#291 Upstream Indicators

by Stephen Michael White

Author

June 1, 2021

Last Updated

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Resources Mentioned on this Episode:

https://www.aaii.com/investing-basics/article/the-top-10-economic-indicators-what-to-watch-and-why

Show Transcription:

Eric Worral: (00:00)
Hey everybody, welcome back to another episode of RentPrep for Landlords. It’s episode number 291. I’m your host, Eric Worral. The year of 2019 is coming to a close. And what we’re gonna be talking about today is upstream indicators. We’re going to be getting into what exactly that means and where you see these in terms of economics and also being a real estate investor. We’re going to get back to that right after this.

Speaker 2: (00:29)
Welcome to the RentPrep for Landlords podcast and now your host Eric Worral.

Eric Worral: (00:34)
All right, so an economic indicator, an upstream indicator. What does that mean exactly? Well, upstream indicators can be in a variety of different areas and you may or may not have heard this before, but basically these are the things that can predict what’s going to happen in the future. So one of the first articles I ever read on this that kind of got me curious on the subject matter was talking about the Caterpillar brand. So you’ve seen these giant earthmovers, backhoes and things like that. The Caterpillar trucks. And the article was saying that these are an upstream indicator of economic stability in that when that brand takes a hit, right, their stock price is plummeting because they’re not selling a lot of equipment. It’s really upstream in the process of real estate because if you think about it, if you’re doing new development one of the things, one of the first things you’re going to do is if there’s a lot of new development going on, people are going to be buying these machines to, you know, move earth around and when they, these machines aren’t selling, it’s usually an indicator that there’s not a lot of new development projects happening, which affects things like the economy and at large much further down the stream.

Eric Worral: (01:47)
So this is an up-stream indicator. So I think it’s pretty interesting cause you can kind of identify these things and kind of have an idea of what to look for and kind of get a little bit of a sense of where things are headed. So I did a little bit of Google and for ya and I found an article, it is by aaii.com that’s the American Association of Individual Investors and it gives the top 10 economic indicators what to watch and why. Some of this I’m going to kind of breeze over because frankly, it bruises over my head. And I don’t want to, you know, sit here and talk about some topics and pretend like I’m educated on them when I’m really just spitting stuff back. But I will at least cover it. So I can show you how uneducated I am and some of these things.

Eric Worral: (02:28)
But number one, it talks about the real GDP gross domestic product. It says that this is important because the federal reserve uses data such as the real GDP and other related economic indicators to adjust its monetary policy. Number two, two or monies apply. It does not include institutional money, fund assets, large denominations over 100,000 or any special reserve banks are required to maintain. Why it’s important to be honest, that didn’t make sense to me. So, so that the federal reserve uses this data to assess current economic and financial conditions to help alter its monetary policy, which includes raising and lowering interest rates, which are real estate, a real estate investor. That’s interesting to you. So we’re gonna skip ahead here. A consumer price index, CPI CPI does not include every item an individual may buy but instead takes a sampling of several hundred goods and services across 200 item categories.

Eric Worral: (03:26)
So the CPI you can find housing out there. So if you’re kinda, I, I know the standard for like a lot of people use as maybe 3% or 5% that they increased their their rent prices each year. The consumer price index, which it comes out from the US Department of Labor’s Bureau of labor statistics. They released the averages monthly. Yeah, during the second or third week. So you can look that up, you know, just CPI, consumer price index, and it’ll tell you like for the last month and then the year, what the actual change has been. So the housing may not have gone up at all or may have gone up like way more than 3% so that’s something you can look to, especially if you feel kind of guilty for raising prices. This is something that’s telling you, Hey, housing costs are going up by this much.

Eric Worral: (04:13)
Like it’s not like a gut feeling thing. That’s actually what it is. So here’s what I haven’t heard of. Producer price index PPI attracts price changes in virtually all good producing sectors, including agriculture, forestry, fisheries, mining, and manufacturing. The PPI also tracks price changes for a growing portion of non-goods producing sectors of the economy as new PPIs are introduced. So it says here, the report measures prices for goods at three stages of production, finished goods, intermediate goods, and crude goods. So this was called the wholesale price index from 1902 until 1978. So that probably explains why I hadn’t heard of it because they just changed the name in 1978. That was a bad joke. But he says that that’s important because this index is timely because it’s the first inflation measure available in the month. In addition, by watching crude prices, which are the first in the chain of production trends, walking sometimes spot inflation in the pipeline.

Eric Worral: (05:09)
All right. Consumer confidence survey. I’m going to skip the definition of that cause it’s just basically 5,000 individuals. They ask questions on and says that this statistic is a leading indicator of consumer spending. And consumers are more inclined to spend money when they are feeling confident about their financial and employment prospects. Make sense? Right. Current employment statistics, you know, obviously that’s important. It says this earliest indicator of economic trends released each month. Employment rates indicate the wellbeing of the economy and labor force changes in wages point to earning trends and relate related labor costs. Economists focus on the monthly change in total nonfarm payrolls and in which sector jobs were gained or lost. All right. And I trust me, stay with me where I’m going to get to some real estate once here at the end. There’s one retail trade sales and foodservice sales.

