Understanding and determining the market trends/climate/cycle

[Travis Bodnar]

Podcast 19 really brought something to the front of my mind (sorry I know I just started listening to the podcasts).  Everyone always talks about the market trends or climate.  I have also heard about market cycles (are the terms correct - used interchangeably??).  From what I have read, much like the cycles of the stock market, the best time to invest/buy is to buy when the market is at the bottom (correct me if I am wrong).  As a math and data junkie, I don't like to always trust the "opinion" of someone else.  So... How does an investor determine the market trend/climate/cycle within a given area?  Within a given state?  What are the tools available?  What are mathematical indicators people look at and where can one find ACTUAL and CORRECT data to support this?  If there is a blog/forum entry or even a keyword to search please let me know.  Thanks and appreciate your time.  

[Craig Haskell]

HI Travis:

Let me throw my 2 cents in.

Real estate goes in cycles as most people know. These cycles are driven by real estate and economic fundamentals. Each year when there is overbuilding of the supply of rental space without the demand to absorb that space (negative absorption), then the market nears a top. If the economy has grown so fast where stupid capital chases poor investment assets, the market is nearing a top. Capital drives cycles because it influences capitalism.

At this point in the cycle, the general real estate market is not overbuilt in most markets. In fact, there are many markets where you can still buy real estate below replacement cost.

Construction loans (capital) are the most risky loans to get, especially on the commercial real estate side. Most high end buildings are being built by the big players who are either the low risk borrows or use cash off their balance sheets to finance their deals.

The middle market players (the biggest pool) struggle because of lack of capital. This produces less new development of inventory (supply), keeping downward pressure on overbuilding. This is great for real estate. We grow slowly until capital can catch up to start the next big development phase in this cycle.

There is no real estate bubble. Having been through 4 real estate cycles, we are not even close to over inflated pricing. The last really hard hit real estate bottom I participated in was during the Savings and Loan crisis in the late 80's and early 90's where the Federal Government set up the RTC to liquidate thousands and thousands of real estate properties throughout the U.S.

For example in Phoenix at the top of the market in 1988 where many S&L's financed deals, they built 32,000 apartment units and they only rented 4,000 (negative absorption). The vacancy rate peaked at 20%+ in some local markets. In 1990, they built "zero" new units and rented 2,000 units (positive absorption), very modestly reducing the vacancy rate. Most cycles in Phoenix last 6 to 7 years. We got so beat up in real estate during this time period, and got so low, the market need over 14 years to go through this cycle.

Again, because the housing market got so beat up during the last cycle that started in late 2006, I expect the upturn to again last longer than normal.

In most markets, we are a few year away from starting the overbuilding process. This overbuilding with high asset prices, creates a top in the real estate cycle. I think we are in the middle innings of the real estate cycle game.

My comments are aimed at the general real estate market. Some local markets are farther along in their cycle while other markets are lagging.