Location, location, location.
Those are the three most important things in real estate, as the saying goes. This applies to home buyers and sellers geographically – where you are on the map, in other words.
For investors seeking to incorporate real estate trends into portfolio strategy, location also matters, in a more figurative sense – as in, placing yourself in a position to wrap your head around all the information out there and attempt to identify viable opportunities.
There are many investing angles into real estate and many moving parts, and housing data tracked by the government and industry groups is notoriously volatile. Where to start?
First, Look at the Big Picture
Housing is one of the most significant gauges of the American economy. Consumer and business sectors typically follow the way housing goes. Housing can lead the economy up, and it can also take it down, hard.
“People buying houses, that’s as good a confidence indicator as you can get in the economy,” says JJ Kinahan, chief market strategist at TD Ameritrade. “Watch housing in conjunction with employment. When both are trending in one way, it gives you a pretty good idea where the economy is heading.”
In recent years, both employment and housing have generally strengthened. The U.S. unemployment rate in April fell to a 10-year low. In February, the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index jumped 5.8 percent from the same month a year earlier, reaching a 32-month high.
Start the Engines
Housing starts, released monthly by the U.S. Census Bureau, are one of the most widely-followed indicators, and these numbers can move U.S. equity and debt markets.
A housing start is defined as the beginning of excavation of the foundation for the building, and is registered at the start of construction of a new building intended primarily as a residential building
Why should investors care? Two words: Ripple effect, according to Bloomberg Markets.
“This narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and potentially your investments. By tracking economic data such as housing starts, investors can gain potential investment ideas as well as broad guidance for managing a portfolio.”
In April, starts fell 2.6 percent to a 1.172 million annualized rate, disappointing market professionals. But again, these numbers tend to be volatile.
“For housing data overall, you can’t let one month rule,” Kinahan says. “You’ve got to look for trends.”
Drill Down, Zoom In
National readings like the Case-Shiller index are valuable as measures of the overall economy. But, according to Kinahan, you need to get more specific, into regions and cities, to get a sense of where interesting trends are emerging.
The Case-Shiller index is a composite of 20 U.S. metropolitan areas, each of which has its own unique qualities. Seattle, Portland, and Dallas, for example, reported the highest year-over-year gains, each rising over 12 percent, Case-Shiller said. New York rose the least, at 3.2 percent.
What’s happening in traditional manufacturing cities, like Detroit, or tech hubs, such as San Francisco? How much people are willing to pay for a house in such places may tell you something about the direction of other industries, from automaking to computer chips.
Also, keep an eye on Sun Belt destinations like Las Vegas, Orlando and Phoenix for signs of froth – these places played a major role inflating the housing bubble of last decade.
“When things start to weaken, you see certain areas deteriorate,” Kinahan said. “Sun Belt locations tend to have more volatility, where people have second homes.”
I Like What You’ve Done with the Place
Building a home requires a lot of different stuff – concrete, copper pipes, lumber, wallboard, windows and so on. Many of these materials are produced by publicly-traded companies, Kinahan notes.
Keep your eyes open as you drive around your neighborhood or town – do you notice any particular brand names at construction sites?
Then, once people buy a home, they need to put stuff in it, of course. The earnings performance of major home suppliers can offer insight into broader economic trends, Kinahan says.
Housing is a major component of the economy, directly and indirectly. Are you and your portfolio in your desired location?