Real estate: it’s complicated | Tacoma Daily Index
By Morf Morford
Tacoma Daily Index
Real estate is many things; for some it’s a livelihood, for others it’s an investment and for others it’s literally where we live.
For builders and contractors, real estate is a project. For those of us who inhabit our real estate, this is our biggest investment of our lives.
A generation or two ago, a newly married couple could buy their first home – a small, affordable house.
Temporary housing, as in 2-3 year military deployments, presumed rental.
The condominium, a quasi-compromise between an apartment and a single-family house, appeared as a housing option in the early 1980s.
Building any type of housing takes time. A condominium or apartment project can take many years from planning to full occupancy. A single family home can take a year or two – if all goes well.
In other words, the economic dynamics of the economy as a whole – and certainly the builders, contractors and potential owners can (and often do) change dramatically between the time the plans are drawn and the time the occupants can move in.
Interest rates, costs (or availability) of materials, and the health, financial, or marital status of potential homeowners/purchasers can change, deflect, or even disrupt the best-laid building plans.
Many fortunes have been made in real estate.
But almost as many were lost.
The wheel keeps turning
There are four semi-reliable stages or seasons in real estate: recovery, expansion, hyper-supply and recession. As with the Earth seasons, there has never been a period of sustained expansion or hyper-supply without an eventual recession, followed by recovery. Followed by another cycle of boom, hyper-supply and bust.
Refining where one phase ends and another begins is, to say the least, the challenge.
Identifying the recovery phase of the cycle, for example, can be tricky, as most of the nation and economy will still feel the effects of a recession.
At the start of a recovery, it’s a great time to pounce on below-market properties that are in various states of financial or physical distress.
A good policy at the start of a recovery is to wait out the rest of the recovery period by adding value to these properties so that they are ready to sell or rent as the economy gains a foothold and proceeds to the next phase.
Expansion occurs when the economy as a whole improves, job growth is strong, and there is increased demand for space and housing.
Construction projects (and construction cranes) seem to be everywhere. Materials, skilled labor and goods are in short supply. Contractors are reserved and literally cannot build housing fast enough.
Which leads to the next phase…
As with any other hot product or trend, investors and developers go wild during the boom phase to ensure that supply meets a growing – seemingly endless – demand.
Inevitably, there will be a tipping point at which supply begins to exceed demand – either due to too much inventory in the market or due to a sudden change in the economy that restricts demand. Now is the time to buy and hold, if you can, so you will already have promising properties in stock when the recovery continues.
But until the recovery returns, supply far outstrips demand, construction projects fail and remain unfinished, and rental property owners suffer from high vacancy rates. Not only is rent growth not present, but some landlords are forced to offer reduced rental rates to attract (or keep) tenants who are also suffering from the economic downturn.
If you have the resources, a recession offers the best opportunity to buy distressed properties at a great price.
The average real estate cycle lasts about 18 years.
That’s about four years per phase – but some phases last (or at least seem to last) much longer.
And, there is nothing predictable about the “average.”
In general though, there are solid strategies for making the most of these situations.
In times of recovery: focus on rehabilitation, buy and hold, and if possible, multi-family investments.
In times of expansion: buy and keep, consider multi-family and commercial acquisitions
In times of hyper-supply: buy and hold. The demand will eventually come back.
And in times of recession: private and hard money lending, investing in foreclosures and bank-owned homes.
As some of us learn, the real estate market is about more than materials, labor, land costs and interest rates. Demographics underpin markets of all kinds – perhaps especially real estate.
A major generation rocks all the markets it touches. High demand for “starter homes” inevitably leads to downsizing, which inevitably leads to these homes being put back on the market – perhaps all, or most, at once.
Another semi-unpredictable factor is the government.
The government will occasionally intervene with policies to help stimulate a market that is particularly sluggish or in a prolonged recession.
Policymakers have the ability to implement tax deductions, subsidies, tax credits, and various homeownership programs to entice consumers to purchase real estate.
And, as we all know in the 2020s, pandemics can upend everything we thought we knew about every market.
Perhaps real estate above all.
Going through these semi-predictable phases can make or break our net worth.
As always, preparation for what’s to come is the best defense.