Neighborhood Shifts Affect Your Business

Dropping Home Prices will Bring Lower Incomes to Neighborhoods

In the spring of 2009, a housing analyst that now works for Catalyst Analytics confronted one of the premier economists of one of the largest financial institutions in the U.S. about a statement made in a private advisory letter of the institution. (You would recognize the individual from TV, as well as the institution... they both will remain nameless.) The statement made, (and to the individual’s credit recognized as a potential problem) was essentially housing was beginning to recover in a major U.S. market as reflected by increases in home prices in the past quarter, in that market.

Our analyst explained to this economist that the rise in home prices in this market was due to an increased level of sales, ALBEIT DEEPLY DISCOUNTED, in the upper price ranges due to the beginning of Alt A/Option Arm and Jumbo loan foreclosures in that particular market. To simplify, if you added a 7 foot NBA center to a fifth grade class and re-averaged the class height, the average height of the class will indeed rise. Quite misleading in making judgments to the height of the individuals in the class.

In the same way, virtually all supply side housing statistics, be they starts, sales, or price statistics are very misleading. They are EXTREMELY misleading when compiled & given nationally. Unlike the price of a Big Mac, or a gallon of gas, or an ounce of gold, individual homes AND home markets vary DRAMATICALLY.

In a large City, for example, the price of a home in one area of the city can be dramatically different from the exact same home 8 miles away. So can the make-up of the individuals living in the virtually same homes 8 miles apart. There can be major differences in income, age, # of persons occupying and significant differences in their lifestyles and SPENDING PATTERNS.

Over the past few decades, with rare pockets of exception, neighborhoods changed slowly. The average price of a dwelling unit within a neighborhood would rise and fall with periodic cycles….occasionally there would be an unfortunate foreclosure. If someone moved out, you had a pretty good idea about the household that would move in….particularly their income level. That paradigm is in the midst of significant change in many major and minor markets throughout the U.S.

What does this mean for corporate and government decision makers? What does this mean for you as an executive or small business owner?

Market data and analysis, particularly demographic, was utilized primarily to judge new growth as it moved outward from the hub of major and minor cities. First, new residential make-up grew. Then the commercial, retail, and service sectors appropriate to it. Market research and analysis models were built around this “paradigm of growth.” Homes were designed and built for a certain type of household make-up and income. Demographers sold expensive systems and research to tell business and government decision makers about these NEW markets.

Once in place, neighborhoods changed slowly. The Census, taken once every ten years, was the foundational measurement of that slow change. Future changes to an area were virtually straight-line projections from original census data.

We at Catalyst Analytics use the one time measurement of Census Data as only one of our “foundations” or “posts” to measure change within a local neighborhood, the county it exists in, and, in the appropriate M.S.A.’s.

The sum of a large city is its parts…its neighborhoods. It can be dangerous to make “macro” assessments about a city, sometimes a county and the business/service located within it, without understanding the “micro” of the specific location and how it has changed. Today, because of radical changes in micro housing markets, and the households moving in and out of them, the old analytic algorithms and models don’t work.

Here is na example of a new housing paradigm that is playing out throughout the country. Picture this scenario:

A 22 year old (an ECHO BOOMER) living alone in a large apartment complex loses his full time job at Home Depot. He has to move out of his 1 bedroom apartment. He has two Echo Boomer buddies next door…one 23 and one 24. One loses his job and is now working part time at McDonalds. The other holds on to his job but his hours have been cut by 1/3. They have to move out of their 2 bedroom apartment.

None are willing to move back home. They figure out, between the three of them, that they can afford the two bedroom apartment. In terms of demographics, two HOUSEHOLDS will become one HOUSEHOLD, (but the 2010 census has already been taken!)  In terms of the demographic POPULATION measure, nothing has changed. Neither has the number of housing units in the city.

Along comes that savvy investor “Uncle Bob.” Can’t sell that 4 bedroom foreclosure he “stole” 6 months ago (couldn’t have built it for what he paid if the land was FREE!). It has 4X the room of the two bedroom apartment and a two car garage to boot! It is only 8 miles from the job victims’ apartment complex.  More importantly, Uncle Bob will rent this house, including utilities, to the three lads, for less than they can rent one two bedroom apartment! What a guy!

