Leading Indicators We Pay Attention To
The past is so last minute… why dwell on the past when you can look to the future? You’ve heard all the cliches. But it holds true. We can’t change the past, but we can pay attention to it, and that’s why we do. That’s why we have Statistics and charts and all those fun things to make people feel good or bad about the same set of data.
We do this too… I’m not immune to using data from the past. But during times like this, when we are living in a Real Estate Market that is unprecedented, stats of the past should only shape the future of what you look at in a minor way. What you also need to focus on is the future. How do you do that? Let me explain.
Lagging indicators
Those statistics that we can look at as a ‘oh, this happened because of this.’ Basically, most of the common statistics we see. Home Sales, for instance, is a lag on what has already happened. A home that closes (final sale) has to first go into contract (pending sale). And before it can go pending, it needs to be on the market and be shown to perspective buyers. This is the reason that Sales Volume and Sales Price are lagging indicators. Things have already happened in order to produce their results.
I talked in my previous blog post about how we can take a data set, like house pricing, and make it look really good, really bad, or really indifferent, depending on the framing we use. The example I used was the timing of the data. I showed the same data set, but with a 1 year chart, a 10 year chart and a 15 year chart! They all looked dramatically different.
Today, I want to talk about what we are starting to pay more attention to, and that is Leading Indicators, and how they help formulate my opinions in terms of Residential Real Estate future sales and price.
Leading Indicators
A leading indicator is any economic factor that changes before the rest of the economy begins to go in a particular direction. Leading indicators help market observers and policymakers predict significant changes in the economy. A leading indicator is not always right, but it can help point your thought process in the right direction.
Mortgage Applications
One of the major indicators I look at is Mortgage Applications. While not ALL buyers use a loan to purchase a home, a vast majority of them do. And we also know that not every single person that files a mortgage application eventually buys a home. And even further, some individuals will fill out MULTIPLE mortgage applications; all reasons that the data is not 100% accurate or a perfect indicator of future performance. But quite simply, people do not put in applications for a mortgage unless they are actively looking or thinking about a home purchase. No one fills out a Mortgage Application for fun! Just like no one does their taxes EARLY just for fun. There is a reason behind it.
CNBC reported on May 20th (yesterday) that Mortgage Applications rose 6% last week compared to the week before. That’s a SHOCKINGLY high increase. And much of the application craze was for purchase financing, not re-financing, which was actually down from the week prior (but up a staggering 160% from the same time a year ago). If you want to read CNBC’s entire article on this, please click here.
Showing Activity
The next LEADING indicator I’ve been paying attention to a lot, and posting in here and on our social media pages (Like or Follow us on Facebook / LinkedIn / Instagram) is Showing Activity on homes. Thanks in part to our partnership with ShowingTime, we are seeing real time updated activity on Showings in our Market. The reason we feel that showing activity is such an important figure to follow is that it really is the beginning of the sales filter, similar to a Mortgage Application.
As mentioned, you can’t have a sale without an offer. And you can’t get offers without showings (for the most part). So tracking the showing activity does shed some insight into what the market MAY be doing in the future. While it’s not perfect, just like a Mortgage Application is not perfect, it does show trends and a trend line of the activity. When we see strong showings, we tend to see strong pending sales and closed sales follow shortly thereafter.
If you look at this chart, you can see some amazing data. The blue line represents the showing activity levels of 2019, and the Orange line shows our showing activity in 2020. The chart uses a 7 day moving average to help smooth the lines and reduce some of the outlier days (both high and low), averaging the showing activity of the Week preceding the date on the chart. What this means is the data point for May 20, 2020 is actually the AVERAGE of the 7 days immediately before and inclusive of the 20th. A couple things you will immediately notice are that we started 2020 higher than 2019, but a decent gap. This actually held true, as our Sales and Pending Sales for January and February were significantly higher than they were in January / February of 2019. Then, you will see the showings hit a high right about the second week of March, which was the week before the State of Nevada was shutdown (and really, the rest of the country). We had an immediate steep and deep drop for a 2 week period, then it leveled off, and dropped a bit again the first part of April. (The above chart has a live link that updates DAILY)
But then, if you look at the chart, right around April 12th, we saw a shift in the marketplace. After being in Quarantine for the better part of a month, some buyers (and sellers) started to realize, that with proper procedures in place, showings could continue, safely. Since about 4/12, we’ve had a very steady rise back up in Showings, signifying a change in behavior patterns for both Buyers and Sellers. This is a LEADING indicator. With more showings should come more pending sales, which should lead to more closed sales!
Looking at the chart again, you will see that while we have not yet reached the levels we had hit in 2019, we are now ‘positive’ for the year, meaning the showing activity is now strong again. As school has ended (yesterday), we are now officially in “Summer”, where we could see showing activity further increase. I would not be surprised if we didn’t see the 2020 showing activity Break Through the 2019 numbers within the next 30-45 days.
Again, we are here to say that Leading Indicators are not 100% proof of a change, but they are forward thinking, and there is a POSITIVE CORRELATION between showing activity and pending and closed sales that follow. My guess is that May will also be a low month of sales, probably right about what the month of April finished with… however I see a potential bottom in April / May, with an uptick in June. We have over 3800 properties in PENDING SALE status right now, providing further proof that the bottom may be behind us.
What do you think will be happening over the next few months? Do you pay attention to Leading Indicators as much as you should?
-GZ
P.S. I hope everyone has a HAPPY AND SAFE MEMORIAL DAY WEEKEND.