Real Estate Investing Basics

How to Analyze the Real Estate Market to Avoid Major Investing Mistakes

Expertise: Personal Development, Personal Finance, Mortgages & Creative Financing, Real Estate News & Commentary, Business Management, Real Estate Investing Basics, Flipping Houses
250 Articles Written

What's a "macro" analysis? Very simply, it's an overall statewide, regional or nationwide analysis of the general real estate status quo. Though some see it as time you'll never get back, it can and has saved my bacon time and again.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

Here are a few examples from my own experience.

6 Examples of Macro Analyses, 1976-2014

1. 1976

The year I switched from owner occupied housing to the investment side of real estate brokerage.

If it was beyond analyzing what day of the week it was back then, I definitely wasn't the guy for the job. However, my mentors — God bless everyone of 'em — explained to me we were in for an indefinite period of inflation and therefore consistent appreciation of real estate values.

Related: Why Investors Undeniably Matter to the Real Estate Market

Their Bottom Line Advice: Buy now. Exchange now. Let simmer. Rinse ‘n repeat. From ’76 through around October of ’79, I called ’em the Amazing Kreskin Group (AKG). (For those who never saw Johnny Carson at work, The Amazing Kreskin had the answers to questions not yet asked. He was a seer.)

There were many who executed more than one tax deferred exchange in that four year period. It was as if Christmas of ’75 lasted that long. For San Diego, it wasn’t JUST inflation they began to see. Another powerful engine behind this prediction was the staggering number of families moving here. In fact, from around 1970 to 2013 the county’s population grew from 1.35 million to just under 3.35 million. Year in and year out, the county’s population increased, net/net by over 50,000 — and sometimes over 70,000.

Supply/Demand works every time it’s tried, right?

2. 1979

Though since 1976 my experience accumulated at the rate of roughly a couple years per year, I was still too rough around the edges to be called a bona fide expert. And that’s being kind, as Grandma would say.

Can’t remember exactly when, but sometime before summer, AKG told me they sensed the end was near. Double digit inflation can’t continue forever without payin’ the piper. They didn’t realize that invoice would come due in a matter of mere months.

Their Bottom Line Advice: Batten down the hatches. It could be a rough ride for a while. The tone of their voices didn't convey sunshine and happiness. They told me I should be warning clients that taking cash out via refinance or secondary loans should be avoided like the plague. They also opined it could go on for as long as a couple years.

As grim as that sounded to a soon to be 28 year old, it turned out to have even longer legs than that. In fact, I didn't transact a straight multi-unit purchase with conventional financing 'til December of 1983. It was an adjustable loan (no negative ammo) starting at 11.75%. Lookin' back, I chuckle at the memory of my client being impressed that the interest rate began under 12%. 🙂

It (recession) lasted at least four years in “real estate time.”

I realize history defines that recession's lifespan as 7/81 through 11/82. For real estate investors, that's a joke. Goin' into 1980 the owner occupied interest rates were already double digit. Investment rates are generally .5-1% higher. By 1981 FHA — for Heaven's sake — was around 16.5%, and many conventional rates hit 18%! Unless I missed it, rates didn't get down to remotely affordable 'til loooooong after the end of '82.

In fact, in ’85 home loan rates had just dropped below 13%, at about 12.5%. That’s three years after the recession “ended.” It wasn’t ’til 1989 the rates went under 10.5%. It took ’til the early 1990s to arrive at interest rates for home buyers literally doubling today’s rates — and folks were in the streets doing the Happy Dance.

The Takeaway from That Era: Recessions aren’t ever truly over ’til the Real Estate Lady sings. The rest is whistlin’ past the graveyard.

3. 1984

AKG burst into uproarious laughter as I proudly told ’em of my December closing. Turns out it was the timing that was so funny. They were about to tell me the stage seemed to be set for a sequel to the 1976-79 run of appreciation. Now, I was laughing, but more in relief than anything else.

