MARKET & TRENDS
MARKET CYCLES
growth” emerges where certain areas of town boom. During the expansion phase, desirable locations closer to downtown and areas with older homes with architectural or historical significance can see renovation and gentrification. Housing inventory can become tight. There will be more buyers than sellers, and sellers will see multiple offers with prices often going higher than list prices. Inventory doesn’t sit on the market for very long during expansion. Often properties sell in days or even hours. Prices climb during expansion and appreciation is strong. Finally, developers with dollar signs in their eyes often overbuild as they try to get into the action. Moves to Make During Expansion The early part of the expansion phase is the time to build new homes and spec homes, and to make money doing flips. During the latter part of an expansion, I recommend selling or preferably exchanging properties that were bought low during decline or absorption. Then with that money in hand, purchase in other markets that have better cash flow and more room for prices to rise. 2. IDENTIFYING A MARKET IN EQUILIBRIUM In the early stages of the equilibrium phase, lots of new inventory hits the market as people sense that things are slowing down and work to cash out. There are fewer buyers as company expansion and job growth have slowed by the time equilibrium arrives. Real estate listings start to age and sit on the market for 90-120 days or longer. Prices start to drop and sellers pay more concessions as the market begins to favor buyers rather than sellers. During equilibri- um, builders offer incentives and start lowering prices. New shopping centers have vacancies and apartment complexes begin to offer incentives. Moves to Make During Equilibrium Don’t get greedy. If you want to sell and you have good equity, this is the time to sell. You may need to sell 10 percent below market value to ensure you get out before the flood of people who will inevitably ride the market into decline. For those wanting to increase their holdings, equilibrium is the time to buy off-market properties from distressed sellers where you can still get pricing that makes sense. 3. IDENTIFYING A MARKET IN DECLINE One of the surest ways to spot a declining market is to watch employment trends. In decline, unemployment increases, jobs are harder to find, companies reduce their workforces. Schools may even let teachers go as people
move out of the city to other markets. Sure signs of decline eventually become evident. Lots in subdivisions, only half built out, may sit and become overgrown as developers de- fault and go into foreclosure. In the latter parts of decline, real estate prices drop significantly and foreclosure inven- tory jumps. In decline, inventory can sit for a long time. Offers are very low and there is room for negotiation. Local governments may try to jump-start the market by institut- ing improvement zones and other development incentives. Moves to Make During Decline If you sold during an earlier market phase and didn’t reinvest in another market, you may have cash in hand. If so, decline is the time to buy steeply discounted
Making the Right Moves in Every Phase of the Real Estate Market Cycle
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Jared Garfield is a private hedge fund manager, real estate in- vestment trainer, and turnkey property provider. With more than 20 years experience, Jared is a sought after speaker and real estate advisor. He has conducted bus tours for “Flip This House” and “Flipping Vegas” and is a former Rich-Dad, Poor-Dad trainer.
Visit JaredGarfield.com/report to learn more.
UNDERSTANDING THE FOUR PHASES OF MARKET CYCLES WILL IMPROVE YOUR INVESTMENT STRATEGY.
by Jared Garfield
ince the real estate crash in 2007, we have seen dramatic recovery in most markets. Many experts are saying that real estate is a bubble that will soon pop; they seem to be shouting, “Buyer beware!” The pundits argue, that since real estate market cycles typically last eight years and we are in the ninth year of successive price gains, a correction is well overdue. Interest rates have risen 2.25 percent since December of 2008, and many may wonder if the party's over. Is this the case? And how can you make your own informed decision? When we understand market cycles, we get a better feel for what to do with current assets and whether or not to buy more. Investing wisely now can help you and me maximize returns and avoid ending up underwater as many did in 2006-2007. Let’s dig into the real estate market cycle and learn to gauge where a given market is in the cycle, and what strategies to use in each phase of the cycle. S
happens. Next comes Equilibrium or a time of slowing and stabilization. The third phase is, of course, Decline or the phase where values inevitably drop, sometimes a little, sometimes a lot. The final phase, then, is Absorption or the phase where property values begin to bounce back and recovery begins, but where growth is still slow. Let’s look at each of these market cycle phases in more detail. Below, I discuss how to better recognize the beginning of each phase and I give a strategy or two to use during each phase. 1. IDENTIFYING AN EXPANSION MARKET Real estate markets in expansion are typically areas experiencing population and job growth. Favorable tax incentives, government initiatives, right-to-work policies, and low or no state income tax can lead to economic ben- efits. For example, when conditions are right in a market, corporations may be more likely to move to or expand in a market. Factory expansions and other infrastructure growth bring jobs. More jobs lead to population growth which leads to more building permits, new subdivisions, new roads, schools and shopping centers. A “path of
FOUR PHASES The real estate market cycle consists of four phases. The first is Expansion or the phase during which most growth
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