TRACKING THE RESIDENTIAL MARKE Lyrics

TRACKING THE
RESIDENTIAL MARKET

Most active residential real estate professionals rely upon three primary sources of market information:

MLS Statistics
Canadian MLS systems typically separate data into active and historical (sold and/or expired) categories. Searches are based on key fields, e.g., price, address, type, style, number of bedrooms, and other significant features. Pre-selected parameters produce specific properties or groupings. Statistic information is also available to a__ist members with marketplace trends and specialized local data for pre-determined geographic districts.
The scope of market indicators vary, but most provide sale prices, average prices, median prices, average listing to selling ratios, and number of days on the market (see illustration below).

Study Links

Encyclopedia

Market Indicators
Canada Mortgage and Housing Corporation
Housing Absorptions
Housing Starts

(1) Market Indicators

Today's economist faces the complicated, if not impossible, task of weighing the relative impact of subtle natural market forces against a myriad of vested interests intruding on the perfect equilibrium envisaged in supply/demand economics. As a result, specialists have increasingly relied on business statistics to provide insight and illuminate important trends within our complex economy. The real estate practitioner, although not requiring extensive knowledge of such information, should be aware of key indicators having a direct bearing on real estate, as well as many other interlocking markets in the overall economy.

Inevitably, nearly all indicators utilized by economists relate directly back to factors in the cyclical flow of the national economy. These are:

Resource Markets (land, labour, capital, entrepreneurial skills),
*

Businesses (supply), and
*

Consumers (demand).

Unfortunately, statistical information often mirrors the disturbing complexities found in the marketplace. However, certain key indicators (as follows), demonstrate a high degree of reliability in predicting market swings.

Resource Markets

Labour

Possesses an understandable priority with most economists. The national unemployment rate is the most widely publicized, but other, more finely tuned indices measure such things as job creation and job vacancy statistics. This information, broken down by regions throughout the country, is very meaningful when a___yzing local markets. Labour indicators not only measure the strength of the economy, but also the efficiency with which manpower is being utilized in addressing consumer demand.

Capital

Statistics Canada provides worthwhile information not only on existing capital investment from private and public sectors but also on anticipated allocations of capital dollars by large and small companies. The availability of capital and attractiveness of interest rates charged are directly tied to economic expansion.

Businesses

National Production

The supply of services and goods in the marketplace is a critical measure of the economic output. Economists have focused on two major indices prepared by the federal government:

Gross National Product (GNP) The most widely known indicator is the Gross National Product (GNP). This indicator measures total production in the economy, and consequently is considered statistically representative of overall prosperity within the country. The GNP measures production by Canadian residents, corporations and individuals, both within and beyond Canada.
*

Gross Domestic Product (GDP) This indicator gauges production located solely within the country, and is a complementary indicator for the GNP.

Manufacturing Activity

Statistics Canada also produces information concerning manufacturer's new orders, shipments, and inventories. This information is necessary when a__essing overall demand through the depletion and replenishment of goods.

Utilization Rates

Although no key indicator exists a__essing the effective use of production facilities within the country, economists do rely upon various topical reports from Statistics Canada. These attempt to illustrate whether the economy is operating at its full potential, utilizing the available production factors.

Consumers

Retail Sales-Selected Retailers

Statistics Canada tracks information concerning retail sales volume. These statistics are normally viewed as a lead indicator foreshadowing overall trends in the economy. Swings in retail sales will usually be reflected in the GNP.

Consumer Confidence and Spending

The Conference Board of Canada produces a quarterly report on consumer attitudes that has proven to be a fairly reliable indicator of future economic trends. If attitudes are positive and consumers are aggressive in the marketplace, increased expenditures on goods and services will normally result.

Consumer Disposable Income/Debt

The ability of consumers to expend dollars in the marketplace relates to both the amount of disposable income (used for acquisition of goods and services), and overall household debt load (ability to pay for acquisitions). A rise in disposable income, coupled with high consumer expectations and lowering debt loads, normally result in economic growth.

The Consumer Price Index (CPI)

The CPI is a combined measure of both the forces of supply and demand in the marketplace. The CPI, often incorrectly labeled as the cost of living index, measures the price of goods and services relating to 600 items which are commonly purchased by an average family living in a metropolitan area. The CPI contains a price index for new houses (labour and material prices only; land value is not included), as well as a rental index. The Consumer Price Index and related sub-indices are valuable indicators as they:

Quantify family expenditures;
*

Provide input on price trends; and
*

Reflect current inflationary trends.

Indicators and Statistical a___ysis

Real estate practitioners require an awareness of statistical techniques used in economic a___ysis. Unfortunately, data can be manipulated to accentuate certain facts or provide credence to a specific point of view. Conversely, certain worthwhile measures genuinely a__ist the reader in a___yzing data and identifying trends.

Indexes

Economists frequently utilize indices to show the change of a particular indicator over time. A base year is selected, and all subsequent years are compared as a percentage of the base. A hypothetical housing index for Anycity is illustrated in Figure E.5.

Seasonally Adjusted

Occasionally economists want to take the peaks and valleys out of data (i.e., seasonal variations in production or employment due to time of year). By averaging seasonal fluctuations, it is possible to reveal underlying trends. Seasonally adjusted figures are normally used when comparing data within one year. Unadjusted figures are more commonplace in year-to-year a___ysis.

