It is no secret that the real estate market works in cycles. One of the biggest down-cycles of the past century happened just seven years ago. You may have been too distracted to notice, but the real estate market was on the brink of disaster. Some people have labeled it the depression of 2008, and it looked rough there for a while. Seven years later, things have stabilized and we are starting to see certain markets flourish. Where will the market go from here? Nobody can answer that for certain, but there are some clues that can give you an idea.
Defining The Market: When talking about the market, it is important to define just what the market is. You may have heard that home prices are on the rise, but this may have no impact where you invest. Your market is where you invest, and what has an impact on you. Home prices may be taking off in San Diego, but unless you have real estate there, it doesn’t mean anything. It is more important if you have a property in a town hit hard by foreclosure. Interest rates in particular, will impact every property you buy. For the most part, you want to focus on trends and data that is specific to where you live and invest. You can also lump property types in a market as well. The market for mobile homes or condominiums can be higher in one area over another. There will always be national news about real estate, but it is important to know what your market is.
Understanding Cycles: The market works in cycles. This isn’t just a catchy line, but the truth. The market will go up and down based on supply and demand. When the market collapsed, it did so because homeowners could no longer afford their homes. When they tried to sell they found demand was lower, which brought down their value. We are currently in a period of recovery. It is safe to say that we have hit the bottom and are on the way back up. There are still many homeowners in foreclosure, but not as many as there were five to seven years ago. Depending on your market, you may have seen strong recovery. Other markets have recovered, but have shown no signs of taking off. To take off, you need the demand to exceed the supply. Currently there are more sellers than buyers. Once that shifts, we will see the recovery turn to an expansion.
Supply And Demand: The real estate market is all about supply and demand. Like any item you sell; if the demand exceeds supply, the price will go higher. Many people want to buy a home, but not everyone can in this market. Lending guidelines and programs have gotten stricter since the collapse. The down payment requirements have increased. Instead of doing a low money down or stated income loan you currently need 5-10% down payment. If buyers can’t buy, demand will be lower. If only a few people want to buy a property, it may not sell for top dollar. Every sale in an area has an impact on other properties. List prices are based on comparable sales. If two houses are similar, buyers will use this as a guide for what they should offer. One lower sale on the street will reduce what the next house sells for. Once homeowners realize they can’t sell for what they want, they usually decide to wait for the market to turn before listing. Fewer buyers and lower inventory means the market is not moving anywhere.
The Future: In order for the market to take off, a few things need to change. Buyer demand needs to be generated. There are several ways this can happen. The first is to make loans more affordable and easier to get. Interest rates are as low as they have ever been. FHA loans only need 3.5% down payment and have lowered some of their standards. We may never see a stated income loan again but a few program changes could help. Even if programs change, we need people to use them. The first-time homebuyer market holds the key to the market taking off. If young buyers hit the market, it will increase demand. The problem is that many recent graduates have student debt and uncertain employment. You can defer your student loans, but you can’t do anything about your employment. If the economy improves and buyers have stable employment, they will buy. Once they start buying, there are thousands of homeowners ready to sell. This will have a domino effect, allowing the market to generate momentum.
Will this happen next year, or ten years from now? There are too many factors working against the market for drastic improvements to be made in as early as a year. What is certain is that the market will take off – it is just a matter of when. There can be great profits made if you can time the market right. Listen to what is going on in your market and be ready to act. You will never be able to time it just right, but you can come pretty close. There is plenty of pent up frustration in the market, and when it turns it is going to explode. Be ready to act when it does.