Good Time to Buy?

One of the topics I follow—and I hope my readers appreciate--the cycle of real estate. The cycle concept is really a prediction by those of us who live in the market every day—a prediction of what will be the next big issue in real estate.

I will go on record as not having a crystal ball, but just a basic understanding of real estate cycles. Again, there have been tons of books and articles written on this topic—but it's all prediction. And like the stock market, nobody knows what tomorrow will bring. 

All civilization rests on change. This change is cyclical in origin. A rhythmic series of extreme changes constitutes a cycle. When a cycle has completed, another cycle is started. The rhythm of the new cycle will be the same as that of the previous cycle. Although the extent or duration may vary.

An early mentor of mine used to say, “nothing happens until somebody sells something.” And once there is a sale, the statisticians step in and begin to record the sale, then see if there were other sales and cluster them by size and by month and the rest. Pretty soon you have enough data to measure—or at least demonstrate—what has been going on. And so when folks ask me, “how's the market?” I have some kind of an answer.

There is a Seller’s Boom and there is a Buyer’s Boom. Think of a seesaw, with a sell,er on one seat and a buyer on the other. At some point in time the sellers seat is up—in control—and they can pretty well set their prices and terms, and buyers just have to agree if they want to purchase a property; other times when the buyers seat is up and they are in control, at that point sellers who want to sell have to agree to the price and terms the buyers offer, or not sell at all.

When a seller lists a house for sale, usually they have a price in mind that they hope to achieve. Sometimes it's a go/no go price by which I mean if they don't get an offer for that amount, they simply won't sell. But usually the primary driver for a seller is greed and optimism. When we experience a so-called seller's market, over a short time period prices escalate. For those of us who follow these things, the telltale is really the selling price (stated as dollars per square foot) of new construction. The professional builders lead the price curve in the seller's market. At the beginning of this cycle you see strong sales volume, but not an immediate increase in home values. As this cycle begins to mature, prices grow and inventory begins to shrink. Days on Market (DOM) goes down. Investors buy the crap because that's what's affordable. Builders can't keep up with demand. Individuals see significant profits. At the end of the cycle, DOM increases, high-priced inventory languishes, and buyers are tired of the super-inflated prices.

At that point it can be said the market is depressed, the buyers are few and far between, and sellers get nervous. This is the beginning of the so-called buyer's market, which is identified by longer DOM time. What would have sold in 3 weeks a year ago, now takes three months, or longer. Sellers lower their prices, driven by fear. Fear of no buyers or minimal “bottom feeder” buyers offering low amounts. Even with minimal sales volume, sales prices erode. Buyers become desperate and to make any sale at all, capitulate to the seller’s offers. As this cycle progresses, resale home inventory grows, builders put on their brakes and building starts are minimal. Soon the only buyers are investors, and cash is king, mortgages are harder to get. Investors who have a ready supply of cheap money (maybe from a limited partnership) become the only buyers and they drive the prices down further.

But as this cycle matures, there is a pent-up demand for housing. About 20% of Americans move every 3 years. So when nobody moves for a couple of years, there is a pretty big pent-up demand—millions of people want to move for whatever reason—maybe they will retire to another part of the country; or take a new job in a distant city; and colleges are turning out graduates (and they're not all living at home). So there is a desire to move.

Once the buyer demand becomes evident and there is a large inventory of well-priced homes, the cycle starts all over again. By the way, this is where we are in May 2013. These cycles normally last about 7 years, so I would predict that we will see a good solid market, possibly adjusted for time of year and mortgage rates, and as much as a 1% to 2% monthly increase in prices for the first year or so.

Dane Hahn is a real estate professional serving Charlotte and Sarasota county. You can reach him at 941-681-0312 or at dane.hahn@gmail.com. See him on the web at www.danesellsflorida.com