Mastering the Market Cycle: Navigating Real Estate Investment with Timely Insights

I learned the hard way back in 2007 that the key to smart real estate investment is timing the market right. My first investment property plunged me $100,000 underwater within two years, a fiscal fumble that could've been avoided with a better grasp of the real estate market cycle. Now, I'm here to save you from the same fate, unpacking the intricacies of the four phases—recovery, expansion, hyper supply, and recession—so you can make moves that make cents.

We navigate the hopeful resurgence of the recovery stage, the fever-pitch frenzy of the expansion phase – reminiscent of the 2021 bidding wars – and move towards the critical hyper supply stage, where the balance between homes and buyers teeters precariously. I also light the way through the murk of impending recessions, pointing out the harbingers of economic downturns, like job loss spikes. So, tune in for an episode that's less about a crystal ball and more about giving you the clairvoyance to make confident and informed decisions in the mystifying world of real estate.

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Transcript

Speaker 0: 0:30

This is Wealthy AF your ultimate guide to understand what it truly means to be Wealthy AF. In this episode, I'm going to share with you the four phases of the real estate market cycle, and understanding the cycle can be a game changer, whether you're a seasoned investor or a first time home buyer. By recognizing the different phases, you can make informed decisions and navigate the market with more confidence. Before I get started with that, I want to share a quick story with you of what happened to me by not understanding the cycles. In 2007, I bought my first investment property. I was in the mortgage industry, bought that property because of FOMO fear of missing out. Banks were lending money left and right. I was doing so many loans and I thought that if I didn't buy a property, I would not ever get to buy my investment property. So I bought this property for $275,000, a duplex, and within two years of owning that property, I was $100,000 underwater. Had I known and understand these four phases, it could have really prevented me going through that pain that I went through in 2009. However, it was good, and I'm going to wait till the end to share the other side of that experience, because there's a good lesson in that experience.

Speaker 0: 1:50

So the housing market, like many aspects of the economy, goes through cyclical ups and downs. These cycles can be broken into four distinct stages. So the first stage is the recovery phase. This is a phase where the market rebounds from a slump. Foreclosures are less common, prices start to stabilize and buyer confidence gradually returns. That's the recovery phase. This is what happened during 2012, 13, 14, where the market was kind of coming back around. We stabilized. We didn't see all of those foreclosures were flushed out and the market was starting to come back around.

Speaker 0: 2:28

Phase number two is the expansion phase. Here's where things heat up. The economy strengthens, demand for housing rises and prices steadily climb. This is a seller's market, with bidding wars and properties moving quickly. You guys remember bidding wars in 2021? 50,000 over asking properties were selling in a week. Two weeks, in a weekend, we would sell properties Lines out the door for when they had showings. It was crazy. It was the wild, wild west. That's what we called an expansion phase.

Speaker 0: 3:06

Phase number three is the hyper supply. As the expansion phase continues, builders ramp up construction to meet demand. Eventually, a tipping point is reached and there are more houses on the market than buyers. This is a buyer's market, with homes sitting for longer and prices potentially stagnating or even dipping slightly. I believe this is what we're seeing right now in the market. As interest rates have gone up, we're starting to see inventory also go up with interest rates and the buyer demand has decreased because of interest rates and the buyer demand has decreased because of interest rates. This is the key indicator to see what's happening in the market. When interest rates go up, affordability goes down. So now that same house that you would buy for $300,000, your payment goes up by 20%, 30%, right. That means that the sellers have to lower the price so that that payment is in line with people's incomes. So pay attention to interest rates. That's going to give you an idea where the market is going, and anticipation is power. All right, business and in life, anticipation is power.

Speaker 0: 4:19

The fourth phase is the recession phase. The recession phase economic declines lead to job losses and tighter credit Housing. Demand falls and sellers become more eager to unload properties, sometimes at a loss. Overall, the market activity slows down with the recession phase. So it's important that you understand and I think the key indicator to understand when we're heading into a recession is job losses. Guys, when we start seeing a tick up in job losses and the unemployment rate, then that's the mother tell, all right. When we start seeing unemployment go up, that's it. If people don't have jobs, they can't buy food, they can't pay rent, they can't buy houses, they're consuming less, they're spending less and this creates a contraction in the economy all the way across the board. So the key indicator to look out for with a recession is job losses. There's a general rule amongst the economists and they say whenever we see a half of a percent in unemployment rate go up, then within six months we see a recession. So that's just a clue, guys.

Speaker 0: 5:28

So how can you tell which phase the market is currently in? Here are some key indicators to look for Inventory level. So if you look at inventory level currently for real estate, year over year, our inventory is up 14% from the same time last year. This year, as I record this video and this audio, in April of 2024. We're up 14%. So inventory levels In a seller's market in the expansion, there are fewer houses available compared to buyers.

Speaker 0: 6:00

Conversely, a buyer's market hyper supply will have a surplus of listings Prices. Rising prices typically signal an expansion, while stagnant or falling prices suggest hyper-supply or recessionary markets. Sales speed Homes selling quickly above their asking price indicate a seller's market. In a buyer's market, houses may linger on the market for longer. Economic indicators keep an eye on overall economic health, employment rates, interest rates. Strong economy often fuels an expanding market, while recessions can trigger a market downturn beyond the basics. So keep an eye on unemployment rate and keep an eye on interest rates. These two are major indicators to tell you what can happen in the housing market and what's potentially coming down the road in the housing market.

Speaker 0: 7:01

While these provide a good starting point, remember that the housing market can be complex and very depending on your location. Here are a few additional tips Local research right. Look at trends specifically to your city or region. Real estate is very market to market dependent. I might look at your city as an outsider and say and look at your demographics and say I'm not going to invest in your city. Or you might look at my city and say I'm not going to go into your city based on what you see. But if I live in the city, I may know that there's a big factory coming to the area that's bringing 800 jobs, but you may not know as an outside investor that that employer is coming and there's going to be a housing demand. So it's very city by city dependent. Do your local research, understand your local market and then consider long-term trends. The housing market cycle can take years to complete a full rotation. Don't try to time the market perfectly. Focus on your long-term goals.

Speaker 0: 8:10

Now I'm going to go back to my story that I had from when I bought that house in 2007 that I started at the beginning. So fast forward 14 years. I bought a duplex about a mile away from this property. Razor comes to my office. He's about to appraise it on the refi. He sits in my office. He's here to pick up a check. I go hey, what are you bringing my property in at? He goes I don't know. He hands me a envelope with a bunch of comps. I look at a comp, two doors down from that house I bought in 2007. That was $100,000 under water. I look at a comp exact same house, exact same number of units, exact same square footage. This was in 2023. We're sitting down. He gives me the comps and I see that property sold for $375,000. Now, guys, here's the math. I bought it for $275,000 in 2007. 2009, it was $100,000 underwater. It was worth $179,000 because I had it looked at by a realtor and 14 years later from the day I bought it, it was now worth $375,000.

Speaker 0: 9:17

What's the message? The message is don't wait to buy real estate, don't try to time the market. Buy real estate and wait. The idea is that you can learn these phases, understand where you are in the market cycle and you can anticipate, and you don't have to go through the heartache I went through of being $100,000 in the water two years after buying a property. Hope you guys enjoyed this video. Hope you guys enjoyed this audio. If you liked it, make sure you share it, like it, subscribe to the channel. If you're listening to it, make sure you leave us a five star review on the podcast. We really appreciate that. Thanks for watching, thanks for listening, peace out.