Market Highs and Lows: A Prediction
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The following is a personal thought sparked by Toddi Gutner at Business Weeks Hot Property Site. Toddi asked, When is the High, What is the Low? In this post, she is trying to understand the dynamics of this real estate cycle. I do not have a definitive answer, but I do have some observations for her (and you).
First, all real estate is local. We see that constantly. Where I live, we have not had the roller coaster ride of housing appreciation and stagnation. We live in an area that sees a constant 5 to 8 percent increase year over year, and do not argue one bit.
With that in mind, other areas are prone to boom and bust cycles. Metro New York, Boston, Washington DC and Coastal California seem to be the worst culprits. If you look at the bubble bloggers, that is where they typically live. All of these regions share one key common ingredient. They have reached build out.
When land is a scarce resource, people will speculate. When people speculate, markets swing. Presently, the speculators have gone overboard pushing up the market.
My guess, Condo’s in these regions (add Miami and Las Vegas to the above list) are over valued by 20 percent. Add in the fear factor and we will see a 25 percent decline from the highs of the market. So when condo priced this summer at $300,000 sells for $225,000 plus inflation, the bottom has been hit.
Housing in these markets has about a 10 percent premium. So again, when houses that were $500,000 over the summer sell for $450,000 plus inflation, the market bottom will be felt.
The other macro trend I see is a rush to the coastline by the near retiring baby boomers. This has driven up pricing along the coast, most visibly in the southeast where property values were lower to begin with, and the temperate climate is appealing to retirees looking to get in their 18 holes a day.
Property values will hold in these regions except for pockets of condominium speculation.There is only so much land near water, and there is still room for development which will slow down the cycle of booms and busts. Plus, with the advent of modern medicine, todays retirees are a vibrant bunch, and demand to be in a place where they can have fun. No one retirees to Des Moine.
People who tend to write about the bubble live in the bubble areas. They are intelligent people who are watching the carnage right in broad daylight. Also, national media writers are concentrated where the bubbles are occurring, so the concept is implied that their regional issues are national. This is a common occurence and leads to a slight slowdown nationally as people are influenced by what they read. This reporting does not adversely affect the national market to a great degree. Mainly because the story burns out over time.
On a personal note, I grew up on Long Island, New York, and left in the late 80’s when housing was out of reach for my peer group. We had the choice, buy a house or have children. It lead me to my present city, and I am more than happy. I think that you will see another exodus of young people from the affected regions.
So, some areas will come off their speculative highs. Most of the country will maintain as it has for the past 20 years. Coastal areas with comfortable temperatures will be a haven for retirees.
That is my prediction. What is yours? Please leave a comment or two on the matter, it is a worthwhile conversation to have.
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Comment by Nate on 25 January 2006:
I think you are absolutely correct. Look at the city of San Francisco and all the problems it is having retaining families. There is nowhere for them to live.
Comment by ss on 25 January 2006:
Real Estate is local, but capital markets are national (international actually). Rising mortgage rates will affect all locales. Those with speculators putting little or no money down with floating rates to buy homes/condos will be harder hit, but the rise in rates will be felt everywhere.
Equally important, investment capital that provides funding to builders and developers will start to move away from real estate into other asset classes as the outsized gains from real estate begin to meoderate to more normal levels. This will slow down housing production and cause those builders that are over committed to certain markets to lower prices as a hedge.
Your comment about the media is right on. The more people read about the bubble, the less inclined they will be to make a purchase decision. They will wait to see the market lower and then buy or they will simply wait to save face and not be the one who bought at the top of the market.
In all this, one should keep in mind that most markets will see the slowdown as a longer sales cycle with slight if any decrease in prices. In inflation realated terms, prices may indeed fall, but I don’t think homeowners will start to drastically drop prices to sell.
Comment by Ferrariwalla on 28 January 2006:
With all this talk about speculators, could one make the argument that even Donald Trump is a speculator? Speaking of Miami area where flippers are rampant, Donald is teaming up with a few highly experienced and sophisticated developers to build at least 5 condo towers? He must feel very secure in his knowledge that in the long term he and his partners do stand to make money or they would not be leading the parade of speculators. What think?
Trackback by Pacesetter Mortgage Blog on 8 February 2006:
Should Home Buyers hold off buying for 2006?
Lansing, Michigan - I was reading an article by Toddi Gutner over at The Hot Property Blog this morning. Here was the question at the end of her piece:Do you agree with Chris that housing cycles are 10-12 years? If
Comment by JiggaDigga on 7 April 2006:
Great reading, keep up the great posts.
Peace, JiggaDigga
Comment by Mark Palace on 6 September 2008:
Real estate prices cycle through highs and lows. Tracking the following market indicators will help you decide if it’s a good time to invest in real estate in your area.
Job Growth
People go where the jobs are, and home prices follow jobs. A strong local job market is a sure sign of a healthy real estate market. While the Wall Street Journal gives you insight into the nation’s overall economy, check your local newspapers for statistics in your area.
Housing Inventory
The housing inventory is the number of houses for sale at one time in the area. If there are more houses than buyers, prices tend to fall and if there are more buyers than houses, the opposite happens. Also look at the number of months or days it is taking to sell a home. If it’s less than 60 days the market is considered hot.
Number of Repos on the Market
A repo is a house that has been taken over by the bank because the owner failed to meet the loan payment—in other words, it’s a foreclosure. The more foreclosures in your area, the weaker the real estate market.
Number of Multiple Offers on Homes
Multiple offers are when two or more buyers “bid” at the same time for the same house. It’s a sure sign of a hot market, usually resulting from a limited inventory creating the need for buyers to compete on price for the same property.
To learn about the local conditions in our market, please call or send an email. I will be happy to get you the information you need.
Best, Mark Palace Founder/CEO PPI