Further, these 3 Echo Boomers are really smart. They know another fellow in their apartment complex who has lost his job and has to move out of his 1 bedroom apartment. He was going to move back in with his parents, but he has talked to them, and good old Dad will be more than happy to pay his son’s ¼ share of Uncle Bob’s rent to prevent the “happy reunion” of junior moving back home!

Net result demographically? Population in the large city unchanged. Population in the apartment complex county…minus 4. Population gain in the county of Uncle Bob’s rental…plus 4. THE NUMBER OF DWELLING UNITS & DENSITY HAS REMAINED UNCHANGED in the city and county... outward appearances are deceiving.

The smart decision makers go beyond these measures. They are interested in the 2010 census, but only in understanding

WHAT HAS CHANGED SINCE IT WAS TAKEN…specifically what has changed in the past business quarter?

They are focused on the demographic changes in HOUSEHOLDS, and use Catalyst Analytics to understand how households changed in the neighborhoods surrounding their business address, their county and their M.S.A. They want to have data to back up their decisions to move or shut down a retail/service operation. Smart decision makers want information backed by data more recent than the census and its updates. They know that the major turmoil in today’s economy is housing….and they want to rely on an advisor that understands it intimately.

There is another group, not retail, service, or government, that wishes it understood the above...the real estate investors who bought the apartment complex across the street from the one the lads left!  THEY ARE REALLY IN THE STONE AGE as they rely on supply side indicators such as housing starts and sales. WORSE, their bane is their market analysis in their drawer based on “competitive research” including competitive rentals. What does this mean for them?

It means the competitive market analysis that told them we were somewhere at a housing bottom is about as right as the competitive pricing analysis contained within it! The “comps” on the apartment complex across the street that left three vacant apartments (and more to come as they tell their friends about their great deal) are about to change as that complex is forced to lower its rents.

Lower incomes in your neighborhood? Now you know why your loss leaders are really flying out the door these days!

Coming Soon!Catalyst Analytics will be launching a brand new website and a new service called the 3L Score.

Follow us on Twitter to be notified of the launch of the 3L Score and see for yourself.

http://www.twitter.com/catlstanalytics

What is the 3L Score?

The 3L Score is a proprietary algorithmic system created by Catalyst Analytics. It combines digital data sourced at base level from data resources open per the Freedom of Information Act. Parts of the 3L Score include data aggregations, measurements, and analysis purchased from private companies that supply Fortune 500 industry giants. The investment in Catalyst Analytic’s algorithms and proprietary programs allows small, medium, and even large size businesses affordable access to address-specific analysis that would otherwise be beyond their reach.

Our team of researchers, analysts, programmers, and graphic designers’ mission is to give our clients concise diagnostics and analysis to enable quick and confident decisions.

The 3L Score is unmatched in its time and dollar saving value for decision makers.

How does the 3L Score benefit you?

Quickly evaluate and score any business location in the United States. Immediately recognize the big differences between locations and get insight to recent significant business changes you have experienced based upon the changing consumer. Your location hasn’t changed, your product mix hasn’t changed, but your customer base may have significantly changed from what you knew it to be 2 years ago, 6 months ago, or even one quarter ago. Do you have a concise picture of the customer base surrounding your business location? Catalyst Analytics will give you that today!

The 3L Score is invaluable in the selection of new business locations and the elimination of old ones. Get lightening quick insight as to when and where you should spend your time digging deeper, or if you should spend your time digging deeper.

Confidently answer the following questions about your business locations in a matter of seconds:

Does the location fit yours or your customers’ basic requirements? Is this location worth the investment of additional time and money? Why is an existing location performing differently than other locations?

o What has changed about this location? Do you have different customers, or has the spending mentality of your

customers changed? How can you tell the difference between two locations that appear to be the same? How do you measure up against your competition? What are the clear patterns of success that can be used in determining new

locations? Everyone tells you that this a great location, but what is the real story?

Quickly eliminate proposed locations that will not fit into yours or your client’s successful business models. Instead, focus your time on higher quality, revenue generating locations.

Follow us on Twitter to be notified of the launch of the 3L Score and see for yourself.

http://www.twitter.com/catlstanalytics