Besides being the greatest asset wealth build & tax haven out there, Real Estate Market Cycle’s are also fairly predictable. Just follow the path of your local indicators so you can play the game from a place of power 😏!
Real Estate markets are primarily local markets. National trends or indicators are great to follow, to have a "sense" of the market, as a leading indicator before the shift in the market happens. However, local markets may not behave the same way the national trends suggest, they might be lagging or even be trending before the national markets do. Often times there are some other local trailing indicators (showing up after an event already happened) specific to that local market. It thus makes great common sense to also look for "signs" in your local market indicators to align for what is happening locally.
To fully understand the local indicators we look at here, we urge you to first read "Make money in Any Market" where we dive deeper into the Real Estate Cycles, Stages and the National Indicators that determine where the markets are currently at.
Local Market Indicators
1. Price and Price-To-Rent Ratio
One of the most obvious indications of the local real estate cycle is home prices and as a sidekick the price-to-rent ratio. The price-to-rent ratio shows how expensive home prices are relative to local rents (it tells you if you’d be better off renting instead of buying). You should always look at a historic growth of the average pricing specific to your area since areas may differ because of localities' employment facilities and demographics.
Both the housing prices and the ratio tend to rise in euphoria around a top inversion point. Identifying when home prices outpace the rise in rental rates, wage growth and inflation can be a big indicator of a coming recession. These numbers are likely to dive back deep down to “normal” as the housing market reboots during a recession. Prices go hand in hand with the cycle, crashing down during a recession, slowly rising during a recovery, euphorically skyrocketing during expansion, to going flat right at the top inflection point, and plumbing back again.
Elevated price-to-rent ratios can also be signs that homes are being bought by speculators on that local market rather than homebuyers, and they are being held to make a quick profit (flipping), rather than rented out.
2. Average Day On The Market (DOM)
Days on market or inventory is an indicator of the amount of demand for residential housing. The more demand, the less time a house stays on the market for sale. In other words, DOM is the average amount of time it takes to sell a house.
The average DOM is around six months. When DOM drops below six months, there’s high demand (the market is strong). When DOM increases above six months, there’s less demand (the market is weak).
This means that during the Expansion and Peak phases, DOM is below average, and it’s often far below average. But during a recession, DOM is above average. One of the leading indicators of a coming recession is a sharp increase in DOM.
3. New Builds
During the Expansion and Peak stages, new construction usually increases. Consumers have generally more confidence in the market, higher income, and lower interest rates. On the flip side, new construction will firmly decrease and stop during the Recession stage. Consumers have no confidence because of higher interest rates, lower wages, growing inflation and growing unemployment. Construction historically tends to stay flat through most of the Recovery stage.
Two indicators that can be tracked that can provide valuable data about what phase of the real estate cycle your local market is in are:
Housing starts
Building Permits issued
Successful investors understand to be prepared to take advantage of the opportunities that come their way during an upswing, a down market or an inflection point (change point). It doesn’t matter if you’re just a rookie or a seasoned veteran, there are ways – strategies - to make money during every stage of the real estate cycle.
The first step is to realize that, by design, there is a great steadiness, timeliness and certain repetition in how the markets behave and how to make money anyway.
The most important step after clearly positioning the market, actually the only reason why you would closely watch the market, is to work the right strategy to make money in that current market flow instead of going against the grain.
Learn to “read” the market by understanding the different stages of the cycle. Analyze both national & local indicators that tell you where you are! You are now prepared to "sense" where the market is going before others do and most importantly, you now "know" how to adapt and keep making money in any market!
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