How to Predict Best Real Estate Investment Markets
It’s no secret that the housing market is still struggling in the US. Everyday you hear attempts to call market bottoms and that now is the best time ever to buy real estate. On some level the media treats this housing crisis like something that has never happened before, which is simply not true.
If you look back on a 35 year inflation adjusted housing appreciation chart for the entire US, you’ll see that once again, history has repeated itself. True, this time the housing market experienced a longer and higher appreciation run up, but the downturn mirrors the run up just like the previous two cycles in the 1980s and 1990s.
Do you remember studying history in jr high and high school? If so you may remember your teacher explaining that history was so important to study, because it repeats itself and having knowledge of history is one of the only ways to prevent it from happening again.
Unfortunately with reagrad to the economy we seem to forget this point and every 10 to 20 years and sometime in the future we will have another recession however deep or shallow it may run.
So how can real estate investors try and prevent from losing their shorts in the future? By using the same techniques that some of the smartest and richest people in the world use.
Do you think it’s coincidence that Wall St. bankers and traders often make more money in one year than a lot of the US population does in their lifetime? Of course not, they have a lot of advantages and knowledge that the little guy doesn’t. Did you know that over 500 years ago ancient Japanese rice merchants invented a system to help predict market cycles? That same system is called “technical analysis” and is used today by all the big players.
The beauty about real estate markets is that they move very slow compared to other markets like stocks, currencies and commodities. Real estate markets take years, not seconds, minutes or days to change. Real estate is very unique. Every deal is different and every market is different and don’t let anyone tell you different. You can not invest in a macro US housing market (except for a REIT perhaps), you can only invest in micro markets. Some investors choose to only invest in their back yard which is fine, while others want to leverage other markets across the US, which is a rapidly growing concept and will continue to grow as real estate investors seek out markets that will give them an advantage.
Here are a couple of quick facts about the recent housing boom that most people may have missed.
- Only 25 markets, or 7 percent of the United States, experienced a true housing boom, defined by a four-year total home appreciation greater than 80 percent.
- Only 75 markets, or 20 percent of the United States realized total appreciation between 38 percent and 78 percent.
- Half of all local U.S. housing markets realized cumulative home price appreciation lower than 9 percent for that entire four-year period.
- Approximately 25 percent of U.S. local markets never realized even 6 percent total appreciation during those four so-called “boom” years.
Not what you would have thought by the media constantly talking about the US housing boom and bust. I’ll bet you that most people in the media reporting this information would be surprised themselves by these facts. Here’s another little secret, most people also think that factors such as housing permits and incoming employers are key for predicting the future of a real estate market. While they do influence the market, these factors will not allow you to accurately predict what will happen. In fact, often markets with rising housing permits may be on a down turn due to supply.
The two key factors that actually drive real estate markets are:
1) Supply and demand
2) Market psychology
Think about it for a second. At the core of it, what really fueled the housing bubble. Sure, cheap credit, crazy mortgages and Wall St had an influence on the market, but at the core what was really happening?
People wanted to be rich or get rich which was happening through housing. Everyone you knew was a real estate investor. This created demand, which absorbed supply. Increased demand sparked a lot of home building, or an increase in supply until eventually there was too much supply and not enough demand. The US still has a surplus of supply, which will suppress demand until the two are back in equilibrium. This will not happen in uniform, as some markets will recover quicker than others.
Of course this is a very elementary pretrial of the housing market, but at it’s core this is what drives appreciation and depreciation in housing market cycles. Investors need to focus on markets that are appreciating or focus only on acquiring income producing property.
For those that would like to learn how Harvard MBA Ken Wade developed a system to predict real estate market trends, you can learn more here about the Ken Wade Real Estate Market Cycle system. For investors looking for income producing properties we have an inventory of turnkey properties where renovations have been included in pricing, and the properties are fully leased with management in place producing positive cash flows for investors. Contact us to learn more about select U.S. markets where you can earn 8% – 15% Cash on Cash returns with renovated, fully leased and managed single family homesContact us for more information.