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What strategies can I use to predict the direction of the real estate boom-bust cycle in my area?

What strategies can I use to predict the direction of the real estate boom-bust cycle in my area?

There are quite a few, depending on the type of real estate you’re interested in. For our purposes here, let’s address residential housing.

One of the best indicators is “Days on Market” for properties listed on the MLS. This—as the name suggests—reflects how many days a property has been listed. The shorter the time, the stronger the market; the longer the time, the weaker the market.

But you need to know a few things. First, average days-on-market varies geographically, even for the same type of property. In a hot market, the average house might have a DOM of 20. In a more stable or slower market, the average might be 50. So the thing you want to look at isn’t just the absolute number, but the direction of the change. A change in DOM over, say, 6 months from 20 to 30 indicates a slowing market. A change in DOM over the same period from 50 to 40 indicates a strengthening market.

You also need to compare apples with apples. The DOM for a $200,000 1-bed condo is likely to be quite different than the DOM for a 4 bed/2.5 bath single-family home priced around $400,000. And while DOM often will move in the same direction even for quite different property types, that’s not always true. So if you were rehabbing a single-family home, the condo stats would be meaningless; you’d look at DOM changes for single-family homes.

Another indicator is the number and size of price cuts for a property. Admittedly, this is pretty closely related to DOM. The longer a property has been on the market, the more likely it is that the owner will cut the price to try to sell the property. Still, especially when a market is slowing quickly (such as in 2006), the number and size of price reductions are a better quick indicator of changing market conditions.

Another indicator: You can usually tell when a market is overheated—when it’s “frothy” and near the end of a boom cycle—when sales prices approach or exceed 100% of the listing prices. It’ll vary by area, but in many areas much of the time, on average, houses may sell for 94%-96% of the listing price. If you see that the average house is selling for 100% or more of its listing price, that’s a hot market that probably isn’t sustainable long-term. Be very careful before buying in that market at that time.

Another indicator: Watch out if it’s cheaper to buy than to rent. Admittedly, there are some areas of the country where that’s the norm—areas of Baltimore, for instance, or certain Rust Belt areas. In general, though, it should be cheaper to rent than to buy. True story: Back in 2006, I was trying to sell a condo using a lease-option. (Great idea. Terrible timing.) Rental rates in the community were around $1,400. But you could buy identical condos for $900 a month. (These were largely “teaser” and negative amortization rates.) People ended up buying condos for $275,000 that, 3 years later, were worth $90,000.

Interestingly, today they’re selling for around $200,000. But here’s a little quiz for you. You’ve read the tips above, right? Tell me if it would make sense to buy there today: In June 2017, average DOM was 50. Today, it’s 1. Since June 2018, the sales price has been more than 100% of the listing price (close—it’s been around 100.5%). Back in 2017, it was around 95.5%. Here are some stats. What that tells me is that the place has gotten very “frothy” in the past year. Properties are selling instantly for more than the asking price. If you owned a place there, now’s the time to sell. Not to buy.

So those are a few strategies you can use.