Resources for Analyzing Housing Markets for Property Investments

When considering an investment in a residential property it is very important to understand both the recent and longer-term trends in housing prices in the broader urban area within which the property under consideration is located. From a strategic point of view, it is also very important to understand at what stage of the price cycle the housing market is at the time of the investment. You can check out what has been happening in the targeted urban area in terms of house prices using the House Price Indexes (HPI) that are published by the Federal Housing Agency (FHA). Please note that these indexes describe trends in the prices of single-family houses. These are constant-quality indexes and are the most appropriate in order to understand both short-term and longer-term price trends in the metropolitan housing market considered for property investment. These indexes can help you understand at which direction the market prices are currently moving by looking at what has been happening in the last four-eight quarters. I give the link of the webpage below, but before going to the page that gives you possibilities to download different sets of data you need to have in mind the following:

  • First of all the FHA provides two types of indexes, Purchase-Only and All-Transactions I recommend that you use the Purchase-Only data because they are entirely based on actual market transactions and as such they describe more accurately trends in market prices. The All-Transactions indexes include in addition to transactions and valuations of properties from refinance mortgages.
  • Monthly data are for the whole US and Census Divisions and as such are not necessarily useful in understanding what is happening in the urban market in which you are active, since housing market conditions and price movements differ by metropolitan area
  • The Quarterly Purchase-Only Indexes for the 100 largest Metropolitan Statistical Areas (seasonally adjusted and unadjusted) is the dataset that I recommend using for understanding what has been happening in US metropolitan markets targeted for investments in single-family houses. You can use the seasonally adjusted numbers for the last four-eight quarters to see if there is a clear trend in terms of the direction in which house prices are moving (up, down, relatively stable). When trying to understand trends it is much better to graph the data using line graphs. We will provide at some point later a spreadsheet that will produce such a graph automatically, the only thing that you will need to do is to copy each time the latest data.

Also to better understand what has been happening to house prices in your market you need to understand the magnitude of changes that have been taking place. To do that you need to calculate the quarterly percentage change for each of the last eight quarters using the index values provided for the seasonally adjusted series. You can use the following formula (where t refers to any given quarter and t-1 to the previous quarter) to calculate the percentage change in house prices for each quarter:

Change in HPIt = (HPIt / HPIt-1) – 1

You can also use the seasonally unadjusted numbers, but in that case you need to calculate how prices changed compared to the same quarter of the previous year. Due to the fact that this data has not been corrected for seasonal fluctuations that are typically present in quarterly housing prices, any price comparison with the previous quarter is meaningless and can lead to erroneous conclusions with respect to the real trend in market prices for houses. Use the following formula (where t refers to any given quarter and t-4 to the same quarter of the previous year) to calculate these percentage year-on-year changes for each quarter:

Change in HPIt = (HPIt / HPIt-4) – 1

The above analysis of the quarterly data will help you to understand short-term trends in house prices. In order to assess at which stage of the price cycle is the metropolitan housing market that you are targeting for property investments you need to estimate annual changes in the index.  We will be providing soon on our website a free spreadsheet that will do all the above (graph quarterly seasonally adjusted indices, estimate percentage changes for seasonally and non-seasonally adjusted data, calculate annual percentage changes and annual index levels, which will also be graphed). The only thing you will have to do is to download the most recent quarterly data for the metropolitan housing market that you are interested in investing in and copy them at a designated position in the spreadsheet. In the meantime, until we make the spreadsheet available, you can use the following formula to calculate annual percentage changes from the quarterly percentage changes:

Annual percentage change = [(1+PCq1)*(1+PCq2)*(1+PCq3)*(1+PCq4)] -1

where:

PCq1 = percentage change in the first quarter of a given year
PCq2 = percentage change in the second quarter of a given year
PCq3 = percentage change in the third quarter of a given yearPCq4 = percentage change in the fourth quarter of a given year

I suggest that you use the quarterly data for the last ten years for calculating annual percentage changes with the above formula. Once you have calculated the annual percentage changes for each of the ten years, you will need to calculate the annual levels of the index, so you can graph it and see visually at what stage of the cycle the market is. To do that give to the first year of the data the value of 100 and then produce the level of the index for the subsequent year with the formula:

Price Index year 2 = 100* (1 + Annual percentage change year 2)

Similarly the price index levels for all subsequent years can be calculated using the following formula, where t is a given year and t-1 the previous year:

Price Index year t = Price Index year t-1 * (1 + Annual percentage change year t-1)

  • On the page to which you will be directed by clicking on the link below, FHA provides also under the title “Additional Data” annual data for even smaller geographical areas such as counties, zip codes and census tracts, that can help you assess house price trends in the more narrowly defined local market of a property that you are considering for acquisition. However, they are based on-all transactions data that include and valuations and therefore I would suggest to use them with caution.

Here is the link to the FHA webpage from which you can download all the data discussed above:

https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index-Datasets.aspx#mpo

Make sure that you select an [XLS] file for downloading in order to be able to open in Excel.

Author: Petros Sivitanides, Ph.D.

Dr. Sivitanides is a seasoned expert in real estate investment strategy and analysis, property portfolio modeling and strategic analysis, and real estate market research and econometric forecasting with over 16 years of experience with leading global real estate investment managers and real estate consultants (CBRE Global Investors, AXA Real Estate, Torto Wheaton Research, DTZ, etc.). He is the editor of the textbook titled “Market Analysis for Real Estate”, which has been used as the main textbook for a graduate course at Harvard University. He is also the author of the book "Real Estate Investing for Double-Digit Returns" and many widely quoted articles that have been published in popular real estate journals. Currently, he is the Head of the Real Estate Department at Neapolis University in Cyprus, and an international real estate consultant.

4 thoughts on “Resources for Analyzing Housing Markets for Property Investments

  1. Pingback: Housing Markets with Lowest Vacancy Rates – Smart Property Investment
  2. Pingback: Property Investment Diversification – Smart Property Investment
  3. Pingback: US Markets with Fastest-Rising House Prices in 2017 – Smart Property Investment
  4. Pingback: Housing Markets with Lowest Vacancy Rates - Smart Property Investment

Comments are closed.