TIMING THE MARKETS
by Corey Donaldson
Timing the real estate market is very important. Certainly a lot of money has been made in real estate over the years (and has been lost as well!). To better understand what will happen in the future, it will be critical to understand what has happened in the past. Markets cycle and history repeats itself.
Currently the real estate market has been red, red hot for a number of different reasons:
- Historic low interest rates. Interest rates have not been this low in 40 years!
- Lenders are extremely lenient. Almost anybody can qualify for a loan… all you need is a pulse! Most banks are not originating loans for their own portfolio, instead they are packaging loans in bulk and selling them off to the secondary market. There has also been some extremely creative loan products that have been introduced by lenders… i.e. aggressive variable rate loans, 40 year terms, etc.
- Stock and bond markets have underperformed. Stock and bond markets have not performed well since the crash of 2000. Most of the money that was earmarked for the stock market since 2000 has now been flowing into the real estate market. Since returns have not been very favorable in the bond market and stock market, people have been putting more and more of their money into the real estate market.
- Euphoria Today, the real estate market is the "golden child" of investments. The real estate market is viewed "euphorically" (very similarly to the stock market prior to the crash of 2000). Most homeowners feel very rich as their home or investment property has an enormous amount of equity (most times more than their retirement plan).
Real Estate prices have increased in different degrees depending upon the geographic region. On the east and west coast, real estate prices have doubled and tripled since 1996. The middle of the country has not fared as well with more modest gains.
Even though there are a lot of national factors driving the red hot real estate market, real estate is significantly influenced by its locality. Demand and supply are critical factors in determining whether the market will be appreciating or depreciating. You will need to look at a number of different locality factors in real estate:
- "In or out" migration. Are there more people coming into the area, or are there people leaving? Price is affected by supply and demand. When there are more people coming into an area ("in migration"), then demand for real estate will increase, which will help increase the prices of homes, apartments, or whatever investment property as long as the supply is not rising faster than demand. An "out migration" for example, is a small town where there the major industry is steel and the steel mill closes and suddenly a lot of people are out of work, so people start leaving that town to find work. Consequently, the demand for real estate goes down and with the same supply of property, pricing decreases because the demand is less than it once was. This creates a downward spiral on real estate prices.
- Path of Progress Path of progress is another factor that can increase the demand for a certain sector of real estate supply. For example, in California a highway was built in South Orange County in the 1990s. That land had been landlocked for many years, but as soon as the highway was built it provided easier access to that land, instantly increasing the value of the land - probably about 10 times what the value was prior to the highway.
- Construction If you increase the supply and have the same demand, it will result in a downward pressure on pricing. Construction is a negative factor because if the supply increases and demand stays constant, the end result will be a downward pressure on prices.
Real estate is definitely influenced by locality. Everything cycles, including real estate. The goal is to buy at the bottom of the market cycle and then try to sell at the top of the cycle. Sometimes investors will get greedy by trying to get every last dime at the top of the market and then trying to buy at the very absolute bottom of the market. However, more than once the investor who has waited too long in hopes of maximizing the gain has not achieved the desired result and lost significant profit. My advice is to try not to be greedy, but just try to time the selling of your property at the top 10% of the market cycle and buying property at the bottom 10% of the market cycle.
Timing of the market is critical. By looking at the past, you will have a good idea as to what will happen in the future!
