Predictions on the next RE "Cycle"?

Question

Having been around since the very early 80's, I've seen a few real estate cycles.  I'll freely admit that I did not foresee the extent of the recent collapse.  I saw a decline/correction coming, beginning in 2003 - when I stopped putting "new" money into RE (I still did 1031's).  I got back "in" in late 2008.

I am looking to consolidate and/or liquidate some holdings at the next peak.  I am thinking we are 5-7yrs out.  I know this is just a guess.  I think that (absent a Nuclear War) these cycles are somewhat predictable and, by following inventory, one can "see it coming".  What have you all been thinking?  I am at a certain age (Ah hem...mid 50's) when exit strategies are at the forefront.  Please let me know your thoughts (guesses welcome!).

Jeff S. · Answer

Until the mid-2000’s, there was little to show that SFR prices had ever dropped nationwide, yet alone a shred of evidence that prices were/are cyclic.  If anyone has something to the contrary, that’s non-anecdotal, I’d like to see it.

This is not to say prices have not been manipulated lately.  There is clear evidence to indicate many banks and some of the GFO’s have been selectively selling in bulk to prop up home prices, minimizing the stigma of having to foreclose, and generally avoiding the open markets.  If they, the hedge funds, or many overseas investors for some reason decide they want out, there’s little to say what would happen again to prices.

We are not living within any kind of market driven organic price structure where homeowners and individual buyers determine price.  Any one of just a few organizations could pull out (or expand) and dramatically affect home prices, as they are currently doing.  For this reason, we’re doing everything short term and will continue to do so.

Jeff

Tiger M. · Answer

We have been waiting for 22 years to see the road sign scrawled in blood red letters, Curve Ahead! SELL EVERYTHING! No luck yet.

We actually chose the name Tradewind for our company due to the requirement to adjust to the cycles and trends. Just like the winds, as they will always change. In the early 90s we were strictly a multi family company. Then the second half of the 90s we did foreclosures, rehabs and flips. In early 2000 we ceased flipping and started a rental portfolios with the residential properties and transitioned to commercial development and construction. Property management was always the foundation in these market swings regardless of property type. So historically we have made an adjustment in our plans about every 3 to 5 years.

Since I have the winds thing going here I guess I'll continue it. It's important to look at the headwinds and the tailwinds you'll face in each individual market for each product type. FHA being asked to accept 500 fico score borrowers and Fannie Mae selling their product to institutional investors instead of main street could continue to be tailwinds keeping inventory low. The potential for rising interest rates could be one of the tailwinds that flipping can face but it's good for the rental market. A headwind that will effect rental prices in certain cities will be the hedge fund portfolio competition. That's one of the reasons to stay on places like bigger pockets to make sure that we're informed as much as possible about things that are happening so we can make informed decisions. The majority of our clients are doing acquisitions in residential real estate looking for 3 to 5 year appreciation play. Let me know if you ever see that road sign that we have been looking for.

James Hiddle · Answer

You know what's funny and a coincidence. I was just studying just today on market cycles and how(or if)there is a way to predict any cycle in any given area.

Danny Day · Answer

Cool thread, I wonder about this all the time. I bought my personal home (and some rentals) at the very bottom of our market in 2010. I've seen a significant increase in the market (inventory, price increases) since.

My plan is to follow what Buffett says.. "Be Fearful When Others Are Greedy and Greedy When Others Are Fearful". As someone had earlier mentioned, once people who have no knowledge of real estate become greedy then its time to get out.

My exit strategy is to sell my personal home at the peak and rent all the way down, and buy at (or near) the bottom again.

Will sell off rental properties as well to buy more properties at the bottom.

Cheryl C. · Answer

Jeff S, I certainly don't have any crystal ball.  In the past it seemed to boil down to the numbers.  Around here (Northern Virginia) the numbers didn't make sense to me after late 2002/early 2003.  People went crazy, imo.  Obviously, I left $$ on the table.  We seem to have corrected back to 2003-2004.  I'm just wondering what others are thinking/guessing.  I believe that the last 3 cycles around here were 15yrs, peak to peak.  I do believe that it will take a few years for supply to catch up with demand (unless that hidden reo tsunami comes about).

