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If you listen to real estate agents – they’ll tell you that it’s always a good time to buy and a good time to sell. They're always happy to share the Kool-Aide and it never seems to hurt their commissions.
Whether you’re a veteran real estate investor or out to buy you first property, you stand to lose a lot of money by buying at the peak of a bubble. Conversely, if you’re selling in a stagnant real estate market, you’re likely to give up a good chunk of your appreciation.
Market timing is critical in real estate transactions. If you buy near the trough in the market, almost any property will make you money and conversely if you buy at the top, you're likely to be underwater even in the hippest up and coming neighborhood. Always keep your powder dry and keep an eye on a number of critical indicators before you consider buying or selling.
1. Pay attention to factors that move the local market. If a major industry in your area is laying off workers, wait for the layoffs to ripple through the local economy and keep an eye out for foreclosures.
2. Catch up on demographic trends. Are young people moving into your city or moving out to seek their fortunes in the sun-belt or major cities?
3. Gentrification is another thing to take into consideration. Certain neighborhoods do much better than others and you’ll find some of the most spectacular appreciation in urban settings that are experiencing a renaissance. Looking in the rear view mirror, I can mention Fremont in Seattle, South Beach in Miami, Old Town Pasadena in California, Harlem in New York and the list goes on. Sometimes a whole city rises like a phoenix from the ashes, spot the trend and get in when its still a little spotty.
4. Follow changes in zoning laws. If a city is targeting and promoting higher population densities in certain neighborhoods, be the first to buy a tear-down property and sit on it for five to ten years until the right developer makes you an offer you can’t refuse.
5. If you have a wad of cash, buy when interest rates are high. You can always refinance later at a lower rate and you get better prices in high-interest environments. This seems counterintuitive but it works great. Just like bonds - when interest rates go up, price goes down. Wait for a few years for the interest rates to go down and bingo, your selling price will be much higher.
6. If you see a housing bubble – stay on the sidelines as a buyer. If you own more than one property, consider taking advantage and cashing in on a windfall by trimming down your real estate portfolio. How do you know when there is a bubble? Look for the obvious indicators - price increases that out pace rent, massive price appreciation even in the worst neighborhoods, historically high home ownership levels, and the chorus that keeps chiming, "Housing prices will never go down"....Sound familiar?
7. Watch the affordability index in your area. That indes measures what percent of the population with median incomes can afford to buy the median priced house. If its under 30%, its not sustainable.
8. Another thing that distinguishes a real estate bubble is when you see house prices going up in virtually every major city in the country. It's just not normal for houses in Midwestern cities to increase 20% per year. When they do, it’s a sign of speculation and time to cash in your chips.
9. Loose credit allows more unqualified buyers to bid for entry level homes. Buy when credit is tight and sell when its really loose. Drive hard bargains buying when credit is tight, you won't have any competition.
10.You can never consistently buy at the best time. It’s OK to miss the first leg of a housing recovery. Just don’t miss the second leg. It’s always hard to pay an extra $20,000 for a house you could have purchased a year ago – but don’t wait till it costs another $100,000 to buy a similar house.
11. Whenever you can buy property at a price where the monthly cost of mortgage, taxes, and maintenance is less than the rental income and rents are flat or rising, buy. With the passage of time, cashflow positive properties usually get more positive due to increasing rents and depreciation and other tax advantages will shield your income.
12. Buy after a major crisis. Crisis come and go and people always overreact. After 9/11 many people dumped their properties only to miss the greatest bubble market in world history. Any crisis can send shockwaves through the housing and stock markets but we have a very resilient economy that inevitably recovers.
Perhaps the simplest advice to give is to sell or at the least cover your ears when the herd is screaming "BUY!". And when they simmer down and start recounting tales "proving" that real estate is the worst investment ever, start bottom fishing for some irresistable deals. Real estate is cyclical and the herd only sees whats behind them.
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