Up to that point in my career, I’d not survived tougher times. In fact, from 1980 through 1983, I learned firsthand the truth of what AKG had earlier told me: “The backbone of the real estate brokerage industry is a working wife.” Turns out that was funny ’til the day it wasn’t. 😉

Their Bottom Line Advice: Buy now. Exchange now. Simmer in the aromatic juices of appreciation. Rinse ‘n repeat. As in the mid to late ’70s cycle, many astute investors transacted more than one tax deferred exchange in the years beginning in 1984 and ending during 1990. Median investor IQs rose above 150 — or at least in their own minds. Net worths skyrocketed beyond that of original goals set long ago.

Down the road, the AKG called this type cycle — derision drippin’ from every word — The San Diego Birthright. They unblinkingly predicted there’d one day be a horrific ending to such a cycle. Sadly, only two of ’em were still alive when that prophesy became reality in late 2006/early 2007.

Towards the end of 1989, AKG began to show signs of visible foreboding. Almost overnight I began callin’ them the Prophets of Doom. At first I told myself it was due to their general nature, which on good days didn’t scare the holy crap outta me. 🙂 But they said the S&L problems wouldn’t be going away any time soon. They were divided as to the ultimate impact on the economy — and real estate in general.

Related: How to Know When Your Real Estate Market is Getting Bad

But they absolutely insisted it wouldn’t bode well for brokerage owners like me.

4. 1990

AKG told me in no uncertain terms that the potential for the S&L “problem” to escalate into full blown crisis —their words — was more likely than not.

They scared me. I'd yet to see a downturn worse than the recent early '80s recession. As they told me this, I was now in my late 30s — and far more experienced, educated and knowledgeable. On the other hand, AKG had three members who'd seen the 1929 crash as either teenagers or young men. They’d all had it explained to them by their parents. If you blinked you coulda missed the transition from “Happy days are here again!” to “Holy crap on a cracker, what new economic plague is this?!”

Interest rates for that decade went from give or take 7% to around 9%. Investment property rates were, of course, higher; that is, if they would lend at all. I remember thinkin’ that AKG was right again, something that kept me nervous most of the decade.

Their Bottom Line Advice: Stay alert and watchful, to say the least. Tell your clientele to go about their lives for a while in order to wait and see what might happen. Don’t make a real estate move of any kind. Be ready to go fishin’, literally. Now THAT was the last straw. I immediately accused them of overreacting.

Wrong move, WhipperSnapper breath. They told me to find out how many S&Ls had already either gone belly-up or that had been deleted by the government. OK, OK, you win. They said I should prepare for not doin’ any business for a year or two, maybe more, though they couldn’t say when that might begin, if ever.

Well, from the fall of 1994 to November of 1996, I went fishin', just as they had predicted was possible. In early '95 I didn't renew my office lease, closing the doors 'til further notice. I told clientele exactly that, and that they should do likewise; that I'd stay in touch. There was a whole lotta soul searching goin' on about then.

During those two very dark years, I hardly met with AKG — maybe 4-5 times. “Keep your chin up” was about all they said. For those who maintain the early '80s recession was the worst 'til the bubble, I say it was the early to mid '90s. Heck, even post bubble, interest rates remained historically low, which allowed for folks with decent credit to buy property. It allowed brokerage owners to remain in business, even if it was as a short sale and/or foreclosure specialist.

I’d never heard of anything called a short sale ’til the bubble burst. Think about that. Over 35 years in the biz by then, 30 of which were as a brokerage owner. It’s not that I didn’t know what it was, but that I’d never even heard the phrase before.

5. Late 2002

By now I’ve at least earned my seat at AKG’s table, if only as a “kinda sorta” equal. In fact, by the late ’90s they’d added a new rule to our mentoring sessions. Before hearing from them, I was to give MY take on the near and not-so-near future, based on experience and any evidence at hand. It was akin to an ongoing oral dissertation for a graduate degree. As usual, there was no slack given. It was both invigorating and nerve-racking at the same time.