In retrospect, following the inventory turned out to be a very good indicator of things to come.  I saw it start rocketing up in June of 2005 and knew that the party was over.

You are correct in that there are many variables - but hasn't there always been?  RE (and everything else) could implode if a disaster is bad enough.  I was caught mid-flip on 9/11 and lost $$.  I'm just trying to gauge the "known".  The pipeline can be reasonably forecasted.  Population growth can be reasonably forecasted.

Those with a longer time horizon probably (and rightly so) don't care too much about peaks and valley's.  I am only wanting to hear what others are thinking.  I'm not going to Vegas based on this post.

Jeff S. · Answer

To twist Will Rodgers advice on buying stocks, “Don't gamble; take all your savings and buy some good real estate and hold it till it goes up, then sell it. If it don't go up, don't buy it.”

Since you’ve been doing this since the early 80’s, you know as well as anyone, Cheryl C., there are no cycles.  If there were, you’d know them.  Cycles are periodic.  Because it’s been X years since a peak or drop, doesn’t mean this will repeat and is not something that can be relied upon.  Either way, you could do a bad deal in a great market and lose money, and vise versa. As we all learned in the mid-2000’s, markets can drop quickly yet real estate is not particularly liquid, so it’s easy to get stuck.

Personally, we do everything short term which, if you think about it, can be used as a long term strategy.  Others we know, who buy and hold, use sensible leverage, don’t swing for the fences, and can withstand market drops.  Longer term investors, such as developers, have to be especially careful and possess the wherewithal to survive an occasional market turn.

The bottom line is that no one, even you, could know when/if a downturn will occur in your particular area, for your particular type of real estate investments.  Rather than trying to time a market, my feeling is to buy sensibly and make sure each deal stands on it’s own without having to rely on a particular market move.

Jeff

Chris Martin · Answer

For all we know, your next "cycle" will be in the next election. Assuming you are in DC, that market is far different than many others. My local market collapsed after the telecom bust a decade ago... and everywhere else was fine. Local markets behave locally. Silicon valley is different than the rust belt.

I'd say pick a strategy and stick to it. If your exit is 5-7 years out... plan accordingly. No sense in thinking 20-30 years. Not part of the plan.

Paul Falbo · Answer

Not too many people saw the last one coming, so congratulations on being lean prior to the fall.  Phoenix had a 16 year up cycle.  Other cities didn't have the spikes that we had; and, their falls weren't quite as harsh.

I've been asking a few of the top players in regional and national positions what their prediction was on this "down cycle."  Most responded: "I don't know."  Nor did they know anyone who "knew."

The general consensus has been that real estate cycles could be pegged.  The RTC days were approximately 7 years.  This cycle is being impacted by so many influences (world economies, internet sales, warehousing, energy costs, consumer confidence, residential bubble, governmental regulations and taxes, etc., etc.): but, the bigger players have been acquiring portfolios and/or investing for the last two years.

I've said this before on BP, the time to sell is when someone offers you more than what you would pay for your asset.

My best guess is that we will return to "normalcy" in 2015, barring any major surprise by government(s).  I agree with your prediction of 5-7 years out for a "new" peak, predicated on where you reside and do business. At least I hope so.

Lynn McGeein · Answer

We also started buying again in 2008, although on a much smaller scale.  Our thoughts are similar, hoping to consolidate in ten years, 2018-2020, sell a few, pay off the rest after capital gains, then have a wonderful retirement.

We did see the potential for collapse when our friends who never had investment property in their lives are bragging about forming partnerships with other friends, equally as inexperienced, buying weird shaped lots in strange areas and being absolutely certain that they were going to make a fortune in a few months in 2006-2007.   In our area, it was impossible to buy any property that would actually cash flow as a rental after 2003, so everything was speculation on appreciation, and everyone was saying, It can only go up.  Scared us silly.