There has been an abundance of news lately about distressed properties. We hear how foreclosures and short sales are up drastically and median sale prices are declining in certain parts of the country. Websites have sprung up claiming to be the place to look for distressed properties. Articles appear in every type of mortgage or financial publication about this topic. Whole panel discussions are dedicated to this topic at industry events. Last week at NAR’s Midyear event there was even a panel discussion titled: “Maximizing Distressed Property Business: RISMedia Power Broker Forum.” But is the discussion focused on the right type of data? It should be noted that when distressed properties are discussed, it is typically in the context of inventory on the market today - foreclosures, short sales, REO (bank owned properties), etc. While everyone is looking for an angle in the distressed market, we suggest that investors and financial firms look to contributing and predictive factors as well when forming their strategy. Sale prices, foreclosures, days on market – these figures cannot be looked at alone to try and figure out where the market is heading.
There is also a pronounced lack of local analysis. Statistics and indicators are typically published at a macro level - using county and MSA designations. Real Estate is local. Onboard determined that it is possible to look at - and predict - distressed activity at a sub-zip code level. Using our geographic modeling tool set and neighborhood level detail, we've factored our analysis down to areas which cover a score of city blocks and single residential neighborhoods.
Onboard has taken a complementary approach in analyzing this marketplace. Through a careful, statistical study of indicating factors, we have created a comparative index - the Distressed Area Index (DAI). This is a forward looking index that can help brokers or investors decide where they should be focusing their efforts both nationally and at a very local level within a given marketplace. It can help companies manage their risk. Our data team created the index by looking at a wide range of economic and housing indicators and establishing trend line correlations to activity in the marketplace. We believe that significant additional development of this index is required. Even so, our analysis shows high correlation between the index and both current and near future term distressed market activity.
The current index is calculated from inputs in the following five areas:
- Median household income
- “High Cost” loans
- Unemployment rates
- Home Price Index
One thing that you will notice is that there is currently no specific foreclosure data in the index. It is easy to crunch the numbers on foreclosures - that is not the intent of this index. Rather, we have looked to understand factors that are leading or lagging indicators (and often causes) of that foreclosure activity such that a predictive short and long term indicator is available to our clients.
These 5 inputs correlate to housing distress levels across the country. Although the index tells us about an area at a point in time, several of the underlying data points are change over time values. By considering the velocity of change in these values relative to the larger marketplace, we can establish an indication of what the market will hold in the future.
The DAI can help firms and investors answer the following questions:
- What areas of the country are still going to experience trouble in the housing market?
- Where do I need to focus my marketing efforts with respect to helping troubled borrowers?
- What areas will I be able to find the better real estate deals?
- Should I engage in an investment - perhaps opening up a new chain restaurant - in the area “x”?
Let’s look at some examples. Below is a representation of the West region, showing the index calculated at the county level. The darker counties represent the most distressed while the lightest areas represent the least distressed.
To no one’s surprise we can see that there most definitely are a good number of counties in Nevada and California that are struggling.
Now let’s look at two drastically different cities: Las Vegas (city limits) and New York City (all five boroughs). To get an even more granular look we have calculated the index at the block level for both of the cities.
New York City:
In New York the area seems to be holding it’s own overall. There are a few areas, particularly in the southwest of Queens (on the border of Long Island) and a few block groups in Staten Island, that compared to national indicators, indicate a high potential for current and near term distressed activity.
In Las Vegas the picture is quite different. There are a good number of block groups that are currently distressed. This should be of no surprise to anyone. We can see, though, that not all of Las Vegas is in the same situation. Investors, home buyers, those determining where government stimulus is most needed, will want to consider these local differentiations when considering risk and developing strategies.
At Onboard we like to look at the bigger picture, rather than focus on one piece of data. We believe that this index can be a very powerful decision making tool. We are currently working on several additional tracking indicators to compliment this index.
What are your thoughts?
Image Credit: Jeff Turner on Flickr.com