Don't get me wrong - if you're buying a property and plan to flip it in a few months, then the current direction of the market is very relevant. But if you're buying a house to live in its less important.

Ok wait, let me explain that. I've been in real estate a long time, and have made a decent amount of money buying and selling properties. But whether the market is going up or down, I continue to buy and sell properties. Regardless of whether the market is hot or cold, it's going to change at some point in the future. A "hot" market will cool down. A "cool" market will heat up.

Sure, it would be helpful to know the exact time a market will turn. Indeed, there are a lot of people that say they know exactly when the market will turn. They're all 100% sure, but no one agrees. Because it's impossible to be "100% sure." Simply knowing that the market will change in the future doesn't give you a competitive advantage, anyway. It's like saying it will rain at some point in the future - it's true, but it doesn't help you know when to bring an umbrella.

Lets look at an example. I have a friend in California. We talked about the fundamental problems with the California market, like lax regulation enforcement. He told me he was happy that he hadn't purchased a specific property recently, because he knew the market was going to tank. So we talked about the property. It turns out that the property he almost purchased at the time was worth 350k. It eventually rose in value to 800k at the peak. Today it's worth 740k. (Oops.)

My point is that knowing the market will eventually change is not as helpful as knowing when the market will change. In the last 20 years, the Austin real estate market has gone through many cycles. Simply knowing that there are more cycles in the future is not helpful. If you are buying a house to live in, its possible you'll see many hot and cold cycles in the real estate market before you sell your home.

So what's important? When I purchase a property I look at how the appreciation of the neighborhood compares to other neighborhoods in the same city. I'm not looking for a property that always appreciates. I'm looking for a property that does better than average in a slow market. This might mean it depreciates at a slower rate. I also want a neighborhood that appreciates at a greater rate than average when the market is hot. While its hard to find anything other than general appreciation rates for a city, a good place to start is a local realtor who knows the market well, and who can tell you how different neighborhoods have performed in the past.

Secondly, I look for properties in what I call "emerging areas." In the past, I've seen the largest appreciation for properties that were not in stellar neighborhoods, but properties in "rougher" areas that were improving. Even if the market is currently cool these properties can be purchased relatively cheaply. And if you wait for the next hot cycle these areas might turn from transitional neighborhoods to the new "hot spot."

While I can't predict when a market will turn, I do look for different things that might affect a neighborhood. Is there a new strip mine moving into an area? It might be a good idea to avoid surrounding neighborhoods. On the other hand, there could be a new development that might increase properties. For instance, if you hear that an old chemical factory is about to be turned into a mixed-use development with cute little shops and expensive houses, it might be a good idea to look at surrounding neighborhoods.

In summary, it's hard to predict the turns of the real estate market. But if you do your research on the property you are interested in and the comparative appreciation of your neighborhood, you can ride out the ebbs and flows of the market and come out ahead in the end.