The Best Investment for Each Stage
I’ve never known anyone who can regularly predict when the real estate market will peak, but that doesn’t mean we shouldn’t try to gauge where we are in the real estate cycle.
Real estate regularly goes through multi year cycles of boom and bust periods. These cycles can be broken into four periods: recovery, expansion, hyper supply, and recession. The following is a mental model I use to understand how my property ties into the greater real estate market and when I need to become greedier or more conservative in my real estate activities.
However, the very phrase “real estate market” is a bit more complicated than you might think upon first hearing it. While we are referring to the general economic condition of real estate, the devil is in the details.
Are we talking about the real estate market in a specific location? Because, as I’m sure you know, real estate prices and demand can differ wildly in different areas. A buyer might think it’s a great market, while a seller might think it’s terrible.
Therefore, when economists look at “the real estate market,” they could be referring to all these factors at once, but it is likely they are focusing on one aspect or a summary of the whole. Therefore, next time you hear the phrase, “the strength of the real estate market,” or something similar, ask yourself, “What are they really talking about?” It would be silly to say “the real estate market is strong” without any additional qualifiers. Consider:
Where is it strong?For whom is it strong?For what kind of real estate is it strong?
That said, the real estate market, as mentioned in the definition above, is based on the supply and demand of real estate, so no matter what niche, location, or user, there are patterns that we can analyze, and hopefully predict, within that niche.
These patterns form what you’ve likely heard before: the real estate market cycle.
Phase 1: Recovery
The characteristics in the recovery phase include declining vacancy and no new construction. More tenants are looking to hermes evelyne replica
sign leases. There may also be a glut of foreclosures on the market. This is when the savvy investor looks to buy new assets.
Unfortunately, securing financing during this phase can be difficult, and overall sentiment is still negative. This marks the contrarian phase, in my estimation, where value investors jump in by buying at low prices.
Many investors were burned by the 2008 recession and are unwilling or unable to buy in this phase. It takes a few years for new inventory to come online, and during this long term period, rents and occupancy both expand. In 2015, rent growth was a robust 5.6%, and occupancy stood at 96.1% both highs.
Housing prices start to rise. Homebuilders return to the market, and we see a surge in the construction of new homes. Unemployment decreases. Real estate becomes popular again. Inflation increases and the federal reserve begins raising interest rates. Think when the CAR affordability index was 36% in 2013 and 30.75% in 2014.
Real estate cycles can last decades or more. Sometimes they send us false signals that the market is going to continue expanding or doom is right around the corner. Unfortunately, it only becomes perfectly clear years later. So if we can’t predict where we are in the cycle, why should we care about it?
We should care so we can anchor ourselves to some semblance of sanity when the market becomes overly optimistic or pessimistic. If we think in probabilities of the likelihood of where we are in the cycle, it can inform us of how aggressive or defensive we should be when we price our deals. Furthermore, the wisdom of the crowd can influence even the most sophisticated investors. Vacancy begins to increase and new construction is still ramping up. This is a period when builders need to recognize that oversupply is occurring and should put the brakes on new construction but often, they don panic selling begins. You begin to see rapid price reductions for homes. Unemployment increases. Houses are taking even longer to sell, and housing affordability begins to increase. New home construction freezes. The federal reserve starts lowering interest rates.