Eric Worral: (06:01)
So that’s important because it measures personal consumption across retail industries and tracks growth or deceleration of personal consumption spending, which of course people stop spending. It’s probably because there are a consumer you know, confidence is low. People are worried about what’s coming up ahead. People don’t spend money, you know, people aren’t investing and hurts the economy. You gotta, I’ll pretend like I know what I’m talking about. Number eight, housing starts formerly known as new residential construction. So we’ll go over this one in some detail. Why it’s important. Housing starts are highly sensitive to changes in mortgage rates, which are affected by changes in interest rates. Although this indicator is highly volatile, it represents about 4% of annual GDP and can signal changes in the economy and the effects of current financial conditions. Analysts and economists know to watch for longer term trends in housing starts.

Eric Worral: (06:54)
So this data comes from the US Department of Commerce’s, US census Bureau and it releases the data monthly. So that’s kind of interesting how much new housing is a, a construction is happening. So maybe you could say an upstream indicator that would be the Caterpillar sales, right? Number nine, manufacturing and trade, inventory and sales. That’s important because it’s the primary source of information of on the state of business inventories and business sales. Inventory rates often provide clues about the growth of or growth or contraction or the economy. A growth in business inventories may mean sales are slow and the economies rate rate of growth is also slowing if sales are slowing, businesses may be forced to cut production of goods. And other about you. But I read that and for some reason I’m just picturing a giant warehouse I think in my mind. And there’s boxes all over it.

Eric Worral: (07:41)
And it means that, you know, the manufacturing and trade inventories numbers are high and that’s bad. But I don’t know why. It’s kinda interesting how your brain just starts to like fill in pitchers that, you know, mayor name may not be accurate, but number 10, you’re familiar with S and P 500 stock index, top 500 publicly traded companies. It says that it’s important because the index is designed to measure changes in stock prices of a component companies it used to be or it’s used as a measure of the nation’s stock of capital as well as a gauge of future business consumer confidence levels. It is also important to note that short term fluctuations are not really considered by economist and they’re really looking at the 10 year total return which is a common indicator of longer term trends. So, you know, the stock market takes a plunge for a week.

Eric Worral: (08:29)
Like people really aren’t looking at as a leading indicator on anything. They’re looking at a 10 year probably rolling average from what the trend is on that. And to finish this episode off, you know, after we were talking about some of that, cause I think that’s interesting too when you’re going back to a, I think it was a number eight here on the housing starts where you’re talking about changes in interest rates which affect mortgage rates. So, you know, all you can see how these different leading indicators are kind of connected. Cause if I do a quick search on interest rates here, let’s see, I get, yeah, the [inaudible] money supply which includes raising and lowering interest rates. So the [inaudible] money supply that we mentioned affects interest rates. And then when you look at the housing starts it says the interest rates affect mortgage rates and then mortgage rates affect housing starts, which also affects the economy and the GDP.

Eric Worral: (09:25)
So you can see how it’s this trickle-down effect, where at the money supplied numbers are off and the interest rates start to rise. Due to that, then your mortgage rates rise and then your new construction is decreased. And you know, maybe even a sales or a, of course. And when mortgage rates go up, you know, you’re not going to sell as many homes cause people don’t want to borrow on crazy mortgage terms. And then all that affects the GDP as well. So it’s the economy is very hard to understand and I don’t claim to understand it, but it is interesting seeing how all these things kind of run in parallel. But one thing I do understand are upstream indicators of being a landlord. So what I mean by that are what are some of the things that you can spot and a tenant that you know maybe upstream in the fact that they are not a tenant yet.

Eric Worral: (10:19)
There may be somebody who is applying to your rental property. So what are those little things that you may spot that might be an indicator to say, you know what, this person might be problematic. I know I’ve covered these in the past, but it’s always worth repeating that. One of the things you can do is run a background check. Obviously RentPrep, we run background checks. That’s why we exist. If somebody is not willing to run a background check or submit to one that might be a good upstream indicator that they have something that they’re trying to hide. So putting that in your marketing that you run a background check will immediately weed out a lot of applicants who might not be a good fit for your particular situation. And other upstream indicator is we do something called the no blank space policy.

Eric Worral: (11:02)
That means you have a rental application somebody fills out, require that they fill out every piece of the rental application. They may say they don’t remember like their previous landlord’s information or something like that. Well, tell them I’m sorry I can’t accept this. When they do that there’s a decreased confidence that I would have in that person. When they can’t give you all the details cause there might be a reason that they can’t give you all the details. Another upstream indicator is they put the wrong information on the rental application. So it could just be an honest mistake or typo. But if you’re running it a, a background check and that social security number doesn’t match with that person that is a form of intentional fraud that some people do cause they know that they might have some history.

