- Knowing when to buy and sell assets is the critical component that can make or break an investor. Often success comes down to understanding this one fundamental idea: market cycles.
- Residential real estate is expected to experience a some healthy ebbs and flows for the remainder of 2016 and into 2017. Although there is a strong likelihood of a mild recession over the next couple of years, in terms of where we are in this current macro cycle, investors can still expect significant upside for their real estate investments.
- The daily noise of experts and market commentators can cloud an investor's judgment. Being independently mindful of the macro market cycles and investor sentiment (for any market in which you invest) will instill confidence.
This question is coming up more and more often: Is the housing market going to crash again? Understandably, most homeowners, first-time homebuyers and residential investors are timid given the last episode of home price devaluation in the Great Recession of 2008 and beyond.
The question is valid — especially for the consumer sector of real estate (residential) because buying a home is one of the largest investments most people will ever make. A 20-percent market correction could be catastrophic for some families and investors, let alone the disaster we saw in recent years past with the subprime debacle.
Therefore, it is paramount to be able to forecast the future of the market. Of course, no one will peg it perfectly, but to have a general idea of what is ahead will give buyers the confidence necessary to see through the news headlines of doom and gloom that surround us every day.
As a real estate investment manager with nearly $1 billion in transactions behind me, I’ve had my fair share of market surprises, particularly from 2008 through 2010. I vowed never again to be surprised by a market. And I haven’t.
I began studying and learning the markets, locally, nationally and globally and discovered what I believe is the dominant force that drives real estate values and helps me predict what the future holds. I have studied this discovery (new to me, not new in concept) ever since.
Believe it or not, the macro winds are not forecasted by interest rates, commodity prices, wage increases or employment numbers, which are purely lagging indicators of what has happened — not what is going to happen.
Since the downturn in real estate, I have made millions and millions of dollars, all starting with this one quote that I stumbled across during my research in 2009:
“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” –Sir John Templeton
That’s right — the best time to buy is when no one wants to buy, and the best time to sell is when no one wants to sell.
While the talking heads on TV and the so-called experts love being featured in interviews on national television (including myself), very few of them think outside of their data-driven boxes and often get overloaded with data points and analyses that are more complex than trying to decipher encrypted computer programs.
And all that could be avoided by focusing on one simple data point: cycles.
Real estate cycles are among the most predictable of any market I have studied. And believe it or not, one simple chart can be used to determine approximate times to be in the market and out of the market. Take a look at this:
The above chart is a simple, quick and dirty view of real estate activity (not prices). The real estate activity cycle is extremely predictable, and as you know, peaks in activity are typically associated with higher prices, and troughs in activity are associated with low (and lower) prices.
As you can see, the cycle is not perfect, but it is as close to a market timing look as you can get. The next peak in activity is scheduled to be in the early 2020s (approximately 2022). So what is to come between now and then?
To understand any market cycle, you must first understand that there is an ebb and flow to every market. There are periods of excessive speculation and optimism, trend changes and growth from external forces such as growing employment, low-interest rates, over-building, etc.
In other words, there is the macrocycle (right now, we’re in the bullish upward part of the cycle) with a minor event or external force-driven pullbacks.
At the end of December, well before the talking heads on TV started talking about a recession and certainly well before JP Morgan called a 22 percent chance of recession in 2016 and RBS told their clients to sell everything, I issued a stark warning for the stock market and general economic conditions.
In December of 2015, I penned the chance of a mild recession in 2016 or 2017 at a 30 percent probability. But while that sent some people scurrying for safety, I see it as nothing more than an upcoming buying opportunity for homebuyers and investors.
And 2016 and 2017 might hold a slight pullback in the cards for residential real estate — some slow times and some more active times. But a mild recession and a moderate slowing in housing sales and prices will be a very healthy thing for the market overall.
When you think about how far we have come since the extreme and extraordinary devaluations from 2008 to 2010, we have had a heck of a five-year run to the upside.
It’s time for a little rest before we start the steepest part of the climb to the top of the market cycle, which is always the most fun. Remember, no market goes up forever, and no market goes down forever — it is an ebb and flow.
I like to think about the real estate market as a steady long-term climb in value and rent rates with a mean line slicing through the middle of the ebbs and flows. There will be periods of time when we are above the mean line and periods of time when we’re below it.
Right now, we have pierced the mean line on the way up, and I expect to pull back slightly to the mean line before we continue our bull market run to the top of the cycle over the next five to six years.
A mild recession or gentle pull back in prices is healthy for any growing market. That means that the market is working the way it should.
I hear the argument on a regular basis that perhaps it’s not that easy. And, maybe it’s not, but it’s close.
There is a quote by a famed cycle analyst that rings true.
“Cycles are the mysterious forces that trigger events.” -Edward R. Dewey
When you look back in history, that statement is completely accurate. Whether it is the subprime crisis for real estate or good weather and low demand from China for agriculture, events happen mysteriously in rhythm with the macrocycle forecasts.
Every market is, in fact, unique. Every region, every type of real estate is somewhat different. For example, real estate in Texas and North Dakota is struggling now due to oil prices.
However, the commodity cycle forecasted well in advance that the time for high oil prices was coming to an end. So, while some people remain surprised at the market cycles, they are truly much more simple and easy to spot than most people think.
JLL is perhaps one of the best commercial research companies I have come across. Because I deal primarily in commercial and multifamily real estate, I follow its research closely.
For each real estate asset type, JLL produces a fantastically simple chart showing where the asset type is in the market cycle. Below is an example of a multifamily value clock by JLL:
Brilliantly done, in my opinion. Because my company manages not only my own personal wealth but also tens of millions for other real estate investors, we decided to produce our own macrocycle chart that we update frequently based on where each market is in the cycle. We like to use an emotional sentiment chart because it often calls tops and bottoms of market cycles better than simple time charts.
No matter what chart you use or what market you’re in, be conscious of the macro market cycles and you will be much more confident in the overall trend without getting caught up in the day-to-day headlines.
Rest assured, investors like myself and others don’t pay much attention to the daily news — we pay attention to macro trends while trying to tune out the noise.