Posted January 19th, 2012 No Comments
Real estate is considered a lagging economic indicator, since real estate activity is a derivative of the commerce in a local area. So what economic indicators foretell an uptick in real estate prices? Let’s explore a few that matter to Main Street in 2012.
The classic leading economic indicators (LEI) are perhaps too far removed to predict an uptick in real estate, due to the macroscopic and global focus of the data. As of December, 2011, LEI was actually rising, although it was difficult to perceive on Main Street.
Here are seven economic indicators that are more useful to real estate, especially to existing home prices.
1. Rental Vacancy Rate. A decline in the vacancy rate predicts increased sales volume and prices. Today’s vacancy rate is declining.
2. Rental Price Increase. An increase home rental prices, predicts increased sales volume and prices. Today’s rental prices are increasing.
3. U-6 Unemployment. A decrease in those unemployed and underemployed signals increased sales volume and prices. U-6 has been stubbornly high since 2008.
4. Household Formation. As new households are formed, sales volume and prices increase. Unfortunately, for the past three years, the number of family households has actually declined.
5. Real Wages. Increases in real wages signal future increased sales volume and prices. Real wage gains in the last ten years have been worse than during the Great Depression.
6. Savings Rate. People must save for a down payment on a home. However, personal savings rate is falling again.
7. Credit Availability. Home prices are a function of credit available to purchasers. More available credit creates higher home prices. Credit standards, while not getting tougher, are much tighter than they were a few years ago.
Together, these seven indicators suggest that an increase in home prices is unlikely in 2012. However, the good news is that most of these indicators have stabilized.