The Real Estate Cycle pt2

"There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive revive of those who do not have the insight to appreciate the incredible wonders of the present."


People occasionally believe that history won't repeat. When things go well, people tend to think the good times will continue forever. Howard Marks, an investor who has made a fortune off his knowledge and understanding of market cycles, insists that "not much time has to have elapsed since the last correction before cyclical history is overlooked in its entirety." Society moves so fast that we are often so occupied with doing what it takes to survive that we don't have the flexibility in our lives nor the wherewithal to step back from our immediate responsibilities to really soak in what's going on behind the scenes in our society. And more importantly to ask WHY.

Markets contain psychological cycles and financial cycles. Both work together without end. Not only do they work together, one leads to the other. For example, when government sponsored organizations make statements like "mortgage lending is safe" then lower rates to irresistible lows, prospective home buyers are likely to take the leap to live their American Dream because mortgage brokers will be incented to swarm their clients to encourage them to sign the loan docs which will give their real estate broker more incentive to push them to sign a purchase agreement. This type of messaging took place in the early 21st century. The American Dream was made feasible and believable, the psychology of home buyers improved, word spread and, not long after, the market shifted from being pessimistic to filled with hope -- there was a strong demand for homes coupled with easy and safe access to money. All of which started from just four words from the leaders of our society : mortgage lending is safe.

People's decisions often fail to take into account what others around them are doing. This  gap in decision making is what allows for control over a markets psychological and financial cycles by the higher level decision makers of our society. The average American is under so much pressure that when we're told to jump we all jump in unison, not wanting to fall behind the other's who are also told to jump. The irony is we fall behind those who are telling us to jump; if not behind them within their plan.

Think outside of your circumstances, in good times and during down times. Appropriately position yourself to take advantage of the rhythmic cyclicality that has been taking place since the early 1900s or else your predictable decision making, multiplied by millions of others who think the same way, will become the yellow brick road to someone else's American Dream. It is challenging to abandon certain qualities of comfort but become more frugal with your budgeting, cut unnecessary weekly or monthly expenses and save for when the time is fiscally responsible to spend. In real estate especially, it can take 30 years, or the entire term of your loan, to break free from a purchase made at the wrong time. Think deeper and consult professionals you trust before making a decision that can significantly impact your future.

The Real Estate Cycle

"Over the course of my career I've heard investment in real estate rationalized by easily digested statements like "they're not making any more" (in connection to land), "you can always live in it" (in connection with houses), and "it's a hedge against inflation" (in connection with properties of all types). What people eventually learn is that regardless of the merit behind these statements, they won't protect an investment that was made at too high a price." - Howard Marks

Market cycles are not only a reflection of financial past, present and future but also of investor and consumer psychology. Understanding the psychology that influences the ups and downs of a cycle will allow you to do two important things.

  1. To understand specifically what part of the cycle we are in during any market
  2. To position yourself within the cycle strategically so you can profit from market conditions

To demonstrate my points I will reference real estate and lending data from 2006-2019. I'm choosing this time period because the 2007-2008 financial crisis occurred in recent memory and will provide a practical and real application to the psychology underlying all cycles.


  • Positive events lead to optimism

Consumers began signing subprime mortgages from private mortgage brokers starting in 2006. Quickly,  providing cheap and easy money to unqualified borrowers with sneaky terms became a mainstream practice. By 2007, homeowners weren't able to make payments. By 2008 property prices declined by 30% from the year before. Investors became weary of risk, consumers didn't believe it would ever get better, the economy was in shambles -- there was no hope. Notice the effect of "no hope" had in the coming years... property prices in 2009, 2010, 2011 and 2012 were even lower than in 2008. It leads you to ask, which came first : lower property prices or lack of consumer confidence? One thing is for certain, the only thing that can turn a bad day into a good day, or in this case down years into great years, are a series of fortuitous events like more government spending, increase in employment opportunities, and steadily increasing home prices, to name a few.

  • Improved psychology encourages increased activity even when there is greater risk

From 2008-2012 property prices were very low. Consumers weren't sure if prices would ever rise again. Following a bust or crash in the market, there is a combination of low prices and lack of consumer confidence that makes the market a risky one to be active in. But bold investors took those risks because they saw small positive events that the average person didn't see. By taking this risk and building new homes when no one else was investors injected society with hope. In down times, society looks to investors to provide improved psychology by taking a risk in an environment where no one is willing.

