Understanding Real Estate Market Cycles and How To Invest Based On Your Own Research

A lot of people have been asking me how I do my research for places to invest in. Here’s my attempt to explain the process.

It started when I sold my home and was wondering where to invest the proceeds. I moved into a condo that had previously been a rental so I didn’t need any of the money to buy a primary residence. I thought that California was overpriced and I definitely wanted to invest out of state.

I spent a lot of time and money reading books and proprietary reports about market cycles, its causes and effects. One great book is Bruce Norris’s California Countdown. I found out the periodically the California market experiences a rapid run-up in pricing, then it crashes, stagnates, and then rises again. As housing becomes less and less affordable, people start to migrate to neighboring states.

How do you know people are starting to migrate out of your city witout waiting for the 2008 census? You can see these trends through the Unofficial Migration Indicator at www.uhaul.com. Check out the cost of a one-way rental for any given city and any other city. Let’s consider the cost of renting a small truck between San Diego, CA and Phoenix, AZ. It cost $225 to rent to from San Diego to Phoenix but only $101 to bring it back! This means that there are probably twice as many people moving out of San Diego and into Phoenix than the other way around. This is basic supply and demand. So you want to make sure that the price is constant both ways or in your favor.

You can also check out population and job growth trends at a variety of different websites, but don’t always assume the given data is correct. You can get data at cities chambers of commerce sites or by google searches.
here are some useful links:
US Census Bureau
Milken Institute

I also found out that whenever prices in neighboring states start to rise, California property prices have started to peak . This is because at the top of the cycle Californians can’t afford to live here anymore and they start moving out of California and into places where housing is more affordable. Eventually as these places begin to rise and CA prices begin to drop, the lure of California becomes irrestible and the cycle starts all over again. Accordingly, there are states that
1) follow an opposite cycle from Calfornia [contrarian states]
2) follow a similar cycle to California
3) states that do nothing or do their own thing.

Contrarian states are states like Arizona, Oregon, Utah, Colorado,etc
Similar states are Connecticut, Florida, Maryland, Nevada, New Hampshire, etc
Limited movement states are Alaska, Arkansas, Idaho,Indiana, the Carolinas and Dakotas, Ohio,etc.

Each state behaves differently so don’t take this as gospel. Do your due diligence.

Look at prospective states or cities and find out how they’ve done historically. I looked at several states before I settled on Utah.
AZ – already too much appreciation in the residential market. I had missed the boat. vacancies are sky-high. commercial still seems good.
TX – It really hasn’t done anything exciting in the past 25 yrs. its a safe place to park money. plus the 3% property tax kills your cashflow.
NM – its looks like a safe place to park your money. a few people I know used to live there and said the local government was not pro-biz.
FL – too late to the party. plus 2% property tax. i had bought 2 pre-construction houses there in early 2004, but the builder had gone under, so I basically lost out on several months of appreciation.
WA – mainly looked at seattle since i went there in july 2004. local economy not
diverse enough for my liking. only 2 main biz – starbucks and microsoft. although the projected job growth is there, the salaries still seem low compared to the house prices/rents.
NY – looked at upstate new york. property tax is over 5%. job growth and population growth are both negative. good cashflow but i’ll wait for the indicators to turn before venturing into this territory.
UT – finally something i like! Positive job and population growth. The market was been flat for several years and had just started to perk up. saw 6.5% avg appreciation state-wide last year – that made front page news!!! govenor is pro-biz (he would be, he’s the son of a billionaire!). SLC is land locked. There’s limited land, always a good sign. Saint George is a hot market too. Also, Utah follows an opposite cycle from california. During the last cycle between 1993 and 1997, Utah saw a 64% appreciation, while California saw only 3%. Between 1999 and 2004, while Southern California saw a 125% gain, Utah saw less than 5%.

In 2003 Utah was 49th in the country in terms of appreciation, beating only Texas. However in 2004, it jumped to the 36th spot. Between 2001 and 2003, Utah saw 21 months of zero or negative job growth, which is why prices didn’t boom in a low interest rate period. 6 months ago, it was 2nd in the nation in terms of job growth (3.7%) lagging only behind Nevada. Since the beginning of 2005, the unemployment rate has been lower than the national average.

Utah also has the nation’s highest birth rates and life expectancy. Over the next 25 years, its estimated that the population will grow between 58 and 75% making it the 5th fastest growing state.

At this point I stopped looking for places to invest and started looking for deals and a team. [feel free to email me for contacts and I’ll hook you up with them]. I also tied up with local builders and developers. I booked several pre-construction homes there and have already closed on 5 of them. I just bought another lot there next to Lake Utah with a build-out time of 12 months. Some of them have gone up 10-20% since the time i’ve booked them.

It definitely pays to do your own research!

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