To succeed in the real estate market, it is essential to understand how to read and interpret market cycles. By correctly identifying the stage of the market cycle, investors can make well-informed decisions about when to buy or sell properties. If you are looking for something, it is not difficult to find. This article will teach you to how to identify whether it is currently a buyer’s or seller’s market, as well as whether it is a better time to buy or rent.
Understanding Market Timing to Build Wealth Faster
Real estate agents generally tell their clients that the three most important things to consider when buying property are its location, location, and location.
This is not always the case. Today, that same house might be worth only $180,000. A house that sold for $400,000 in 2006 in Stockton, California might only be worth $180,000 today. The value of the house decreased significantly, as in 2009 it was worth only $100,000.
Same location, very different result.
To be successful in real estate, you need to understand market cycles. Although it may seem daunting at first, it is not too difficult to learn which metrics to focus on.
People probably always ask you if now is a good time to invest in real estate. In most cases, it is always a good time to buy real estate.
If you’re chuckling, it’s probably because you know that salespeople will say almost anything to get their commissions. Many real estate agents believe that real estate values will continue to increase over time.
And they may not be all wrong. The median home price has increased in value even though there have been recessions approximately every ten years. In 2010, during the heart of the Great Recession, home values were higher than they had been in the previous decade. Values have increased substantially in the past 6 years. Based on historical data, it seems that holding property for the long term will result in an increase in value due to inflation.
If you’re not interested in holding a property long-term, there are other options available. If you want to retire in ten years rather than a few decades, you might need to invest more money in your portfolio.
Whether or not now is a good time to buy a house depends on what you want and where you’re looking to buy.
The media portrays the existence of a United States housing market, when in reality, there is no such thing. It would be pointless to try and average the temperature of an entire country to determine what to pack for a trip to Phoenix or Alaska.
The U.S. is not one large market, but thousands of small markets that are each in different stages of growth or decline. It is very important for people who are new or have experience with investing in real estate to know about the market trends in the area that they are interested in so that they can make good decisions about what to buy.
If you invest wisely, you could make twice as much money and retire sooner than most people.
Knowing When to Buy Property
The 2006 real estate bubble and subsequent crash that brought down the global economy is a well-known story to anyone interested in the real estate market. As lending became easier, prices kept increasing due to people believing that the demand was real rather than based on false motivation.
Borrowers became overextended because they didn’t realize that markets go through cycles every 10 years. Recessions are healthy and help keep prices in check.
Unfortunately, our government wants to prevent another recession. The Fed has avoided quantitative easing at all costs because it is unprecedented. The government printing trillions of dollars is a false stimulus that is creating bigger bubbles that will eventually burst. This could be worse and more catastrophic than before.
The general public has been caught off guard by most recessions in the past. The people who are good with money can see these things coming and know how to take advantage of the situation to make money.
Let’s look at that Stockton example again.
While prices increased rapidly in California, they decreased in other parts of the country. For instance, Dallas residences were underestimated by 26% in 2006, just when California prices were overestimated by 100%.
At the peak of the California market, savvy investors sold their high-priced, low-cash-flow properties and exchanged them for low-priced, high-cash-flow properties in Texas, which was just beginning its boom cycle.
This is what they were advised to do.
The three most important metrics we consider when evaluating markets are:
– Job Growth – Population Growth – Affordability
They knew that Dallas had the highest job and population growth in the country, and yet the home prices had not increased at the same rate as salaries. While in California, businesses were moving out because it was becoming too expensive to do business there – yet home prices had gone up far beyond salary growth.
An example is a lady who was advised to sell her three properties in 2006 for $420,000 each and trade them for nine new homes in Rockwall, Texas. She was attracted to that area because a new freeway was being built that would make the commute to downtown Dallas much shorter.
She had a total of 12 properties, 3 in Stockton and 9 in Texas, that were all rented for $1200. As a result, she tripled her cash flow! A couple of years after she sold her Stockton properties, they were worth $100,000. However, her Dallas properties increased in value during the recession and are worth about double today.
Seller’s versus Buyer’s Markets
People who are good at market research invest in assets that are undervalued. They don’t buy when the market is at its highest point because it will only go down from there. Instead of waiting for everyone else to find out about a good opportunity, they buy it before anyone else so they can make money off of it.
