Riding the real estate cycle
Real estate is having a bit of a moment. It seems long overdue. The 2008 collapse, which devastated not only property values but almost every sector of the economy, still feels fresh, but that was over three presidential terms ago.
The Great Recession is etched in our memories, but it was not the first housing bubble. The conventional wisdom is that real estate tends to go through a regular cycle of appreciation and decline that lasts about 10 years.
Most analysts agree that the depth of the 2008 collapse was in part due to the length of the appreciation part of that cycle, which lasted 13 years. The first signs of trouble came in mid-2007 when mean and median prices started falling. With so many owners with sub-prime loans and high leverage second mortgages, there was no room for deflation before many owners were underwater.
It took about 10 years for average prices in our region to get back to where they were at the peak in 2007. The cycle lasted about 18 years. Over the last decade, we have seen the market progress from declining, to stable, to appreciation again:
From 2016 through 2019, our region saw average prices rise around 3-4% per year. While inventories were lower than usual for a stable market, and days on market were also shorter than normal, we had not entered a truly aggressive Sellers’ Market.
That started to change in 2020, even before the pandemic reached our shores. Comparing the first quarter of 2019 to the first quarter of 2020, average sales prices by county rose by between 5.1% and 14.6%. A year later, that appreciation has accelerated rapidly with averages up by 13.5% to 20%.
This is an explosive increase. Inventories now are measured in weeks instead of months. Median days on market are a quarter of where they were in 2006. List price to sales price ratios are above 100%. It is no exaggeration to say that all of these statistics are extreme, if not record setting.
America is returning from the pandemic. The federal government is plowing trillions into the economy. Erstwhile Federal Reserve Chair Janet Yellen indicated that the Fed can rein in inflation by raising interest rates “somewhat,” a signal that in her view rates will remain at or near historic lows for the near-term.
The current market has entered the “irrational exuberance” portion of the real estate cycle. It is hard to see from here what will cause the upswing to end, yet history is a persistent teacher, so we know that it will, in fact, end.
Understanding real estate values requires a long view. It means not getting caught up in the moments when the market is overreacting — positively or negatively — to current pressures, and seeing the long, steady trend, smoothed of wild variations.
We all remember how it felt to live trough the collapse of 2008. What is surprising is how little we remember 2006. That does not mean that this is the wrong time to buy if buying is what you need or want to do.