Signs of A Real Estate Market Top
Published On: April 12, 2016 Posted by: Jeremy Peterson
For those of us who have been around for a few turns of the real estate cycle, there are similar signs that mark each market peak. While exact timing is anyone’s guess, the signs are nevertheless consistent. Here are a few red flags that tell us that Utah real estate prices are reaching their zenith in this current market run:
Real Estate Guru Ads – Have you heard the ads on the radio from a national real estate guru telling you he has more money than he has real estate to buy and he wants to teach you how to flip houses quickly with no money out of your pocket? If this guy could make money flipping houses, he would be doing that instead of trying to sell you on his wares on the radio. The truth is that in this market, there is little if any margin to be had in flipping homes right now. Bargains today are even more scarce than they were six months ago. FLASHBACK: In Spring 2007, a famous real estate guru (named after a duck and last name rhymes with rump) came with his team to Utah and told a swarm of new investors to go out and buy anything they could. They said Ogden was the best place to buy.
Thin Return On Investment – For cash flow investors, the best measure of an investment is annual return on investment. This figure is derived from calculating how much money you put in your pocket each year for every dollar you had to spend to purchase the property. Historically, real estate investors like an 8%-10% annual ROI to feel comfortable with the investment. Right now, we are seeing returns in the 5%-7% range. FLASHBACK: During the Bubble Madness of 2007, ROI was in the 3%-5% range or worse.
Record Low Unemployment – People have jobs. Jobs pay wages. Wages pay for houses that people like to live in. So the more jobs and more wages you have for a given market of homes, the higher prices will go if no supply is added to the market. This is the situation we find ourselves in right now. Utah has cyclically low unemployment right now. There is only one direction it can go from here. When wages decrease, house prices start to feel the pressure. FLASHBACK: Weber County unemployment last bottomed out at an unnaturally low 2.7% back in January of 2007. Today Weber County’s unemployment has bottomed near 4% for the past year.
Subcontractors Are Scarce – When real estate values increase, homeowners feel wealthier and begin making improvements on their homes. Even I am not immune to this phenomena. Another indicator that we are at a market top is that the contractors that build and work on homes are overbooked. We have had to wait several weeks for quality subcontractors to become available to complete remodel work on our rental properties and on my client’s homes which are being prepared for sale. FLASHBACK: The last time I had this rough of a go getting contractors to work was the Summer of 2007.
House Price Acceleration – While it is normal for house prices to increase in good market conditions, typically the prices will do so at an orderly rate. However near market tops, it seems there is often a final rush of exuberance that unexpectedly pushes home prices to new levels in a hurry. Yet, nobody can tell when the last thrill of exuberance suddenly turns to caution. FLASHBACK: In January 2007, the market was imbalanced. But, the market kept moving upward in price for another 8 months after that point. Who would have guessed?
The bottom line is that we are in a historically strong period for home prices right now. While there is opportunity in any market during any part of the market cycle, they key is identifying the opportunity. Ultimately, the market wheel will keep turning and the market will shift to a buyer’s market again in the future. But don’t misunderstand, the doomsday real estate depression we experienced in 2009-2012 was a once in a lifetime event. Your unborn grandchildren might see one when they are middle age, but likely not before then. For this next downturn, I expect it to be softer, slower, and longer than the last one. It will likely be akin to the 2001-2004 period which was marked by increased sale times and stagnant house prices.
So, if you are thinking of selling your home, don’t press your luck, now is the best time to do it. CONTACT ME, and lets discuss your options.