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 aren't convinced, consider how one of the less desirable cities in SW Florida (Lehigh Acres) and the most prestigious cities (Naples, Bonita, Sanibel etc.) fared during the cycle of the past real estate cycle.
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 every real estate cycle. TIMING IS 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 update this report at the start of every year, and suggest how the key indicators relate to our 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 one of the strongest indicators. Tom: Sales have gotten to a nice level since a few extraordinary high sales years after we hit bottom in January, 2011, 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 local recovery (2011 & 2012). However, based on U.S. Census Bureau projections of 10,000 full-time residents moving to Cape Coral alone for each of the next 10 years, and continued high demand for our area from retirees and second home owners. I expect that 2018 will see higher sales numbers than in recent years. Hurricane Irma stymied SWFL home sales for a few months, yet our area still had more home sales in 2017 than in 2016.
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 2017. Cape Coral had over 1,800 new home permits in 2017 - a big leap from the approximately 1,150 permits pulled in 2016, and a huge increase 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 (not including seasonal owners). Construction of Cape Coral freshwater and off-water homes increased last year, as existing home prices rose here for the seventh straight year. Because the cost difference of new homes versus existing homes has shrunk to about 20% (from 40% - 50% during the Great Recession), combined with a shortage of acceptable inventory, more homeowners are now opting to build. Builders and investors are taking advantage of the low inventory, and are building spec homes that usually 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 supply of homes. Tom: In 2017, we averaged less than 41/2 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. To start the year, there is under 3.8 months of home inventory, not enough homes to meet demand as we head into "high season". If we have too many months of low inventory I'm concerned that home prices will spike too high.
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 five years, as there are very few homeowners in SWFL who are still “underwater”. Although we will not see many new foreclosures, banks still have a small inventory of existing foreclosures that they will gradually release over the next few years. Banks have noticed the dramatic increase in home prices, and are in no rush to sell off their foreclosure inventory in a rising market. I feel that a slow stream of foreclosures will help keep a healthy balance of inventory, which will prevent local property prices from skyrocketing.
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 2017, SWFL homes averaged under 60 days on the market (even lower on homes priced between $200 - $500 K). 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 likely drop below 50 DOM, which is not necessarily a healthy place for our market. I'm content with 60 - 80 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 at the start of 2018, have risen about 1/2% from historical lows. Rates are predicted to rise to about 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 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 (out of over 300 books) I have ever read about real estate: Timing The Real Estate Market. Below are invaluable quotes and advice from this book and a few others, 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 Cape Coral, indicating a seller's advantage. Higher priced homes (over $500 K) are selling between 5 to 8% off asking price, with homes over $1 M selling at close to a 7 - 10% differential. Low-priced homes sell the fastest, often with multiple offers, and sometimes over asking price.
Unemployment, GDP, 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 always wrong regarding real estate cycles. Tom: we keep our clients informed about our local market so they can 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.
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 can decide whether it's time to buy, sell or hold.
During rising markets even poorly located, poorly maintained properties go up in value. During falling markets, even pristine homes in prime locations 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.
Good Luck, and Great Real Estate Timing
Sue and I believe in Cape Coral/Southwest Florida real estate.a We’re not just Realtors, we’re heavily invested in the area