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The Four Stages Of A Real Estate Cycle

The Four Stages Of A Real Estate Cycle

The Four Stages Of A Real Estate Cycle

If I get asked one question more than any other it is this, “Where is the Market Going?”


Simply stated while no one has a crystal ball to determine where we are headed, we must first look at the dominant motivating factors which exist in every stage of a real estate cycle…FEAR!


Before I delve into that, let me say that on average since the mid-seventies when we have recorded the ups and downs of the real estate cycle, the shift from positive to negative happens every 10 years, like clockwork. Which is why we call it a cycle. Our last shift happened in 2007, which means that we are now 15 years into this 10-year cycle.


The reason for the delay? Simply put, money was on sale. Inventories were low. And, the lower the Fed allowed the rate to go, the more buyers could afford to pay (monthly) and our inflationary cycle was palatable because low interest rates kept home ownership possible.


Now let’s talk about Fear and its historical influence in our real estate cycle.


When we look at the market that we were just in, fear had buyers writing offers that were not in their best interest. They gave up all contractual protections, and risked it all to get their offers accepted. They waived appraisal, loan, and condition contingencies. They allowed sellers to stay in the home after sale for (sometimes) months on end at no cost. Why (you might ask)?


The answer is fear. Buyers endured the pain and the risk because they were afraid that if they didn’t acquiesce to the seller demands, they would either not get their offer accepted or, they would have to pay more for the next home.


This market was the pure definition of a sellers’ market.


With interest rates rising, buyers, today fear being priced out of the market. You see, for every percentage point that interest rates rise, buyers lose roughly 12% of their buying power. Simply stated, there are fewer buyers out there today. And, normally that would indicate a shift to a

buyer’s market, and we would expect to see prices fall. But, this is not a typical shift. You see, as interest rates rise and buyer activity falls while pricing has remained mostly stable. Why would that be? Housing inventory has also fallen in many markets creating an offset between buyer and seller where there appears to be no clear-cut advantage for either side.


The question of the day is why? Prices are holding! Why would you not sell and capture that equity before inflation and the market shift eat it all up? Once again fear is the driver. Sellers are afraid that the interest rates $5.25% at the time of this writing, would double the monthly housing cost for those who have 30-year fixed-rate mortgages in the 2’s and 3’s.


That coupled with a complete shutdown of the new home market as builders have seen the writing on the wall and have slowed their rate of building. Builders fear having to sell at a loss or not at all as buyer activity continues its freefall.


If this trend (rising interest rates and falling buyer activity) continues we will certainly transition into a neutral market, where both the buyer and seller must negotiate to facilitate a transaction. And, neither has the upper hand.


Now let us explore how fear affects buyers in a buyer’s market. Simply stated, with few exceptions buyers do not buy in a buyer’s market. The fear factor here is that buyers believe that if they wait just a bit longer, they can pay less for the home then they would if they bought today.


In a traditional buyer’s market, inventories exceed 6 months. And buyers have so many choices, that they fear committing too early. In this market, sellers are at a competitive disadvantage. Buyers will only buy if the concessions make the risk of further erosion of value worthwhile.


But here is the lesson that I want you to get out of this article. When we operate out of fear, we don’t always make the best decisions. But, we usually survive them. It is a fact that at the end of every shift, the market bounces higher than it falls.


Meaning, that there is no bad time to buy. There can be however, bad times to sell. If you plan on being in your home 7 years or more, it is likely that you will realize a gain in home value while you simultaneously build equity.


If your timeline is less certain, then your outlook as a homeowner could be problematic.


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