Eric Worral: (11:49)
So what they do is they just provide fake data and maybe throw a, their social security off by one number, hoping you’re not actually going to run anything. And that is an upstream indicator potentially that either they dish have poor attention to detail or that they might be trying to hide something. And then as far as attention to detail, I think there’s a bunch of upstream indicators you can look at when you’re doing a showing. How much you know, stock you want to put into it is up to you. But sometimes the accumulation of all those things together might tell you a little bit of a, a story on the person that you’re about to rent to. And what I mean by that is let’s say they show up nine minutes late to the time that they are supposed to look at the property.

Eric Worral: (12:31)
Then they have model over their shoes and they’d drag it through the house on unknowingly. Right. They didn’t even know is that they were just putting a muddy footprints through a, as you’re looking at the house, they’re asking you questions like Oh does that what’s your policy on a fire extinguishers or can I is it OK if I grow a plants inside of the house in the closet? You know, these are kind of some ridiculous examples, but you know, I have had actually somebody who looked at a property and he was 100% hungover if not drunk from the night before. He told me that he worked at a bar and I’m pretty sure he was still drunk and he kept on asking me about like, if you can plant all these plants and what my policy was on that.

Eric Worral: (13:21)
And you know, I just got the feeling he was just going to like, plant, you know, marijuana, which whenever your stance is on that, whatever. But for me, I was like, I don’t want to deal with that. And I mean this is also going back like nine years. So we’re way more offensive back then too. But you know, you get those little questions or maybe they’re like nitpicking stuff. That’s an upstream indicator right there. They’re, they’re looking at like a knob that’s like a little loose on one drawing. One, maybe we could get this fixed if somebody’s nitpicking the property as they’re looking at it. It’s, in my opinion, it’s very different as a renter looking at a property than it is looking at a used car. If you’re looking at a used car, you want to point out everything wrong with it cause you’re trying to get the price lower.

Eric Worral: (14:02)
If you’re looking at an apartment, you just have to decide is this a good fit for you based on the budget, location and the condition of the property. You’re not going to sit there and haggle with a landlord and say, look at this, look at that. You know, I don’t know about this. Of course, if there’s some major things like, you know, you just moved in and like, you know, the sinks not working or stuff like that. But I do get feedback from people saying that, you know, they’ve dealt with nitpicky tenants through the beginning process and then once they placed them in they just got even worse. So all sorts of consider and then, of course, you know, you’d walk them back out and you walk them to the car and some situations if you can their car is a good indicator of how they’re going to treat your rental property.

Eric Worral: (14:42)
That’s an upstream indicator. If that car is a mess, like it is absolutely destroyed, you know, they own that car. That’s how they treat the things they own. Granted, we all have, you know, our times when things get out of control. I just had to clean my car out the other day. I get these adorable little drawings from daycare and all they are is just these like scribbles and they keep them. Then we got to take them home and at first, I was like, Oh, that’s so cute. I’m going to keep this. And now I get like scribbles like every day and I’m like, okay, now it’s trash. But they were like sitting in the backseat on the floor there. And I was like, God, I got to clean my car out a little bit. I, it’s full of child propaganda. That’s what I call propaganda too.

Eric Worral: (15:25)
As a these daycares, there’s a lot of propaganda there. They get these Apple updates and they say to my kids, I will work on his fine motor skills and it’s a picture of him carrying a pumpkin. I’m like, I don’t know, I think he’s just picked up a pumpkin. And you took a picture of him and you said, it’s fine. Motor skills are the one is like he’s learning Tai Chi and he has his hand up. Like he’s telling somebody to stop at a stop sign or something. And I’m like, ah, Tai Chi might be a stretch. He’s too, but you know I just think it’s funny the little spin you put on things. But anyways, I’m getting off track. But yeah, upstream indicators I think are interesting in the economy. Also when you’re interviewing somebody to be a resident at your property there think of those little upstream indicators and maybe it’s a situation like we were just talking about earlier where there might be something that leads to something that leads to something that really gives a red flag.

Eric Worral: (16:15)
And an example of that, like we were talking about before, how interest rates lead to mortgage rates. Rich lead to housing stars, which lead to effects on GDP. Well, somebody fills out a rental application and they don’t provide their social security number. Then after some cajoling, you get it out of them, but then when you run it, it didn’t match anything. So maybe it was the wrong social security number and they say, Oh, I’m sorry, here’s this, you know, and then he, they ended up somehow getting into the property and then you have this issue and you realize that they gave you some fake information, further background check, which happens and is absolutely happening more and more. And you had these situations where these is leading upstream indicators and then you get this person in. And as we talked about in the past, as soon as you give that person the keys and they signed onto the other line and handed you that check for first month’s rent, they’re in, you know, if they’ve been in for five minutes like you’re going to be going through an eviction process if this person’s a nightmare tenant, you know, so you want to make sure that you’re aware of those things.

Eric Worral: (17:17)
You’re looking at those leading indicators and making sure those upstream indicators are you know, being considered and thought of. So I’m a, I feel like I’m starting to ramble. I apologize for that and I appreciate you for staying on, listen to him and guys. I think next time I’ll be talking with you. It’ll be the new year and a new you, and a new me. So I’m looking forward to that. And until next week and next year, have a great year. Take care.