Many people are scared off from investing in real estate because of what happened in the market 12 years ago. The housing market crash that began in 2007 was the worst period in U.S. history for the housing market and was largely to blame for the resulting financial crisis, which came to be known as the Great Recession.
The housing market experienced consistent growth during the latter part of the 1990s. But in 2000, when the stock market crashed, a lot of money was taken out of the stock market and put into the housing market. The result was a six-year boom in the housing market where things really got out of control. Subprime mortgages were a popular thing then, as people were approved to purchase homes they probably couldn’t afford.
The real estate market peaked in 2006, but then came to an abrupt halt only a year later. Freddie Mac announced near the beginning of the year they wouldn’t be buying risky subprime mortgages. Other lenders began to file bankruptcy in the months following. By late summer, a credit crunch the world over began, no subprime mortgages were available, American Home Mortgage filed for bankruptcy, and the crash began.
What followed were foreclosures that reached the millions and a massive decline in housing prices across the country, with some regions experiencing a drop of 40 percent in value in a short period of time.
In the years that followed, people fled from home ownership, opting instead to rent. In fact, according to a Business Insider report, in the country’s 50 largest metro areas, the number of people who rent housing rose from 36.1 percent to 41.1 percent from 2006 to 2014.
Now, 12 years later, while the housing market has rebounded, some people are still wary of real estate as a source of investment. Naturally, they worry about another crash and how that could potentially destroy their lives. Not many people predicted the housing bubble bursting in 2007, so how are investors to feel safe and secure that another crash isn’t on the horizon?
Even those people who invest in the real estate market question how they know prices won’t go down after they buy. The answer to whether you are buying at the top of the market or at a more preferable time lies partially in the stock market.
How the Housing Market Trails the Stock Market
It’s not easy to predict the future success or failure of the stock market. If it were, a lot more people would be getting rich off doing it. While it can be even harder to predict the future of the housing market, one way of getting a glimpse into a crystal ball is to look at the current state of the stock market.
How the stock market performs today is a general reflection of what people’s expectations are for earnings over the next six months to two years. You can drill down further by taking a look at the specific industries that drive the economy in a particular region. If you are considering investing in real estate in Raleigh, North Carolina, Seattle or San Francisco, for example, you can look at the performance of the tech sector in the stock market to get a sense of whether there are good times or bad times ahead.
While the stock market will correct itself quickly, the housing market tends to take a much longer time to do so. A big reason for this is the general public is heavily involved in the performance of the real estate market, while they are not in the stock market.
There are four general cycles to the housing market, and each is driven by the desire for investors to make money via new construction to meet demand:
- Phase 1 is recovery, which includes declining vacancy rates but no new construction.
- Phase 2 is expansion, where vacancy continues to decline, and new construction begins to pop up.
- Phase 3 is hyper-supply, where vacancy begins to increase as the new construction projects hit the market.
- Phase 4, finally, is recession, where vacancy increases dramatically as the majority of new construction comes to completion.
While the housing market will almost always follow these four cycles, it’s important to recognize that different markets throughout the country could be in different phases at the same point in time. San Francisco may be currently in Phase 2, for example, while Houston is in Phase 4. Identifying where your market is right now is important to knowing what’s ahead.
The key is to invest in a market in either Phase 1, early Phase 2 or late Phase 4. This will give you the best value in terms of your purchase and the highest possible returns in the form of either a resale or rental. Jumping into the market in late Phase 2, Phase 3 or early Phase 4 will mean you are paying a premium for your property, with the market about to tumble.
Where Some of the Top Markets Are Right Now
John Burns Real Estate Consulting conducted a study of where some of the major markets were on the housing cycle. The data was last reported at the end of 2017, so some of these markets have moved forward in the cycle. Even still, it’s worth taking a look at some of these markets and what the company says is happening in them.
During this phase, home prices have or are bottoming out and distressed inventory is what is ruling the day. Capital investment is mainly targeted to distressed properties, and there are declining to flat pricing and volumes.
Chicago was in early recovery at the end of 2017, just moving into the next phase.
Phase 2 is defined as expansion. Sales and prices are rising. There is good affordability and low construction. This is where capital investment begins to rise.
“Ripening recovery” is happening in Phase 2 in cities such as Minneapolis, Indianapolis and San Antonio. “Big volume market acceleration” is happening at the midpoint of Phase 2 in Las Vegas, Phoenix, Tampa and Houston. “Nearing exuberance” is being experienced at the end point of Phase 2 in Atlanta, Charlotte, Los Angeles and Raleigh.
Phase 3 is the time when both prices and volumes surge in a market. Affordability weakens as a result, and consumers are in a frenzy to snatch up homes before they fly off the market. Savvy real estate investors begin to grow cautious during this phase, especially near the end.
John Burns Real Estate Consulting says Denver, San Diego and Salt Lake City are in the “early exuberance” stage of Phase 3. Markets such as Austin, Dallas, Manhattan and Nashville are in the “maturing exuberance” stage near the end of Phase 3.
The company doesn’t classify any U.S. markets that are currently in Phase 4 of the housing cycle, meaning there are no regions that are in significant, obvious downturns. Regions that enter Phase 4, though, are in a bad situation.
Capital is still often deployed in these markets, but sales volumes begin to decline. This is also the phase where some investors begin to cut their losses and back out of the market.
John Burns Real Estate Consulting actually adds a fifth phase, which it terms a Full Downturn/Recession. In this final stage of the housing cycle, sales volumes and pricing decline rapidly and invested capital loses money.
To complete the cycle, though, the distress this creates eventually attracts new capital ready to pounce on the opportunity, and the market flips back to Phase 1.
Where Should You Invest in Real Estate?
Analyzing the stock market is a great way to predict the future of the housing market, and identifying where in the housing cycle a particular market is can be a strong way to see whether your investment could be solid or soon face challenges.
That being said, there are always opportunities for positive real estate investment in each phase of the game, if you will. Just because a region may be at the end of Phase 3, entering Phase 4 or well on its way to Phase 5 doesn’t mean there aren’t good investments to be found.
In fact, when the housing market does enter these phases, people often leave behind home ownership in favor of renting housing – as we saw following the 2007 crash. This, in turn, provides a great opportunity for real estate investors who serve as landlords and rent single-family housing.
Even when a particular market enters a downturn period, the demand for single-family housing does not disappear. While fewer people owned homes (or sadly even lost their homes) after the 2007 crash, their desire to live in a single-family home did not go away.
Savvy real estate investors jumped on this opportunity to purchase homes at a lower price, fix them up and rent them to families who desired single-family housing, but could no longer afford to purchase it themselves.
Partner with a Trusted Firm to Invest Smartly
Now that you have an idea how to identify whether your home is due for a drop or increase in value, it’s time to research which markets might be prime for investment. Oftentimes, though, investors are limited to where they put their money based on where they live.
By partnering with HomeUnion®, investors can remove that barrier and put their money in the right markets across the country. HomeUnion® provides a wealth of tools, information and resources to conduct research for people who want to invest their money wisely.
Visit us online for more information, or call us at (866) 250-5610.