Victor’s Insider Scoop on The Housing Cycle GPA …
June 1st, 2009 | top of page

I have previously found the insights of John Burns Real Estate Consulting  helpful in understanding the real estate marketplace. Believing that the housing market played a primary role in leading the country into the current recession I also feel that it can be used to help portend the demise of the commercial real estate downturn. More importantly, if you are currently sitting on the sidelines with cash and trying to decide not only when but where to jump back into the national marketplace, I believe you will find John Burnsʼ article: Introducing the Housing Cycle GPA – A Leading Indicator for Housing to be quite insightful. It is reproduced below with one revision: I have substituted the original chart for San Diego with that for Phoenix and have revised one paragraph of the original text (shown below italicized) to match the Phoenix chart.

In our quest to be the first to properly call a bottom in this housing cycle, we have developed a tool called the Housing Cycle GPA. Our analysis has shown that the health of the market fundamentals (demand, supply and affordability) – which we measure with our Housing Cycle GPA – has proven to be a very good 1-2 year leading indicator for home price appreciation / depreciation. By monitoring the early signs of recovery or decline in market fundamentals, our clients will be better able to prepare for the future. When the GPA increases from a D to a B, it is time to invest. When the GPA falls from a B to a D, it is time to divest. The Housing Cycle GPA for Phoenix is shown below. The GPA indicates that 1987-96, and 2002-05 were the times to invest, while 2005 to date were the times to divest. Right now, Phoenix has improved from an F to a D-, so it is too early to invest in Phoenix.

Housing Cycle GPA

After significant testing of our assumptions, we have learned that:

Demand is the most important indicator, but demand deserves more weighting in markets that have traditionally not been oversupplied or experienced significant shifts in price, such as in the Midwest;

Supply is a more significant leading indicator in markets that have few barriers to entry and have experienced wild fluctuations in supply, such as in Texas; and

Affordability is a more significant leading indicator in markets with high barriers to entry where wild price fluctuations typically occur, such as the coastal markets in California.

After significant testing of our assumptions, we have learned that:

Demand is the most important indicator, but demand deserves more weighting in markets that have traditionally not been oversupplied or experienced significant shifts in price, such as in the Midwest;

Supply is a more significant leading indicator in markets that have few barriers to entry and have experienced wild fluctuations in supply, such as in Texas; and

Affordability is a more significant leading indicator in markets with high barriers to entry where wild price fluctuations typically occur, such as the coastal markets in California.

While most markets are faring well with regards to affordability due to significant price declines and historically low interest rates, extreme weakness in demand and relative weakness in supply mean that no metro area is currently earning a grade higher than a “C,” as shown in the map below (where a 4.0 represents an “A” and a 0.0 represents an “F”):

While the overall Housing Cycle GPA is very important, the recent history and the trend are just as important. Our analysis below shows how the changes in the direction of the fundamental have played out historically, and what that means for the future of your business.

Rising Fundamentals
When the fundamentals improve after an economic collapse, it is a time to consider taking more risk and planning on a recovery. Rising fundamentals usually means price appreciation is likely to occur. In some markets, the improvement has been almost immediate. In other markets, the improvement has taken several years. The timing and extent of the recovery are primarily due to the level of the demand / supply imbalance that is created, as well as sudden changes in affordability, which is driven by changes in prices, incomes and mortgage rates. Markets that have been hit   hard for a number of years also tend to come back more slowly than others, probably due to consumer sentiment.

Nationally, rising fundamentals generally occurred:
• in the mid-1980s and mid-1990s in the Demand-driven markets
• in the late-1980s and late-1990s in the Supply-driven markets
• in the early-1980s and late-1990s in the Affordability-driven markets

Declining Fundamentals
When the fundamentals erode near the end of an expansion, it is a time to consider taking less risk. Interestingly, the greatest price appreciation often occurs after the fundamentals begin eroding. Therefore, declining fundamentals does not mean that you should sell all your holdings immediately. It just means that you should be forewarned that the risks are very high.

Declining fundamentals generally occurred:
• in the late-1980s and 1999-2001 in the Demand-driven markets
• in the early-1980s and mid-2000s in the Supply-driven markets
• in the early- and late-1980s, 1999-2001 and 2004-2008 in the Affordability-driven markets

Managing risk during both the upside and downside of a housing cycle is crucial to the success of your business, and arming yourself with the best information and tools like the Housing Cycle GPA will allow you to seize the opportunities in each stage of the cycle.

Complimentary GPA
If you’d like a complimentary GPA chart of one of the 40 markets we have completed, email Holly Bernstein at holly@realestateconsulting.com .

[Reproduced by permission of John Burns Real Estate Consulting]

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PS – If you are ready to begin to thrive again by getting off the sidelines and putting your money to work give me a call at 602-320-6200. I see lots of deals and may have just what you are looking for.

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