The Cyclic Nature of Real Estate, Part 2

6. November 2007 by Ana Connell.

This is the second post in a series looking at the cyclic nature of real estate. This is a somewhat simplistic look into a very complicated subject and is intended to provide some context for the current and future real estate cycles.

Please keep in mind that the national statistics that I will share in this piece will not always reflect your particular market place. Each market behaves differently based on such variables as demographics, employment situation, availability of housing, migration patterns etc. At the same time such macroeconomic factors such as the overall business cycle, inflation levels, value of the dollar can affect local real estate.

As a financial advisor I researched real estate for over 15 years from an asset allocation stand point. In order to make recommendations to my clients with respect to how much of their financial pie should be invested in this particular asset class, I needed to understand the cyclic nature of real estate.

In order to gain perspective into the current real estate cycle, it’s important to do some research into past real estate cycles. I wanted to share part of a chart by Fred Foldvary, who is an Economist at Santa Clara University. (Click here for the full chart).

This chart highlights the peak value years for real estate on a national level.

This is a great chart which highlights that while in most circumstances there seem to be about 18 years between market tops, this is not always the norm. The most eye catching span, of course, is the 48 year cycle between the 1925 market top and the peak in 1973. This long recovery period gives insight into just how catastrophic the 1929 stock market crash and the Great Depression were and the lasting impacts, both economic and psychological.  Another interest point is that in past studies researchers have shown that both single family and multi family housing movements are closely aligned with macroeconomic movements.

The point here is that there clearly are real estate market cycles and if you are an investor or only planning to live in your home for a few years, timing is important. Your time horizon should be a major if not the major consideration, when considering a real estate purchase.

Unless you have a crystal ball, what’s important is to look at current trends in your marketplace. You should be asking many questions of your real estate professional, here are a few:

Is the local economy is doing well, is the city’s tax treatment and incentives for companies competitive, with few or no companies leaving?

Is housing affordable? What type of demographic is your housing attracting? Are jobs for them close by and plentiful?

How much new housing is being created and how does that compare to current housing needs and future job growth?

How do property tax rates in your area compare to other areas?

Are there planned or potential zoning changes that could affect housing values in the area?

The better informed you are, the more likely that you will make a sound decision when considering a real estate purchase, whether that be for investment purposes or to buy a home for your family.

Stay tuned for part 3 of this series!

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