The housing market is currently sitting at an all-time high again. I seem to hear someone with sage guidance about the market every day. Josh, I will wait a couple of months until the real estate market cools off, then I will buy. However, that day may never come. What do we do?
Trying to determine the best time to buy real estate can be highly frustrating. If you are a first-time home buyer, then the answer is pretty simple—you need to purchase something immediately. If you are an investor, then the answer may be a little more complicated. First, let’s take a look at the four real estate cycles to position ourselves in the market better.
Stage 1: Recovery. Recovery is the time directly after a housing bust. The market is at all-time lows, and there are foreclosures everywhere. It is an investor’s dream. However, banks aren’t lending very quickly, and it can be challenging to secure financing. Many people who can secure funding become rich throughout this phase. Again, this is an investor’s dream. I continually write about creative financing in real estate (101, 102, 103) in preparation for this time.
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Stage 2: Expansion. Things are looking suitable for investment in the real estate market. The vacancy rate is low, and banks are lending. New home buyers are out and about and have an agreeable time buying a home. Everything seems balanced—sellers and buyers seem to be about even because supply and demand are about equal.
Stage 3: Hyper-Supply. Everyone seems to be making millions off fix-and-flips. Something seems a little off. The home prices that were selling aren’t selling anymore. Buyers seem to control the market. Also, there are too many homes on the market; builders have a ton of supply, and new developments stop mid-construction. You wonder if we are at the top of the market.
Stage 4: Recession. The inevitable bust in the boom/bust cycle. Prices collapse or stall out. Real estate is making much fewer new millionaires. We have hit the peak and are on a descent to lower costs or more supply. After biding your time, this is the moment you were waiting for. You can get your hands on as much property as you can buy.
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For reference, America went through this entire cycle in the 2000s. It is a period that we should all study because it was the perfect storm of Wall Street greed and Main Street ignorance. However, this idea that everyone is a house flipper was born in 2009 and 2010 when home prices dropped 30-50%.
Why do we need to know the four stages of real estate? Because knowing how everything will play out can lead to becoming a more savvy investor. When I came home from overseas in 2005 and witnessed the San Diego housing market firsthand, I was shocked. Everyone was rich. New homes, new cars, new boats were an everyday occurrence.
I was a 25-year-old Sergeant in the military. I hadn’t read any books and didn’t possess any higher-level thinking. I knew something was wrong but couldn’t describe it. In fact, I remember that my mom was renting a house in Chula Vista, San Diego, California, in 2005.
Next door to my mom was a professional couple—a teacher and a nurse. They had two brand new BMWs, a boat, and an RV parked outside. The houses in the neighborhood were priced at $550,000, which was a large sum of money then (and even now). I remember thinking, how the heck can standard Americans afford all this fancy stuff?
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Later we find out that they couldn’t afford it. It was all on borrowed money. House values were increasing so fast that people were tapping imaginary home equity to buy “toys” such as jet skis, RVs, boats, and motorcycles. As I said in “TAP You Home Equity,” only buy assets that produce money if you tap into your home equity. It was a candy wonderland, and everyone became sick from the sugar.
Knowing the four stages of real estate would have allowed me to better position myself to take advantage of the situation. That feeling that something was off would have led me to start consuming the appropriate media to ascertain what was going on. I would have read about interest rates, gas prices, and stock market growth. These are all indicators of the actual situation.
The four stages of real estate are there for you to exercise second-level thinking. Second-level is asking “why” four times. Every boom/bust cycle will play out differently, and the catalyst that bursts the bubble will be a different villain every time. However, using second-level thinking, we can better position ourselves to profit when everyone else is trying to survive.
So what do we do today? Today, I am getting that same sense that I got in 2005. Something is wrong in the housing market. The prices are way too high, and home values appreciate over 10%, year over year. This rate of appreciation is unsustainable. I am researching the market and finding that there is a severe shortage of new homes. Since prices are so high, even if someone sells, they can’t afford another house—time for second-level thinking.
