Why is Real Estate Cyclical? Just about everyone knows that real estate prices cycle from high to lows depending on market conditions. As markets improve more and more investors, builders, and flippers want to get into the market. Rising prices and higher profits result in higher demand until prices strain affordability to the breaking point. When that happens prices level out or drop until speculators decide that opportunities are limited. Prices then level out or even drop. We watch several statistics to get an idea of the risk level in a given market. One very important factor is the number of building permits being issued. In one of our previous posts we showed that the number of single-family building permits decreased by 34% from 2006 to 2007. Condo/townhome permits decreased by 8.3% over this same period.
Is This Trend Continuing? Looking at January 2008 compared to January 2007 certainly leads to that conclusion. Last January there were 344 single-family permits issued compared to 548 the previous year. Looking at condo/townhomes, we saw only 88 new permits this year compared to 614 last year. This represents a decrease of 85.7%. Of the 88 permits issued 58 or 66% came from Denver and Jefferson County. Arvada, Aurora, and Arapahoe County reported no new permits.
Its Not Yet a "No Brainer." Markets may drop even further and there is no guarantee of success; however, each month has brought us some new encouragement. Stay tuned for the next chapter.
Cash flow Is Improving. Vacancy rates in rental units is dropping slowly and rental rates are starting to rise. One investor I know who has 40 years experience in the business is beginning to acquire units to rent out and hold for up to three years, at which time he believes the market will rebound and he can sell those units at a profit. Not a bad strategy for patient investors. Generally, the best buyer for these investments will be nearing peak earning years with ample income from other sources.
No comments:
Post a Comment