I miss them so much, I can’t tell ya.

In 2002 my growing anxiety wasn’t yet based upon funny money loans. Instead, it was primarily founded upon the already previously shameful rent/price ratios in San Diego actually worsening. They had quickly become the punchline to a horrible joke.

Want an example? How ’bout a half century old duplex in a blue collar neighborhood. Sold in about 2002 for roughly $515,000. It’s GSI for the year was under $26,000!! That rent/price ratio was painfully embarrassing at barely .4%. Who does that on purpose?! Even if you didn’t invoke Murphy’s spreadsheet, and used 40% for vacancies and expenses, the NOI was no better than $15,500. Gotta love that 3% cape rate. The 1-4 unit investment loan rate at the time was around 7.5% or so. They had to put almost 36% down in order to merely BREAK EVEN. Yeah boy. Sign me up for that rockin’ party. 😉

I told this to the November 2002 meeting with AKG. Furthermore, I posited the thinking that there surely were other states with better rent/price ratios — and superior overall economic indicators. A rare sighting of smiles all around the table was my reply. An arrow could’ve gone through my heart then and there, and I still woulda died happy.

Sadly, AKG is no more. One doesn’t know me on sight. The other two died, the last one in 2008.

6. Late 2014

Methinks I was partially right when, in late December of last year, I said the party might’ve been over for the latest run-up in home prices, which in some markets has been significant, to say the least.

However, I don’t think it’s a pause before resuming its upward course. I think this is Bubble-2 popping. I realize this doesn’t set me apart from much of the crowd. Flippers had far more impact than I first thought, which created upward pricing pressure via competition with traditional home buyers. Add to that the ridiculous rebirth of relatively easy money, and, well, you get it, right?

Flipping is now beginning to fade. There are more folks underwater, or virtually so, than we previously thought. I think in the long run this won't change investors' longterm plans much. I do think it should affect current and near term decisions to sell rental homes. The price you’ll get for the remainder of this year could (and I think will) be measurably higher than next year.

Plus, as homeowners wanting to sell in the first coupla quarters of next year will quickly observe, buyers will have read the memo too. Investors can keep on buying. IF an investor can afford to offset capital gains taxes with stored losses elsewhere, they should sell yesterday, wait awhile, then buy at a lower price. The only possible downside is any uptick in interest rates.

Oh, and I could be dead wrong.

I just don’t think so. This also bodes well for folks not buyin’ into advice saying they should buy in lower priced neighborhoods “to make a killing.” In my view that could end up comin’ back to haunt them — and sooner rather than later. For the foreseeable future, the 1-4 unit investor should strongly consider buying very young properties in regions offering solid economic fundamentals, in areas nice enough you’d let your grandma live there alone.

I’m hopin’ AKG is givin’ me the ‘golf clap’. 🙂

What’s your view of the “big picture” of real estate? Where do you think we’re headed from here?

Leave me a comment below!

