It’s All About The Real Estate Cycle!
Back in March, I briefly described the cycle of real estate in an article discussing whether we were in a real estate bubble or not. Now as we head into September, six months later, this measure of market reactions is confirmation that owning and investing in real estate has long-term advantages over general economics including times of inflation and recession.
There are four stages in a typical real estate cycle. Expansion, Peak, Slowdown and Recovery. The most common period for these stages to complete is 10 years. Each stage of the cycle has its own opportunities for buyers and sellers.
This stage normally occurs as homeowners begin to feel confident about their ability to sell and find their next home easiest. The buyer pool is not as competitive and days on the market tend to be quickening. There is still time to view homes and make an informed buying decision without feeling rushed. Home prices tend to be on the rise during this stage.
This is where most buyers and sellers feel the market at its fastest pace. Home values are at their highest point and days on the market are extremely low. Properly priced homes sell almost immediately, and it may be a challenge for a move-up/move-down seller to find their home of choice without having to negotiate for delayed possession or prepare to move into short term temporary housing and storage. Buyer and Seller anxiety levels are highest at this stage.
The number of homes for sale begins to build as homebuyers back away from the buying market. Outside influences can also affect this stage such as rising mortgage interest rates. With longer time on the market for home sellers, price reductions and an overall dip on pricing is common. The benefit in this market is that home buyers have more time to shop and the ability to pay less for their home purchase.
This stage tends to be the slower in terms of market activity. Homes for sale are on the market longer and home prices become more affordable during this time. The recovery stage is normally short lived and influenced by seasonal activity, such as winter months and the most likely time to see this stage is November to late January when holidays and weather are most impactful.
How This Cycle Looks Over Time
Now that you have a good understanding of the different cycles of the real estate market, let’s apply this to the last real estate cycle and to the one we are currently in.
As I mentioned earlier, the typical real estate cycle is approximately 10 years from start to finish. That is not a hard and fast rule. The example above shows the last real estate cycle that started around the year 2000 ending in 2010. It just happened to be a ten-year cycle.
The Expansion Stage ramped up from 2000 to around 2006 when many banks and mortgage lenders were making loans based on limited, or no documentation of the buyer’s income coupled with risky adjustable-rate mortgages and interest only loans where homeowner equity never had a chance to grow.
2006 was the peak of this real estate cycle. The slowdown stage was a market recession which become known as the subprime mortgage crisis. The result was home foreclosures as adjustable-rate mortgages caused owners home payments to skyrocket beyond their means to pay and short sales and bank repossessions became a common occurrence, especially in markets around the country that experienced fast and reckless building and development. Fortunately, Iowa didn’t experience near the swing in home values of other states, but we did have our share of foreclosures. 2010 marked the recovery period which coincidentally ended this cycle at ten years.
The second half of this graphic shows the current real estate cycle to date as of mid-way through 2022.
Everything was on track for a normal ten-year cycle again with the expansion period moving right along through 2015. By 2019, just before Covid-19 appeared the following year, the signs were showing that we were arriving at the peak of the cycle. Home inventory levels were showing hints of leveling off and buyer demand was strong, but not overly so. All indications were that this cycle was going to be longer than the typical ten-year period.
Then, in March of 2020, Covid-19 hit. The result of this pandemic caused the real estate market to effectively skip the slowdown and recovery phases and start back upward in an expansion period again.
Fast forward to this third quarter of 2022 and the real estate market is finally showing signs of peaking, even with home inventory levels rising. Buyer demand and maximum pricing is continuing, but we are beginning to see signs of longer days on the market. The upper price points along with new construction properties are seeing the months of inventory rise quickly, resulting in many builders beginning to offer buyer concessions and even incentives to real estate agents to bring homebuyers to the table for them.
How Long Will This Cycle Last?
When will we officially see and feel the slowdown phase? How long will recovery take? These are all questions that will be answered by the real estate market itself. A struggling national economy and the fast rise of mortgage interest rates this year have all affected the market. In the short run, we will see home values dip slightly, but not by much. An increase in the number of homes for sale will be welcomed by a likely continuous supply of homebuyers as we move into 2023. And lastly, I do not foresee a real estate market crash anytime soon. The lending methods put in place after 2008 have kept us away from homeowners with risky mortgage loans and home equity continues to grow in the Central Iowa real estate market.
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~Les Sulgrove, Vice President
VIA Group REALTORS
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