Metrics Used in The Media

What Are Metrics and How Are They Used in the Real Estate Industry?

Whether you are a professional real estate investor or simply someone looking for a new home as a principle residence, understanding the metrics used in real estate can help you. Knowledge is power and understanding some of the popular metrics (a formula or algorithm that predicts events and allows measurement of these events) can help you make better decisions.

The general and financial media often quote some metrics in their contemporary articles. You should, at least, have some familiarity with these measurements and data if you want to be a knowledgeable buyer. A few of the more popular metrics used include -

• Case-Shiller Home Price Index. There are multiple indices in this metric, from national home prices to those in specific regions around the U.S.
  
• National Association of Realtors® (NAR). NAR publishes its Housing Affordability Index on a monthly basis, offering data on the current state of the real estate industry as it applies to buyers.
  
• National Association of Home Builders. NAHB computes and publishes a housing index that measures "Home Builder Sentiment", which tracks the opinions of home builders around the U.S. on their perceptions of the housing market and buyer confidence.

Publishers of these indices and those experts who analyze and evaluate current real estate conditions use these business metrics to predict future trends and results. Performance metrics are used in many industries for the same purpose. Much of the general public remains unaware of other industry metrics, but is becoming more familiar with those used in the real estate industry because of wider media exposure.

It is important to understand the components of the different indices that are computed and published. While you needn't understand the algorithm or formula, understanding some of the raw data used and what the results mean helps make reading about them more meaningful. For example, the NAHB Home Builder Sentiment housing index was 17 for current sales conditions, 14 for buyer traffic, and sales expectations for the next six months were at 26 in July 2009. Do you know what that means or what to infer from it? The NAHB considers any result under 50 to indicate a negative sentiment concerning the real estate market.

An experienced REALTOR® follows some of the major performance metrics to stay abreast of the current market conditions and mathematic projections for future trends. Using the Internet to learn more about some of these business metrics can help you become a more knowledgeable real estate buyer, seller, and owner.

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How Does a Case-Shiller Index Help Me to Understand Real Estate Market Conditions?

The Case-Shiller Housing Price Index is really a series of indices and among the most followed performance metrics in the real estate industry. Karl Case began studying repeat home sales during the 1980s boom in the Boston metro area. He subsequently associated with Robert Shiller, a noted researcher and an initial expert on financial "bubbles", to design some performance metrics to create a formula for better measuring repeat home sales and how they are affected by "bubbles" in the market.

In 1991, graduate student, Allan Weiss, convinced them to form a company to market their business metrics. The public and the financial community adopted their approach and the Case-Shiller Housing Price Index was formally born. In 2002, Fiserv, a noted information and data service company, bought the Case Shiller Weiss company and partnered with Standard & Poor (S&P) to better formalize and expand the Case-Shiller performance metrics.

Collecting massive data on single family home sales around the U.S., the company uses their formula to measure national and regional real estate markets. Formerly updated quarterly, Case-Shiller Housing Price Indices are now calculated monthly, have a two month lag, and are released to the market and the public on the last Tuesday of each month. The results indicate a three month moving average calculation (remember the two month lag that's included) of single family home re-sales.

REALTOR®, investor, mortgage lender, builder, financial professional, and individual homeowner, buyer, and seller can all benefit from an understanding and reading of the S&P/Case-Shiller Housing Price Index. Remember, this is an index, or indicator, not a simple numeric listing of home prices. But, don't worry, it's not too complicated to understand. You don't need to be an economist to learn current trends in the real estate market.

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How Might the NAR Housing Affordability Index Make Me a Better Real Estate Investor?

The National Association of REALTORS® (NAR) offers a long menu of services to its members and to the real estate buying and selling public. One feature is their Housing Affordability Index (HAI), which considers home values, mortgage loan interest rates, and the funds buyers need to complete purchases.

For example, a published value of less than 100, indicates that average buyers might need more than half their monthly income to afford an entry level home. As you can see, you don't need to understand the business metrics algorithm to realize these projected outcomes.

Using published statistics, the NAR determines the "median family income" for each month. The mortgage loan interest rate used is the effective rate on closed loans for the prior month. The NAR also calculates the "median-priced single family home" from a variety of statistics and data. Using performance metrics methodology and a constant stream of data, the NAR helps REALTOR® and homeowner alike stay in tune with the current real estate market.

Homebuyers can get a good "feel" for overall current real estate conditions by becoming familiar with this use of business metrics. For example, an index of 100 indicates that a buyer with a median income at current mortgage interest interest rates and buying a current median-priced home has precisely enough income to afford the property and do so comfortably. When the NAR Housing Affordability Index rises above 100, homebuyers can work with a REALTOR® with confidence because a median-income borrower can easily afford a median-priced home. Conversely, an HAI less than 100 can indicate that a buyer, in the median- income category wanting to buy a median-price house might need up to 25% to 50% more income to qualify for their dream home.

