looking for economic checks, Dietz recommends referencing builder confidence (Housing Market Index), starts from a quarterly perspective, the GDP and employment data.
"If you as a consumer feel that your economic well-being is better and is likely to continue, then you’re likely to be more willing or able to go out and buy something really expensive like a car or a house.”
Senior vice president and chief economist, CoreLogic
Going forward, interest rates will be a key factor in gauging housing demand, alongside the rate of household wage growth, the combination of which can affect affordability as well as the mobility of current homeowners. In a recent blog post, Nothaft noted that when mortgage rates went up 1.5 percentage points, mobility rates dropped; when they fell 1.5 percentage points, homeowners were more likely to re-sell.
Above all, it's important to understand the sources from which the data come and what their inherent biases might be. Dietz cautions against putting too much weight on any report, especially when that report seems deeply counterintuitive. And if you can’t find any other sources that agree with someone’s analysis, consider that the analysis could be slanted.
When in doubt, look to trusted industry economists — those from national groups via their writings and studies as well as the data available from your local industry and small-business associations. These sources will not only report the data but also break it down to identify what the numbers mean for your business, your market and the housing industry overall.
For more of the latest construction industry data, check out our Industry Pulse page.
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