Real Estate Market Cycles (How and Why They Matter)

Real Estate Market Cycles

How and Why They Matter

by Angie Barbosa

Real Estate Market Cycles (How and Why They Matter) 

Hi Real Life Traders! I have had an opportunity to talk with many of you this month during Real Estate Month at RLT and it's always a joy to share this passion of mine. One inevitable question asked is, 'Is this a good time to buy/sell?” Have you ever heard anyone say with frustration: 'Never ask a Real Estate Agent if it's a good time to buy or sell . . . they'll always tell you 'yes' because they want the commission.”? Let's just address this elephant in the room. There are good Realtors and there are not-so-good Realtors. In my opinion a Good Realtor wouldn't give you a blanket response like this because there are so many factors involved. In the interest of full disclosure, I am a licensed Salesperson in Idaho, currently working on licensing in California. Although I don't function as an active Agent, I work for 11 Agents at the time, all handpicked, all Good Realtors, and all know the state of the national as well as their local Real Estate markets. Their answer to the Question of the Day, like mine, would be, 'It depends.” It's not that I'm trying to be vague; truly I'm not. Just truthful.

Real Estate moves in cycles, similar to a stock price's ebb and flow, called Housing Market Cycles. There are highs and lows with recovery periods in between, and specific activity levels of four main factors characterize each position in this cycle. They look like this:

There are two locations in this cycle that are opportune for purchasing real estate (Top and Downturn) and two that are better for selling (Bottom and Recovery). Actually, there are two 'Sweet Spots' I've marked with red marks on the chart. To some degree it depends on your chosen investment strategies, but we'll keep it simple for this article. 

During a 'Top' (salmon-colored bar), housing sales are high, with prices and inventory (properties available for sale) high and leveled off. New construction numbers are high. Due to these four factors, supply is higher than demand and this is a Buyers' Market. You will have many options to chose from and in this phase buyers are typically able to lock in an offer at less than a seller's asking price. As the flood of purchasers becomes somewhat satiated, sales begin to slow. Sellers react by dropping prices, home builders slow their new starts, and we enter the 'Downturn' phase (yellow-colored bar). THIS is that 'Sweet Spot' where buyers are more apt to find a good deal while still having a nice selection to choose from.

During a 'Bottom' (blue-colored bar), housing sales are low, with prices and inventory low and leveled off. New construction numbers are low. Due to these four factors, supply is lower than demand and this is a Sellers' Market. This is a difficult time to be a buyer because the pickin's are slim, and in this phase it's not uncommon to have multiple buyers (even 15 – 20!) competing for one listing. Sellers are thrilled to sell for higher than their asking price and buyers are less likely to make repair requests after inspections because they know it's highly probably that the seller has two more offers waiting in the wings to swoop in and bump them out of contract. Competing buyers continue to elevate housing prices and we struggle with proper quantities of inventory. Slowly the Market enters the 'Recovery' phase (green-colored bar), often prompted by economic factors like a decrease in the unemployment rate and consistently low mortgage rates. Right as we round the curve into this phase is the 'Sweet Spot' for home sellers.

Similar to the ups and downs of a stock's price, these cycles are fractal and although they're generally somewhat predictable, it's important to remember that every downturn doesn't have to look 'just like the last one'. Currently we are experiencing the 'Recovery' phase of the Market Cycle, with the long term 'Bottom' felt back in 2009-2010 after the big real estate 'crash' of 2008. Since that time, however, we've experienced several smaller term market cycles within the larger cycle. Home sales have been strong this summer, and the general consensus among the 'broad picture' real estate pundits is that we are due for another 'Downturn / Bottom' phase during mid-2016.

Now you may ask, 'Why would this matter to you, Angie?” Well, how about I start preparing myself now for the possibility of selling my 3/2 single family rental property not too long after the next market upswing from a 'Bottom-into-Recovery' phase (that 'Sweet Spot', remember?) and pyramiding that equity into a multi-family 4-plex to improve my monthly cash flow? I'll definitely pencil it out and give it some serious thought!

You can always reach me at Angie@RealLifeTrading.com

Sources: 

(Gary Keller's Real Estate Market Update) http://blog.kw.com/2015/08/20/real-estate-market-u... (CNBC Housing Report) http://www.cnbc.com/2015/04/01/dont-get-too-optimi...