Data And Analytics: Helping Real Estate Investors Pinpoint Opportunities

Patrick Barnard
by Patrick Barnard
on July 29, 2015 No Comments
Categories : E-Features

A recent study from real estate data and analytics firm HouseCanary shows that baby boomers drove most of the growth in the single-family housing market during the past year, while millennials were largely shut out of the market due to affordability challenges.

And as home prices and interest rates continue to rise, millennials are more likely to remain renters, the report finds. In fact, should mortgage interest rates hit 6.0% – which they could by the end of next year – one in three millennials will no longer be able to afford to buy a home at current prices.

This means institutional investors will likely continue to invest in the single-family rental market. However, moving forward, they are going to have to be savvier than ever when it comes to identifying markets and neighborhoods in which to purchase rental properties. Things have changed considerably since 2011, 2012 and the first half of 2013, when the single-family rental boom was in high gear. Prices were low, and investors were snapping up properties all across the country, sometimes in a seemingly indiscriminate fashion. Today, buying up adjacent properties simply to boost the value of the comparables is no longer a good approach to real estate investing.

‘A couple years ago, if you were an investor and you were looking to get into certain markets, you could simply use the historical housing and transactional data that was available to see that it was extremely profitable to buy,’ says Jeremy Sicklick, co-founder and CEO of HouseCanary, in a recent interview with MortgageOrb. ‘Back then, homes were extremely affordable – and you knew there would be a time when the value of those properties would come back up. But what happened was that investors came in, snapped up the deals – especially out West – and then you saw affordability ramp straight through the roof. And by early 2013, things had already started slowing down [in the single-family rental space]. So you could see ahead of time what was going to happen. It was affordability-driven.’

The key for investors today, Sicklick says, is to combine multiple data elements – not just basic housing and transactional data, but all kinds of other demographical data – with analytics in order to arrive at a better assessment of each property's potential return on investment. For example, if you're an investor looking to get in on the single-family rental market and you're looking to specifically target millennials, then you would probably want data that shows which markets have the highest concentrations of millennials. Further, you would probably want to know which markets have the potential to attract higher concentrations of millennials over the next several years.

One of the problems that real estate investors have faced in the past, Sicklick says, is that the different data providers they used were limited in terms of the types of data they aggregate – they just didn't give investors the granular view they needed in order to more accurately assess opportunities in local markets.

Another problem was that the real estate industry was using ‘rear-view-looking information for forward-looking decisions – and as we know, past is not prologue for the future in real estate,’ Sicklick says.

In addition, county and metropolitan statistical area-level data ‘was often too high level and lacked any bearing on relevant decisions with regard to a specific neighborhood,’ he adds.

‘Take San Francisco, for example,’ Sicklick says. ‘It's too hard to understand what's going on in [all of the different neighborhoods]. But that massive dispersion of returns represents about a seven percent difference, annually, on an unaveraged basis. There is so much variation.

‘That's where all the money is made and lost,’ he adds.

The key is to bake in additional demographical data – jobs, income, consumer spending habits, schools, crime and more – and run it through powerful analytics in order to arrive at a more complete picture of all the factors that are (or will be) impacting values in a specific neighborhood. By identifying where ‘demographical imbalances’ exist, and the factors that are driving them, investors can make smarter decisions and boost profitability.

‘Demographic shifts are causing significant change and new opportunities for real estate investors,’ Sicklick says. ‘Addressing these shifts is critical for investors and developers to thrive in the future residential market. Our research indicates greater opportunity for development of for-sale residential to the aging population and for-rent residential to serve the younger generation.’

The study finds that in Washington, D.C., millennial renter households grew by more than 4,000 in the past year. In fact, millennials drove 21% of the household growth in Washington, D.C., creating strong demand for both single-family and multifamily rental units. In contrast, baby boomer home buyers in Miami accounted for 600% of all new households.

Sicklick says that with millennials looking to rent and a lot of overseas investors still coming in, there is plenty of opportunity for the single-family rental market to continue to thrive. However, moving forward, investors will have to be much more savvy about the tools they use to aid in their decision-making – especially with rising prices and rising interest rates on the horizon.

‘Investors today must have a good understanding of the type of community they are looking at, who is trying to move there and where it is in the cycle, in order to make better long-term bets,’ Sicklick says. ‘It's no longer, 'I'm going to just buy up as much as I can and hope that it works.'’

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