In 2005 and 2006, the market in just about every asset class was booming. Everyone was getting rich, and very few people saw the end of it coming. But those who took the temperature of the market knew that things were too hot — much hotter than they had been in the recent past.
- In today's information-obsessed culture, truly valuable real estate professionals have the ability to tune out the noise and evaluate the market from an objective perspective.
- Analyzing reputable statistics, graphs and numerical facts is the place to start when beginning to understand how different economic factors correlate with your industry and affect your business and your clients.
- Observing your industry from a 10,000-foot-perspective will prove invaluable through market fluctuations.
In 2005 and 2006, the market in just about every asset class was booming. Everyone was getting rich, and very few people saw the end of it coming.
But those who took the temperature of the market knew that things were too hot — much hotter than they had been in the recent past.
Those who followed statistics of affordability — average loan-to-values of mortgages, average credit scores of debtors and so on — would have seen the end of the boom coming quickly.
But few people, and even fewer agents, want to look past next month’s closings to steer both their careers and their clients in the right direction.
Those with market-cycle literacy had prepared their business for floods of REOs and short sales and made literal fortunes by doing so.
Those who didn’t were crushed.
Making sense of the noise
The world is an incredibly loud place. Today’s society is full of technology, noise, commentary and self-proclaimed experts. Everybody is tweeting, posting, writing and recording talking-head videos.
With all the noise, market literacy is crucial for your understanding of real estate and for your clients.
If you watch CNBC or CNN or read The Wall Street Journal, you’ll quickly become confused and lost in the sea of information and opinions. Moreover, you’ll be wondering whom to believe because every so-called expert has a different opinion on the market.
One guy is bullish while another is bearish. One says, “Sell everything and head for the hills,” but another says “Stay steady, and use this opportunity to buy more.”
So how does a quality real estate professional stay up-to-date with all the things going on in the world and properly understand how it affects real estate — and, more importantly, his or her clients?
Simple — become market literate. Rely less on other people’s opinions, and learn how to formulate your own educated opinions on the market dynamics.
Market literacy is less about becoming a Ph.D. economist and more about understanding the dynamics of the real estate markets. Even today’s most astute news junkie can become overwhelmed wading through the noise of our complex informational environment.
How to become market literate
Choose your sources wisely
Sifting through the commentary and opinions is where you need to start your journey to becoming market literate.
First and foremost, choose who or what you want to listen to or read for all the right reasons.
The “right reasons” would be a depth of market knowledge and lack of special-interest motives.
For example, if you listen to the CEO of Marcus & Millichap or Colliers International, they will always have a silver lining to the market. Why? It’s their business, and they can’t belittle their business even in rough times. (Some people call this diplomacy, but I call it politicking.)
Other people who produce market reports, like I do with the Savant Report, love to sell doom and gloom because fear sells subscriptions.
This is why choosing your information sources wisely is a critically important place to start with market literacy.
Becoming literate with all of the wrong information won’t help you. Even on international news networks such as CNBC, I often find that headlines are deceiving, and the tone of an article written by someone who knows nothing about the subject matter is misplaced.
Furthermore, the true devil (or angel) is in the details, so it’s vital to pick apart the headlines, sift through the data and begin to develop an all-encompassing mental picture of the markets.
Understand (and pick apart) the data
I find it disturbing that agents who have the tools to become market literate still misuse data for self-interest and spout twisted facts as skewed sales pitches. This is what gives our industry a bad name.
So while I’m giving you some tips here to become market literate, use them responsibly.
I find the best market data from commercial research reports. Using pure statistics is a great way to get information.
Review numbers, read fewer articles and watch less TV. There is far more market knowledge to be gained by studying numbers than there is listening to someone’s opinion.
Because my business is buying and operating commercial real estate, I focus on the big national firms with excellent, reputable research departments.
My favorite is JLL. Their team does a wonderful job of creating graphically represented, statistic-based information tools.
CBRE is probably my next-favorite resource, and Colliers is a close third. These firms have full-time researchers who put together this information for the company’s brokers and their clients.
Obviously, the statistics come along with long-winded commentary full of bullish opinions, but the data itself will tell a story.
Every day, Inman publishes a market update, and you can also find regional data. Regular sources include associations like the National Association of Realtors and Mortgage Bankers Association; government outfits like the U.S. Census Bureau, the Department of Housing and Urban Development and the Federal Housing Finance Agency; and financial groups like Black Knight and First American.
Absorb some charts to get a feel for what’s happening
This chart from JLL shows the age mix of retail properties being renovated:
This chart is a wonderful example of taking data points and forming your opinion and analysis.
In my world, this chart means that landlords feel it’s a better investment to renovate older properties than it is to buy or build new properties. (A residential real estate agent might be able to extrapolate from that in their market — or might know that lots of new commercial development activity means residential construction isn’t far behind.)
The next chart shows what states have the biggest renovation numbers:
This tells me that it is still cheaper and better to renovate than it is to raze and build new.
I didn’t need to spend hours and hours researching that to make that decision for myself or our investors — I can see it in simple terms in just a couple of charts. I didn’t need to read thousands of words to figure it out. The stats made it clear as day.
Here is another JLL chart showing the disparity between real inflation and wage inflation:
With this one chart, I know that people make more money and little to no inflation means a likelihood of consumer spending growth — more money, same cost of goods. That’s a great thing for consumers and average income earners.
It also means that new-home construction costs are likely flat. People can afford to spend more for the home, which makes new-home construction more affordable for those wanting to build — this does not necessarily reflect the homebuilder’s pricing model, however.
Looking at a good chart or two for a few minutes will do you a lot of good. Add a couple of free-thought moments to absorb the information and think about it, and you’ll become market literate in short order.
Avoid the hype
There does seem to be a massive amount of misinformation when it comes to market literacy in real estate.
Most people think that as interest rates go up, property values go down. This is simply not true — in fact, inflationary times carry higher interest rates, and real estate is the most coveted asset to hold during inflationary times.
Second, people forget that everything cycles.
In my last article for Inman, I described market cycles and why it’s so important to pay attention to them. Not only do asset values cycle, but so do do vacancy rates, rent rates and asset class popularity (such as homes, office, retail, industrial, multi-family, etc.).
If trends are peaking, it is relatively easy to determine that based on historical data and statistics, such as vacancy rates going from 20 percent to 3 percent.
It doesn’t take a rocket scientist to know that means higher rent rates and higher asset values when the market is doing well. And vice versa.
Look past simple
Market literacy is more about common sense than it is about the complex. It’s also more than following every CNBC guest commentator and self-proclaimed experts.
In short, market literacy is about you developing a feel for the temperature of the marketplace combined with statistics and forming your own opinion of where things are currently and where they are heading.
Make no mistake; market literacy is not to be used for the wrong reasons. It’s also not to boost your ego or add to your vocabulary.
Market literacy is to be used as a sophisticated tool to steer yourself and your clients in the best way to meet their objectives.
Before you know it, you’ll be more confident in the direction of real estate formulated by your own informed opinion, not the conflicting opinions of other experts.