Beginner Series - Understanding Market Cycles

The Real Estate Espresso Podcast

Beginner Series – Understanding Market Cycles

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Beginner Series – Understanding Market Cycles

Welcome to the Real Estate Espresso Podcast, your morning shot at what’s new in the world of real estate investing. I’m your host, Victor Menasce.

On today’s show, we’re diving into another installment of our monthly beginner series. Unlike other podcasts, the Real Estate Espresso Podcast primarily targets a very experienced audience. Our listeners are sophisticated, many of them managing large portfolios of apartments. But we also recognize that you may have people in your life who are eager to learn more and may lack access to high-quality information.

The thought of sending your spouse to a $199 weekend boot camp for beginners, where they might be exploited by unscrupulous salespeople, is unsavory. So, where do they turn? Look no further. We dedicate a few shows every month to topics that expedite the learning process for less experienced investors. Additionally, our discussions may offer seasoned investors a fresh way to explain an otherwise complex concept. Today, we’re delving into market cycles.

Market cycles result from the delay between perception and reality. A perfect analogy is driving a car. Imagine for a moment that there was a significant delay between turning the steering wheel and the car’s actual response. It wouldn’t be instantaneous. This would compel you to overcorrect, leading to constant wavering within your lane. This scenario mirrors what happens in nearly every market, including real estate.

We observe it in retail, where sellers hasten to build up inventory in anticipation of potential tariffs, only to end up with a massive surplus. Meanwhile, manufacturers experience a cycle of feast and famine: huge orders come in, then dry up—this is essentially overcorrection. The pattern repeats itself in various sectors of the economy.

So, what will the market be like in 15 years when that new mine opens? It’s impossible to predict. We might be in the midst of a building boom or a crushing recession—it’s anyone’s guess. A specific real estate market might seem to have a shortage of housing, causing people to rush in to meet this demand. However, the time required to plan and build means market conditions could have altered by the time these projects are complete. What was a shortage a few years prior is now a surplus. We’re seeing this exact pattern unfold in several major markets right now.

Throughout the pandemic, we witnessed huge demand for vacation properties. With social isolation a necessity and work going virtual, many opted for telecommuting from a lakefront property instead of a one-bedroom apartment on the 30th floor of a high-rise. Demand for these holiday homes skyrocketed, many were switched to short-term rentals, and rental income soared in response to the red-hot demand. Now that office work is starting to revert to pre-pandemic patterns, the demand for these lakeside homes has decreased, as have their prices. This is merely another cycle.

During the pandemic, there was an RV shortage; manufacturers increased production, and now RV dealers’ lots are overflowing with new products. What does this symbolize for you as a real estate investor? Well, many sellers reminisce about what their property was worth just a few years ago. Most haven’t accepted that prices may have fallen by as much as 30% in some areas, and some are behaving as if there’s still a shortage in their markets. Some brokers are acting likewise. This ignorance is concerning. Coming to the negotiating table armed with two-year-old data and using it to validate their position is troublesome. The polite term for this type of disconnect is called price discovery.

New investors usually depend on more experienced figures to guide them on market dynamics. However, trusting these sources can be perilous for new investors. Brokers often propose an operating budget to the buyer, but this should never be the foundation for the buyer’s decision. When we conduct our own underwriting, we never rely on just one source of data. We create our own financial model and commission a third party market study. We also incorporate a financial model from our property manager, who is locally based and intimately familiar with market conditions. Additionally, we obtain a model from our lending contacts.

Ideally, all four of these should align. Usually, they do align quite closely, and if they don’t, we investigate to comprehend the differences and underlying assumptions. It’s only through this process that we gain an objective understanding of current market conditions and how the market cycle has evolved or is in the process of changing.

Keep that in mind as you strive to make the most out of your day and do something extraordinary. We’ll catch up again tomorrow.

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