Understanding and determining the market trends/climate/cycle
Murrieta, CA · Member since 2017 · 14 posts · 2 votes
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.
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.
@Travis Bodnar Travis the best way to see the market trends is to get out there in the trenches. It will take years for you to understand the market. I am still learning even after 25 years in the business and thousands of transactions under my belt. I still make mistakes. Buy low and sell high and it is that simple. But its not easy.
Best Wishes
I can appreciate getting out and in the trenches. But does market trends/cycles in my area reflect that of the rest of the country. If I want to be an out of state landlord, how can I possibly know the other areas if I am not knee deep in it?
@Travis Bodnar There is no surefire way to guess a market bottom or a market top. This is like trying to predict what the weather will be 45 days from now. There are so many variables its impossible to predict.
That being said just like the weather we can see long term trends of where things were before and estimate where they may go. Even this isnt an exact science.
As a real estate investor you should not be worried where the market is at because it is completely out of your control. What you CAN control is buying properties that have solid fundamentals in any weather. You can buy in a hot market, you can buy in a cold market. As long as the property you are buying supports itself with enough income to cover mortgage, insurance, taxes, maintainence, vacancy, capex, utilities and a decent cashflow you will be fine.
PS keep cash reserves for the storms.
Great advice guys. For those that buy in other states but want to get a hot or cold feeling, what market indicators or data is out there to say, "I like this state - wow this city is worth investing in because..." I guess what I am getting at is I have heard (by opinion) that X market is hot right now. Are jobs a good indicator, or gas price fluctuation etc etc... My reason for asking is that California is a market, while I live in and own in, I don't think I can afford to invest at this time but want to get my feet wet per se in another market.
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.
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.
Hope this gives you new ideas to think about.
Take care,
Craig Haskell
Hi @Travis Bodnar , this is what we're best known for and we've been following the California market data for years. You may really like our radio show as Bruce often interviews different economists from national economists for broader trends to California economists. I think he interviewed Leslie Appleton-Young last month from CAR on this very topic. California doesn't always trend like the rest of the country. Another really good read is Big Shifts Ahead from John Burns. See also the video from I Survived Real Estate. Doug Duncan, chief economist from Fannie Mae and John Burns both appear on the video. I think there forecasts and input have been pretty spot on.
Thanks for the info. I will check them out.
Can you tell where the OVERALL market is right now?
Can you tell where your LOCAL market is right now?
You want buy in phases 1 and 6. Some will say phase 5 is the perfect time. Theoretically - yes it is. However, "it is very difficult to catch a falling knife" as William O Neil, the infamous investor says.
@Travis Bodnar
"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?"
Fantastic question! Hard data is exponentially more useful than opinions. It's important to listen to those who've seen full market cycles of the past - but always go back to the fundamentals.
Cost to build and inventory figures will tell you 80% of what you need to know.
The macro market conditions will affect your local market conditions, but your local market is another beast on it's own.
Listen closely to the media but know that they are two steps behind.
Thanks @Mike Flora . None anytime soon. Since that was his 10-year outlook, that should last a while unless something drastic happens.
@Eric Delcol this maybe an amateur question but if hard data is something we can look at to give us indication, where does someone find costs to build and inventory figures? Where is the best places to pull data? What other data are people using (I am new and in the learning/research phases while I grow my cash)?
I like numbers to make decisions. For someone like myself who is numbers driven can I use data/numbers to better a) pick a designated state/county/city and b) prepare to enter the market when the time is "better" (someone like myself who is starting with little money).
I don't think the California market is something I can invest in right away. How do others invest in out of state areas without numbers? Do you pick by closing your eyes and pointing at a map or because I took a trip there when I was 12? (sorry not making fun but my wife says she does things by "feel" or "heart" and I don't think thats the way to run our investment portfolio).
Great feedback from everyone. Appreciate the help/advise
"where does someone find costs to build and inventory figures?"
Inventory figures is the low hanging fruit. You can find this on the MLS, or if you don't have access, your real estate agent can help you.
Re: cost to build. Needless to say there is large set of variables here.
You can ask your local builders / contractors. This can range from anywhere from $70-$150/sqft depending on your area.
I'll use an example of an average SFH, 1000sqft in Phoenix.
Land: $15K
Cost to build $90 / sqft 90,000
Total $105K
"For someone like myself who is numbers driven can I use data/numbers to better a) pick a designated state/county/city and b) prepare to enter the market when the time is "better" (someone like myself who is starting with little money)."
Yes and yes.
Start with data on where people are moving to.
"I don't think the California market is something I can invest in right away."
California, as a state, is generally more expensive than most of the rest of the US, but it's also fairly large -there are plenty of cities where you can find your niche.
@Travis Bodnar You can look towards new home starts, and home price indexes, for example Accident Maryland https://www.zillow.com/accident-md/home-values/ you also likely want to keep an eye on population data by city, just Google the area, for example "Accident MD population" to get the below population chart. For the most part you get as much data that you can consume about an area, go visit it, and jump in when your ready. If your right, you buy, lots more. If your wrong, you will be looking for an exit rather quick!
@Craig Haskell I just read about the RTC in a book entitled "The Cashflow Quadrant". Is it true that some investors made a ton of money around this time? From what I understand the RTC was a government agency that was placed in charged of liquidating tons of foreclosed homes, and purchasers were investors that knew the game well, and of course had the capital. Is this true? I hope you're staying cool in PHX, 100 plus degrees!
Maurice
Thanks everyone for the advice and guidance. I will check those suggestions out.