Grouping Cities by “Community Profiles” Validates the Geo Score & A Look at NJ

Categories: Commentary, Uncategorized |

August 18, 2014

This week we look at a grouping scheme for US cities and think about ways to apply it to municipal bond investing.  We also use the occasion of bad news for Atlantic City to take a deeper dive into New Jersey county-level DIVER Geo Scores.

Grouping Cities by “Community Profiles” is a Helpful Tool for Muni Investors

We recently read an interesting paper

[1], which discussed the prospects for the housing markets and economies of 2000 cities across the US.  The paper was published by the Demand Institute (a joint endeavor of the Conference Board and Nielsen). It explores a theme that we frequently highlight and examine in our weekly Commentaries:

It is all too easy when discussing the US economic outlook to forget that it aggregates the economic prospects of thousands of different cities, towns, and villages across the nation. National statistics typically mask this local, and indeed more human, view of the country’s many distinct communities.

A key concept in the paper is the development of a “Community Profile” scheme, which characterizes cities by various economic and demographic characteristics.  We think this concept has value for municipal investors.

Whether managing large diversified institutional portfolios or smaller individual accounts, a key challenge in the municipal bond market is sifting and sorting through the large number of credits to decide where to invest and, after investing, to identify and manage risks.  Sector classifications are one tool to help in this process, but sector level trends can mask wide, underlying variations.   We think a classification scheme like that developed by the Demand Institute can help investors segment their exposures to think about them more clearly.

The Demand Institute used a quantitative analysis of 100 economic and demographic variables to create what it referred to as “community clusters,” a qualitative analysis reduced these clusters down to nine distinctive Community Profiles:

Af­fluent Metroburbs

Established, wealthy communities near big cities that offer an ideal mix of urban and suburban lifestyles.

 Cosmopolitan Suburbs

Fast-growing, contemporary suburbs that offer distinctive services and wide-ranging amenities

Traditional Suburbs

Solid middle-class communities that represent a cornerstone of American family life

Vacation & Retirement Destinations

Special-purpose communities in warm climates that attract vacationing families and retirees

Historic Skyline Cities

America’s urban core — largely concentrated on the East Coast and reaching back to the country’s founding

Transitional Cities

Older, inland cities undergoing transition; higher reliance on government jobs to sustain the local economy.

De­flated-Bubble Communities

Ethnically diverse communities that were hit hard by the real estate bubble and bust over the last decade

Challenged Communities

Cities and towns facing economic stress due to a weak private sector and limited employment opportunities

Endangered Communities

Truly distressed cities and towns with weak housing markets and severe socioeconomic pressures

Source: Demand Institute “A Tale of 2000 Cities”

While the Demand Institute’s combined qualitative and quantitative approach can yield insights, the time and labor involved in its preparation limit applicability to responding to evolving conditions.   Our DIVER Geo Score is a purely quantitative measure calculated monthly that uses many of the same variables as the quantitative portion of the Demand Institute’s profiling process.

We believe that long-term groupings like the Profiles and more high frequency readings like the Geo Score are complimentary.  To test this thesis, we compared the Geo Scores for the various Demand Institute Community Profiles.

The chart below shows a history of the average Geo Score for each Demand Institute Community Profile using the 75 largest cities in the US as a sample.  For use in this graph, we made several tweaks to the Profiles.   We divided the Historic Skyline cities into two sub-groups:  Strong (e.g. NYC, Boston, DC) and Weak (e.g. St, Louis, Milwaukee, Buffalo).  In our view, this additional grouping better reflects the economic fundamentals of these cities.


The relative ranking of the Profiles by Geo Score fits with our expectations and confirms the methods are complimentary.  Using Geo Scores creates the ability to view trends in the relative health of the Community Profile types as economic conditions change.

Over the last two years, the Geo Score of Affluent Metroburbs have improved dramatically.  Two years ago this Profile’s average Geo Score was the same as the Traditional Suburbs.  Now the Metroburbs average Geo Score is 1.5 points higher than the Suburbs.  The Historic Skyline City-Strong Geo Scores have been flat over the period, but the Historic Skyline Cities-Weak has continued to decline.

The theme of grouping credits by similar characteristics is a productive exercise that can yield interesting insights.  We plan to explore this more in the future.

Economic Diversity is Difficult to Attain in New Jersey Portfolios

Atlantic City received more bad news this week.  One of its newest casinos (the Revel) will not be able to emerge from its second bankruptcy and will close in early September.  The Revel joins two other casinos (The Trump Plaza and the Showboat), which will be closing soon.  Atlantic City has struggled to recover from the recession due to increased competition from new casinos around the northeast and on-line gambling.  Governor Christie has announced that he will convene a “summit” in September to explore solutions to AC’s difficulties.

While there’s not much useful new analysis that can be done on Atlantic City right now, AC’s most recent problems prompted us to look more closely at the DIVER Geo Scores for New Jersey’s counties.  We were particularly interested in exploring intra-state variations.  We divided the state into “North” and “South” counties.  As can be seen from the chart, North Jersey counties are stronger economically and have performed better than South Jersey counties and the State as a whole since early 2012.

8-18 2

Digging a little deeper, we looked at the correlation of the New Jersey Counties’ Geo Scores vs. each other since early ’12.  The results, shown in the chart below, highlight the difficulty of achieving true economic diversity within an in-state portfolio from a relatively small state like New Jersey.  The economic condition of most of New Jersey’s counties is highly correlated.  Hudson and Cape May Counties are the least correlated to State-wide economic trends, but unfortunately for in-state investors, neither is a significant issuer of bonds.

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As we begin the final two weeks of August, the DIVER by Lumesis team will, for the most part be in the office (while several members of the team are on holiday or taking children to college).

If you would like further details regarding the component aspect of the Geo Score grouping referenced in this commentary please contact the Lumesis team.

Have a great week,


Michael Craft, CFA, Managing Director, Credit
Lumesis, Inc.


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