Real Estate Market Cycles, 5 more good years

Our local daily paper ran a six column headline this week stating: “Home sales, prices up”.  What a happy turn of events given the last 5 years or so, when almost all of the news stories have been about the fall of real estate—and now the market is climbing faster than the editors seemed to think was possible.

I won’t go into the details, except to say those of us who live our lives in the real estate marketplace agree that the news is accurate for a change, the market really is going up.  The buyers are back and the sellers could not be happier. We are on the leading edge of the new real estate market, and the prices are as low as they are likely to be for another dozen years.

Typically the residential real estate market swings up and down in a 12 year cycle

The normal pattern of real estate price movements is a smooth curve, 6 years upward and 6 years or so downward.  The cycles have a similar length, 6 years of building to a high market, and six years of weakening and tightening.

The recent “Great Recession” redrew the graph, but it appears we are on the uptick of a six year cycle, with perhaps the first year already behind us, meaning that we may have a good 5 years still to go. The last year didn’t seem good, but it was the turn-around year and grew into a solid year one cycle.

The firm—which is now called Case-Shiller—was once just a couple of economists, and they postulated that the housing boom of 1983-1988 could be explained using a consumer phychology approach—when certain financial situations were in place. During that time period, house prices doubled in many parts of the US, and they interviewed both buyers and sellers.

In their interviews they found that the driving forces of that boom time rested on the perception of the public. An especially striking feature of the answers, noted Case and Shiller, is that not a single respondent referred to explicit quantitative evidence relevant to future supply of or demand for housing.

Buyers never cited any concrete evidence about the economy, or housing supply. Rather than being based on objective economic facts, the optimism of buyers was based on mutually reinforcing conversations. I like to call this cocktail chatter.  Everybody at a cocktail party talks about real estate, and almost never talks about fundamental economic factors. Conversations like: “Housing prices are booming,” said the buyers polled by Case and Shiller.  And these folks tended to worry: “Unless I buy now, I won’t be able to afford a home later.” The moral is simple: do not always believe that the current markets growth is due to ‘fundamental’ factors.

And what are these fundamental factors?

Increases in national income (GNP). A 1% increase in GNP growth was associated with a 1-4% rise in real house prices after three years.

Reductions in interest rates. A 1% reduction in the short-term interest rates is associated with ½ to 1 ½% increases in house prices within a year.

Equities prices increases. In the US, a 10% equities price increase causes about a 1% house price increase over three years.

So the fundamentals are in place for a booming market over the next 4-5 years. Yet above all, buyers pay attention to what other buyers are saying and are prepared to pay. So there is no perfect market driven by external news but rather a predictable market, feeding on itself.

Today you actually can still make real money trading houses.  And I’m happy to share my time-tested system with you:  buy low, and sell high.  Your profit is the difference (between the buy price and the sell price, less the transaction expenses and costs of fix-up).  But here’s the secret, since you can’t control the selling price, you must control the buy price.  All your profits are established in your purchase price. 

Step One is to buy low when the market is weak but rising—like right now.  But what’s the right price?  Ay, there’s the question, and it’s one I can help you with.  Just remember, this is a great time to buy.

Dane Hahn is a real estate professional.  You can contact him at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the net at: http://www.danesellsflorida.com/