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Is it possible to use data about past real estate transactions to predict future real estate trends?
I suspect my answer will surprise you, but probably won’t satisfy you.
Allow me to explain it to you like this: Meteorologists know that weather is highly predictable. Given the right amount of data at the right time, it’s possible for the computer models available today to predict with a reasonably high degree of accuracy and certainty exactly what weather will be like in a specific local area. It’s not perfect, but it’s pretty good a lot of the time.
The same thing is true of real estate. Given the right type and amount of data, it is, I believe, quite possible to make reasonably accurate predictions about the future direction of a particular real estate market.
But also like the weather, the amount of data that’s necessary to make those predictions accurately is nearly impossible to have in a timely manner. In the case of weather, the problem is that too much data is necessary. In the case of real estate, the problem is that the data is not available quickly enough.
There are several services that purport to use real estate data to predict future market directions. While there is some legitimacy to the fundamental idea of using statistical analysis to analyze real estate data, I still can’t help but think of these services as the real estate version of a Ouija board or a “Crystal Ball”, because they generally require a substantial leap of blind faith.
Here’s an example: One “Crystal Ball” service with which I am extremely familiar purports to have many years of market data divided into local markets according to MSA (“metropolitan service areas” are geographic divisions that separate the country into population centers around large cities). This service uses some fairly simple analysis tools to establish trend lines which the promoters claim can allow users to get a very good reading on the direction of the markets within a particular MSA.
Theoretically, this makes sense. I’m familiar with the nature of the analysis techniques used by this service (and others like it) and the mathematics behind it is sound.
But despite the soundness of the mathematics, there remain two big problems:
* Timing Is Everything – If you’re making a decision about an entry to or exit from the real estate market today, you need fresh real estate data. But none of the Crystal Ball services with which I’m familiar provide data that’s any more recent than 90-180 days old. Data that is as much as 6 months old is nearly worthless for helping you to pick an investment today for two reasons: (1) Markets can change a lot in 3-6 months, and these changes are never reflected in the Crystal Ball services [my own local market has dropped off by 12 percent in the past 3 months, and this decline would never be reflected in these "Crystal Ball" services]; and (2) Data from “closed sales” used by the Crystal Ball services reflect negotiations and agreements that were put into place [usually] at least a month or more before the sale closed, so while the data being analyzed by the Crystal Ball services may be 3-6 months old, the market conditions reflected by that data is even older, rendering the analysis provided even more questionable.
* “Invisible” Markets: Recall that many Crystal Ball services divide their data into “MSA’s”. A typical example is the Atlanta, Georgia MSA which includes all of Atlanta and all of the suburbs around Atlanta. The Atlanta MSA has, on the whole, been declining quite aggressively in recent years, and so if you rely on a Crystal Ball service that uses MSA’s, you’ll have the impression that the Atlanta market is a horrible danger zone. However, there are literally dozens of local real estate markets in the Atlanta MSA, and several of them have been consistent and substantial winners during the past several years. The net effect is that since most of the Crystal Ball services aren’t able to show data at a level any more granular than MSA’s, the best opportunities will not be apparent to you. In other words, fundamentally all of the “diamonds in the rough” will go unseen by the Crystal Ball services.
Obviously, there’s a problem with the Crystal Ball services. But is there any value to them?
If you’re strictly a buy-and-hold investor, the Crystal Ball services can give you a reasonably decent starting point for selecting markets that have clear trends in place. But that’s where the usefulness ends, and even that is questionable since the data being used by these services is quite old by the time you receive it.
While I really like the idea of using statistical analysis to make sense of the real estate market, the Crystal Ball services with which I am familiar simply fall short, and probably for reasons that really aren’t their fault. Nevertheless, if a service can’t really help you to pick local markets (not MSA’s) and also can’t help you to time your entry/exit in a smart manner, I can’ recommend that you pay for such services.
Therefore, our presentation recommendation is for you to pass on the paid services, and use free ones like:
* Zillow Local Info
* Realty Sniper
These services have similar weaknesses to the “Crystal Ball” services, but they have similar benefits as well. Plus, they’re all free.