We’ve been tracking the Dow Jones Industrial Average (DJIA) for some time now. We don’t see that it gives any appreciable lead time to dispose of real estate before it’s too late.

Durable goods orders are tracked against California median prices, Like the DJIA, not enough lead time has been found to help the local real estate investor. In fact, median prices in California were already dropping in the last recession before durable goods orders fell off a cliff.

The same thing again. In California, retail sales fell off after real estate began to tank in the last recession. Another problem stems from the fact that California retail sales reporting is about a year and a half behind. Federal Reserve national retail sales reporting is far more up to date/ Even FRED data on a national basis does not show a reliable pattern of US retail sales declines occurring before the start of an official recession.

Supply is an important factor regarding real estate cycles. Permit activity is also an indicator of builder confidence. Lately, new construction increases toward the end of an upward cycle.

Interest rates are generally considered a lagging indicator. However, when it comes to real estate, rate increases tend to diminish demand while falling rates tend to increase demand. Hence, when it comes to real estate cycles, we considered interest rate moves to be leading indicator. The 10-year Treasury and Constant Maturity Rate are indicators used by investors while the 30-Year Fixed Rate Mortgage Average is another. An upswing in rates coupled with other indicators pointing to a downturn is used by many to anticipate a coming recession. Note that interest rates themselves don’t necessarily mean price trend changes. However, interest rates & mortgage terms are components of the affordability index which we find is a more reliable index for forecasting.

The trend in sales is an indicator of demand and demand swings, especially when tracked with median prices. We find this to be a reasonable indicator that can help anticipate a trend. Before median prices dropped at the beginning of the last recession, existing home sales began dropping quickly approximately a year before median prices dropped like a rock.

When these factors are tracked against median price trends, they can give some insight into future price trends.

This is a statistical measurement of the overall health of the economy as determined by consumer opinion. We track this economic indicator against median price trends. It has some use but doesn’t give a lot of time for real estate investors to react. Consumer Sentiment reflects perception of consumers’ own personal circumstances. Consumer Confidence reflects consumer feelings toward the economy.

Supply is generally reported by the California Association of Realtors as “Unsold Inventory”. Typically, when supply is under 6 months, it’s considered a seller’s market. Over 6 month’s is a buyer’s market. However, prior to the last crash, California median prices began falling when supply was at 4.5+- months while sales volume began dropping when supply hit 4+- months. Dips in 2014 median prices occurred when supply was below 4 months. Supply levels for local markets differ.

We like this one the best. It gives investors a better lead time to make decisions on buying or selling. Traditional affordability is a number expressed as a percentage that represents the percentage of households in a given market area that can afford to buy the median priced home in that market. It is based on income, current mortgage terms (20% down) and the median price in that market. First time affordability reflects the number of households that can afford to buy a home at 90% of the median price with 10% down. It is also based on income, mortgage terms, and median prices in a particular market. We think, when falling California traditional affordability approaches 20%, it’s time to sell. The level for Los Angeles is similar in our opinion. However, different market areas change direction at different levels. It’s important for investors to know where the danger level is in their particular market.

Yield curves are considered to be harbinger of a recession. The yield curve becomes inverted when short term yields are higher than long-term yields. Since bond rates influence mortgage rates, an inverted curve is not a good thing. The curve to the left is a normal curve.