A brief overview of real estate market cycles, where we are now, and what we should expect in the near future.

 

When you think of the great prophets, you think of Isaiah, Jeremiah, Ezekiel, and Daniel, but what about Foldvary? That’s right, I said Foldvary. He’s the guy that stated in 1997:

 

“The next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war.”

 

Though that makes it sound like he’s the greatest prophet to be excluded from the canon, really Fred Foldvary is just an economist from California. Yet, if it wasn’t Holy Spirit unction, how did he predict the explosion of the housing bubble over a decade before it happened?

 

Real Estate Market Cycles

Back in the 1930’s, an economist by the name of Homer Hoyt recognized an 18-year pattern in real estate markets. He said that every 18-years there was a peak and a corresponding bust. It was under that assumption that Fred Foldvary so accurately predicted the housing crash of 2008.

 

So, are housing market cycles really always 18 years? No, nothing in life is that well-defined and predictable. Things like war and weather have an impact, and the cycle can be shortened to 15 years or extended to 23. But, the market always moves in cycles.

 

Four stages have been identified in the basic pattern of real estate market cycles. First, there is a Recession, as we saw in 2008. The recession slowly makes way to a Recovery where things start to pick up again and vacancies decline. The recovery grows into an Expansion, where both construction and home values pick up. Then, prices stabilize and an Over-Supply leads to a buyer’s market. The over-supply causes prices to stagnate or drop. This leads buyers to hold out for even lower prices, thus creating the next recession. Every cycle has all four stages, though their length and severity vary.

 

Where Are We Now In The Cycle?

Right now, we are in the expansion phase of the cycle. However, we may be nearing the end of the expansion. The first indicator that we are transitioning from the expansion phase to the over-supply phase is an increase in vacancies and unsold inventory. When more houses begin to sit longer on the market, you know that over-supply is on the horizon.

 

While predictions are mixed, it appears that this is already happening in Southern California, which tends to be a forerunner for the nation as a whole. Does that mean your home value will go down by the end of the year? Probably not. Depending on where you live, it could be several years before your local market slows down. Most analysts watch the West Coast to make predictions, so if you’re not one of us lucky west-coasters, you should get a fair warning. 🙂

 

What Comes Next?

I’m not a prophet or Fred Foldvary, so I’m not going to try to tell you what exactly the future holds. However, over-supply always follows an expansion, so I think it’s safe to say that that is coming sooner or later. If the 18-year rule holds true, we should see the next recession in 2026, which is still a ways away.

 

So, if you’re planning on buying or selling a home soon, keep these stages of the cycle in mind and watch your local market for telltale signs. And, if you live in a parsonage and plan to buy your own place in retirement, keep an eye on where things are in the real estate market cycle as that day closes in.

 

For a more in-depth look at real estate market cycles, read this from a teacher at Harvard Extension School.