I’ve been through two down real estate markets in my adult life (Texas in mid-80’s and California in early 90’s). Hard to generalize based on only two experiences. Houses above 1M will shed more blood than houses in the median price range. That’s almost guaranteed. Unless you are talking about NYC, where $1M is a median priced home.
A declining market will definitely lengthen the time houses will be on the market.
I was in Austin recently, looking at some nice places on the west side (in the 500-700K range). 250-300 days on the market in common right now. I sold a house in San Francisco last July (in a probate sale for a client). sold for 75K more than asking price in one day. a 950K deal for a 85 year old beat up Victorian in a B- neighborhood.
how can these markets be so different?
The Texas down market seemed to last a lot longer than 2-3 years, but my memory may be faulty. The Cal down market was 2-3 years.
Markets are incredibly complicated, and I am not nearly smart enough to predict the whens, whys and how longs and how fars. What I can do is prepare, keep my debt load down, focus on income production, and avoid frivolous spending, and pinch every penny I can find.
Posted by John H on February 18, 2005 at 19:19:22:
I havent been involved in RE investing for too long, and was hoping some of you veterans could tell me how long does a housing/RE downcycle usually last. It’s undeniable that we are heading for one, even if it’s a mild one. I’d like to know specifically how it impacts the luxury residential market. I’m aware that previous RE crashes have all been caused by different factors and each crash is different, but the effect on the residential market, I imagine, is still the same. I’d like to know if the luxury (1+ mill) is impervious or equally affected by the higher interest rates and low appreciation.
first, understand that the US is NOT one big real estate market. It is a collection of thousands of markets, which do not act in unison.
Second, understand that the resale market and the rental market operate independently, even in the same area. I saw a horrible year in 2003 in Tyler, TX, with high vacancies and declining rents, yet resale values of my properties jumped 20%. It made no sense, but it happened.
third, the residential resale market and commercial markets operate independently. Compare Silicon Valley office/warehouse space with Silicon Valley residential. It makes no sense.
Austin residential properties have suffered already. But Northern Cal properties (in and near Silicon Valley) have done well. How can that be?
So what do we do?
don’t get overly leveraged. don’t put yourself in a position where you can be hurt badly by a downturn.
try to identify markets which have already shed value. look for value and cash flow.
nothing will get you through a recession like cash flow. ride the rents through the recession, and you will live to see another bull market. I had clients who were winners adn losers during the last Northern Cal downcycle (1990-93 or so). The winners got through because they had the ability to absorb vacancy and lower rents. The losers had too much debt, and lost their properties.
don’t speculate. don’t get you capital tied up in unproductive properties (like raw land).
recesions tend to knock off the high end stuff first. aim for the “meat” in your market.
If you really see it coming, then start hoarding cash now. Stay liquid, and jump on the opportunities that inevitable surface in recessions.
I admit to being an eternal pessimist. I am not that experienced in real estate. But I ask you experienced folks: have you ever seen a period of easy credit like you’re seeing today in your lifetime? Have you ever seen people speculating as wildly in real estate as they are today? Have you seen people taking on as much debt (credit card, mortgage, every kind) in your lifetime? My feeling is that we are seeing a historic bubble. If I’m right, we may see a crash like Japan saw in 1990 or stocks saw in 2000. When it happens, who knows, but it could get very ugly. If I’m right, the best thing to have is cash.
Posted by John H on February 22, 2005 at 12:01:17:
Jimmy, thank you for the response, all very valid points.
I’m more interested in understanding the transition from a seller’s market into a buyer’s market, and how that affects the time it normally takes to sell a SFH; specially $1+mill homes.
Also, a bubble burst is just a self correction of a market that is overvalued. So is it safe to assume that this correction takes place in 2-3 years, and then it’s normal business again?