  • Combination of improved psychology and increase in activity causes prices to rise

Investor optimism, taking the risk, buying low, improving by adding value and then selling higher, leads to a shift in consumer confidence which, along with other factors, starts an upswing in the market. This occurred in 2013. To better understand the flow of ups and downs within real estate cycles we must understand the answer to the following question.

What makes the real estate cycle different from other financial cycles?
The long lead times for real estate developments and real estate transactions. Depending on the size of development it can take between several months to several years to complete development of a property that, upon completion, impacts the market by either placing downward or upward pressure on prices, depending on levels of demand and where we are in the market.  That is why it took several years, between when investors took the risk and began buying after the bust (~2009) to when we started seeing signs of a new boom (2013). Keep in mind, market conditions can change significantly while developments are taking place.

  • Rising prices leads to even more activity

With prices high the laggard investors who didn't get in early (who were too late for the real profit) begin believing in real estate again and they start buying out of fear of missing out. Sellers start selling because they recognize that they can get top dollar for their property. This psychological trend was seen from 2017 - 2018.

  • Prices continue to rise and consumers forget about downtime's ever existing leading activity levels to go beyond sustainability

This is seen when prices go higher than already recorded historic highs. 2017 median sales prices in the San Fernando Valley eclipsed the previous record high experienced in 2007, just before the economic bust that brought home values down 30%. After the 2017 high we experienced we continued to see appreciation in sales price through 2018 and now through 2019. In 2019, interest rates have also been reduced to a historic low. Consumers are feeling good. Buyers understand that sales prices are high but are justifying those sales prices because interest rates are low and giving them an opportunity to still feel good about their purchased. Sellers are thrilled at the opportunity to sell high, especially because demand for their home is picking due to the low interest rates. While some people are aware that an adjustment is looming most are so consumed with their own lives and busy chasing their own American Dream that they have forgotten about the recent downtimes we experienced as a nation.

Why are interest rates and lending requirements so important in determining where we are in the real estate market?

During better economic times, lenders become more optimistic and willing to provide capital. The optimism leads to cheaper and easier financing, this leads to more buying and more development because cheaper money means higher projected returns. More and more developers follow the leaders meaning longe and longer lead times between developments (i.e., projects are always going on). Interest rates set the tone -- the period between the start of planning and the opening of a building is often long enough for the economy to transition from boom to bust. The builders who get started at the perfect time will prospect yet many developers who start projects in obviously good times (i.e., when interest rates are low and prices are high) often open their doors in bad times, leading to unfilled supply that puts downward pressure on rents and sales prices. These bad times cause the level of development to be low and the availability of capital to be constrained and lending to become more difficult. Interest rates and lending in general to play off the fact that there are significant time lags in real estate, changes in interest rate can often provide insight into current market conditions and foresight into future market conditions.


From the eyes of the every day consumer the news is positive now. The psychology of buyers and sellers are good which creates for a healthy and balanced real estate market. When news turns less positive the resulting price correction will cause the psychology of the people to become less positive, which encourages decreased activity that causes downward pressure on prices. Compared to this time last year, San Fernando Valley is seeing less supply and equal or greater demand. The next stage of the cycle will contain less demand and too much supply.

6 Steps To Selling Fast and For Top Dollar

Once you have signed a listing agreement and committed to listing your home it's time to execute and follow through on your decision to sell. It's no coincidence that the best realtors consistently sell homes for top dollar. Among other reasons, they don't get in their own way of being successful. Follow these tips and you will put yourself and your realtor in a position to sell for top dollar and to sell fast.