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I recently wrote an article called “Should You Buy a Home in Smaller City?” If you are sitting on $300,000-$400,000 of home equity, it may be a good idea to tap into it to purchase a home in a small city. Second-level thinking tells me that these tiny towns are going to get an influx of older citizens soon.
What If you are a first-time homebuyer? I know that prices are high, but you have to get into a house any way possible. Remember, all those articles I wrote about renting rooms and lowering mortgage costs. Yeah, those ones. Time to do the math. The goal is to buy a house to get a roommate to assist with the mortgage. “Mortgage Zero” is an excellent place to start to get ideas.
If you are a parent, it is incumbent on you to start planning to help your kids buy a house. If you can buy a home now, buy it. Salaries haven’t seen real growth since the 1970s, so home prices are sky-rocketing, and wages stagnate. Our kids are screwed if we can’t help them get into homes. Parents need to become investors.
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What if you are a real estate investor? Become an investor first, real estate investor second. Becoming a broad investor means that you can jump into different asset classes as necessary. There are multiple asset classes, and knowing how to leverage each one at the appropriate time will position you to succeed across the board.
Now real estate is running hot. Some other asset classes are cryptocurrencies, stocks, commodities, and business. Cryptocurrencies and stocks are running hot right now as well. The difference is you don’t need large amounts of money to get started into those.
In fact, the more I read about crypto, the more I learn that it is a “first mover” asset. There are ways to get involved in new coins early in their lifecycle. I don’t want to get too much into it now, but this may be an excellent time to learn how new coins come to market and learn how to become seed money.
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Stocks are heating up as well, with the Dow Jones Industrial index hitting a new high almost every day. There are still pockets of suitable investments if you conduct the proper research.
What is the asset class that lost the most during the pandemic? That’s right, business. American needs small businesses to return in a big way. You don’t have to open a large business; it can be a “Company of One.” Luckily I just wrote an article called “Retire Rich, Retire Comfortable with a Business” that pieces together some ways to get involved with a business. I also put it together in book format.
All this is to say that real estate is expensive right now. In 2006-2008, it was the banks who were juicing the housing market artificially. Currently, there is an extreme shortage of houses. Will builders be able to catch up? No one knows how this will play out. However, it may be an excellent time to buy into homebuilder stocks.
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As we wait to see what is happening, we need to expand our horizons into other asset classes such as crypto, business, stocks, and commodities (gold/silver, etc.). Shifting focus does not alleviate us from studying and preparing to make a move in real estate.
Money made from other asset classes needs to be ready for action in the next window of opportunity in real estate. We need to form strategic alliances with our parents, sisters, brothers, and other family members to buy more houses. Only by working together can we succeed against the world.
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The best time to buy a house was ten years ago; the second-best time is now. If you are a first-time homebuyer, you need to get into a place now! Get with your parents or other family and devise a way to get into a house. You cannot build true wealth without getting into real estate. When house prices take off, you want to be one of those who are benefitting, not looking from the outside.
As investors, we need to broaden our horizons. If you are not reading 2-3 hours a day on real estate, stock market investing, cryptocurrencies, commodities, or business, please don’t consider yourself an investor. And that’s okay; not everyone wants to be a true investor.
However, if you aim for greatness, get started by reading everything you can about the different asset classes. Build your thesis and move forward with it.
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My current thesis on real estate is that the market will run hot for a couple more years. There is too much money on the sidelines and not enough houses. There will be an influx of people ready to buy if there is a slump in prices.
We “little people” need to work together or risk getting left behind. Remember, there are other ways to get into real estate, such as raw land. Perform second-level thinking on all that you do. I put some of my articles together in “Financial Independence through Real Estate.” And in book format. That is a great place to start, and I have many references to books that have helped me in my real estate journey.
Trust me; it feels good to own assets that are appreciating very fast, like the current real estate market. However, I recognize that my kids will have to buy into this market, and my mind starts working again. There are no easy answers, only easy questions. How do I get into a home? How do I raise the money? How can I afford the monthly payments?
From there, use second-level thinking to get to the answer you need to move forward! Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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