TOM & SUE DEMOGENES...
"YOUR INFORMED REAL ESTATE COUPLE"
The single most important factor to successful real estate investing is timing . . . even more important than "location, location, location," which historically has always been # 1 in importance. If you are not convinced, consider how one of the least desirable cities in Southwest Florida (Lehigh Acres) and the most prestigious cities (Naples, Bonita, etc.) fared during the cycle of the past 10 years.
You made a tidy profit with either end of the location spectrum if you timed the market well. Conversely, you lost a lot of money in any location if your timing was wrong. The same can be said for virtually every part of the country in the last cycle, and every preceding cycle. TIMING IS KING.
Below are 6 simple and reliable indicators as to whether a local real estate market is headed up or down, or is stagnant. Because timing is so important we will email this reminder every year, along with how it relates to our local market. We would all be wise to pay very close attention to these indicators when buying or selling real estate investments.
1. Sales of Existing Homes: Are sales increasing or decreasing? This is the strongest single indicator. Tom: Sales have dropped off from peak numbers a few years ago because there are far fewer foreclosures/short sales, less investor purchases, and slightly higher interest rates. Recent sales are at healthy, balanced level, which should prevent unrealistic price increases such as we experienced in 2004 - 2006
2. New Construction Permits: Increasing or decreasing? Permits start to drop before a recession, and increase prior to an expansion. Tom: Permits for new construction in Cape Coral/Ft Myers are steadily increasing, but mostly on saltwater canals. Construction on freshwater canals and off-water lots started to increase slightly in 2013 as existing home prices (especially gulf-access homes) rose for the third straight year. Because the difference in cost of new homes versus existing homes has shrunk to 15 – 20% (from around 50%) more homeowners are now opting to build.
3. Supply of Home Inventory: 6 months supply is a level playing field. Under 5 1/2 months, prices will rise. Over 6 1/2 months of inventory and prices will decline proportionally to the number of months' supply of homes. Tom: Over the past six months we’ve had between 3 and 7 months supply of home inventory in Cape Coral/Ft Myes. We will keep a watchful eye on this important indicator over the next six months and report accordingly.
4. Mortgage Defaults & Foreclosures: Two things to look for - are the default/foreclosure numbers traditionally high or low, and more importantly, is the number increasing or decreasing? Tom: Defaults and foreclosures have decreased dramatically over the past few years, and there are not many homeowners here who are still “underwater”. Although we will not see many new foreclosures, banks still have an inventory of existing foreclosures that will gradually be released over the next year or so. Banks have also noticed the dramatic increase in home prices, and are in no rush to sell off their foreclosure inventory in such a fast-paced rising market. I feel that a slow stream of foreclosures will maintain a healthy balance of inventory, which will prevent prices from rising even faster than they have for the past three years.
5. Days On Market (DOM): This stat provides a big clue as to what the market is doing. 90 days on the market is neutral. Over 120 days means it’s a buyer’s market and you can expect prices to drop, and under 70 days means it is a strong seller's market and prices will rise, and will likely rise significantly. Tom: Currently, and over most of the past year, we have averaged 80 DOM. This is down significantly from the bottom or our market when we had homes on the market for 120 -140 days on average, with many homes lingering on the market for a year or two. Only near the next peak will we drop down to 50 - 60 DOM, and that is not necessarily a healthy place for our market. I'm quite satisfied with 80 - 90 DOM.
6. Interest Rates: Again, there are two aspects of this indicator to monitor. Are interest rates relatively high or low, and are rates rising or dropping? Tom: Interest rates, which are in the mid 4% range, have risen about 1% from historical lows. Rates are predicted to rise to 5 – 5.5% over the next 12 – 18 months, but this is still well below average mortgage rates. The rise in interest rates should be offset by the lending industry’s gradual loosening of borrowing requirements, which were quite stringent over the past few years. Also, many borrowers are now “out of the penalty box”, meaning they now qualify for loans again after going through a foreclosure or short sale a few years ago.
Most of the above information was gleaned from two of the best books I have ever read on real estate investing: Timing The Real Estate Market and Making Hard Cash In a Soft Market. Below are invaluable quotes and advice from these books.