  1. Stage Your Home (If It’s Vacant)
    Staging is a great way to add perceived value to your listing by showcasing your home to buyers in a way that highlights your home's best features or covers up their imperfections -- it's like women who wear make up to lure men closer to them; granted, once you move in with them you see a whole different side, just like a buyer who purchases a new home, but let's stay focused on the benefits of applying makeup. While there may be that one buyer every homeowner is betting on to defy market research, 7 out of 10 buyers are not only thinking the same things but looking to feel the same emotions when they walk inside a new home. The best stagers study buyer psychology : they know what colors are most inviting, what types of furniture shows space the best, what kind of design is considered modern and up to date and how to work around the unique bones of a home. Nowadays, having the right space is everything. It's almost a prerequisite to selling your home for top dollar. If that space, however, is being cluttered with excess furniture and, even worse, out of date excess furniture you are hurting your chances of getting top dollar and selling fast. Don't bet on buyers walking in and seeing past the things they don't like. The large majority of buyers are going to judge your home based on how you show it. Be in tune with this reality and prime your canvas appropriately to set the best impression that will get you the best response within the short amount of time a buyer is in your home. If the few hundred dollars you spend on staging will help you sell for thousands more and weeks faster then it is a smart and worthy investment.Many listings, however, are being lived in while they are on the market. This makes staging more challenging for homeowners. At the very least, declutter your home as much as possible by removing things that do not add value to the majority of buyers who will be walking through your home. Think about the 70% who think the same way, not the 10-30% who don't -- if you cater to the 70% you won't be taking anything away from the other 30%, however, if you bet on the minority then you will lose the majority of the market's interest.
  2. Don't Stay Home During Open Houses
    Some homeowners want to be present to make sure their realtor is doing their job. I have news for you, if you feel the need to do this then you hired the wrong realtor. The truth is that your presence can be intimidating to prospective buyers who may feel reluctant to freely express their opinions when they know someone is looking over their every move. And trust me, buyers can feel it and your realtor will too. I never allow my client’s to do something that will hurt our chances of earning top dollar and allowing them to be present during open houses is one of those things. In sales, when your feelings are too invested in the transaction, they will often get in the way of servicing the feelings and emotions of the person who has interest in purchasing. Rather than objectively listening to the buyers ideas and vision you will be waiting for every opportunity to correct them. You will lose the lead (i.e., when they are getting ready to leave your open house for the next one on their list they will not give you their contact information) which gives you no chance at following up and closing the deal.TIP : here's a suggestion if you're a homeowner who feels you can sell your home better than your realtor. Prepare a list of all of the improvements you have made to your home over the years and include as much detail as possible. How did these improvements make you feel when experiencing them as a homeowner? Describe how the flow of your kitchen made it feel like you were Gordon Ramsey or how your master bathroom felt like a private getaway from the rest of your home. Rather than trying to sell on behalf of your realtor, treat this as an opportunity to prepare a script for your realtor that they can use to sell your home. You'll be pleasantly surprised how this will make you feel better about trusting your realtor but also how your realtor will open to the fact that you know your home better than any one else.
  3. Ask Your Realtor For Weekly Updates
    Your home will receive the most activity and traffic during the first 3 weeks of hitting the market. Activity should not hit a standstill after the first 3 weeks but traffic will die down unless adjustments to marketing are made (e.g., creative marketing strategies, price adjustments, etc). If you hired the right realtor they will be tracking incoming traffic and collecting their contact information so that they can follow up about their level of interest. Buyers sometimes look at over 7 homes in one weekend. For that reason, these follow up calls should be made within 48 hours of their visit so that your home is still fresh in their mind. If you have an open house on Sunday, follow up calls should be made on Monday or Tuesday (at the latest) and your realtor should be reporting to you by Tuesday evening or Wednesday morning with an update on the week's activity. I always report to my clients three things after every open house : (1) how many prospective buyers visited the open house (2) what their overall thoughts about the home were (3) how many offers were submitted on the home. All realtors know how to sell themselves but far less know how to sell homes. If leads aren't being tracked and follow ups aren't being made then chances of you selling your home fast and for top dollar greatly decrease. If your realtor is not taking the initiative then it is on you to hold them accountable! Don’t forget, we work for you!
  4. Allow Time For Private Showings on Short Notice
    Trust me when I say, not even your realtor likes to show properties on short notice but the best realtors know that the more exposure they give to your listing the higher their chances of selling for top dollar will be. You never know which showing is going to lead to the sale. While it’s unrealistic to expect a listing agent or a homeowner to let go of everything they are doing to show a home at the drop of a dime, it’s important to be flexible. Keep in mind, you -- the seller -- pay for the listing agent's commission and the buyers agent's commission. In other words, buyers agents are working for you too. They are constantly sending their buyers homes that they feel may be a good fit and if your home is one of those they send to their client don’t be the reason they can’t do their job. Give your realtor a set time that you are willing to have showings during the week to accommodate for buyers who aren't able to make the public open houses or just don't want to wait. Hiring a local agent to list your home makes private showings for you and for the buyer's agent much easier because they are able to get to your home quickly, even on short notice.
  5. Install A Lock Box
    Working with a realtor you trust is important for many reasons. Maybe the biggest reason, aside from trusting them to manage one of your biggest assets, is that they will often be the one’s looking after your home when strangers are looking through it. As mentioned above, to give yourself the best chance at selling for top dollar and selling fast you must give your home as much exposure as possible. It's a good idea to give your realtor a spare key so that they will be able to accompany buyers to a showing even when you are not home. This is why I believe homeowner's should elect to install a lock box. Some lock boxes give all agents access to your home. Other types of lockboxes only give your agent access to your home. If the house is vacant I suggest installing a lock box that gives all agents access so that any agent representing an interested buyers can easily show your home. If you are still living in your home then I suggest installing a private lock box and only giving your realtor the combination. In this business, a missed showing opportunity only makes it easier for a buyer to submit an offer on a competing listing instead of choosing your home for more serious consideration. The ideal realtor is alway a local realtor and will be only minutes away from your home at all times, positioned well to service buyer's agents and buyers at all times of the day.
  6. Listen To The Market
    Once you list your home on the market it’s normal for every conversation you have with friends and family to either start or end with “so has your home sold yet?” It’s important to trust your realtor and more importantly to listen to the market over everyone, even your friends and relatives. Don't get me wrong, support systems are great but your friend who overpaid for their house 3 years ago is not a real estate expert, your sister who lives 3000 miles away might understand the real estate market in her neighborhood, your aunt who is a realtor is kicking herself for missing the chance at listing your home and is still looking for the chance to swoop in. Once your home is listed, the most important voice in the transaction becomes the voice of the market and the one person who has their ear to that voice is the person showing your home on a weekly basis.

