Sunday, July 28, 2019

Los Angeles Housing Market vs. Condo Market – Who Wins?

-- Intended for New College Graduates --

(Click on the image to enlarge)

Question # 1
Interviewer: What does this graph show?

Candidate: The two market segments moved in tandem during this period. Lately, growth has been tapering off.

Question # 2
Interviewer: Despite the falling interest rates in last two quarters, LA residential market has tapered. What would you attribute this market behavior to?

Candidate: The LA residential market is heavily dependent on foreign buying which has tumbled in recent months, taking some steam off the market.

Question # 3
Interviewer: Would you recommend this market to our clients now?

Candidate: No. This market has good downside potential. Once it goes through a phase of correction, we will see buying opportunities. For now, my recommendation is "hold." 

Question # 4
Interviewer: In terms of long-term market growth, will NoCal continue to outperform SoCal?

Candidate: No. The new generation of tech companies cannot afford NoCal anymore so SoCal is fast becoming the emerging 2nd tech-hub of California. Therefore, the SoCal residential market will outperform the NoCal market.

Question # 5
Interviewer: Can you explain why there is a sudden spike in the housing market in April, 2019?

Candidate: Considering it's the most recent month, it could be a data aberration. Generally, the most recent month of data is somewhat illiquid. As the new data points come in, the current value will be moderated down, making it more in line with the most recent past.

Question # 6
Interviewer: As an Analyst, what would you do to stabilize the time series, meaning how would you reduce this noise in the data?

Candidate: For this short time series, I would apply a 2-Month Moving Average (with the resulting trendline). That would iron out the minor kinks in the data.

Question # 7
Interviewer: How would you forecast out the next 3-4 months assuming this is the only data you have?

Candidate: I would use the same 2-Month Moving Average and forecast out for the next 3-4 months. Since the market is trending sideways, Moving Average would provide a much better solution than the usual curve-fitting with the incompatible data from unrelated periods.    

Question # 8
Interviewer: If you add the 2013 through 2015 data, would your Moving Average produce better forecasts?

Candidate: Not in this particular case, as we know the market recovery back then was totally V-shaped in California and now it has been trending sideways. As I said, adding incompatible data does not improve model's accuracy or predictability.  

Question # 9
Interviewer: Let's get back to this data. Which market segment, do you think, is the winner here? 

Candidate: It's a tie. Condo slightly outperformed housing in the first half, but underperformed in the second half, hence a tie.

Disclaimer - The author is not advocating the Case Shiller indices listed here. Consult your Financial Planner for an appropriate asset allocation model and/or trading strategies for different markets, including housing.

Good Luck!

Sid Som, MBA, MIM
President, Homequant, Inc. 

Coming soon: Sid's New Book: Modern Interviewing Techniques and Skills - Live Simulations with actual Market Data

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