These 6 Vital Indicators Have Preceded Every Boom Or Bust - DON’T IGNORE THEM!
Listing Price Versus Sales Price: An average differential is 5 %.
If the difference falls below 4 %, that is an indication that prices will start to increase. If the spread goes over 6%, it means it's a strong buyer’s market and prices will keep falling. Tom: There is currently only a 4% Sales vs Listing price gap in Cape Coral/Ft Myers
Unemployment, Consumer Confidence, Population Trends and Changes In Tax Laws are other secondary indicators that you should monitor. However, the Six Vital Indicators will be your road map to real estate timing and investing
Trust What You See ( especially the 6 Vital Indicators ), not what you feel. Be particularly wary of what the media reports. The media is usually far behind the curve on real estate cycles.
Don’t follow the herd mentality. The herd is almost always late and wrong regarding real estate cycles. Tom: we try to keep our clients informed so they are ahead of the herd
Location, Location, Location is no defense or consolation against financial loss when you buy or sell at the wrong time. Tom: Please burn this sentence into your brain.
v Knowing when to sell is probably even more important than knowing when to buy.
v Nobody rings a bell when the market peaks or hits bottom. Buying near the cycle bottom can make you rich, and buying near the market peak can make you poor. It's as simple as that.
v By observing the Six Vital Indicators, you have a three to six month window to sell at the peak or buy at the bottom.
v Market Trends last three to five years, both on the upside and downside. The longer a down cycle lasts dictates how long the up cycle will last (usually 1 1/2 to 2 times longer). Tom: Because the down-cycle was so long (almost 4 years), historical trends suggest we should have an up-cycle of 6 to 8 years, and we are currently at three years. I feel we are still closer to the bottom of the current cycle than the top.
v Over 90% of real estate buyers and sellers do not have an established guideline as to when to buy or sell. They simply conduct their real estate activities based on "gut instinct" or worse, they “follow the herd”.
v Like the weather, real estate markets should be looked at locally, not nationally. Southwest Florida historically precedes the rest of the country in real estate cycles by about two years.
v At the bottom of every cycle people have always predicted that “we will never again in our lifetime see the price levels of the previous peak”. When the following peak arrived, prices surpassed the previous peak’s prices, often by huge margins.
v Savvy Investors sell when the market is hot, and buy when it's not.
v The media and the general public feed off each other at market cycle extremes. Tom: It's almost as if the media provides the "Herd" their oats and hay.
v There are no bad pieces of real estate, only good pieces that are owned at a bad time
v Once a real estate cycle has reversed a trend, it will continue in that direction until it hits the other end of the cycle. It doesn't zigzag like the stock market.
v Real estate is like horseshoes...you can score with near misses. You don't need to be perfect in your timing. Just be close to the top or bottom of the cycle.
v The greatest profits are achieved in the last year or two of the market up-cycle. The majority of losses occur in the last few years of a down-cycle.
v Because real estate is an illiquid asset, you would rather be out of the market wanting in, than in the market wanting out.
The biggest secret in real estate isn't what to buy . . . or even when to buy. The greatest secret is knowing when to sell.
Rising real estate markets are what make you rich. Avoiding bad markets is what keeps you rich.
The 6 Vital Signals are the language of the real estate market. When they talk, LISTEN.
Ego and "gut feelings" are enemies of successful investing. Objectivity and information are what is needed.
Just as a great baseball hitter only swings at good pitches, a good investor should only be investing in a good cycle trend.
During rising markets even poorly located properties go up in value. During falling markets even prime located properties go down in value.
90 % of millionaires acquired their wealth through real estate. They didn't "Buy High and Sell Low", or follow the herd. They were very astute at market timing.
Topics: 4th of Year RE Recovery - No Housing Bubble! - Cape Celebrate's Comeback
Topics: Flood Insurance Info - Out of Area Realtor Help - New Home Construction
Topics: Cape Median Home Prices Drop Below $200,000 - Seller/Buyer Season Preperation Reminders - Misconception of Hurricanes in SW Florida