CYCLICAL
CHANGE
By: Larry Kendall, chairman emeritus of
The Group, Inc. and author of “Ninja Selling”
ARE YOU A CHANGE LEADER?
Read on to find out how to recognize the four types of change.
The ability to anticipate and manage change is a critical leadership skill. The first step in being a change leader is recognizing the
four types of change: Cyclical; Structural; Exponential and Incremental. In this article, we’ll focus on cyclical change and how to
predict and benefit from market cycles.
We are in a cyclical industry. Knowing where we are in the
market cycle is a critical skill. Real estate market cycles tend to be
long, slow and predictable (when we watch the fundamentals).
I teach market cycles in the College of Business at Colorado State
University. Here are four fundamentals you can use to predict
market cycles:
• Jobs. Employment is a leading indicator of a real estate market cycle by 12 to 18 months. This is your earliest warning signal
of a change. Contact your state employment office and join the
mailing list to receive the monthly employment numbers for your
county. Watch for a change in employment (either up or down).
This is your best crystal ball, giving you a 12- to 18-month head
start.
• FHFA.Gov. Go to this government website and download their
quarterly “House Price Index” report. This is a long report (usually
75 pages) so scroll down to the charts that give you “House Price
Appreciation by State” and 300 individual metropolitan markets.
These charts show the house price appreciation for the last year,
the last quarter, the last five years and since 1991. Want to see if
the market is speeding up or slowing down? Take the quarterly
change in prices for the market and annualize it (multiply x 4).
Then, compare this number to the annual price change. Here’s an
example using the June 30, 2014 report:
nualized) is a market that is speeding up. Some markets are seasonal,
so be careful about jumping to conclusions based on just one quarter.
Start tracking each quarter, and you will spot the trends.
• Affordability. The three components of affordability are house price,
household income and interest rates. Because of the low interest
rates, most markets are more affordable today than they were 10
years ago—even with rising home prices. Ultimately, home prices
and real estate activity is a function of people’s ability to pay. The
funny money, subprime lending was an aberration that was not sustainable and contributed to the housing bubble.
• Investment Ratios. Tracking supply, demand, rents and the relationship of rents to prices will also give you a clue as to whether a
market is overheated, and a bubble is building. Markets tend to seek
equilibrium over time and develop historic ratios. If a market gets out
of sync with these historic ratios, watch out. Unless there has been a
structural change, (which we will discuss next month) a change is on
the horizon.
Tracking these four fundamental ́ݥ