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Profiting in Any Market Condition.
How to identify market cycles and their sweet spot.
By Tom Bissmeyer ~ Principal, Price Morgan
The more I travel the country the more I keep hearing the same comments about people interested in investing in Real Estate. It doesn't matter if I am in California or in North Carolina. The question is "Where should I be investing in Real Estate today?" In fact, some are saying "With the stock market running the last couple of years, maybe I should forget investing in real estate and start investing in the stock market."
I know of some investors who have invested in real estate within the last couple of years and are now finding themselves in an upside down position. With that type of experience it's no wonder people are confused on what to do today.
Where is the puck going?
With all of this in mind I would like to share a little perspective. The question of "Where should I be investing today?" is always a moving target. Why? Because real estate markets are not static, they are very dynamic. Meaning that markets are constantly changing and adjusting. This can be best described by a famous quote by Wayne Gretzky "Skate to where the puck is going, not to where it is." Let me translate as it relates to the questions regarding "stocks vs. real estate" and "if real estate, where?"
In just a moment I will briefly explain how markets cycle. But let say this, there is no secret that real estate as a whole has under performed the stock market over the last couple of years. In fact, as I write this, the stock market is at or near an all time high. I don't think that you have to have a PhD in Finance to understand that putting money in a market that is at an all-time historical high is probably not the best time to be investing in that specific sector. In fact, I think most of us understand that the time to buy is when a certain sector is beat up and down in the trenches. For the stock market, this would have been about three or four years ago.
Local vs. National Real Estate.
Where is real estate today? In some markets like South Florida or Southern California and many other markets across the country, real estate has slowed down considerably. But, I do think it is important to understand that in some places across the country real estate is doing very well.
Here is where the dilemma comes in. When people think of the stock market and the real estate market, they think of each of them being some big single market Ð meaning, if the stock market does well, then all stock are doing well. If the real estate market does well, then all real estate must be doing well. That is definitely not the case in either market.
In fact, on any given day you can see in any financial media that there is a list of the biggest winners for the day and a list for the biggest losers for the day. What does this tell me? Every day there are some stocks that are doing well and some that are doing poorly. The same can be said for real estate.
Real Estate really needs to be evaluated on a local or regional basis. Not on a national basis. I have to laugh some times when you see the national press quote some statistic about real estate. They make it sound like that particular statistic relates to all real estate across this entire country. That could not be further from the truth. Let me reiterate, real estate needs to be analyzed on a local basis.
Market Cycle
Let's spend just a little time looking at how markets cycle. I think once you understand this, you will have a much better understanding of when and where to invest in real estate. A market cycle can be best described with the S-curve. Imagine a lazy S lying on its side on a graph.
First Stage.
The first stage is called the Formation Stage. This is the very beginning of a market cycle. This stage is where a market is just starting or maybe restarting for some reason. This stage is normally very hard to identify for most real estate investors. Why, because there is not some big sign posted saying this is the Formation Stage. Not much activity is happening at this stage. There is very little visible proof that the market is getting ready to run. You don't see the big name developers in the market place, not yet at least. Everything is happening under the radar of both the general public and many within the industry.
Second Stage.
The second stage is called the Concentration stage. This is where the market just starts to get a little traction. What I like to call a "toe hold." You start to see some of the early signs that the market is positioning itself to really take off. Maybe you see some major announcement that a large chain is moving into the area. Maybe you see some announcement that a new airport is going to be built or the existing one is going to be expanded. Maybe the announcement is that a new highway is going to be coming through the area or a new outer loop is going to be built. The list can go on and on showing signs that something is getting ready to explode.
Third Stage.
The third stage is called the Momentum Stage. This is where the growth seems like it is going almost straight up for some period of time. All of the foundation for a big run has been laid down during the first two stages. This is where you seem to hear about one major development after the next being announced. This is where you hear of large national real estate companies showing up on the radar screen.
The reality is that they have been positioning themselves during the first two stages, but they have been flying below the radar screen so they could get their land positions in place before the general public learns of their strategies. I know of one area in the country where a very large real estate company just purchased 20,000 acres for a multi phase development. This could be 10 years worth of development. Do you think they are skating to where the puck is going?
One sure way to build wealth is to acquire land by the acre and sell it by the sq. ft. Understand, you don't have to have hundreds of millions of dollars to participate in this game. You just have to know where to position yourself in a market cycle.
If you look at either the stock market or the real estate market, you will see that over the last 100 years, both of these markets have gone through multiple S curves. If fact, if you lay them out across the graph, you will see one S curve connected to the next S curve moving from left to right and from bottom to the top. This pattern will continue as we move into the future.
Forth Stage.
The fourth stage of a market cycle is called the Stability Stage. As we know, nothing goes straight up forever. When it starts to level off, this is when it is entering the fourth stage. Sometimes the market appreciation seems to go back to a more normal growth pattern or even level off for some period of time. In some extreme cases we have seen it even go down or backwards for a period of time. Obviously, you don't need to be a rocket scientist to know that the stability stage is not the most optimal time to be investing.
Reading a Market.
So, now that you have a little better understanding of how markets cycles. Let me ask you a question. Where do you think the stock market is right now? No one knows for sure, but it is at an all time high. In this case we would think it is close to the top of the momentum cycle or entering the stability cycle.
Where is the real estate market? Given the overall corrections that have taken place in the last couple of years, we believe that in certain markets real estate is getting ready to run or is currently running in a positive direction.
One thing that I have learned in my twenty-plus years of real estate investing is this "There is always somewhere that is doing well." Don't ever forget that. Our goal as real estate investors is to find the markets that are getting ready to really take off or are somewhere in the lower one-third of the Momentum Stage. If we can position ourselves somewhere along this part of the market cycle then we stand the greatest chance of profiting the most during a real estate run.
At Price Morgan, we pride ourselves in making fact-based decisions. We travel the country and specific parts of the world looking for markets that are in the first and second stage of a market cycle. We then deliver these unique real estate deals to our valued clients via informative webinars and teleconferences. We, like you, are looking for the best investment real estate opportunities at the right place in the market cycle.
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