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Understanding Real Estate Booms, Busts, and Bubbles - and How To Profit From Them

Copyright (c) 2006-2023

The basic laws of supply and demand can teach us many things when it comes to investing our money. For years, real estate has been one of the best markets in which to invest money and to realize a solid profit in a reasonably short period of time. Real estate though, much like any other market, will realize increases and decreases in both the supply and demand of properties.

In this article, we will examine the life cycle of real estate booms and busts. We will also look at how real estate bubbles occur, and how to prevent yourself from being caught in one. And finally, we will look at how to profit from real estate in times of both boom and bust.

The Real Estate Boom Of The Mid-2000's

During a major growth cycle in real estate prices, when demand for living space is outpacing the supply of homes, lots of people can make tons of profit buying investment properties to resell at a later date. With the record low interest rates of the past few years, America experienced a major boom cycle in real estate. Investors across the nation experienced record profits, as people began looking to upgrade their homes and to buy vacation homes for themselves.

All across the country, regional pockets surfaced where demand was outstripping supply in record volumes. New home builders got into the game building more new homes at record rates. Real estate investors got into the boom themselves, buying older properties and investing the money to improve the value of the homes.

In an average year, any home that goes on the market will be available for between four and five months, before the home sells. During the administration of Bush Sr., the average time for a home to be on the market was between five and seven months. During the recent real estate boom, under Bush Jr., many markets were experiencing a window of only a few days, between when the home went on the market and when a buyer was signing the contract.

What happens is that the buyer has been on the house hunt for so long that when they finally see a house they want, they offer to sign a contract immediately, to make sure that they do not lose out on another desired home purchase. This is a true "seller's market", where the seller holds all of the cards and the buyer is at the mercy of the seller and the market.

When demand is strong and supply is small, we see record turn-around times on home sales, and we see real estate prices increase at double digit percentage rates. This is what is referred to by some as "hyper-inflation" in real estate pricing.

Now, in every real estate cycle, we see growth and we see slow downs. The trick to hugely profitable real estate investing is to get in while the prices are rising at staggering rates. But, what often happens is that the late-comers in a real estate boom will pay exaggerated prices for a home, and then get stuck holding the bag when the bottom falls out --- when supply outstrips demand and prices for homes begin to drop.

This is what some people in the industry refer to as the "real estate bubble". If an investor is to be successful, he or she needs to get in and get out of the market, before the real estate "bubble" bursts.

How Real Estate Booms Occur

At any one time, regional real estate markets are either in a boom or bust cycle. If you are wise and you watch trends in your market, you can see when a boom is ready to happen.

For example, let's say that an area or large city is seeing tremendous growth in the number of people moving there, but this same area lacks sufficient housing for those people. The trend is expected to continue as large companies are planning on opening new businesses in the area, which will bring in even more people looking for housing. If a real estate investor is aware that these changes are on the horizon, then that investor can make a smart move and purchase relatively inexpensive housing, make some home improvements, and then sell that house at the peak of demand and realize a huge profit on their investment.

Many Industries Profit In Boom Times

When real estate boom cycles occur, more people than just the real estate investor will profit from the trend. Some of these other people include real estate agents, home improvement contractors, and building supply stores. People in these industries will reap great profits during the real estate boom cycle.

Imagine that you are a real estate agent that makes a profit from every home that you sell. The real estate boom is going to be especially good for you, because you may be able to get that commission twice --- once when the home is sold to the investor, and again when the investor sells the home. Real estate agents have learned that marketing themselves to these real estate investors is good business. Real estate agents will go out of their way to point investors to value properties, and some will even offer to reduce their commission ever so slightly, if the investor agrees to use the same real estate agent when the house is resold.

This makes good business sense for the real estate agents. Since real estate agents are operating off of a commission, a percentage of the home's sale price, agreeing to offer discounts to real estate investors means that the real estate agent may surrender a small amount of money the first time that the home is sold, but that he or she will more than make up for that reduction when the house is resold at a higher price by the real estate investor.

Home improvement contractors are also realizing that it is a smart decision to align themselves with real estate investors in these situations. When there is no real estate boom occurring, home improvement contractors are forced to rely on the occasional home improvement job they can acquire from home owners.

From a management standpoint, it makes good business sense for the contractors to work with a handful of investors that have purchased multiple properties. This is far easier to manage than to have one project per customer. This reduces the amount of time spent in customer service, accounts receivable, and reduces headaches in general.

Building supply stores like Lowes and Home Depot also benefit strongly from real estate booms.

Everyone profits when the real estate market is in boom cycle.

How To Spot A Real Estate Bubble

Real estate bubbles occur when a market is overheated and people are still investing in property for profit, but the supply is on the verge of outpacing the demand for homes.

If you are smart, you can spot the bubble while it is developing. And if you can foresee the burst of the bubble, you can get out of the market with your profits intact.

Many individual investors make the mistake of seeing the signs of a bubble market, and not taking steps to avoid loss. If the time between the listing of a home and the sale of a home begins increasing, then that is a sure sign that the real estate market is cooling. Given that during a normal year in a normal market, the average turn-around time is four to five months from the listing of a home to the sale of that home, we have a solid marker for determining how soon we should expect the bubble to burst.

If the peak turn-around time was five days, and the current rate is now fifteen days, then you don't have much to worry about just yet. But, you really should keep your eyes to the horizon. If the current turn-around time is now three to four months, then the boom market has played itself out, and you can forget about the huge profits you could have made six months ago.

As the turn-around time begins to grow, the price pressures on sellers will start to accelerate. It is true that you could have sold the home for a $75,000 markup when the market turn-around time was five days, but now that the turn-around time is three months, you really should consider dropping your price and getting your profits, before you find yourself sitting in a market where your real estate investment is significantly over-priced.

Sometimes The Best Investment Is Aligning Yourself With The Right Third-Party

For the average joe, investing in real estate can be a big winner, but it can also force the investor to bankruptcy. Yes, the average joe can reap huge profits if they buy a home property for resell, but the average joe seldom has the connections or knowledge to know when the market is cooling down. Far too often, the average joe is the late-comer in a real estate boom cycle, and far too often they pay the exaggerated prices believing that they will reap the same profits the big investors have been taking. But the last man in usually takes the biggest losses, and for the average individual who is attempting to play in this market, they are the ones who can least afford the huge losses when the real estate bubble bursts.

No matter what role you find yourself in during a real estate cycle, it is important that you take full advantage the opportunities that are presented. If you take advantage of the laws of supply and demand and make smart alignments with third-parties, you too can profit from real estate.

Not all of us are cut out to be real estate agents. And not all of us are cut out to get into the home improvement business. But the opportunities in real estate are more varied than most of us realize. There are many opportunities out there for folks who want to profit from real estate, that do not require individuals to invest in property or to get a license to sell real estate.

There are plenty of companies out there who have a stake in the real estate industry who need people on the ground to help them to make money. One example is those big corporate real estate investors. Many of them need boots on the ground to find value properties to invest in. You can align yourself with these investors to help them to find property to buy, and these investors will reward you with a finder's fee. Along this same line of thinking, there are ample opportunities for individuals, who want to align themselves with third-party companies, to earn a nice living in real estate without being an investor.

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