Monday, February 29, 2016

National & Local Real Estate Market Cycle Factors



Have you ever wondered how or why the real estate market follows cycles?

As with most concepts, ideas and opinions vary, and very few scenarios should include a blanket statement answer. Fact of the matter is that many aspects contribute to each area, with such complexity that truly determining the entire list of factors that affect any market cycle change, or series of changes, is not realistic or probable.

With that being said, there are certain high level aspects nationally and locally that contribute, affect, and determine the transition and current state of any real estate market. If you’re a real estate professional, investor, or financial company, you’re probably already aware of national and local factors that contribute to the market cycle changes within the real estate industry.

Why though are national and local factors important, even for consumers (buyers and renters) and non-industry related professionals?

If you can recognize, even as a one-time home buyer, the current national and local factors that contribute to a real estate market cycle, then you can feasibly understand, with educated reasoning, how those factors help you make a smart financial investment that ultimately allows you to Know the Home Before You Buy.

As discussed by Dean Graziosi, one of the most highly acclaimed real estate investors in the country, various components exist within both national and local real estate market cycle factors:

National Factors:

  • Interest Rates: (High Importance)
  • Business Cycles
  • Inflation
  • Flow of Investment Funds
  • Cataclysmic Events: (Usually Unpredictable)

Local Factors:

  • Supply & Demand: (High Importance)
  • Neighborhood Trends
  • Migration & Job Growth
  • Development Plans
  • New Construction

Next week, we’ll dig a little deeper into each national factor component, exploring more information and aspects that relate and contribute to the current, past, and future predictability of national and local real estate cycles.

Until then, Know the Home Before You Buyby visiting www.NationwideHomeFax.com for all of your national real estate information needs & be sure to schedule your next seller’s inspection, pre-listing inspection, or home inspection with Home Fax Inspections.

Nationwide Home Fax LLC, its affiliates, The Home Fax™ Blog, and the author of this posting are not affiliated with Dean Graziosi, or any of his entity(s) or party(s), and have referenced information used through this posting strictly as a secondary source from Mr. Graziosi’s book How to be a Real Estate Millionaire, without obligation or compensation.

Monday, February 22, 2016

Real Estate Strategies by Market Cycle



Last week we discussed Identifying Target Real Estate Markets, Cycles & Locations and found seven common points within the real estate market cycle. Now that we’ve reviewed the typical strategies applied to each point of the market cycle, let’s explore the identification process and expand upon those strategies to help you identify the current state or your local real estate market.

1) Peak: Sell
Like most experiences in life, there is a time to sow and a time to harvest. In a peak real estate market supply (inventory) is low, and demand (buyers seeking to purchase) is high.

Remember when Beanie Babies and 1980’s sports cards were the hottest toys and collectibles around, with dealers fetching prime dollar for even some of the most common items around? People followed the crowd, some to the point of hoarding their future retirement “investments”, only to find that some years later most of what they had held was pretty much worthless because it was overvalued. Like the dealers who saw prime opportunity to off their inventory for massive prices and profits while everyone was buying, as opposed to holding, smart real estate investors sell, sell, and sell in a peak market. They’re honestly is only one strategy, SELL, and do not buy.  

2) Early Downturn: Sell or Hold
Almost every aspect of the real estate market begins to see the effects of reaching maximum capacity. Cap rates begin to trend upward and purchase prices are starting to fall. The influx of demand slowly starts to dissipate and the market sees a bit more inventory, with homes starting to extend their recent listing period on the market. Any fix-n-flips should be turned over expediently, and hopefully those income properties invested in earlier have already been sold during the peak market or beginning of the early downturn.

Renovations should be held to a minimum, but new home construction, such as the last models within newly developed areas, might be found for a steep discount. Reason being, those companies have made their profits during the peak market and you may get a steal for being late to the party, similar to buying a display Christmas tree for 10% cost of the original purchase price. Sure, it might be January, but there’s a time to sow and a time to harvest, remember?
 
3) Full Downturn: Hold or Acquire
As the bottom has dropped out of demand, landlords are doing all they can to extend leases and hold current tenants, while foreclosures are increasing and sales volume has decreased drastically. Inventory begins to rise, and prices that do sell are falling steeply. Banks risk less on credit, with higher interest rates, leaving property purchased with cash as the best option. 

Any development homes still left are on full clearance, investments are being dumped, and renovations a time of the past. If you missed the early downturn and choose to sell now, you may lose deeply. Holding may very well be the best option, and may take a longer period of time to see recovery. Any relocations or necessary moves, for instance, may need to involve a long-term lease at the most affordable property management costs.

4) Bottom: Acquire
Homeowners who purchased their home during a peak market may have their stomachs turned upside down at this point. During this stage, supply is up and demand is down, driving down purchase prices for investors to acquire and hold, or acquire and lease. Typically strategies involve buying income properties for cheap.

