Reading the Market – Part 1
So here we are with a whole slew of monthly and quarterly housing and economic data. What does it all mean to the average investor, trying to rent a home, or speculating on “when is the right time to purchase an investment home?
I’ll put it in terms that are easy for me to understand, I hope this helps you as well. When the average investor / armchair quarterback, looks at the field, they see the offense and defense. They’ll comment on the plays, how their team is doing or not doing, but nothing too specific! When the pros, the coaches and players look at the field, they read the field. They notice the cornerbacks cheating up, or the quarterbacks tendencies with certain defensive fronts.
It is the same with this market. You read the headlines and watch the news and for the most part everyone says the same thing. Are we at the bottom of the housing market? Things seem to be getting better! The pros in this market see a completely different story. They will talk about the specifics of construction, and the job growth, the housing starts, and more. They use leading indicators, to help them read the market and predict what is going to happen in the future. So, when you begin to understand what these leading indicators are and what they mean, you will quickly be able to get a firm grip on what will happen in the next few months as well as the next few years.
To understand this, you will need to get familiar with the four main phases of the commercial real estate market cycle. Buyers Market (I), Buyer’s Market (II), Seller’s Market (I), and Seller’s Market (II). Even though this is a commercial market cycle, it is important to learn as it does pertain to the residential market as well.
There are different types of commercial property, apartment buildings, retail, and office space, but they all follow the same phases, though they may be in different parts of the cycle at any given time. Let say a new factory comes into town. Apartment buildings will experience growth before retail does because the renters will move in first to fill the new jobs available at the factory. Only after that happens will the retail establishments notice the increase in their business due to stronger consumer demand!
An average market cycle can last between 10 and 25 years, depending upon the specific marketplace. Cities on the coasts change more rapidly than the cities in the midwest and plains. Consequently the coastal cities will have periods of rapid growth and steady decline, and inbetween experience periods of slow steady growth and stagnation.
We’ll breakdown the first phase of the cycle, the Buyer’s Market (I) in the next post!
