Cont..An investor's $204,000 mistake (Part 5)

"Learn from the mistakes of others. You can't live long enough to make them all yourself"

              -Eleanor Roosevelt US diplomat & reformer  (1884 - 1962)

" In the stock market, history repeats itself. This is because human nature rarely changes"

               - William J. O'Neil (Founder of Investor's Business Daily)

                                                 Looking for Market Clues

Like Sherlock Holmes investigating real estate cycles, the first thing I did was make a list of all the economic indicators that could possibly reveal clues as to the future direction of the local San Diego market.  Notice, I said local,not national.  There is a big difference.  Property values can be rising in one area of the United States and falling in another. In fact, it happens all the time, it is very common.

It took me a few months to gather all of the San Diego's economic data.  I had hoards of data for almost everything under the sun.  I accumulated historic data on San Diego home prices, unemployment rates, population trends, new home sales, existing home sales, home affordability indexes, new home building permits, vacancy rates, job growth, home foreclosures, inventory indexes, construction activity, income levels, time on the market statistics, mortgage defaults, and remodeling permits.  These were probably a lot of data to test.  While some of the statistics data was sketchy and difficult to obtain, I wanted to be as scientifically thorough as possible in doing this research.

Of course, I also looked at interest rates.  From my formal education in economics and business- as well as my previous stock market research- I knew that interest rates were one of the best, if not the best, economic indicators that any investor could watch.  I knew interest rates would probably play an important role in predicting future market trends.

Then came the part that is a little complex.

As I said before, the first step was to collect this raw economic data for each economic indicator.  Most of these statistics are reported on a month-to-month basis.  The second step was to mathematically analyze the statistical data.  Basically, I was looking for trends in the data that might possibly foretell future real estate trends. In some cases, I had 25-30 years of monthly economic data to analyze for each economic indicator!

Finally, as the last step in my analysis, I compared the historical trends of each of these economic indicators against the historical price trends of each of these economic indicators against the historical price trends for San Diego real estate.  I was looking for correlations between (1) the trends in the economic data and (2) the trends in property values.  Even more importantly,  I was looking for trend correlations that would give advance warning of turning points in the real estate cycle.

To be continued...

Resource: 'Timing the Real Estate Market' By: Robert Campbell pages 42-48