With a commercial real estate career spanning over 30 years, I am asked numerous questions regarding real estate. One question that comes up most often is “whether it is a good time to invest in real estate.” Which is usually followed up with yet a similar query, “should I buy now or wait”?
In order to adequately answer both parts of this question, I find myself looking back at the economic cycles that have occurred over my career. As I reflect, many things become apparent, the first of which is each time we have an expansion in the market it is always followed by a contraction, which is then followed by yet another expansion. The cycle repeats itself with varying degrees of recovery and contraction. Just when things are feeling great and everyone is jumping into the market, the bottom suddenly falls out and people are surprised. Then, when things feel like it cannot get any worse and everyone is staying out of the market, the market suddenly recovers and people are surprised, wishing they had bought when prices and conditions were more favorable.
Economic cycles occur approximately every 5 to 7 years. They are a common occurrence and have been with us since we began tracking markets. At least two events take place each economic cycle (1) the downturn referred to as the “contractionary period” usually lasts an average of 10 to 12 months while (2) the recovery referred to as the “expansionary period” lasts an average of 36 months, with varying degrees of upward and downward movement, from crest to valley.
Corrections in the market are necessary to balance the supply and demand of inventories and to keep prices in check. Without corrections, inflation and rising interest rates surface, causing irreparable damage to our economy, both on the domestic front and on the international scene. Inflation, deflation and stagflation can cripple our economy. To delay or soften their impact, economist and the Federal Reserve (The Fed) often manipulate interest rates, create tax incentives and even rebate taxpayer’s money, urging them to spend, which in turn produces a reaction within the economy. Sometimes the reaction is positive, other times it advances and perpetuates the inevitable. Attempting to guess and time the market even during periods of stability is not easy; it is increasingly more difficult when no one knows what The Fed will do next. Banks don’t lend, buyers don’t buy and everyone sits around waiting for direction or for something to happen. The result leads to deflation in the economy.
As consumers, we have an innate trait, “the propensity to consume” goods and services, meaning we can only put-off making that purchase for a relatively short period-of-time. It’s not our nature to deprive ourselves of those things we want. Notice I did not say the things we need; therefore, eventually the “pinned-up demand” is released with a vengeance and the buying cycle begins all over again.
The return of a strong housing market has led our economy out of recessions more than once. It creates jobs in almost every sector of the economy; simply put, recovery cannot occur without the creation of jobs. By closely observing trends within the market you may be able to better gauge when the cycle begins and when it comes to an abrupt end.
New construction has a wide and far-reaching “multiplier-effect” on the economy, touching virtually every industry either directly or indirectly. When a new home is built, hundreds of businesses benefit.
Now that we have examined some of the factors that impact the market and understand that economic cycles are a natural occurrence, let’s address the question. Is now a good time to Invest in Real Estate? When the market is in contraction and hits bottom, we usually have lower interest rates, lower prices, motivated sellers and a large inventory of property to choose from, which in-turn creates an ideal buying scenario. As an added bonus, Congress provides tax credits or other buyer incentives to help simulate the lagging economy. On the other hand, when the economy is expanding we have higher interest rates, high inflation, higher prices, stubborn sellers, less inventory and the government working against us to cool the market off. The ironic thing is most people make their purchases under the second scenario because it feels right and that is what everyone else is doing. Everyone except Warren Buffet, Donald Trump and other savvy investors; this group of elite investors buys low and sells high. You will usually find them heading in the opposite direction of the herd, reaping huge rewards for their insight, vision and discipline.
When you examine the two scenarios it becomes very apparent that the best time to invest is when others are sitting back waiting for something to happen. Sadly, for some, both scenarios pass them by. When the economy is red hot, they say, “let’s wait for prices to drop” and when the economy is soft, they say “let’s wait for things to get better”.
So you tell me, “Is now a good time to Invest in Real Estate”? The important thing to remember is you must act to reap the benefits. Both scenarios create opportunity. Understanding how to benefit from each requires skill and specialized knowledge. I hope this helps you spot the trends and encourages you to act when others sit back and do nothing.
Charles Marina has served on numerous real estate boards and committees at the local, state and national level. He recently served as the Chairman of Real Estate Commercial Alliance Committee (RCA) for The Texas Association of Realtors (TAR) and currently serves as a Federal Political Coordinator (FPC) to Congress for The National Association of Realtors (NAR) and serves on the BBVA Compass Bank Advisory Board. He is a member of the McAllen South Rotary Club and attends Calvary Baptist Church.
Charles is an avid reader. His greatest joy comes from reading a favorite book, sitting in his recliner with an over sized cup of coffee and being surrounded by family, with his wife, Debra, and his loyal King Charles Cavalier, Duke by his side.
Charles Marina is the president of First American Realty, which is located at 3827 N. 10th Street, Suite 105, McAllen, Texas 78501. He can be reached at 956-682-3000.