Riding The Real Estate Cycle

Anyone who follows real estate knows that the market experiences cycles. This is not much different than any other business or industry in our country. The main difference with real estate is that there are some determining factors that may just give us a clue as to where the market is going next. By keeping an eye on employment numbers, medium income levels, demographics, interest rates, housing sales and new starts, you can get an idea as to which way the roller coaster is going to go.

We are currently in a period of leveling off after the recession of 2008. It may seem like only yesterday, but we are already five years removed from one of the worst economic periods in our history. One popular real estate theory suggests that the market moves in 18 year cycles. Quick math tells us that the next boom won’t be for another ten years or so. This doesn’t mean that you can’t make money during that time, but if you position yourself correctly now, you could be sitting on a pretty nice nest egg when the market does take off.

Trying to time the market, any market, can be an exercise in futility. One minor change in the economy or domestic policy can send the market on its ear for several years. Assuming there is no dramatic change, you should be looking at the main indicators to give you an idea of what will happen next. National indicators may not reflect what is going on in your market. You need to follow the areas you invest in and monitor them closely. Right now, we are starting to see a shift in the mentality of owning a home. Just a few years ago, buying was considered too expensive and renting was a far more affordable option. With interest rates still low and home prices leveling off, buyers now see value buying low and building equity in a house they can live in long term.

The idea of 20% property appreciation was never sustainable and was doomed to stop abruptly at some point. Well, that point came at the beginning of 2007 and changed the way buyers thought about home ownership. In 2006, home ownership was more like trading stock in an effort to constantly move to a nicer neighborhood or a bigger house. In 2013, home buyers are looking to buy a house they can raise a family in and eventually pay off. There will always be renters looking to rent, but buyers realize that with low interest rates and home prices still down, that they have not missed the boat as of yet. These are the types of homes and families you should look to building, buying or rehabbing to. This is where the majority of your buyers will come from now.

We may be entering a pretty boring stage in the real estate cycle. Interest rates are most likely not going to get too high or too low for the foreseeable future. Mortgage programs are not going to get any stricter or more lenient any time soon. The economy has made a nice recovery, but considering just how bad things got in 2008, any improvement has been incremental and slow. Real estate values have gone up, but have certainly not skyrocketed as many hoped or expected. We are, and most likely will be for a while, at a period of slowly rising home values, sales and inventory. Short sales and foreclosures are way down from their peak and mortgage delinquencies have followed as well.

While this may be a boring period, it is still a profitable and critical one for investors. There are still many great deals to be had, but you have to know where to look. You also have to do your legwork, due diligence and be willing to outwork your competition and know everything about the areas you are investing in. If you can set yourself up with a strong portfolio now, when the market changes, it will all payoff.