Keys to Predicting Your Real Estate Market  

It has been said that one way or another you will pay for your education.  You can learn from those who are the experts or you can learn from the school of hard knocks.  One is definitely more expensive than the other.

From 2004 through 2006 we bought several lots in "recreational communities".  These were nice communities with golf courses, beautiful views, hiking opportunities, etc.  We didn't buy with the intent of building on all these lots.  We bought because we were told, and we believed, that the lot values would increase as the developer sold more and more of the lots.  Furthermore, many of these lots were offered with no money down and low adjustable interest rates.

This same type of behavior happened to many people who bought houses or condo's never planning to live in them.  With prices rising so fast in 2002 - 2005 you could buy a house or condo before it was being built and by the time it was done you could put it on the market and clear $25,000 - $100,00 in profit, just for using your credit.  We were living in Pensacola, FL at the time and heard of numerous people buying condos in new beach construction projects and making more than $50,000 selling the condo when the condo was finished.  Life was good!

We all know what happened starting in 2007, the real estate market tanked.  This isn't to say that everyone lost money buying and then selling with no intent of occupying the property.  Many made lots of money and many lost money.  What I know is making money is a lot more fun than losing money.  I also know that 90+ percent of millionaires in this country made much of their money with real estate.  Which started my asking,  'what was it I didn't know that cost me money?"

Around this time one of my sons invited me to attend a 3-day real estate investing seminar with him.  I went reluctantly because I knew that Mary Jane and I had been investing in real estate for more than 25 years and sometimes we made money and sometimes we lost money.  By the end of the second day I was sold that real estate investing was probably the best way to go in order to achieve the kind of life I wanted for my family.   So we started taking courses; and you know who I took as my guest to the first course?  You got it, the wife!  You know if Momma isn't happy, nobody is happy, so if I was going to make this work we would have to be united as we moved forward.  Needless to say she was sold and over the last several years we have invested more than $100,000 on our real estate investing education.

Now back to the beginning of this article and the bad investment decisions so many of us made.  Could we have known the market was going to tank?  The answer is yes!  Real estate moves in repeatable phases and each phase has unique indicators to let you know where the market is headed.  The cycle looks like a double humped camel's back.

As you might guess, the top of the humps represent the peak of the market and the valley between the two peaks represent the bottom of the market.  One of our mentors, Mr. David Lindahl, divides this real estate cycle into 4 phases and has told us the characteristics of each phase of the cycle so the educated investor can be on the lookout for these indicators and take appropriate action.  The phases are:

BMI = Buyers Market 1: unemployment is up, prices are falling and therefore properties can be purchased at prices that better allow them to provide cash flow as rentals.  However, if unemployment goes too high even renting for cash flow may be difficult.  Strategy = buy only for cash flow or very quick flips.

BMII = Buyers market 2: prices are beginning to rise, the time properties stay on the market is getting shorter, new jobs are being announced.  In the real estate investing community this phase is often referred to as the "millionaire maker" phase.  Strategy = buy everything you can, especially if it cash flows, and ride the wave up.

SMI = Sellers market 1: prices are rising fast, building is booming, bidding wars are common, the days a property is on the market before selling drops drastically because demand is so high.  Strategy = keep buying; however, as prices rise it may become more difficult to buy a property that cash flows.

SMII = Sellers market 2: price increases are slowing, properties are sitting on the market longer, buyers and renters are being offered incentives due to oversupply, inventory on market is rising.  Strategy = Now is the time to sell, sure there may be a little profit left on the table but better that than try to sell on the downside.  Now you can take your profits to another rising market, or sit on the sidelines until it is time to buy again, or just invest in very short term flips.    

Remember, in real estate all markets are local.  Many of these market characteristics can be observed as you drive around, others are statistics the local real estate professionals keep track of, and you can learn a lot from fellow investors in your local market.  If we had only had this knowledge in 2004 how many of us would have made different decisions?  

Marcus & Millichap, the largest commercial broker in the US, tracks 44 real estate markets.  In all 44 of these markets apartments are projected to post effective rent growth, which indicates we are at a sustainable growth phase.  In fact, major developers are jumping in and building additional apartment complexes because demand will soon exceed supply.

The recovery is very broad based.  The index ranks San Jose, San Francisco, New York, and Boston as the leading cities.  In accordance with what we have said in previous newsletters, job growth in these markets is pushing demand up.  People who had previously been sharing apartments or had moved back in with mom and dad are now working again and looking for their own places to live.  In addition, most of these cities have limited land in which to build new units; so as demand increases rents will rise more aggressively.  

So, given this news, which phase of the market do you think these cities are in?

A key question to ask is: "As apartment rents rise, and home prices stay low and have low payments, will people opt for home ownership?"  Historically, as apartment rents reach levels close to what home payments are there is a move to home ownership and the real estate cycles continue.  However, with so many people financially hurt during the housing crises many may continue to rent because it is viewed as safer or because they can't secure a mortgage.   

Laughs and Interesting Stuff 

The Weatherman:

It's late fall and the Indians on a remote reservation in South Dakota asked their new chief if the coming winter was going to be cold or mild.  Now this was a modern day chief, he had never been taught the old secrets.  When he looked at the sky or the trees or the bugs, he couldn't tell what the winter was going to be like.   Nevertheless, to be on the safe side, he told his tribe that the winter was indeed going to be cold and that the members of the village should collect firewood to be prepared.

But, being a practical leader, after several days, he called the National Weather Service and asked, 'Is the coming winter going to be cold?'  'It looks like this winter is going to be quite cold,' the meteorologist at the weather service responded.   So the chief went back to his people and told them to collect even more firewood in order to be prepared.

A week later, he called the National Weather Service again. 'Does it still look like it is going to be a very cold winter?'  'Yes,' the man at National Weather Service again replied, 'it's going to be a very cold winter.'  The chief again went back to his people and ordered them to collect every scrap of firewood they could find.

Two weeks later, the chief called the National Weather Service again. 'Are you absolutely sure that the winter is going to be very cold?'  'Absolutely,' the man replied.  'It's looking more and more like it is going to be one of the coldest winters we've ever seen.'  

'How can you be so sure?' the chief asked.

 The weatherman replied, 'Well, the Indians are collecting firewood like crazy.'

Interesting Stuff:  

If you were given the chance between taking one million dollars in cash this very moment or a single penny that doubles in value every day for 31 days, which would you choose?

If you chose the penny, good decision... because on day 31, that compounded penny is worth Ten Million, Seven Hundred Thirty Seven Thousand, Four Hundred Eighteen Dollars, and Twenty Four Cents.    

That's the compound effect!

(As a side note:  I had to spell the ten million number out because some spam blockers  block emails with large dollar amounts in them.)