How to Know When Your Real Estate Market is Getting Bad

“Real Estate is not a passive investment business. If you don’t add value, you fail”

-Marcel Arsenault

Value adding strategies typically surround increasing rents, decreasing expenses or repurposing the asset i.e. office to apartments. I would like to propose another value-add strategy, Market Trend Analysis, that if used effectively can help you make and avoid loosing capital.

Market Trend Analysis is a value accretive strategy as it can help investors identify a downward or upward trending market so that they can make an educated decision as when to sell or buy an investment asset. For the casual real estate investor, the early market indicators are difficult to ascertain, as they may not have a research analyst on their investment team. So, let’s simply use the indicators and the process. I am going to share 5 basic trend indicators that you can easily monitor to understand the direction for investment market based on a flip or buy and hold investment strategy.

Flip Market Indicator Chart (Seller Perspective)

INDICATORS	WHAT IT MEANS	IMPACT
SUPPLY	Consists of all the supply on the market consisting of active and new listings.	Growing: NEGATIVE Shrinking: POSITIVE
DAYS ON MARKET	Indicates the number of days it takes for an asset to sell.	Growing: NEGATIVE Shrinking: POSITIVE
ABSORPTION RATE	Calculated by dividing the total number of available homes/assets by the average number of sales per month. Breakeven point is 6 months for residential and multifamily assets.	Growing: NEGATIVE Shrinking: POSITIVE
LISTING DISCOUNT	Calculated as a ratio of sale price to active listing price.	Growing: NEGATIVE Shrinking: POSITIVE
RENTAL ASK TO CLOSE PRICES	Calculated as a ratio of closed rental price to ask rent price.	Growing: POSITIVE Shrinking: NEGATIVE

The impact column will help an investor ascertain if the balances of the indicators are pointing in the right direction to either sell or buy investment assets. The exercise is both an art form and a science. Investors will be able to gain access to the raw data they will need for this analysis through their local MLS or through a Realtor team member.

Buy and Hold Indicator Chart (Seller Perspective)

INDICATORS	WHAT IT MEANS	IMPACT
CAP RATE	Calculated as investment asset net operating income divided by sale price	Growing: NEGATIVE Shrinking: POSITIVE
RENTAL ASK TO CLOSE PRICES	Calculated as a ratio of closed rental price to ask rent price.	Growing: NEGATIVE Shrinking: POSITIVE
SUPPLY	Consists of all the supply on the market consisting of active and new listings.	Growing: NEGATIVE Shrinking: POSITIVE
ABSORPTION RATE	Calculated by dividing the total number of available homes/assets by the average number of sales per month. Breakeven point is 6 months for residential and multifamily assets.	Growing: NEGATIVE Shrinking: POSITIVE
LISTING DISCOUNT	Calculated as a ratio of sale price to active listing price.	Growing: NEGATIVE Shrinking: POSITIVE

Both the charts above analyze the key indicators from a seller point of view. If you are a buyer, you can use the inverse for all indicators to help identify a market that is ripe for buying opportunities.

Market Trend analysis can be a powerful value-add strategy when monitored and utilized as a part of the overall investment business plan.

What do you guys think of Market Trend Analysis? Let’s discuss…

Happy Investing!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.