You will tend to see an influx of foreclosures (some due to people who don’t want to pay a mortgage for a property that is worth 25-30% less than what they owe –don’t be ‘that guy’), which is a great example of a quality income property. Buying property at this stage, when most people are too scared, or have switched focus to the stock market or other investment areas, is a prime opportunity. As rental prices are lowest at this point, this is about the only time we would recommend exploring renting, as necessary. In addition, homeowners should be holding, and investors acquiring.

If you’re planning on purchasing a home in six months, you may want to consider purchasing now.

5) Early Recovery: Acquire, Develop and Explore Renting
Inventory is available below replacement cost and trading for above replacement cost. Meaning, if you put $5,000 in renovations within your property, you should see a $10,000 return on the purchase price or equivalent increase in monthly rent.

As the rental market may be gaining some steam, and prices leveling, wise real estate investors put as little, or much, as necessary into leased income property as possible. With vacancy rates decreasing, occupancy is still low, but demand is improving. Foreclosures may be lightening up, but affordable property in ideal locations should be acquired and developed, or held until the late stable market. One year leases may be the best option to prohibit a vacancy period, expiring within the late stable to peak point where selling may be explored.

6) Late Stable: Rent, Refinance, Improve, and Prepare for Selling
Credit is affordable, vacancy rates are decreasing, rentals are increasing, and purchase prices are gaining steam. It’s time for the fix-n-flip, leases, and renovations.  

7) Peak: Sell
Repeat step 1 and watch closely to determine the next early downturn. 

In our opinion, (which is the minority opinion, to be fair) this is where we believe most real estate markets across the nation currently sit as of February 2016. Most people would tell you we’re in Step 6, late stable, preparing to Peak with a good year or so left in high-priced inventory. So with that being said, even professionals will not always agree, and only time will tell.

What stage do you think your local real estate market is currently in? Any different nationally?

Next week we will explore different local, state, regional and national factors that contribute to real estate market cycles and strategies. Until then, Nationwide Home Fax™ and Home Fax™ Inspections will help you Know the Home Before You Buy™.

Tuesday, February 16, 2016

Identifying Target Real Estate Markets, Cycles & Locations



Location, location, location…the real estate 101 catch phrase we’re all familiar with, if not engrossed in.

Why is location so important, though?
Practically every aspect of a home can be altered or changed with enough money, time and resources, except location. Even the most serious of home defects, such as foundations, structures, roofs or new electrical systems can be fortified, updated, replaced or repaired.

Then what determines a locations desirability?
If you’ve ever owned a home, you might understand how your neighbor’s home, the foreclosure down the street, city school systems, tax funding, and new development impact your home’s value. As many additional aspects also contribute to desirable locations and home values, these main components lead most people to avoid all properties in certain locations. Some people know so much about a location that they don’t even realize they missed a diamond in the rough because they failed to explore or reach outside of their single strategy.

Ready for one of the best kept secrets in the real estate market that the wisest investors don’t want you to know? You can make money in any location, through smart investments, by applying the correct strategy to the current market cycle.

What do you mean? What is a market cycle strategy?
Almost every aspect of investing (e.g. stocks, bonds, real estate, etc.) have market cycles. Within the real estate market specifically, there are common cycle points, often referred to through different names, including: Peak, Early Downturn, Full Downturn, Bottom, Early Recovery, Early Stable, and Late Stable. Check out the graph from Creonline.com below for a visual.





When viewing a historical market cycle via line graphs, you’ll generally notice that the market resembles a roller-coaster. That’s because the cycle is progressively advancing through each stage of the market over time. This is caused by various means, but can often result in those who own real estate applying the incorrect strategy, not understanding that it is commonplace for a market to bottom out and peak, for instance.

Often times missing the correct point to apply a certain strategy will lead to selling at the time you should be holding, renting to a tenant when you should be selling, and overpaying purchase costs due to a lack of inventory or decision to follow the crowd.

So which strategy should I apply during each cycle?
The answer to this question is complex, but on a basic level real estate owners who generate wealth typically apply these general strategies during each respective point in the market cycle:

1) Peak: Sell
2) Early Downturn: Sell or Hold   
3) Full Downturn: Hold or Acquire
4) Bottom: Acquire
5) Early Recovery: Acquire, Develop and Explore Renting
6) Late Stable: Rent, Refinance, Improve, and Prepare for Selling
7) Peak: Sell

Next week we’ll check out more in depth information on each specific cycle and explore various strategies that can be applied to any location, as long as it’s the right time. 

Until next time, make sure to Know the Home Before You Buy™ by obtaining your Home Fax™ Report and other real estate information from www.NationwideHomeFax.com and of course, all of your inspection needs from Home Fax™ Inspections!