Follow Us on Social Media

email icon rss icon linked.in icon google plus icon twitter icon facebook icon

Should You Stop Buying Real Estate in a Appreciating Market? I’m Still Buying and Here’s Why

by Mark Ferguson on March 2, 2014 · 15 comments

  
Should You Stop Buying in an Appreciating Market?

We all see home prices rising in most parts of the country.  In fact some parts of the country have seen prices surpass the high points that were seen before the housing crisis.  This rise in market prices has caused many people to worry about another housing crisis and rethinking whether they should buy any real estate right now.  I personally am still buying houses and I will continue to buy houses going forward.  This article is an explanation of my limited view of our national economy based on my local economy.  I am by no means an expert and please feel free to chime in if I am missing something or got something drastically wrong!

My current market

I am in located in Northern Colorado and our market appears to be very similar to the national market.  The median price in Greeley Colorado is about $180,000 and our prices have increased about 20% over the last two or three years.  The price increases have made it harder to buy houses as cheap as I would like too, but even though I have to buy houses for more money now, I can also sell and rent them for more money as well.  In fact our rental market is going crazy with rents increasing 20% as well and vacancies extremely low.  I am still making just as much money on my fix and flips as I was two years ago and I am making just as much on my new rental property purchases as well.

Why is our market appreciating so much?

In my market we have almost no inventory; last year we had 1,500 homes for sale and now we have 300.  The law of supply and demand has pushed prices up, especially in the lower end of our market.  In the past it was not uncommon to see homes for sale for under $50,000 in the low end and now it is hard to find anything below $100,000.  There simply are not enough lower priced homes for the current buyer demand.  That demand is continuing to push prices higher.

Related: What Needs To Be Said About Appreciation

Why is our inventory so low?

For seven years there was no new construction in our area.  Our market was fueled with REO and short sale inventory and that inventory was priced much lower than any new homes that could be built.  The inventory kept coming and our prices slowly decreased as well.  Then someone turned off the faucet and the REO and short sale inventory dried up.  All the sudden there is very little REO inventory and people have to resort to buying fair market sales, but there has been no new building while the population has been increasing every year.  People still want houses, but there are not enough houses in our area to meet demand.

Can new construction meet the demand?

Building in our area has taken off lately.  Builders are filling up the vacant lots that were left in subdivisions when the housing crisis started.  There is a lot of new construction in our area, but prices start at about $200,000 for a new house.  The construction can’t come close to the median price or the lower end demand.  I think the new homes can ease the housing shortage in some segments of the market, but we still have huge demand in the lower end and with little inventory.

What the future holds?

I only know my market, I don’t have the time to study every state in the US and learn their market statistics.  I am guessing many markets are similar to my market from what I hear from other investors and agents across the country.  I can’t possibly see how our market will see another huge decrease in prices unless a huge wave of REOs hit or the national economy tanks.  Unfortunately I can’t predict those scenarios, but I have high doubts that we will ever see prices drop down to 2008 levels again.  As for other markets in the US I think it could go either way.  I see crazy prices in areas like California again and California always seems to have extreme ups and downs ever since I was a child.  Could some markets see a huge decrease again?  Probably, but I don’t think the entire US will see huge decreases anytime soon.

What if the population cannot afford the cost of housing?

This is the part that I am struggling with.  If the average person cannot afford the average house and rental rates are skyrocketing; how can prices keep going up?  To me it seems inflation may be the answer to allow people to afford higher priced homes.  We have had very low inflation rates recently due to the poor economy and maybe inflation will help balance the housing market with the economy.  That is unless the cost of houses rise right along with inflation.  I am in no way an economic expert and this is a very simply observation on my part.

How will inflation affect the real estate investor?

The great thing about real estate is if you already own property; inflation is not a bad thing.  Your rents and values will most likely increase and your payments stay the same.  The downside is it is more expensive to buy property, but if the rents are rising as well; you should still be able to make the same amount of money as you did with a lower priced property.  That is why I continue to buy properties and I am not worried about rising prices.  I also can’t predict the future, I can only do the best I can right now with things I can control.  If I keep buying rentals below market value that cash flow and keep buying fix and flips that have plenty of room for profit and sell them quick, I think I will be just fine.