Many people are confused about the difference between a buyer’s market and a seller’s market.
BUY in a buyer’s market. SELL in a seller’s market.
In a buyer’s market, the buyer has the power. If you are buying something, there is less demand and more supply, so you can negotiate a better deal.
In a seller’s market, the seller has the power. More demand and less supply gives the seller more power to negotiate better deals.
Here are some major factors that contribute to whether you’re in a seller’s or buyer’s market:
Real estate inventory
Real estate inventory is also known as supply and demand. The number of available homes on the market compared to the number of buyers is called the market absorption rate. When there are more buyers than sellers, it means there is high demand for those homes. This is good for sellers since it means there will be a lot of people interested in their home. If there are more homes for sale than buyers, this creates low demand, which favors buyers.
Housing prices
A major determining factor is the change in house prices in your area – whether prices have increased or decreased, by how much, and how long these changes have persisted.
If you are looking at the specifications for a house that was on the market and sold two years ago, you may want to reconsider your purchase. The asking price is 10% more than the last sale price. Is the price 10% lower than the last time it was sold? The prices of homes that are for sale keep getting cut.
When demand is high, prices tend to go up. Sellers can take advantage of high demand by increasing their asking prices. Of course, lower prices are great for buyers.
Length of time on the market
If you’ve seen homes sitting on the market for a while, you may be wondering why they haven’t sold yet. It seems like every time you turn around, there’s another “for sale” sign in the neighborhood. But before you know it, that sign is replaced with a “sold” placard. The fact that things are selling quickly indicates that there is high demand, which means that it is a seller’s market.
Mortgage rates
If mortgage rates are low, buying a house would be more affordable. This means that there are more buyers looking for homes, which is good news for the seller.
If mortgage rates are high, the cost of buying a home becomes more expensive, making it out of reach for more people. If you are looking to buy a house, it may be a better time to do so when mortgage rates are high. This is because there will be fewer people competing for houses.
Now that you know some of the key things to remember, let’s explore what a seller’s and buyer’s market looks like and what each type of market means for a buyer or seller.
What Is a Seller’s Market?
In a seller’s market, the demand for homes is larger than the available inventory. This means that there are more buyers than there are homes available for sale. Here’s why this is advantageous for a seller:
- Higher asking price: First, sellers can ask for a higher price for their home, knowing that with more prospective buyers than usual, they are likely to get more money than they would normally.
- Higher offers, and more of them: Increased demand increases the number of offers. Competition among buyers to make the best offer is created when multiple buyers are interested in the same home. This means that buyers are more likely to offer more money for a home when there is more competition, as opposed to when there is less competition.
- Fewer negotiations or repairs: When buyers compete with each other and make offers to beat out other offers, this drives prices up in a bidding war. Sometimes buyers get so excited about a house that they are willing to negotiate less and even forgo inspections in order to get the house.
- Faster sale: When demand for homes is higher than the number of homes available, buyers may feel pressure to submit their offers quickly. An acceptable offer is more likely to be received sooner when the home is priced correctly, leading to a quicker sale.
The Best Buyer’s Market in History
The United States experienced one of the greatest housing recessions in history from 2008-2012. The price of many things dropped by half, building almost completely stopped, and foreclosures were in the news every day.
Most people were too afraid to buy at that time, even though it was the best time to buy!
People often forget that the market can change very quickly. Once the good deals are gone, a buyer’s market can quickly turn into a seller’s market due to lack of inventory. When there is a low supply of a product and a high demand for it, the prices will increase. This will often cause more people to want the product, which can cause the prices to increase even more.
The Best Seller’s Market in History
From 2005-2006, property owners could sell at top dollar. They didn’t need to fix up properties. They just put up a sign and would get multiple offers and bidding wars within days.
The masses jumped in to buy at the peak, even though it was the best time to sell. People seem to have forgotten what happened, even though it was not that long ago.
The situation today is similar to what it was in 2006 in San Francisco, Los Angeles, Seattle, Portland, Denver, and a few other markets where homes were selling quickly. What are the masses doing? You got it – they are buying! Be careful about following the crowds.
If you’re investing for cash flow, you shouldn’t be buying in markets where prices are inflated. Housing market conditions vary by region, with some cities offering better real estate opportunities than others.
