Real Estate Investing: Where Are We in the Real Estate Cycle
Questions to Research
Where are we in the real estate cycle?
As with most investment fields, real estate tends to have a cyclical market. Some years it's up, and other years it's down. In watching the market, it is clear that the real estate market tends to move in 7-year/14-year cycles. Historically, it has gone up, or down, for about 7 years before switching directions. Typically, a complete cycle (apex to base to apex) takes about 14 years. While these are not exact figures, and they might not be duplicated in future markets, they are a good starting point to help identify where the current market is. If real estate has been "hot" for 5 or 6 years, chances are it's getting ready to peak and may soon be turning down. It it's been cold for 5 or 6 years, it may be getting ready to reverse direction and turn up. It's critical to peg the location of the market in the current cycle since you don't want to buy just as it turns down, or sell just as it turns up.
How are the state and local economies doing with jobs?
Home prices follow jobs. Economic statistics are widely reported in both national and local newspapers. Read papers such as the Wall Street Journal or the New York Times regularly, and you should get a handle on where the national economy is. Read local newspapers for statistics in your area and neighborhood. If the national and local economies are tanking, chances are there will be a loss of jobs. And that will eventually result in a deterioration of the overall real estate market. On the other hand, if the national and, particularly, the local economies are booming, expect real estate to go up as new jobs bring in new workers and home buyers. Be wary of investing in a weakening economy.
What is the local supply/demand for housing?
All real estate is local. If there are more houses than buyers, prices will tend to fall. If there are more buyers than houses, prices will tend to rise. Nationally, the supply of housing decreased significantly between 1995 and 2005 because of a slowdown in construction. However, in a few local markets, such as those experiencing a loss of jobs, this trend was reversed. The Commerce Department and the National Association of Home Builders put out statistics for home supply/demand. Other organizations may do it for your area. (Check an Internet search engine such as Google for information on your location by looking up key terms such as housing supply and residential supply/demand.) In the Los Angeles market, for example, which covers a huge amount of territory, there is relatively little buildable land available. Hence there is a shortage of housing that has resulted in past price increases. In other areas, such as Las Vegas, there are enormous tracts of buildable land, meaning that the potential supply is almost endless. While the short supply in Los Angeles bodes well for sustained price increases, the abundantly supply in Las Vegas suggests that over time there will be increased market volatility. Las Vegas market is one of the hottest in U.S., but it is supported by many new arrivals in the area and by many speculators. This is leading to building in huge new areas that, in time, could reverse the situation.