Related: Examining Real Estate and Inflation on a Global Perspective

 

Email *
  



{ 15 comments… read them below or add one }

Ziv Magen March 2, 2014 at 6:37 am

Mark, I think the bottom line is that nobody, as you admitted correctly, knows what will happen. I think that since, as you say, prices are now above their pre-GFC peak in some places should make you seriously question your assertion that “you don’t think they’ll ever fall to 2008 bottoms again”. A very dangerous assumption.

We have quite a few clients who insist on purchasing in the same markets that have already appreciated, in most cases against our explicit advice. Nobody knows what the future holds, but the general strategy of going against the herd, which buys when prices rise and sells when they drop, is still very valid in my opinion.

Markets always fluctuate, drawn this way and that by emotion. And while human instinct is to “oh my god, if it keeps rising I’ll make a fortune, I’d better buy!” or “oh my god, if it keeps dropping I’ll lose heaps, I’d better sell”, the logical reality is quite the opposite -if you’re certain of your chosen market’s fundumentals, it’s time to sell when it’s rising, and buy when it drops – you’re advocating the opposite, if I read you correctly, and in my opinion, that’s a dangerous strategy to pursue – although, heaven knows, you’re not alone pursuing it.

Personally, when my favourite market starts rising beyond a certain point, I know it’s time for me to find a new, depreciated one, at least for a while. Fortunately, with modern technology at our service, there’s absolutely no need to stick to our back yards these days – the world’s our oyster, and there’s always an opportunity somehwere else.

Just my own two yens, anyways ;)

Reply

Mark Ferguson March 2, 2014 at 7:54 am

Hi Ziv, thank you for the comment. Maybe I did not convey my thoughts very well. I am not advocating sell when the market goes down and buy when it goes up. I am saying in my market, I am buying all the time whether it is going up or down. I can’t predict the market and I think timing the market is dangerous. The article was about my particular market, which has similar characteristics to the national market. When I talk about California I was trying to say you may need to use a different strategy because prices have increased so much.

The bottom line is if you are investing for cash flow and can still acquire properties with significant cash flow in an appreciating market I think it can be a great investment.

Reply

Ziv Magen March 2, 2014 at 8:29 am

Thanks for clarifying, Mark – I completely agree with this rationale – as long as the cashflow is good (even if not great), it’s still ok to buy for long term holding, in my book too.

Only thing is, as I’ve mentioned, that I don’t really see the need to stick to the one market and compromise on “ok” deals, if you can get great ones somewhere else. Most of our clients are spread over various regions of the same country, with at least half of them (ourselves included) spread over several countries (and continents) too – there are always great deals somewhere out there. Once you own more than two or three properties it’s quite likely that you delegate large parts of the research and management to capable individuals and companies – and once you’ve started doing that, there’s really no essential difference in playing in your own back yard or half way across the country (or the world) – all it takes is the right due diligence and good team management skills, which most full time investors should normally have already after a few years in the game.

Otherwise, as mentioned, completely agree – thanks again for clarifying.

Reply

Mark Ferguson March 2, 2014 at 4:21 pm

I still get great deals where I am because I know my market better than anyone. By staying in my market I know I can buy properties well below market value because I am an agent. In other markets I’d have to find another agent, wouldn’t save a commission, would not know the market, would have to hire a property manager and find a different lender because mine only lends in Colorado. To me I estimate I save 25% buying local then in another market.

Sharon Tzib March 2, 2014 at 7:36 am

Hey Mark! Under the “My Current Market” section it says: (insert link why i pay more than the 70% rule on fix and flips). Doesn’t look like the link got inserted.

You don’t talk too much about it in this article, but I know from reading your blogs that you are a long term buy and hold investor, and that all your properties are cash flowing. Therefore, if prices (either rental rates or home values) stall out, you’ll be fine. Historically it’s quite rare for rents to decrease, but since you’re paying your homes off, I’m sure you can absorb that if it happens due to your great cash flow.

AND, here’s the reason why I think your strategy is ok in your market – you are holding these properties. If the market takes a downturn, which it always does every 5-7 years or so, you won’t panic and sell. You’ll ride the wave out and you’ll be fine. It’s the people, as Ziv says above, that freak out and sell during downturns that lose their shirt. Seems to me what you are doing is just fine.

Reply

Mark Ferguson March 2, 2014 at 7:56 am

Thank you Sharon, I’ll send a quick note to the BP editors!
That is exactly what I am talking about. It is hard to explain everything in one article!