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.
    Replied about 6 years ago
    I too have been investing for long enough to see several cycles. How do you think the unwinding of the government bond buying will affect real estate? Also, I think/hope the last time we had skyrocketing interest rates was a fluke, but after WWII my husband’s parents say that they bought their first house at a 3% interest rate so I am guessing there was a more gradual increase during the 50’s and 60’s than what occurred in the 70’s and 80’s. I am thinking something similar will happen now as the children of the baby boomers purchase more and more real estate (once their student loans are eliminated) and they begin families. What do you think?
    Jeff Brown
    Replied about 6 years ago
    Michelle — If we’re to wait for student loans to be removed so they younger buyers and get a loan, I’m thinkin’ 2020 or so. ‘Course that’s a guess, pure ‘n simple. Reverting to traditional loan underwriting WITHOUT pushing the pendulum past the ridiculous, will get us back to ‘normal’. That is, homes will be valued based on actual ability to buy. There are so many factors that’ll come into play when the ‘unwinding’ gets serious. I’m counting on the gov’t to get it completely wrong, causing unintended consequences. Again though, those with capital and solid credit will do fine as investors. The real key is this: Buy now, and buy often, cuz once this perfect storm is over, and it will be, those 4-5.5% investor rates will only be found in the stories we tell our grandkids. 🙂
    Replied about 6 years ago
    Jeff, I hear you. My husband and I purchased our first wave of real estate investments starting during the mess in 1991 and got up to 55 units, then sold most of them in Nov. 2007. Now we are in buying mode again and up to 35 units. Older and wiser this time, but just trying to see the future to decide what the long-term plans should be.
    Jeff Brown
    Replied about 6 years ago
    Michelle — If we’re to wait for student loans to be removed so they younger buyers and get a loan, I’m thinkin’ 2020 or so. ‘Course that’s a guess, pure ‘n simple. Reverting to traditional loan underwriting WITHOUT pushing the pendulum past the ridiculous, will get us back to ‘normal’. That is, homes will be valued based on actual ability to buy. There are so many factors that’ll come into play when the ‘unwinding’ gets serious. I’m counting on the gov’t to get it completely wrong, causing unintended consequences. Again though, those with capital and solid credit will do fine as investors. The real key is this: Buy now, and buy often, cuz once this perfect storm is over, and it will be, those 4-5.5% investor rates will only be found in the stories we tell our grandkids. 🙂
    Replied about 6 years ago
    Jeff, Nice article. I live in a small town in Wyoming and we never really followed the market for the rest of the nation. Our economy seemed to be tied to oil exploration. Oil prices went through the roof and coal mining and oil drilling went wild driving prices out of site, workers moved into the state left and right, houses could not be built fast enough. Oil prices drop as there are gluts of oil everywhere. Oil companies stop drilling, hundreds are laid off, many folks leave the state. Businesses are boarded up on main street, you can buy hundreds of homes for taking over payments, but you have no renters to rent to. then OPEC shuts down production levels and oil prices rise and jobs and housing boom again. You think of all the rich guys who lost their shirts last time and stay very conservative in buying and renting. That is how our economy went.
    Frankie Woods
    Replied about 6 years ago
    Jeff, as usual, I really liked the article and how you broke down your experience. I’m not sure I’d agree that we are in a bubble nation-wide, but there are certainly red flags across the country. However, the fact that people are still making better returns in real estate than practically anywhere else tells me that R.E. has some legs to run.
    Jeff Brown
    Replied about 6 years ago
    Hey Frankie — I actually hope I’m dead wrong. But in San Diego we’ve gone from shutting down purchase offers at 10, received in a few days, to multiple price reductions. Real estate always has more legs than the investment competition. 😉
    Replied about 6 years ago
    GREAT article Jeff. I always enjoy your take on things. Your story falls in line with my version of AKG. His advise right now is to sell your dogs, pay down debt and hold on. The main concern is the Student Loan “crisis” waiting in the wings to take down the next generation of would be home buyers. By the way, I had to smile when you were considered an “almost equal” at the table of your mentors. I know the feeling and mine came a few years back when my mentor came to me for advise on a problem he was having. Such a great feeling.
    Jeff Brown
    Replied about 6 years ago