    Let's keep things in proper perspective. If your realtor sold you the dream during the listing appointment and insisted that they could sell your home for 30% over market value within 30 days then, by all means, hold them to it -- they misled you just to get the listing. This is where your support system (i.e., your friends and relatives) may have a point. But if your realtor carried themselves realistically from the start and gained your trust with knowledge of the market and the industry but felt it was worth taking a risk with a listing price higher than market value because of specific conditions that were clearly communicated to you (e.g., low inventory of comparable homes in your neighborhood) then it's wise to be realistic and listen when the market speaks through the mouth of your realtor. Strategically speaking, there may hit a time during your listing where making a timely price adjustment will actually help you in selling for top dollar. Everything is case by case, the fact of the matter is sometimes you should stick to your guns and sometimes you need to see past your emotions or you risk losing credibility in the marketplace.


Danniel Grigorian

LA Home Prices Have Sky Rocketed – Consider These 5 Things When Determining Your Home's Value

Internet sites like Zillow, Redfin, Trulia and are good places to start. However, if you are relying on these sources alone to get an accurate home value don’t be surprised if your home sits on the market, if each open house you hold doesn't attract at least 20 prospective buyers and if you don't sell for top dollar. The estimated home value these websites provide are based on the three most basic defining features of your home : the city it's located in, the living square footage of your home and the price per square foot of recently sold homes in your city. Put yourself back in your shoes when you purchased your home and ask yourself this : was price per square foot and city the only two factors affecting your decision to buy? If your answer is yes then you're every realtor's dream buyer to work with; conversely, if you answered no then you're every realtor's dream seller to work with. Either way, it makes you a dream to work with so call me and let's talk about your real estate needs.

Here are 3 important factors you must consider when determining your home’s value, a list of difference makers that will set you apart in the marketplace and a strategic pro tip that could help you get a higher price for your home than it's actually worth.

Be specific with your search criteria so that you are comparing apples to apples. Consider these 3 criteria before anything else.

