The Market Begins To Feed On Itself As Homeowners Begin To Rush To Take Profits

Category: Finance, Real Estate.

The stages of a real estate market are most often recognized only after the fact.

Real estate speculators call themselves investors because they believe they are taking calculated and controllable risks when purchasing homes. Even when all the historical data confirms that a downturn is in progress, most speculators won t stop gambling. In the mid to late 1990 s real estate investing was virgin territory because it was easy to use formulas of 60% to 70% of Fair Market Value minus repair costs to determine an offering price for a seller. In only three years, a groundswell of speculation led to frenzied buying. The" chant" was" Get as many properties under contract because they can only go higher! " In the earlier years, buying properties cheaply enough allowed them to be rented and they supported themselves while the investor simply collected checks. Families looking for a home to live in got caught up in the buying panic because of the scarcity of homes for sale.

Almost no other speculative opportunity in history caught on as fast because of real estate investors needing little or no money down and ease of loan qualification for" retail buyers" . The market quickly and efficiently climbed with the help of lending institutions who were offering low interest rates, 100% financing, with no proof of the buyer s income. Even when many of the potential borrowers had credit issues and minimal down payments, the lenders created more lenient loan requirements. Here is a summary of the stages of a real estate cycle: Stage# 1- This is where supply closely equals demand and home prices fluctuate between+ /- 3% per year and prices are basically stable over a five year period. The number of single family homes that were owned by investors rose from 5% in 1995 to almost 29% by the end of 200Effectively, these investors took away at least 25% of available single family homes with the intent of selling them at higher prices to retail home buyers. Stage# 2- Here demand out- strips supply, or a" sellers market" develops because of fewer homes on the market. Stage# 3- Here demand far out- strips supply with resulting large annual price increases.

This can be created by investor speculation. Homes now offer new speculators more attractive yields than stocks and money market instruments. The market begins to feed on itself as homeowners begin to rush to take profits. More so called" investors" begin buying multiple properties with expectations of selling for huge profits because of the low down payments required for mortgages or using creative financing. Stage# 4- As home prices become unaffordable, interest rates increase making financing costs too expensive for homeowners to purchase, and investors have inventory that can t be sold. Summary- Based on the current market conditions and continuing available data, the real estate market is well into Stage# There is no way to determine how long this swing will last but historically they have lasted for 6 to 15 years.

Seemingly everyone tries to sell and the market readjusts to former market conditions by pulling back as much as 30% to 60% of peak values as the market begins to stabilize for 3- 8 years. This stage offers huge opportunities for real estate investors and homeowners alike that want to purchase homes either for living in for 5 years+ for homeowners, or for" flipping" for investors. Unfortunately, retail buyers who wait to get the lowest possible price often wind up paying higher mortgage rates which offsets the cost savings by waiting, especially when you include their cost to rent, and the interest tax- deduction that they lose by not owning. Both homeowners and investors looking to buy a property need to be very selective about how much they pay for a property, the amount of costs to rehab it, how they will be financing it, how long they intend to stay in it, other properties currently, the carrying costs listed on the MLS� , and neighborhood conditions. Investors will have to buy low and sell low, while the retail buyer has become" king of the mountain" in picking the best possible home for the lowest price.

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