    Hey Tim — I’d of gladly cut a finger off if just once one of ’em asked me for any advice. 🙂 Check my comment above as to my thinking on student loans. There are so many factors, both in real estate and complete divorced from it, that will impact the next 2-5 years. But if the investor can acquire a safe amount of income property at today’s historically low rates, they’ll more than likely come out smellin’ like a rose when the smoke clears.
    Replied about 6 years ago
    Great article, I always like learning about past recession and the cause and effects. I am actually selling my investments right now, to cash out before the next price drop, when I will start again. It’s nice hearing my own worries and observations qualified by someone else! Thanks!
    Jeff Brown
    Replied about 6 years ago
    Bobby — I’d certainly ensure a generous cash reserve account. However, in my soon to be 45 years in the biz I’ve NEVER seen a perfect positive storm like we’ve experience the last 5+ years. IMHO it’s become even more crucially important to adhere to the bedrock principles of real estate investing. Buy QUALITY, put a decent amount down, lock in long term fixed rates, and let simmer. Superior location + nice rent/price ratio + quality buildings that are YOUNG + being in a region whose economic outlook doesn’t frighten you. 🙂 When those fundamentals are in place, weathering the storm will not be as difficult as anticipated. I know, cuz I’ve seen me do it. 😉
    Replied about 6 years ago
    Once I sell out, I should have what I will consider a “generous” reserve, but it’s probably something you would laugh at 🙂 I have pretty strict criteria (I think) for investing in small properties, and it has served me well. I try not to get caught up in a new trend when I find them either, even though it’s tempting. Thanks!
    Replied about 6 years ago
    Hello Jeff, Can you explain your expression “perfect positive storm”…..thanks!
    Don Clark
    Replied about 6 years ago
    Hi Jeff, I am looking to build my rental portfolio in st. louis, mo. I see that you are advising to not buy in areas that are not low priced neighborhoods or that grandma wouldn’t live. Before I read this, I was going to start buying in those areas, because I thought I could “make a killing” as you mentioned some are doing. I am trying to understand what is going to happen in those areas if real estate bubble 2 pops (which I think could happen after the stock market crashes again). Are you saying that renters who live in those low priced areas won’t be able to pay rent due to the economic hardship that will affect low income people? And, if I buy in superior areas those renters will be more stable and more likely to pay their rent? I know this is relative to my area, but what cap rate would say is a good for these stable areas. I need to start moving on building my portfolio and I am trying to be well informed before I begin, especially with another possible crash coming. What would you recommend?
    Jeff Brown
    Replied about 6 years ago
    Hey Don — Any area you wouldn’t put grandma to live alone, is out, period. What you said about the reliability of tenants in better neighborhoods is correct. When the stock market goes south, some are hurt while others are unaffected. It’s the economy in general AND your market specifically. What’re the macro analysis facts where you are? Do they compare favorably with TX and other relatively superior regions? If not, stop investing where you are. Forget cap rates, as they’re likely the most overrated, inaccurately calculated metric in investing. This is especially true in the 1-4 unit niche. Make sense?
    Don Clark
    Replied about 6 years ago
    Makes sense. I am trying to find out the macro analysis of St. Louis, but I’m not having success. Where do you look? What type of real estate do you recommend now if the macro doesn’t look good; wholesaling, fix and flips? thanks, Don
    Jeff Brown
    Replied about 6 years ago
    Don, go to my site, contact me, and I’ll lay it out in spades for ya.
    Replied almost 6 years ago
    I really love this site. Very informative!
    David Johansen Investor from Kernersville, North Carolina
    Replied almost 6 years ago
    I somehow missed this article in October but wow what great advice and insight! Thank you very much for sharing this with the BP community!
    Replied almost 6 years ago
    Jeff: I am finally going to take that step and since I will not be doing it full time (flipping) until I retire in 4 years, am considering buying and renting so that my investments will make money until such time. I am looking at the Detroit area as that’s where we will be retiring (at least for the summers). I have secured an agent and have a nephew who is excellent in construction. I have not secured a GC, but since I will be holding on to the properties for rental, figured that cosmetic upgrades could easily be handled. Any advise there?
    Bogdan Cirlig Real Estate Investor from Los Gatos, CA
    Replied almost 6 years ago
    Very good article and I definitely agree with the author. Also a must do is local market analysis. Way too often I see people running for that great 50% of the market price purchase they found to realize later it was such a bad hard to rent or similar neighborhood.