Today we have a pop quiz.  Please have a sharp #2 pencil ready.  I must say from the outset that the older generation will have a definite advantage when taking this quiz.  Extensive experience is a real plus in determining the answer to my one question quiz.

The graph at the top of this page is a well-known and widely accepted representation of normal real estate cycles. Real estate cycles are a fact of modern life. I admit, when I was in my twenties and thirties, I argued with my dad that the modern Texas economy was not subject to such trends.  People were moving here in droves and we were not “making any more land.” That was several recessions ago. Like the stock market, the overall trend is upwards; but we have had down times interspersed in there as well.

So your assignment today is to take your pencil and circle that point on the graph that best represents where you think we are today in the Austin real estate cycle.  Be honest.  The interesting part of this quiz is that we will not know what the correct answer is until we are well past the current stage, whatever that is. If you are expecting to sell or buy a property in the next year or so, this is more than just an academic exercise.

Having been through several lesser booms, but nothing as crazy as what we have experienced the last couple of years, it is my opinion that we are slightly past the “Euphoria” stage. In fact, I find it remarkable that the Austin economy has sustained the euphoric atmosphere for such a prolonged period. So what is the point of this discussion? Well, it may be helpful to discuss a few common sense strategies.

First, are you planning to sell a property in the next year or so? Depending on the stage you believe we are at  on the chart, now would surely be an ideal time to maximize the value while the market remains poised at the top of the business cycle.  But what about buying at the top of the market?  I get that question a lot now.  Good real estate deals can always be found at any point in the real estate cycle. The key is to fully understand the fundamental value of the property rather than relying on some pie-in-the-sky, hoped-for appreciation which may not come until the next business cycle.    When buying at the peak of the market, there is little room for error.  Incomes may be less than expected and hold times may be much longer.

When near the top of the market, it may be time to take a profit or at least diversify to reduce the rick of a soft real estate market. It was a real shock to me in the late 80s to discover that a diversified real estate portfolio was NOT different colored duplexes in South Austin.  Who knew?  I regularly have investors tell me that they like to keep their properties clumped in one neighborhood. That is certainly one strategy, but it comes with some risks.

In summary, it is time to make a careful judgment regarding our local economy and the real estate market.  It might be time to put a plan into motion rather than reacting after the fact.

Time’s up.  You may put down your pencils now.

Jeff Stewart, CCIM    Stanberry & Associates   jstewart@stanberry.com