The single most important factor to successful real estate investing is timing. . . even more important than "location, location, location," which historically was always # 1 in importance. If you are not convinced, consider how one of the less 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 equity in any SWFL 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. TIMINGIS KING.
Below are 6 simple and reliable indicators as to whether a local real estate market is headed up, down, or is neutral. Because timing is so important we will email this report at the start of every year, and how it relates to our future SWFL market. We would all be wise to pay very close attention to these indicators when buying or selling real estate.
6 VITAL REAL ESTATE CYCLE INDICATORS (order of importance)
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 a fairly balanced level, which should keep our market healthy and hopefully prevent unrealistic price spikes of 25% or more per year, such as we experienced in 2004 - 2006, and the first two years of the recovery 2011 & 2012.
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 SW Florida (especially Cape Coral) are steadily increasing, and by a significant number in 2016. Cape Coral had over 1,100 new home permits in 2016 - a big leap from the bottom of our market when we averaged only 200 permits a year. Based on U.S. Census Bureau reports, Cape Coral alone needs about 3,000 permits a year for the next decade to keep pace with expected demand of new residents. Construction on freshwater canal lots and off-water lots started to increase last year, as existing home prices rose for the sixth straight year. Because the cost difference of new homes versus existing homes has shrunk to about 20% (from 40% - 50% during the Recession), more homeowners are now opting to build. Builders and investors are taking advantage of the low inventory and building spec homes that oftentimes sell before completion.
3. Supply of Home Inventory: 6 months supply is a level playing field. Under 5 1/2 months is a seller's market and prices will rise. Over 6 1/2 months of inventory is a buyer's market and prices will decline proportionally to the number of months' supply of homes. Tom: In 2016, we averaged less than 4 month's supply of homes in Cape Coral/SWFL, and at one point dropping to as low as 3.2 month's supply. We will keep a watchful eye on this important indicator over the next year and report accordingly. If we have too many months of low inventory I'm concerned that home prices will spike over 10% for the year.
4. Mortgage Default & 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 four years, and there are not many homeowners in SWFL who are still “underwater”. Although we will not see many new foreclosures, banks still have a smallish inventory of existing foreclosures that they will gradually release over the next year or two. Banks have noticed the dramatic increase in home prices, and are in no rush to sell off their foreclosure inventory in this rising market. I feel that a slow stream of foreclosures will somewhat help keep a healthy balance of inventory, which will prevent local property prices from rising even faster than they have for the past six 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 down or declining market, and you can expect prices to drop. Under 70 DOM means it is a very strong seller's market and prices will rise, and will likely rise significantly. Tom:During most of 2016, SWFL homes averaged 60 - 70 DOM, with homes under $500 K on the market for a shorter period. This is down significantly from the bottom of our market when homes were on the market an average of 150 days, with many homes lingering on the market for over a year. When we approach the next peak we'll drop below 50 DOM, and that is not necessarily a healthy place for our market. I'm quite content with 60 -70 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 4% range, have risen about 1/2% from historical lows. Rates are predicted to rise to 4.5 – 5.0% over the next year, but this is still well below historical rates. Any negative aspect of interest rate increases should be offset by the lending industry’s gradual loosening of borrowing requirements, which became quite stringent following the housing bust. 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 several years ago.
These 6 Vital Indicators Have Preceded Every Boom Or Bust - DON’T IGNORE THEM!
The 6 Vital Indicators were gleaned from one of the best books I have ever read on real estate investing: Timing The Real Estate Market. Below are invaluable quotes and advice from this book, with my own notes in blue.
A Few More Real Estate Market Indicators:
Listing Price Versus Sales Price: An average differential is 5%. If the gap falls below 4% we are in a seller's market and prices will increase. If the spread goes over 6%, it's indicative of a strong buyer’s market, and prices will keep falling. Tom: There is currently only a 3% list/sales differential in SWFL, indicating a seller's advantage. Higher priced homes (over $500 K) are selling between 4 to 8% off asking price, with homes over $1 M selling at closer to the 8% differential. Some well-priced homes are selling at over asking price, with multiple offers. Lower priced homes sell the fastest and the closest to asking price.
Unemployment, Consumer Confidence, Population Trends and Changes In Tax Laws are 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 keep our clients informed about our local market so they stay ahead of the herd
Location, Location, Location is no defense or consolation against financial loss when you buy or sell in a great location at the wrong time. Tom: Please burn this sentence into the financial part of your brain.
· Knowing when to sell is probably even more important than knowing when to buy.
· 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.
· By observing the Six Vital Indicators, you have a three to six month window to sell near the peak or buy near the bottom. Tom: we don't need to nail the exact bottom or top of the market, just come close.
· 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 5 years), historical trends suggest we should have an up-cycle of 7 1/2 to 10 years, and we are currently at 6 years. I feel we are only a little more than half way into our current up-cycle.
· 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”. Tom: following proven historical guidelines is far more likely to lead to successful investing than following gut feelings.
· Like the weather, real estate markets should be looked at locally, not nationally. Tom: Southwest Florida historically precedes the rest of the country in the real estate cycle by about two years.
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 peaks arrived, prices always surpassed the previous peak prices, often by huge margins. Tom: if we don't reach our previous peak (January 2006 in SWFL), it will be the first time in recorded history.
· Savvy Investors sell when the market is hot, and buy when it's not.
· 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.
· There are no bad pieces of real estate, only good pieces that are owned at a bad time.
· 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 daily, weekly or monthly like the stock market.
· 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.
· 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.
· 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 sell. The greatest secret is knowing when to buy or 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.
Just as a great baseball hitter only swings at good pitches, a good investor should only be investing in a good cycle trend. Tom: We provide monthly analysis of what is happening in our local market so our clients know whether it's time to buy, sell or hold.
During rising markets even poorly located properties go up in value. During falling markets even prime location properties go down in value.
90% of millionaires acquired their wealth through real estate, not through their jobs or other forms of investing. And they certainly didn't "Buy High and Sell Low", or follow the herd. They were very astute at market timing.
Thank you for visiting today. If this is your first visit, take your time and look around. I have plenty of information and resources available to you. If you are a return visitor, thank you. I would love to hear from you and tell you how I can serve all your real estate needs.
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