How long will the current RE expansion cycle last?

Question

I was curious about previous real estate cycles and came across this short article: "How to Use Real Estate Trends to Predict the Next Housing Bubble", by Ted Nicolais (2014).

http://www.dce.harvard.edu/professional/blog/how-use-real-estate-trends-predict-next-housing-bubble

I am wondering what you BiggerPocket REI's think about the current trend.  Are we still in recovery or expansion?  I know prices have recovered or even surpassed the bubble prices from 2006 in most areas, but supply is still limited throughout.   If expansion has already started, how long do you think this trend will last?  How do existing home sales come into play?

Leland Barrow · Answer

I bet if you data mined BP you could use this site as a trend predictor. When interest in real estate investing (BP) peaks it is sign that the national market is shifting. As someone already mentioned regional markets can be different. When the writing on the wall is "this is a great investment option" and people start flocking to it then it is time to pull back and watch the fun. Combine that with large investment firm activity and you can get an idea of where the expansion cycle is.

I asked my teen niece why she is no longer on Facebook and she said "because grandma is on there". When grandma is talking about brrrr, SFR, and MFR then it is time to be a bit cautious.

JD Martin · Answer

Prognosticators always look right in the rear view mirror. If anyone could truly tell the future, they would be better served using it to make millions rather than telling other people about the millions to be made.

OK, with that out of the way. The market "crash" and "expansion" is, and has been, locally oriented. I can think of markets right off the top of my head that have continued to contract over the last 5 years, and others that never stopped expanding during the recession. National, homogeneous real estate markets are a myth used to sell ad space and guru courses.

If one looks at underpinnings, "as a whole" the US market should keep modestly expanding over the next several decades - we have a healthy birth rate, good influx of immigration, diversity of household, and plenty of land to build and rehabilitate. That doesn't mean everywhere will expand indefinitely, or at all.

Joel Owens · Answer

Hi Scott,

If you are talking about SFR housing only that is pretty long in the tooth for the housing cycles in most parts of the country.

If you are talking about other asset classes they are in varying stages of recovery. Everything generally has on average about a 10 year complete cycle plus or minus a few years.

So housing might have started recovering in 2009 and now be at the top. Conversely on the commercial real estate side a retail strip center might be 1.5 years into the recovery on a 4 year cycle before peaking at this current time. Even then you have recovery cycles by market. So for my commercial real clients the best cap rate I can hit in Nevada for a retail strip might be 7.25 where in Georgia it can be in the 8's. Both demographics are great in those areas I am looking one state has just cycled earlier.

Account Closed · Answer

@Joel Owens - You mentioned you were seeing 8 caps on retail in growth markets even at this point in the cycle.  Can you give some brief thoughts on a) % of rent to set aside for expenses and b) typical financing for such a deal?  I have some interest but struggle to make the numbers work.

Joel Owens · Answer

When it is NNN the tenants pay almost all costs.

Minimal reserves per sq ft are usually set aside such as .15 to .25 per sq ft.

Down payment is 25 to 30%.

Joel Owens · Answer

Long in the tooth means it is nearing it's end for that asset type in the current cycle (peaking).

If the debt is such that you can hold onto the property for the next upswing than not that bad. If your plans for a property are continued growth to keep pulling out money to invest on an asset that is topped out using short term debt terms you can get into trouble.

Scott Szurek · Answer

Originally posted by @Joel Owens:

Joel,

Yes, I am trying to focus more on SFR, but welcome any discussion about other sectors.  What do you mean by "pretty long in the tooth"? What about existing rehabbed SFR?

Also, yeah...Each individual market have their own cycles. I guess I am trying to see what people think more on the macro-levels.

How long will the current RE expansion cycle last?

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