When To Buy Real Estate: Understanding Market Cycles
How To Determine If It's a Buyer's or Seller's Market?
Approximate Reading Time: 5 Minutes
The key to success in real estate is to learn how to evaluate market cycles. Luckily it’s not too difficult, if you know what you’re looking for. In this article you’ll learn how to tell the difference between a buyer’s and seller’s market to find out if it’s a better idea to buy or rent right now.
Note: This article was updated on September 1st, 2016!
Understanding Market Timing To Build Wealth Faster
Most real estate agents tell their clients that the three most important things to consider when buying property are: Location, location, location.
I disagree. If you sold a house in Stockton, California in 2006, you might have received $400,000. If you sold that same house in 2009, you might have only received $100,000.
Same location, very different result.
The key to success in real estate is understanding market cycles. Luckily it’s not too difficult, if you know which metrics to study.
Every time I’m interviewed on TV or radio, I’m asked if now is the right time to invest in real estate. Most real estate agents respond, “It’s always the right time to buy real estate!”
You may be chuckling because everyone knows salespeople like their commissions and will say nearly anything to get them. But to their credit, many real estate agents may actually believe real estate values will continue to increase over time.
And they may not be all wrong. As you can see in the following chart, the median home price has gained in value in spite of the recessions we’ve experienced nearly every decade. Even in 2010 during the heart of the Great Recession, home values were higher than the previous decade.
Today, 6 years later, values have increased substantially since then. So based on history, it does seem to be true that as long as you hold property for the long term, values will likely increase due to inflation alone.
But what if you don’t have time to hold for the “long-term”? Perhaps you need to accelerate the growth of your portfolio so you can retire in one decade, not several.
That’s why the way I answer the question of whether its the right time to buy is, “It depends on what you want and where you’re buying.”
There is no such thing as a U.S. housing market, as the media like to pretend. That’s like planning a trip to Phoenix or Alaska and averaging the temperature of the entire country to determine what to pack.
Instead, the U.S. is comprised of thousands of micro-markets in various stages of growth or decline. Therefore, it’s vitally important for new and experienced real estate investors to understand market trends on a local level so that they can buy right.
If you time markets correctly, you could double your cash flow and equity growth, and retire in half or a third of the time it might take others to do the same thing.
Knowing When to Buy Property
Everyone interested in real estate knows the sad story of the 2006 real estate bubble and subsequent crash that brought down the global economy. Prices went up and up and up, due to easy lending and a belief that the gains were a result of real demand versus speculation based on false stimulus.
Borrowers overextended themselves because they didn’t understand that markets cycle – every single decade! Recessions are healthy and help keep prices in check.
Unfortunately, our government wants to prevent another recession. That’s why the Fed has avoided it at all costs with unprecedented quantitative easing. This “free money printing” of trillions of dollars is yet another false stimulus that’s creating bigger bubbles that will eventually burst – only this time it could be worse and more catastrophic.
This is not meant to scare you, but rather to prepare you. The masses have been blind sighted by nearly every recession in the past. The “smart money” sees them coming and knows how to respond and profit.
Let’s look at that Stockton example again.
While prices in California were flying out of the stratosphere, the opposite was happening in other parts of the country. For example, Dallas homes were undervalued by 26% in 2006, just when California prices were overvalued by 100%
This gave savvy investors the perfect opportunity to sell their high-priced, low cash flow properties at the peak in California and exchange them for low-priced, high cash flow properties in Texas – at the very beginning of their boom cycle.
This is exactly what we were advising people to do at Real Wealth Network and on the Real Wealth Show podcast at the time. How did we know?
The three most important metrics we consider when evaluating markets are:
– Job Growth
– Population Growth
We knew Dallas had the highest job and population growth in the country, and yet the home prices hadn’t caught up with salary growth. While in California, jobs were leaving because it was becoming cost prohibitive to do business – yet home prices had soared far beyond salary growth.
That’s why we advised one of our clients to sell her 3 Stockton properties in 2006 for $420,000 each and trade them for 9 brand new homes in Rockwall, Texas. We liked that area because we knew a new freeway was planned to be built that would cut the commute time to downtown Dallas in half.
Each of her 3 Stockton properties rented for $1200, and each of her 9 Texas properties did as well. As a result, she tripled her cash flow! A couple of years later, the Stockton properties she sold were worth $100,000, but her Dallas properties had gained in value during the recession and are worth about double today.
Seller’s V.S. Buyer’s Markets
People who know how to do proper market research look for investments that are undervalued. They don’t buy at the top of the market cycle, as there is nowhere to go but down. Instead they buy before everyone else discovers the opportunity so they can ride the wave up.
Most people don’t know the difference between a buyer’s market and a seller’s market, so they get it all mixed up.
BUY in a buyer’s market. SELL in a seller’s market.
In a buyer’s market, the buyer has the power. More supply and less demand allows you to negotiate better deals if you’re the BUYER.
In a seller’s market, the seller has the power. More demand and less supply allows you to negotiate better deals – if you’re the SELLER.
The Best Buyer’s Market In History
From 2008-2012, the United States experienced one of the greatest housing recessions in history. Prices dropped over 50% in many areas, building came to a near complete stop, and foreclosures made daily headlines.
Ironically, most people were too afraid to buy at that time, even though it was the BEST time to buy!
People often forget that market cycles can change on a dime. A buyer’s market can quickly turn into a seller’s market once all the good deals are gone, and inventory is low. When supply is low and demand is high, prices rise so more people jump in and fuel the frenzy further (like today.)
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.
But even though it was the best time to sell, this is when the masses jumped in to BUY – at the peak. We know how that turned out… but it seems people have amnesia, even though it wasn’t that long ago.
I think it’s safe to say that we are in that same situation at 2006 today in San Francisco, Los Angeles, Seattle, Portland, Denver and a few other red hot seller’s markets.
What the masses are doing? You got it – they are buying! Be careful about following the crowds.
One of our clients just sold a property in San Francisco for $1.5 million. The BPO was $800,000. We helped her trade those properties for cash flow properties in better markets. She now earns over $20,000 per month in cash flow!
Please don’t be one of those people making crazy offers just because you think prices will continue to rise. Only make offers when it makes sense for the average person in the area to afford the average home at a 6% interest rate. Simply look up the average income of an area and then triple it – THAT should be the average price of a home.
And if you buy for cash flow, you shouldn’t be buying bubble markets anyway. I met a first-time real estate investor yesterday who told me just bought a 6-plex in Oakland. I asked her if it cash flowed and she said, “Well, it’s not as negative cash flow as other properties!”
This truly is one of the greatest times to build wealth – IF you understand market cycles and the best strategies for today. Make sure you have access to the information you need to succeed.