  • PROXIMITY Comparing homes in the same city is not good enough. Distinguish between your home's city and your home's neighborhood. Within once city there can be several school zones, multiple zip codes and vastly different architecture. It’s important to limit your search to homes in the same pocket or neighborhood. When I’m working with a motivated client who wants to sell high and doesn’t want their home to sit on the market – experienced sellers know that  the first 3 weeks on the market are the most important for attracting motivated buyers willing to pay top dollar – they expect me to be accurate with their home’s value. Therefore, when I’m calculating their home’s value I start by setting a one mile radius around their home. Then I further filter the results by removing homes that are on the opposite side of main streets (e.g., in the San Fernando Valley home's south of Ventura Blvd carry a different prestige than homes north of Ventura Blvd) and homes that fall in a different zip code. Homes in the same neighborhood generally have more things in common, such as similar building characteristics like interior layout and lot size.
  • PROPERTY TYPE, SIZE & TIME After distinguishing a home's neighborhood, I immediately identify the property type  (single family residence/SFR, condo or townhome). Then pull data based on market activity in that neighborhood and for that property type by identifying all the homes that are currently listed, all the homes that are in escrow and all the homes that have sold within the last 180 days (180 days is a standard time frame used in the industry to define recent sales). Once you have pulled all the sales data in your neighborhood relating to your property type you must filter this data by searching for homes that are a similar size as yours.

 One of my listings in Woodland Hills, CA serves as a perfect example. Woodland Hills, CA is a city in the San Fernando Valley containing SFR's, condos and townhomes. My listing is a SFR but within Woodland Hills there are over 20,000 single family homes that fall in two different zip codes. Also, the home I listed was originally built in 1960 as a 2,276 sq ft home. In 2008, my clients added 2000 sq ft and a 2nd story to the house, significantly changing the property's profile (now a 4300 sq ft home). Most homeowners in their neighborhood have not made 2000 square feet additions, therefore, most homes are smaller in size. Would it make sense to compare a 2300 sq ft home with 3bd/2ba to a 4300 sq ft home with 6bd/5.5ba? 

Compare your home to properties similarly sized by adjusting your search criteria to include homes that fall within a range of +/- 15% of your home’s living square footage. This will do two helpful things for you, narrow down the number of comparable homes to analyze and give you a more accurate sense of of the market value of similarly sized homes in your neighborhood.

  • FEATURES Now that you have narrowed down your search to include similarly sized homes in your specific neighborhood it’s time to consider the improvements and features that make your home unique. In this step you make your price adjustments by analyzing the specific features and improvements of your home compared to those that are similarly sized in your neighborhood. On the most basic level, a half bathroom carries less value than a full bathroom; a home without a pool is less valuable than a home with a pool; a home that sits on a 7,500 sq ft lot will be valued different than a home that sits on a 15,000 sq ft lot. Now let’s take it one step further. When comparing two full bathrooms of the same size, the bathroom that has more modern improvements to their vanity, flooring and shower will carry more value; a pool that been recently replastered will carry more value than a pool of similar size that is empty; a lot that is 15,000 sq ft of flat land will typically carry more value than a lot that is 15,000 sq ft but has only 10,000 sq ft of flat land and 5,000 sq ft dedicated to unusable hill side. Making the right price adjustments are essential. This is why working with a local real estate expert who has access to all the market data is pivotal for motivated sellers.


DIFFERENCE MAKERS There are extraneous factors that can't be modified by homeowners that often impact a home's value either positively or negatively. Factors that typically raise your home's value include being in close proximity to new developments that are selling higher than your neighborhoods median sales price; having multiple structures or an ADU on your lot; the specific direction your home faces will attract or detract different types of buyers, for example, one buyer may not like the direction a specific home faces because they believe in feng shui while another buyer would love the direction that same house faces because of the 180 degree views it provides. Exposure to a lot of noise or traffic will typically decrease your home's value, e.g., living on a main street, being close to an air port/train tracks or being across from a school. With that said, there may be that one buyer who will pay top dollar for a home right across the street from a school even though cars will be lined up in front of their driveway during drop off and pick up hours because they will be unaffected by the traffic since they leave for work and arrive home at odd hours and they want their child to be able to walk to and from school. Similarly, a house with a city wash behind it is typically seen as a negative when it comes to a home's value but there may be that one buyer who prefers the wash being there over having another neighbor. In this industry there is a general rule of thumb on how to adjust for each difference maker when it comes to determining a home's value, yet that general rule of thumb applies to the typical buyer who behaves like, thinks like and represents 70% of all buyers. Across sales in all industries, however, there is an even bigger rule of thumb : never assume you know what people value most because all it takes is 1 buyer to view a factor positively that would otherwise be viewed negatively.

