How to Predict Home Prices: Track Construction Spending
Jan 21, 2024
People think the real estate market is super complicated.
And it is. π΅π«
Luckily, I might have found the one stat to track if you want to predict home prices. π€©
Let's dig into the data!
Residential Construction Spending
The Census tracks the value of investment to develop residential real estate.
This is called residential construction spending. ποΈ
It's fair to assume that the people/companies developing real estate have good insight into the market compared to the average Joe.
Based on this, they are likely going to ramp up spending in the good times and pull back as the economy gets challenging.
The data seems to confirm that as well.
In the chart above, the blue line represents the value of the construction spending on residential real estate Nationally.
The orange line is the Case-Shiller Home Price Index which is the gold standard for measuring home prices nationally.
While it isn't 100% accurate, it's pretty close.
I've highlighted several major changes in home prices that were predicted by construction spending.
In fact, there's a 90% correlation between the two variables using a 6-month lag. π€
This means that construction spending has historically given us a 6-month warning on home prices. π‘
If we see spending consistently rise or decline, home prices are likely to follow in the next 6 months.
Finding Opportunity
This is huge. π€―
If we pay attention to the changes in construction spending, it alert us to potential market shifts.
Here's how I'm thinking about using this:
I'm looking for differences between the two. π§
Often called divergences, if I see spending fall while prices are rising, I'm on red alert. The opposite is would help me stay confident of a rebound.
The good news is it takes time for these changes to happen. β³
You don't need to stay glued to the screen watching this.
Also, i'll be providing monthly updates going forward to help us all watch this together.
Here's to continuing to level up your Market IQ! Have a great week! π
Dr. Alex Stewart
Founder
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