What Is Backcasting In Real Estate Terms?
You may be unfamiliar with the term backcasting, but if you’ve been in the real estate industry in any way shape or form for even just a month, you’re bound to have heard about real estate cycles. Cycles are evident in every form of real estate – commercial and residential, big and small. Nearly every aspect of real estate is cyclical in some way, whether it’s the price of a market, the types of living spaces people are attracted to, new development vs. redevelopment, and so on. The below graph illustrates this concept in general terms.
These cycles are not exclusive to real estate either. Businesses in many industries apply trend analysis and backcasting to a variety of data points to better position themselves within their market. For example, the airline industry adheres tightly to the economic growth of the country as a whole. A bad year for the economy means less discretionary income for travelers. For this reason, financial and marketing analysts working for major and small airline companies carefully track GDP trends to predict their own economic cycles. Fashion, likewise, is famously repetitive. Understanding when a certain style will make a comeback can be a massive advantage to any brand.
This method of looking to history and examining industry cycles to find trends is called “backcasting,” and, as explained above, it can and is applied to a wide variety of industries and products with spectacular success.
But while a seasoned real estate investor may already do this subconsciously, it is not common to practice trend analysis and research in the real estate industry as of yet. If used effectively, analyzing trends can propel your investments so that you are on the bleeding edge of the market. Whether you are looking at location, interior upgrades, or different housing markets, backcasting will help you make good business decisions going forward and discern when a calculated risk is worth taking. You will be an ” early adopter” … likely generating a much greater profit margin than your peers because you are on top of the trend before the feeding frenzy begins.
Define Your Market
The most crucial step when backcasting is identifying where in an industry cycle the current market resides. Knowing where you are and where you’re coming from will give you a good gauge of where you are likely headed. Take your time to properly identify the data points that are important to you and to locate when in the past these points of data have aligned as they are today. And each real estate market could differ widely. Take for example a suburban community in Northern Utah. The values, economic condition, and current market status will vary tremendously from that of an urban center on the East Coast.
Additional Reading: Renting to a New Generation
Engaging in trend research requires a level of deep-rooted thinking that is not always clear on the surface, especially in real estate. Real estate is affected by economic influences, political influences, social influences and much more. For that reason, there is no simple answer to the question, “What stage is the market in?” If you want to address this question, then you want to start by identifying your market. You can be as specific or broad as you would like, but that will play an effect on your trend cycle. A broad market might be easier to research for historical cycles, but a narrowed market will most likely be more useful for your business decisions. For this reason, national trends can be useful as a general guide, but are not adequate in establishing your market or the current position in that market’s cycle.
Dig Deeper for More Effective Backcasting
Asking yourself probing questions is the first step in trend analysis. For real estate, you might what to know, “Where are people moving? Why are they moving there? Where are most of the new jobs located? Are generations separating themselves by market? When was a market transition like the current one seen in the past? What came after that move?” These kinds of questions enable you to better research past trends.
Trend analysis and research is important in every industry. Once you have started to think on the deeper level you will begin to recognize patterns and develop ventures from those patterns. For example when it’s popular to move to the central business district and have an apartment in an urban area, as an investor, you shouldn’t be looking to buy up urban multifamily housing. You should be looking to invest in single family homes in the suburbs because that will likely be the next transition in the cycle. Like stocks, buy low sell high. Trend analysis has been codified in many industries, but is still handled subconsciously in real estate. By applying a system and practical, tactical research, you will be able to produce a trend forecast that has substantial reasoning and can be trusted for making wise and likely successful investments. In real estate, investors are always looking for an edge. Backcasting will give you just that.
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