Indices like these are not intended to be hard and fast rules. They offer REALTORS®, home buyers and sellers, economists, and all other interested parties indicators of the real estate market's current condition and longer term prospects. This index can be particularly useful for those people considering either buying or selling a home in the immediate future.

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Should I Follow the Home Builder Sentiment Index as a Prospective Home Buyer?

Home Builder Sentiment Indices are a bit different than some other performance metrics you may see quoted by the media. Unlike some of the complex algorithms used by other business metrics and decipherable only by math majors, the National Association of Home Builders (NAHB) is a bit more opinion driven. However, it can still be just as useful to individual homebuyers as it is to a REALTOR®, mortgage lender, or home builder.

The NAHB collects data and comments from home builders around the U.S. to determine and estimate the level of buyer confidence and motivation to buy housing. Along with providing a "snapshot" of current buyer mentality and real estate market conditions, this index projects possible trends for six months into the future. Like all performance metrics, these indices are indicators, not concrete answers or predictors.

Regardless of the current Home Builder Sentiment Index, you may have recently bought a newly constructed home for a fair price and are thrilled with your purchase. Conversely, you may want to buy a home, but are waiting on the "sidelines" because of the uncertainty in the real estate market during the economic downturn.

The Home Builder Sentiment Index has three components that might help you.

1. Current sales conditions.
   
2. Traffic by prospective buyers.
   
3. A sales expectations index.

These measure the "perceptions" of over 400 home builders as they view their local markets. Builder feedback is based on fact and live data, but it also includes observations and subjective input. Business metrics can sometimes create data that experts and media must then interpret for general consumption. The Home Builder Sentiment Index attempts to interpret data and deliver a simple numeric indicator.

The target number is 50. Values under this level indicate negative buyer sentiment towards newly constructed homes and the real estate market in general. Values higher than 50 indicate a positive buyer sentiment, projecting a good market.

While the Home Builder Sentiment Index indicates current buyer feelings, it also projects future trends. For example, the sales conditions and buyer traffic indices for July 2009 are at the 17 level, obviously - and not surprisingly - very low, but the sales expectations index is up to 26. While still well below 50, it does offer some hope for a real estate rebound in the next six months.

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Does the NAHB-Wells Fargo Housing Opportunity Index (HOI) Measure Affordability?

The National Association of Home Builders (NAHB) and Wells Fargo have partnered to use performance metrics to measure home affordability much as the index offered by the National Association of REALTORS® (NAR). Like the NAR index, the NAHB-Wells Fargo HOI combines income and housing cost to construct performance metrics that indicate affordability.

Interestingly, in the Spring of 2009, the HOI rose to its highest level in 18 years. How is this possible in an extreme down market? The HOI does not measure or predict the "heat" of the housing market or how many homes are or will be sold. It concentrates on the affordability of those homes that are available and have been sold. This data is much more important to homebuyers in both up and down markets. More important than home prices, mortgage interest rates, or funds availability, affordability affects everyone.

Home affordability is typically based on, at least, three factors.

1. Current home prices.
   
2. Current average mortgage interest rates.
   
3. Current verifiable monthly income - and the probability that it will continue.

The NAHB-Wells Fargo HOI attempts to disclose the current affordability of an average home for a borrower with average monthly/annual income. The primary reasons for the impressive HOI index in early 2009 was the result of positive data in two of the three major affordability used by performance metrics: Home prices and mortgage interest rates. The decline in home prices combined with record low interest rates, outweighed the uncertainties in the employment data to generate a good HOI.

Business metrics for this index in early 2009 showed that over 70% of both new and existing homes sold were affordable by buyers earning the basic national median-income level. When compared to the HOI for the same period twelve months earlier, around 53%, this indicates a distinct improvement in affordability. Obviously, more buyers should be able to purchase homes. Everyone hopes that this reality will spur an improvement in the depressed home market.

However, as with most components of a national or regional economy, consumer confidence is just as important as overall business conditions, interest rates, money availability, and pure supply and demand business metrics. An experienced REALTOR® can help you become a positive contributor to a real estate rebound if you have a confidence level in the future and understand these indicators.

You can use the published real estate performance metrics to help you make home buying and selling decisions. Don't be intimidated by business metrics. They are published to give the media, experts, and you, the individual, clues to national, regional, and local conditions that affect the economic health of the area. Use those that help you make informed and wise decisions.

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