Council Post: Boom Or Bust: Consider These Factors Before Purchasing Your Next Property

Vice President at CBRE | Founder of Marketing Real Estate.

I recently wrote an article about how to understand current market signals when investing in real estate. I looked at the continuing upward trend of home prices and placed this in the context of some market signals indicating that all might not be well in the real estate market. My conclusion was that now is not the right time to buy and that the current boom phase is likely to soon turn to bust.

The boom and bust cycle is accepted lore in modern economic theory. Despite extensive research and countless theories on how business cycles and economic recessions work, all we know for sure is that one follows the other and that no one can predict with 100% accuracy when.

Unlike the previous subprime mortgage crisis — and the years leading up to it — where big banks were the culprit, what seems to be partially driving the current frenzy is the pressure some Millennials feel to purchase. With historically low interest rates on many mortgages, what was once considered an impossible dream for many Millennials felt within reach for the first time. Additionally, a discernable shift in the workplace, from being immersed in an office to that of your home, perpetuated the desire for a larger space, with home amenities such as but not limited to a large home office, gym and overall larger and more practical living spaces. 

Already we’re seeing more and more first-time homebuyers regretting their decision to buy a house over the previous six months. And, of course, if the market begins to cool, as some experts predict, you’ll need to know how to spot the signals and be ready to come back in for an ideal buying opportunity — one that is congruent to if not stronger than the last market correction.

In the current boom phase that we find ourselves in, how will you know when it is the right time to buy? Telling you to wait for the next bust cycle before you buy is like telling a stock market investor to buy low and sell high.

Three Sets Of Considerations To Guide You

The first set of considerations are deal-specific. While good deals can be found in any market, they are very difficult to find in a boom phase. When buying a property, it is key to have clear parameters and stick to them. Set an absolute limit to what you’re willing to spend. Additionally, for investors, ascertain the rent a property can generate or the appreciation, the appreciation that can be created in the case of a fix-and-flip project and a realistic selling price if you need to immediately sell the property. Don’t consider buying unless you have planned for the worst-case scenario and have a significant cash buffer to get you through a significant downturn.

The second set of considerations are related to your specific market. In South Florida, we are seeing an acceleration of rising prices. According to the FHFA’s Housing Price Index, property prices in Florida were increasing at a rate of 7.07% per year in the first quarter of 2020 and 12.61% per year by the first quarter of 2021. Understanding the structure of your local, city and state real estate market and location-specific factors is key to making good purchasing decisions.

The third set of considerations are related to what can be considered macroeconomic factors. Whether Covid-19, unemployment, economic growth, interest rates or demographic trends, these often play out in the real estate market. Keep reading, keep observing and deepen your understanding of all the factors at play.

Keep all three sets of consideration in mind, and if you find the perfect deal, jump on it. However, with deals few and far between in the current market, you are best served by building up your net worth, down payment or savings and getting ready for when the significant opportunities do come. Don’t regret buying a property, regret not walking away from a bad decision.

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