Reply

Jason Flynn March 2, 2014 at 9:19 am

I see it like this, and think you might too:
If the market is down, you buy amazing deals.
If the market is up, you buy “just deals”.

A deal is a deal. People seem to get hung up on “I need 15%+ or the deal isn’t worth my time” or “I need to meet the 2% rule”. Those things are great, but I wonder as the market swings downward which at some point it will (part of its life cycle), will people panic, sell and get out of the game all together? Obviously the “true pros” in the market will stay but I wonder if a lot of the “hobbyists” will leave?

I enjoyed reading this article. There’s been some doom and gloom talk lately and this was nice to read the perspective of “oh well, press forward”.

Reply

Alan Mackenthun March 2, 2014 at 12:21 pm

Hi Mark. Good article. I get the point, but don’t think always is the right time to buy. Financial advisors advise not to try to time the market, but I’d suggest that timing investments is critical. You have to admit that ‘irrational exuberance’ has been exhibited regularly the last few decades. Booms and busts have repeatedly hit both the stock and real estate markets. I’ll guarantee you that the Oracle of Omaha doesn’t buy consistently in all markets. The numbers still have to make sense. Rents are increasing now in a lot of areas, but there are also a lot of apartments being built. I’m still shopping, but I haven’t bought as much recently. It’s getting harder to find real deals. I’d rather not buy if a place isn’t going to cash flow adequately. Flips have a larger margin for error as they’re not expected to be a long term investment. It should be easier to maintain flipping for longer through a cycle since rising prices actually add a factor of saftey. On the other hand, flipping in a dropping market is real tough.

Reply

Mark Ferguson March 2, 2014 at 4:33 pm

Very true that the numbers still have to make sense. I am not a proponent of buying just to buy. I only buy properties with plenty of cash flow.

Reply

Adrian Tilley March 2, 2014 at 3:28 pm

I would say that the right time to buy is “always” as long as the price is right!

Also, I think you’re correct in implying that inflation will cause higher house prices. I think it has to be true that housing prices (or any other) cannot rise faster than inflation forever (there may be some specialized markets where this does not hold true – items that are truly unique, like original copies of the Declaration of Independence or something). If housing continued to rise faster than inflation forever, eventually no one would be able to afford a house, and that can’t be the correct outcome.

Reply

Mark Ferguson March 2, 2014 at 4:36 pm

True Adrian. Predicting inflation and the economy is beyond me.

Reply

Derick Branson March 3, 2014 at 1:12 am

Thanks for coming up with this interesting and illuminating article. I want to add a point to enrich the post. When it comes to real estate decisions I always prefer to look at the prospect of the economy where the real estate is located. It may happen that the real estate is located at a place where the growth factors are still at a nascent stage. In that case, I will look at the prospect of the local economy in the coming 10 years and also checkout the expectation of the investors in this place.

Reply

Mark Ferguson March 4, 2014 at 10:12 am

Tha knyou Derick! I agree that you need to check out a local economy if you are choosing a place to invest. I hear Texas, Memphis and Charlotte have great prospects.

Reply

Dave Tanner March 3, 2014 at 7:59 pm

I end up buying 1 or 2 properties/yr with buy and hold strategy (slow, steady growth is my speed). In a sense it’s kind of like dollar cost averaging. Some yrs I get a little more for my money, some less. Cap rate drifts up for a while, then down a bit. I’ve been able to find deals every year, market up or market down (but I only need 1 or 2/yr).

Reply

Mark Ferguson March 4, 2014 at 10:16 am

Hi Dave, that’s great. Stock market advisors will advise the same thing. Invest continually and don’t try to time the market.

Reply

Leave a Comment

Comment Policy:

• Use your real name and only your name in the field designated for your name.
• No keywords allowed as anchor text in the name or comment fields.
• No signature links allowed under your comments
• You may use links in the body of your comment, but it must be relevant to the discussion at hand, and not merely be some promotional link.
• We will have NO reservations about deleting your content if we feel you are posting merely to get a link without adding value to our discussion.
If you add value, but still post keywords, we'll use your comment, but remove your link and keywords.
• For more information about acceptable practice, see our site rules.

Want your photo to appear next to your comments? Set up your Gravatar today.

Previous post:

Next post: