Dan Amoss over at Whiskey and Gunpowder makes a good correlation to 
various valuation calculations and the prediction of a real estate "bubble". Namely he compares rent-to-price and price-to-income ratios to determine whether real estate is overpriced or not.
His post is about the next real estate bubble that will likely occur, showing justifiable reasons for that bubble to happen in Eastern Europe. He uses Bulgary as his example where rent-to-price ratios (cap rates) run at just 3-4% and the price-to-income ratios are around 7-9.
If you apply those same calculations to Florida real estate, particularly South Florida, you could easily see the properties down here were overpriced and a "bubble" was due for bursting. A bubble bursting is not a disaster, but rather a correction that needed to take place to sustain a normal marketplace.
So, when should the potential investor get in?
When the cap rates start to look attractive again, namely getting back to around 10%. If we start seeing cap rates greater than 10%, then properties are being undervalued, which increases the chances of making a great investment.
Why wait until 10%? You don’t have to, but 10% is a good gauge for when properties are valued correctly. You may very well be happy making less than 10%. You may also want to make more than 10%. You have more options as to when you purchase, but do not try to time the market.
Instead, focus on your investment objectives and find properties that meet those objectives. Never forget that you make the profit on the purchase, not the sale!!!
What about the family just looking to move?
When to buy is subjective for them. There are a lot of variables that you cannot control, including the timing of when you must move. For these types of buyers I suggest to not try to time the market and focus more on finding a home that you love and can afford. If you find one, buy it regardless of the market conditions because you will be happy living in it and not worried about the "investment".
If you are unsure if a property meets your criteria for a purchase, contact me and I can help. I will help ensure the property you purchase fits into your overall financial and investment plans and help you find the mortgage that is the best fit also.
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