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?