Understanding the Real Estate Cycle
With the right timing, a long-term investment can really pay off.
The American housing market has officially crossed the line from correction to stabilization. After stabilization, the phases are recovery and revival. Small-business owners should take a close look at real estate investment opportunities over the next few years, since this is when the money is really made.
As you can imagine, timing the real estate cycle is critical to achieving big returns on investment. In future submissions of this column, we'll discuss the other strategic objectives, like picking winning markets, purchasing properties, increasing value by improving property, and more. This edition is dedicated to the market cycle, how it works and where we are in it.
Visualizing the cycle in its entirety is the easiest way to grasp its predictability. But in order to see the pattern you have to zoom way out, because one pulse of a property takes 12 to 15 years.
Consider the following two cycles of median home prices. The first, from 1983 to 1996, started with the economy in rough shape. Then an economic boom pulled real estate and the DOW way up. It was a big party, everyone was making money, and then banks got a little crazy with their lending standards and the whole thing went off the rails--stock market crash, massive bank failure, real estate market correction and a serious recession. (Does any of this sound familiar?)
(Median home values over 13 years)
The cycle reset in 1997, and a very similar pattern started again. This cycle is not finished yet, but the plateau is almost here.
(Median home values over 12 years)
I expect values to hit bottom in 2010 and stay flat for five years, only to go back up significantly when tax-cutting becomes the policy and the economy booms again.
So there is good news, better news and great news. The good news is it's pre-boom all over again. The better news is you are aware of it at a very early point, and the best news is you have plenty of time to get your assets in gear and take a position.
I recommend that you visit www.zillow.com, use its "Local Info" tab to drill into your area, and choose "Home Values." Researching a market you know well is probably the best place to start. Make sure you change the setting on the charts to "Sale Price" and "10 years." Then you will see your market in context. I recommend you do this exercise before continuing . . .
So you've seen the graphic. Now ask yourself, was there a meltdown here, or did this market end up the cycle much higher than it began?
Here's the first proof that you can't believe all the pundits who called this a housing freefall. This was a very profitable real estate cycle that made a lot of people a lot of money. Sure, many investors got hurt in this cycle, but most of them ignored the fundamentals and tried to buy and flip with no money down. That's a sucker's bet in real estate.
Take a look at your business plan; ownership can enhance stability, channel your rental expense into equity building and enable you to take advantage of the tax benefits of ownership. It's time to work real estate into your long-term plan; you already have two very strong advantages--a long-term view and a well-timed cycle.
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