All markets face ups & downs, booms 👍 & busts 👎. What if you knew exactly WHEN, WHY & HOW to make money come what may? Freaking amazing, right? Well the rich know, why not you 🤑?!
There's no certainty surrounding any investment and the word "foolproof" should never enter your prospective investor’s mind. However, when you act from a place of “knowing” you’re less likely to make the mistakes of those who “are just wandering in the dark”. Just like when you play that new virtual game with your niece, she knows what’s coming and you are just a sitting duck waiting to be slayed 😂.
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 Market Cycle
Economic, business or market cycles are the cyclical expansion (strong economy) and contraction (weak economy) that we see about once every decade and is typically dismissed as basic economic fluctuations. A simplified representation of this continuous upward cyclical fluctuation is shown below.
The Real Estate Market Cycle
The Real Estate Market Cycle closely follows the same pattern and fluctuation. The complete real estate market cycle seems to have an average duration of about 18 years (source: 1933 real estate market researcher Homer Hoyt).
There are two main concepts to watch when trying to understand the market: the different “Stages” in the cycle and the “Indicators” that tell you where you are.
Successful investors understand to be prepared to take advantage of the opportunities that come their way during an upswing, a downswing or an inflection point (tipping point). It doesn’t matter if you’re just a rookie or a seasoned investor, there are ways – strategies - to make money during every stage of the real estate cycle. But first you have to understand the real estate market cycle, it's stages and it's global & local indicators.
Sometimes the real estate market will react a little more quickly or slowly than the general economy. But when the economy is strong, so is real estate; when the economy is weak, so is real estate. The cycle spends several years (averages around 59 months / 4,5 years) trending up through a period of economic expansion (Stage 1). It then plateaus during a peak phase (Stage 2), which generally lasts for a few months up to a year. It declines during a period of recession and economic contraction (Stage 3) (averages around 1,5 years). Finally, the market starts to recover (Stage 4), as the recession comes to an end and begins again its upward swing.
The second step to see is that the phases aren’t equal in length the upswings (expansion and recovery) are often longer than the downswings (recession).
The Expansion Stage
The buyer demand for housing increases, as other economic factors such as wage and job growth, are strong. Occupancy rates increase and vacancies decrease. Housing inventory drops, new construction begins to meet the increasing demand. Because demand is outpacing supply, prices increase, and they often increase faster than the rate of inflation. Deals become scarce, and it’s not unusual for investors to overpay for property during this phase of the cycle.
The Peak Stage or Hyper Supply
Housing prices hit a plateau and demand starts to slow down with higher days-on-market for residential property and fewer new listings and buyers. New construction keeps booming because the units coming to market were in the works for months or years. But the strong economy has been driving inflation, and the government steps in and raises interest rates to help combat inflation so we start to see real estate prices decline, and the downturn begins.
The recession stage
During the recession, there is high unemployment, reduced wages, and tightening of credit. For investors, this means an increase in the number of foreclosures, higher vacancies, fewer home-buyers, and reduced prices, and reduced property values, reduced market rents. New construction quickly stops, and many partially finished projects go unfinished.
The recovery stage
During this phase, the government lowers interest rates in an attempt to spur economic growth. Once the recovery gains momentum, inventory declines, and many distressed properties get picked by investors. Buyer demands increases and prices start to rise. New construction hasn’t yet picked up, as financing is still tight but builders start to come out of the slumber, begin to line up credit and financing and look to build their portfolio of land for future development.
The Indicators: How To Know Where You Are!
There are two types of data indicators that can help us:
Leading indicators; shift before you see major changes in a specific market or the general economy.
Trailing indicators are the results of shifts in a market or economy. Unlike leading indicators that warn you to adjust your strategy, trailing shows up after a change has already occurred.
The overall economy can be “watched” by a few indicators such as wage growth, Gross Domestic Product (GDP =measures the value of economic activity within a country), and unemployment. These indicators also impact the ability of consumers and developers to buy and sell real estate.
When the economy is strong, interest rates are low (<5%), unemployment is low (3-4%; <3%= turning point), incomes are rising, people can afford big purchases such as a home, so developers are able to build and sell new constructions. When the economy is weak, interest rates are high, wages flat, inflation is high (>3%), unemployment is high and the opposite happens.
There are many ways to gather the information to “sense” where we are in the market cycle:
Monitor Closely monitor what you see happening in the market in general. Real Estate prices going up or down? What is the time to market for sales (higher or lower than 3 months)? Government announcing interest rates changes? Banks lowering or increasing rates for loans? You know it’s spring when birds start to sing!
Timing Time the market. How long has the economy been rising? When was the last recession? Every 10 years a complete cycle is due. So if the last recession was in 2007 we are long overdue for a recession in 2019! It’s not about knowing exactly when the first snow will fall, but to be prepared for when winter is coming.
Global Indicators The best way obviously is to actually follow the hard data itself and continuously monitor specific global and local market indicators.
The yield curve represents the change in interest rates for government bonds of different expiration dates.