Between basketball games at the gym I got to talking to a local agent today.He asked me what I thought was going to happen with local real estate values and I asked his opinion also. He then went on to play the “All Real Estate is Local” card while trying to justify his point. While I do agree most trends that affect real estate values are on a local level, he blatantly disregards (like most people) the national trends that affect real estate values.
There are multiple national trends that affect real estate, but I’m only going to touch upon two for this post; inflation and the psychology of the masses.
Real estate cycles are partially shaped by these national trends and they can directly influence if your next real estate investment is successful or an opportunity cost. Don’t get me wrong, you can go against the grain and invest successfully when these trends are not favorable, but great care must be taken.
More often than not inflation occurs on a national level and if you are a real estate investor, most often inflation is your friend. If prices of building material (lumber, steel and other raw materials) go up, then the cost to build a home or building will rise also. This obviously helps your investment to hold its value or more likely appreciate.In addition to appreciation, during times of inflation we can usually raise rents.
You might be thinking “so far so good”, but one of the key measurements most inflation loving investors forget is wage inflation. If wages aren’t inflating accordingly you have a bad situation on your hands, and that my friends is part of the reason most real estate markets aren’t finished correcting at the time of this writing.Their values simply aren’t inline with local wages and historical price to rent ratios.
The second trend I want to talk about today is the psychology of the masses. There are many reasons our country recently experienced probably the greatest national real estate boom in our history, but one of them was the phychology of the masses. From the year 2000 to 2005, no matter where you went people were talking about real estate. Everybody thought they were Donald Trump and money was pouring into real estate as if it was impossible for values to go down. Fast forward to today and we obviously know how that story turned out. Try talking about real estate today and most people treat you as if you have the black plague. The psychology has shifted. The proverbial pendulum swung too far in favor of real estate during those heady times and I believe it will swing too far the other way (at least in some markets) as time goes on (some markets will “over-correct”).
In summary, don’t believe the hype, while there are many trends that affect real estate on a local level, remember there are national trends that affect values too.
P.S. If you are reading this John, I will see you on the court on Monday, be prepared to be schooled again (just kidding).
If real estate investment is your goal, then education is an important part of success. An investor who profits consistently is one who learns how to research market indicators and interpret them properly, gaining some insight on the current market trends. While there are certainly plenty of lucrative investment opportunities available for those that do their homework, today’s uncertain markets can be treacherous, making it more important than ever to acquire effective research skills.
In the midst of the housing boom, many inexperienced investors were able to stumble into highly profitable real estate investments with little real knowledge about the housing market. However, times have changed, with markets in many areas recently experiencing significant slumps. In some of these areas, the markets have begun to recover, while in others the downward slide is still well underway. In this market climate, knowing how to judge the viability of a particular real estate market is crucial to successful real estate investment.
The standard mantra for investors of any kind has always been “buy low, sell high.” Sinking real estate prices in many areas may seem to create the right atmosphere for that rule of thumb, but low priced real estate won’t be much of a bargain if property values in the market continue to fall. The sell high part of the equation can present some difficulty in a market that has yet to hit bottom, making it essential to know in which direction the market is moving before you commit your capital.
Basic supply and demand trends are important indication of the direction you can expect a real estate market to travel. If the supply of homes is far greater than the demand for them, downward pressure on home values is the most likely result. On the other hand, if demand is rising in a market that has been depressed, your investment has the potential to rise in value as the market moves towards recovery.
Housing inventory statistics can be the best way to judge the supply and demand in a particular housing market. Released monthly, these numbers track how many homes are on the market waiting for a buyer. By examining these statistics over several months, you can determine whether supply is on the rise, which can indicate that the market that has yet to reach its lowest point and one the wise investor will avoid. If inventory is diminishing, the market has likely hit bottom already and is beginning to rebound, a condition that is ripe with investment potential.
Gone are the days of the housing boom, when nearly any real estate purchase was bound to appreciate in value, making profitable investment as easy as shooting fish in a barrel. However, learning to research and evaluate real estate markets effectively can help you choose your investments wisely. Armed with a bit of basic knowledge of how the housing market works, you can learn to recognize the signs that experienced investors use to avoid the pitfalls of today’s unsettled markets and follow them down the road to successful real estate investment.