The real estate market depends on supply and demand because of its transactional nature. When it comes to investing in real estate, you constantly need to analyze the supply and demand. The housing supply is constantly changing, and in my lifetime, I have seen the real estate market rise and fall, boom and bust, and everything in between. You may be saying to yourself right now, okay, but why is the real estate cycle important? Understanding the housing supply and demand will help you make well-informed investment decisions and increase your likelihood of success. The goal is to find the most profitable investments, right? To do so, you have to be aware of what’s happening in the market around you. By staying with the latest trends, you can predict what will happen with housing prices in the future and score the best deals.
What is Supply and Demand?
Supply and demand works in real estate like this: a healthy market has the right amount of buyers (demand) and sellers (supply). In real estate, you will hear things like “a market has a 9 month supply.” What does that mean? That means if a market has a 9 month supply, with the number of houses listed and the number of buyers in the market, it would take 9 months for that house to be sold. Therefore, the prices will be soft, or in more simple terms, cheaper. Take the average of the houses sold in one month and the average of houses listed for sale in that same month. Divide the houses for sale by the houses sold that month and you will get the months of supply.
You can start by looking at Zillow (or a similar website) or asking a realtor to find the property’s price per foot for July 1st of the past five years. In that process, you will learn whether or not you’re paying more. You’ll be able to get an idea of where the market is at in terms of the real estate cycle. Remember, low supply will most likely drive prices up, and an oversupply typically causes prices to fall.
When Should I Make a Move?
At my annual Real Estate Workshops, I always get asked, well when should I make a move? My answer is always: when the supply is 6, 7, 8, or 9 months. What you want to look for is about 6 months of supply. That signifies a balanced or healthy market. If it’s above 6 months, you get strong price concessions, meaning you will be able to easily buy for less than the asking price. This is simply a result of supply and demand! When demand is less than supply, the market is yours to conquer.
When Should I Not Make a Move?
I’m always reluctant to buy when the supply is under six months. When demand is exceeding supply, the market gets overheated. Everyone is competing for the same handful of properties, and so the sellers are able to ask for a lot more than usual. Basically, that tells you that you could buy the houses at a different time for a lot cheaper. If the housing supply is under six months, wait for the cycle to run its course, and be prepared to emerge when the market is strong.
Take it from someone who has been doing this for a long time. You have to consider the real estate cycle in your property calculations. You can’t control the market, but you can control the outcome of your investments.
If you’re looking into becoming a real estate investor, you’re in the right place! WealthBuilders offers a handful of different real estate resources ranging from free blogs and vlogs to weekend-intensive Real Estate Workshops. I understand how intimidating it can be to start a new venture, especially one that involves risk. That’s why I wrote and created the Real Estate Mastery Manual using my 30+ years of experience as a real estate investor. I’ve made a lot of mistakes so that you don’t have to!
If you want to take the next step and really get in the game of real estate, I encourage you to join my team of real estate professionals and me on the weekend on June 12-14th for the Real Estate Livestream. If you’ve ever wanted to attend a Real Estate Workshop but couldn’t make it to Denver, you can now catch all the live sessions from the comfort of your own home. As always, if you have any questions, you can email firstname.lastname@example.org and my team will take care of you.