No study of real estate investing could be complete with no comprehensive understanding of markets and how those markets are influenced by economic conditions. Only through an understanding of this critical topic can the Investor properly understand their risk exposure and implement strategic investment planning and effective risk mitigation techniques.
Market Cycles real estate forecast
The next section will provide an breakdown of the four major phases of a real estate market cycle. Although all these phases have specific characteristics that make them stand aside from each other, unfortunately, the original transitions in and out of every phase might not be plainly obvious. The four market phases are listed below:
- Sellers Market I (Expansion)
- Sellers Market II (Equilibrium)
- Buyers Market I (Decline)
- Buyers Market II (Absorption)
Each phase of the cycle can present the Investor with both challenges to overcome in addition to opportunities to benefit from. The well informed and action oriented Investor will understand what strategies to work with during each of the phases. The next section will provide an overview on each of the market cycles.
Sellers Market I (Expansion)
Throughout a Seller's Market phase I (also called the Expansion Phase), lots of the key economic indicators are telling a compelling story that features these:
Due to the strong economic conditions, builders and developers regain their confidence that new construction now makes sense; significant increased activity sometimes appears in the building permit application process. As construction levels begin to increase, it may also stimulate the requirement for primary and secondary workers.
The general population feels that times are good and discretionary spending increases; therefore will stimulate the economy.
Market sales price and market rents have reached the highest levels as a result of high demand for housing; this increase in demand absorbs the available inventory and creates sometimes fierce competition among home buyers that are bidding against one another for the exact same property. This bidding frenzy can lead to multiple offers being presented to the sellers and in some cases, bidding up the list price.
Investment Strategy
The Investors who have been holding properties getting into this phase is going to be benefiting from significant appreciation of these real estate holdings; this market cycle could be a great time to leverage your equity by selling at the top of the market and re-invest the proceeds in other perhaps larger properties. To be able to maximize your available re-investment capital, an IRC 1031 Tax Deferrered Exchange should be considered.
Warning! It's strongly recommended that you seek advice from your Accountant ahead of implementing any tax reduction strategies.
In a market with high demand, you should expect to pay for strong sales prices; the higher demand could also set the stage for sellers to be less motivated in agreeing to creative deals like seller financing, assignments, or Lease Options.
In this market, you may also see Investors that are purchasing properties just for the appreciation and aren't concerned with the cash flow. For Investors that are considering this process, it is going to be critical they've adequate cash reserves available for them in the case there is an interruption of rental income caused by vacancies. Furthermore, not having cash flow might make it difficult to keep up the property effectively in the case repairs or replacement is required.