SOLD LISTINGS VS ACTIVE LISTINGS : Which is the more accurate comparable?

This is frequently brought up during my first meeting with a client. Both are important to consider. Sold listings represent the market value of your home aka what buyers are paying for similar homes in your neighborhood. Active listings represent your competition in the market. In other words, sold listings represent price where as active listings represent perceived value. If your current competition on the market is priced at 15% more than what buyers are actually purchasing homes for in your neighborhood then I would strategically stay close to my overpriced competition by pricing my listing according to its perceived value in the market place even if that price may be 10-15% higher than the market value. Why? Because even if my client is willing to sell for less I'd be putting them in a position to sell their home at a price higher than they would have been able to if market conditions and competition were any different. I'd be overdelivering, keeping their best interest as my priority and showing my value as a professional.


'We have to take advantage when luck is on our side, and do as much to help it as it's doing to help us.'

Your Home’s Value is Higher NOW Than Ever Before

“Price is what you pay; value is what you get.”

While there is no way for me to know where your property is located, how many square feet your property is, the size of the lot your property sits on or the improvements you have made to your property I can state with confidence that you paid less for it than what you would get for it in today’s market. In other words, your home’s value is at an all time high because of three reasons.


Sales Prices

The 2008 financial crisis saw median sales prices in the San Fernando Valley fall an unprecedented 28.6% from the year before – more than the price plunge during the Great Depression of 1929. In 2007, home value’s were at a historic high; this high was surpassed in 2017 and has only continued to rise. Home values are higher now than ever before. The graph below, produced by data from the Southland Regional Association of Realtors (a governing board of the National Association of Realtors) highlights median sales prices in the San Fernando Valley over the last 20 years.



The law of supply and demand states if there is a decrease in supply while demand remains the same then prices tend to increase. As illustrated in the below graphs, inventory in the San Fernando Valley has decreased in comparison to this time last year, therefore, we can conclude that in today’s real estate market there is a decrease in supply/inventory. What do we know about demand in today's market?

Interest Rates

Supply is an indication of seller’s listing their property on the market; demand is a reflection of buyer activity in the market. We know that less sellers are listing their property; what do we know about buyers? Over the last 12 months the FDIC has reduced mortgage interest rates to a historic low of 3.75%, a reduction that has spearheaded buyer activity in the real estate market. In other words, regardless of the high prices, there is strong demand to buy in today's real estate market because of low interest rates.

New homebuyers have justified the high sales prices because they have been able to secure 30 year fixed loans at incredibly low interest rates and purchase properties at near, if not above, the same rate as this time last year (as seen by the graph below). Subsequently, less properties are hitting the market while roughly the same number of properties (if not more) are being sold—the law of supply and demand.

What does this mean for home value and homeowners thinking about selling?

The combination of low inventory, historically low interest rates and record high sales prices have created market conditions that could not be more perfectly suited for a seller to collect top dollar for their home. If you are a homeowner thinking about selling, whether your motivation is to upgrade or to downsize, THE TIME IS NOW. While the existence of highs and lows in a market are inevitable, predictions about the extent and timing of each phase in the cycle are not as dependable. Everyone knows it's a seller's market, the question becomes for how much longer until we see the other side of the cycle. It is in the best interest of office and our current president -- on the cusp of a re-election opportunity -- to create a perception of a strong economy, to provide consumer confidence and to make our dollar feel strong by allowing Americans to feel good about the value of one of their biggest investments -- their home. Timing is key. I believe advantageous sellers will reap big rewards over the next 6-10 months because market conditions beyond Summer of 2020 are uncertain.

ADDED NOTE : the market is especially suited for a homeowner who has intentions of selling their home and upgrading to a new home in the luxury market ($1,500,000 +). Studying the luxury market I have been seeing price reductions of 20% or more at a much higher frequency compared to recent years.