CashFlowDepot Fear Buster #3 – Maarket Unpredictability As To Whether To Buy, Seller Or Hold



Fear Buster #3: Market Unpredictability As To Whether To Buy, Sell Or Hold


by Jack Miller


The housing market overall mirrors the business cycle. In general, the costs of credit and the underwriting criteria of lenders affect housing decisions more than any other thing. A lot of the unpredictability of the economy can be eliminated by reading financial publications such as the Wall Street Journal or Business Week, which report on many of the above economic indicators, and adjusting what you do accordingly.

For example, for several years rents haven't kept up with price increases on houses. For emotional reasons, many long term investors settled for lower yields rather than to adjust to the new market realities. Those who sold out, paid off their debt, and channeled funds into the buy/fix/sell market realized much higher yields for the past five
or six years.

The cycle has now slowed housing price increases, so a prudent course would be to sell houses held for short term profits and use the funds to buy stagnant inventory from builders and banks; at deep discounts to hold for long term rental income as rents will rise to meet demand.

Local vs. National Economy. When all is said and done, remember that local market activity where you are operating can be completely different from the national economy on any given day. When attempting to gauge the housing market in your own local operating area, it's essential that you first define the role you're playing in the market and the kind of housing market you're in.


I like to divide markets into two basic types:

Buyers’ Market. The first are housing markets that generate short term profits such as one might earn being a land developer, builder, real estate broker, property manager, or mortgage broker. In these markets, some of the more critical factors are short term interest rates, lender underwriting criteria, availability of financing, and overall "turn around time" from the time money is paid in until it is returned. Anything that reduces or increases demand will be felt fairly quickly in short term housing markets.

Short Term Market. The short term market thrives when there is high demand for houses, either from owner/occupants, investors, or speculators. This is the kind of housing market we had during most of the 21st century thus far in most areas. The largest fluctuation in this market takes place when there is an imbalance between available houses and available buyers. When overbuilding has created a housing glut, the market can be termed a buyers' market. In this market, houses remain on the market for longer periods before selling. This impacts developer, builder, fixer, speculator and broker profits as more time and money is tied up for longer period before being rewarded with a sale.

Sellers’ Market. Conversely, when, for various reasons such as restrictions on growth, lack of building space, zoning, taxation, energy prices, etc., construction slows relative to population growth and increasing net after tax disposable income, this creates a sellers' market such as prevailed in many areas from 1995 to 2005.

A sellers' market favors highly leveraged speculators, whether they are developers, builders, rehabbers, financiers, or flippers. When the market slows they, along with the brokers who earn commissions from selling their houses, see their incomes disappear just as their costs of holding begin to rise. This usually creates a buyers' market as many distressed and foreclosed properties are offered at deep discounts to fair market value. There is a fairly simple way to deal with this situation; work against the crowd: When you can't sell, buy. And when you can't buy, sell.

Long Term Market. The other kind of house market is the long term market usually characterized by long term investors, landlords, and property managers. Profits are generated by four factors: mortgage loan amortization, appreciation, property improvement - which includes modernizing and expanding a house to make it more attractive and livable - and net cash flow from rents. In this kind of market, price is less important than financing terms that create net positive cash flow; so seller carry back financing, taking title "subject to existing loans," leases, and Options are the key to profits.

Zero interest rate financing can create very rapid equity growth through amortization. Long term price inflation also builds highly leveraged equity very rapidly. When these two forces are combined with upgrading and expanding the living area, that is paid for mainly out of rents, it's nothing short of amazing how equity can compound with very little cash investment.

Hopefully, the foregoing will help remove the fear of a rogue economy. Bear in mind that, while retailers and manufacturers can be surprised by rapid changes in their markets, the housing cycle moves much more slowly, and entrepreneurs who are watching for the signals can adjust their holdings accordingly. Basically, an informed mind won't have surprises in real estate markets.
Reprinted by Permission. Visit Call (972) 496-4500.  Jack Miller passed away in October 2009. A few of us were fortunate to be able to attend some of his outstanding seminars and also to  get to know him as a wonderful person. Jack  appeared at MREIA meetings and was an international speaker and active investor, specializing in single family houses. He  wrote a monthly investment newsletter and conducted seminars on Exchanging, Management, Portfolio Strategies and Options.