We have been taught, in the business world, that everything works in cycles. Currently, we are rebounding from a prolonged down cycle in the real estate market, but from every indication things are looking up. While things may appear to be headed on the right track, it doesn’t mean it will happen. One of the biggest mistakes any investor can make is relying too much on past history and assuming trends will continue. Sure, history can be your guide, but it is far from a predictor of what will happen moving forward.
If you look back at the mortgage crisis last decade, the catalyst was not lending policy or guideline changes, but rather the assumption that values would continue to rise. It was not uncommon to see some properties rise 1-2% in a two week span without doing as much as signing a contract. The assumption was that property values would continue to rise 10-15% annually without ever slowing down or stopping. Obviously, this massive appreciation couldn’t continue forever. When the market stopped, it stopped cold. Those investors who got the jump on the market and either sold or braced for the sudden change came out smelling like a rose while those investors who were over-leveraged and needed their properties to keep appreciating were forced to sell at a loss.
There is a segment of investors who rely heavily on trends to make their investing decisions. Instead of relying on trends look at them a little deeper and see what caused them to move one way or the other. If you see that in your local investing area new home permits have been up each of the last five years, get to the bottom of why this is. Is there a new school being built in the area? Has a new factory or other employment source recently been built? Did a recently elected mayor vow to keep taxes down for at least another term? All of these aspects, and many more, contribute to trends. Keep a close eye on which way the market is moving, but it is more important to find out what is causing it to move.
A common phrase with the real estate market is that it is cyclical. What this means is that things move in cycles and will have periods of highs and lows. We have been hearing for the past year or two how the real estate market is poised to take off. History tells us this may be the case, but there is no predicting when and even how it will happen. Just because the market was down for five or so years doesn’t mean it has to go up. The market may very well stay flat for the next five years and all of those investors who were again relying on appreciation will be greatly disappointed. The market trends shows that values will increase at some point but when that happens is anyone’s guess.
The best investors know how to decipher the information that is presented to them. They will look at past trends and future expectations to determine if a property or a situation is best for them. Trends may help you with those decisions, but they should be just a piece to a bigger puzzle. If you use the past as a guide, you are doomed to repeat some of those mistakes.