Are We Entering the Real Estate Down Cycle?



A recent Bankrate survey shows many American investors developing a “skittishness” when it comes to real estate investing. We know the real estate market goes through cycles that eventually includes a down market. Could this be the earliest stages of a down market that can present some of the best investment opportunities for the astute investor?

The survey found that 32 percent of all Americans think the stock market is the best place to invest savings that will not be needed for at least 10 years. Another 24 percent say they prefer “no-risk” cash liquid investments for the long term. Only 22 percent now prefer real estate investing. That’s a total of 78 percent of American investors. The remainder mostly preferred gold, bonds, and bitcoin. This is the first time in 4 years that the survey did not prefer real estate.

The Real Estate Cycle

Buy low, sell high. The major phases of the real estate cycle are the bottom which is a good time for savvy investors to buy low. The middle is when many investors hold properties to profit from cash flow. And the high point, which is the time to sell for a profit before the cycle dips into a new low cycle. The last low cycle roughly lasted from 2008 to 2011. Since 2012 we’ve been in the middle of the cycle characterized by rising rents and rapid appreciation in property values.

Just because general investor sediment is beginning to turn away from real estate does not mean we are near the low point of the cycle or that this is prime time to make big investments. But it is noteworthy that we may have turned from the top of the cycle and are beginning to dip lower. This is characterized with prices and rents first plateauing before decreasing (however slightly they may decrease).

Whether this is actually happening and how significant decreases might become is anyone’s guess at this time. What the survey shows is a strong indicator that investment money is beginning to steer away from real estate. Unless you want to buy at the high point of the cycle, this is probably a time to be wary of expensive property investments.

Other Matching Indicators the Cycle is Turning

As home prices and bidding wars continued through the hot summer season, other indicators also began pointing at a slowdown. High prices have simply made it impossible for potential buyers in the market to afford a house by qualifying for a loan. Rising interest rates have exasperated this problem for at least the past 9 months to a year. June saw existing home sales drop 2.2 percent. Although prices were increasing, this summer (prime construction months) saw new home construction and mortgage applications decline. And we are only now seeing the impact on new construction from tariffs on Canadian lumber.

The Millennials are now the largest demographic for home sales. A different survey by Bank of the West shows 54 percent of Millennials believe the American dream of homeownership is no longer attainable. Home values have increased on a year-over-year basis for 76 straight months. The national median price (half sell above and half sell below) reached $276,000 in June. Also pressuring affordability is the average 30-year fixed-rate mortgage hoovering at 4.68 percent in July.

Adding to the financial problems of Millennials is the huge amount of college debt that they owe, which no previous generation has ever held. And according to the Fed, Millennials held only a median average of $2,600 savings in 2016. This has led 3 out of 10 Millennials to currently say cash is their favorite long-term investment.

The growth and high point of the real estate market has enjoyed a long and vigorous run. But it always goes through the full cycle. Almost certainly, this isn’t yet the time to be searching out bargain investment properties. However, as we enter into the always-slower autumn and winter seasons, look for more indicators that buying sentiment is also changing. This is likely the time for savvy investors to be getting their finances in order for future opportunities.

What is your take on the current investing cycle? Please leave a comment. If you have a question that might interest other readers or a suggestion for a future article please submit ideas to askbrian@realtybiznews.com.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.