Three Month Moving Average

In order to minimize monthly fluctuations some statistical reports provide a three month moving average, which is normally calculated as follows.

A moving average should not be confused with a quarter to quarter change (one three-month period compared to another).

Weighted Average

Occasionally economists will work with weighted, as opposed to simple, averages.

Graphs/Charts

Lastly, caution is advised when reading business statistics and studying graphs and charts-appearances can be deceiving. Two charts portraying the same information can appear dramatically different if the incremental values on the vertical axis are altered as illustrated in Figure E.6.

Market Indicators

In real estate brokerages, informed decisions concerning everything from budget projections to market share rely upon accurate market indicators. Given the computerization of MLS systems throughout Canada, brokerages and salespeople enjoy increasingly sophisticated measures of the market.

Measures of the market typically include sale to list price ratio, number of days on the market, average and median price, inventory turnover ratios, and sales volume/sales unit production figures.

Brokerages have developed a wide range of complementary indicators to a__ess competitive stance and public awareness. The scope of indicators will vary for residential and commercial brokerages.

Measures of the competition include MLS market share and sales force production statistics.
*

Public awareness measurements have not been widely used in real estate brokerage, but can include results from customer satisfaction cards, informal data gathering, and local market surveys.

A detailed example is provided outlining typical market indicators used by residential brokerages and real estate boards. Commercial brokerages typically utilize more in-depth a___ysis of specific property types including factors such as vacancy and absorption rates, as well as detailed research on available inventory.

Canada Mortgage and Housing Corporation

(see also National Housing Act)

Acronym: CMHC

As the housing agency for the Government of Canada, CMHC has a mandate to encourage:

Construction of new houses;
*

Repair and modernization of existing houses; and
*

Improvement of living conditions and housing for Canadians throughout the country.

CMHC provides a range of publications and acts as a resource centre for both private and public organizations related to the housing industry. CMHC advises the government on housing matters and designs, as well as overseeing various federal housing programs. Real estate practitioners are most likely to encounter CMHC regarding mortgage financing alternatives and, in particular, insured high ratio loans offered through approved lenders.

Housing Absorptions

A term generally referring to the taking in and utilization of new housing within the real estate market. Canada Mortgage and Housing Corporation (CMHC) provides a range of widely accepted definitions concerning the absorption of residential housing.

Absorption

Newly completed units sold or rented. Units sold or leased before construction are not considered as absorbed until the completion stage. Condominium units are absorbed when a firm sale has been reported, even though the unit may not be occupied.

Completed and Not Absorbed

Newly constructed, completed units that have never been sold or rented.

Completion

Completion of a single detached or semi-detached home occurs when 90% or more of a structure is complete. In row housing and apartments, completion occurs when 90% or more of the dwelling units within a structure are completed and ready for occupancy. Generally, a structure may be considered complete and ready for occupancy when seasonal deficiencies and/or minor infractions of building codes remain.

Housing Starts

A term generally referring to the commencement of construction of a residential dwelling unit. Canada Mortgage and Housing Corporation (CMHC) provides a range of accepted definitions concerning residential housing starts.

Housing Start

A dwelling unit in which construction has advanced to a stage where full (100%) footings are in place. In the case of multiple unit structures, the definition of a start applies to the entire structure.

Pending Start

A dwelling unit where a building permit and/or National Housing Act (NHA) approval exists but construction has not started.

Under Construction

The inventory of units currently being constructed.

Total Supply

The total number of new units including pending starts, units under construction, and units completed but not absorbed. Market Trends
Real estate salespeople typically receive market information from real estate boards and other external sources. Statistics are often focused on measures of central tendency, most notably the mean (average) and median (mode is rarely used for real estate statistics).
Further, means and medians are spotlighted in press reports and many media publications. While valuable, neither in isolation warrant such status. Today's professional practitioner understands that accurate market depictions come not from one or two measures, but rather from many distinct, but complementary, indicators.
Don't make snap decisions about mean and median trends. A decline or increase is often taken as an indication of falling or rising prices, but appearances can be deceiving:

Mean and median may move due to increased sales activity in upper or lower price ranges. The shifting distribution gives an impression of rising or falling prices.
Mean and median may move abruptly in a particular month given low total sales, particularly if several very high or very low sales are included.
Mean and median may be rising, but not for all property types or areas included within the statistical report.

Study Links

Encyclopedia

Mean
Median
Mode

Mean

The sum of a group of numbers divided by the number of values within that group, commonly referred to as the average. For real estate purposes, the most common measure of market activity involves the mean or average price for specific types of property. Real estate boards commonly track average prices as one of several indicators of market conditions. Average price, as a measure of central tendency, has limited value when considered in isolation and should be a___yzed in conjunction with other market indicators.

Mode

A measure of central tendency representing the most frequently appearing number in an array of numbers. The mode is seldom used in real estate a___ysis, as properties rarely trade at exactly the same price. However, frequency of sale prices within defined price ranges is commonly a___yzed, e.g., number of sales between $200,000 and $300,000 etc. This information is often used in conjunction with other measures of central tendency, i.e., mean and median, in scrutinizing market activity and trends.

Median

The midpoint in an array of sequentially ordered numbers. Real estate boards commonly track the median, a measure of central tendency, as one of several indicators of market conditions. Median and average prices are commonly reported in market reports. As with other market indicators, the median has limited value when considered in isolation and should be a___yzed in conjunction with other market indicators.