Does the housing market really have price cycles? Yes. But these cycles aren’t always so rigid and perfectly predictable like so many people think they are. Let’s talk about this today. I’d love to hear your take also.
UPCOMING PUBLIC SPEAKING GIGS:
- 3/15/2022 NARPM Luncheon (details)
- 3/22/2022 SAFE Credit Union market update (details)
- 4/28/2022 SAR Think Like an Appraiser (details)
THE MARKET FROM 1975
Last week I wrote about doom and gloom articles, and today I wanted to follow up by looking at some visuals using the Freddie Mac Price Index.
Limited data: I have stats from 1998 through the local MLS, but it’s really difficult to get older stats. However, Freddie Mac does have a price index from 1975 for Sacramento, so that’s what I used here to help tell the story of value.
Is the Freddie Mac Price Index accurate? Yes, I think so. I lined up the median price for Sacramento County (my stats) over the past twenty years (red), and compared the Freddie Mac Price Index on a separate axis (green). I would say the trend looks really similar, so this makes me trust the trend from the 70s, 80s, and 90s also. If you have a better source, speak up.
NOT ADJUSTED FOR INFLATION
When looking at the Freddie Mac Price Index it’s clear there are multiple price cycles over the years since 1975. And when we don’t adjust for inflation, the current price (nominal price) is way above the previous peak.
ADJUSTED FOR INFLATION
What happens when we adjust for inflation? We can still see market price cycles, but we also see the current price point is so much closer to the previous peak in 2005 instead of being way above. There isn’t anything magical about being “back to peak prices” of course. I’m just saying when we start comparing today with really old prices, it becomes important to consider inflation because the value of the dollar hasn’t stayed the same.
I dig this graph especially. When we adjust for inflation, it sort of smooths out the trend a bit. In other words, it makes the trend a bit less extreme.
I hope you liked the visuals.
STUFF TO CONSIDER ABOUT PRICE CYCLES
1) Not the new template: What happened last time isn’t the new template for every future market correction. It’s easy to look at prices today and say, “We’re about ready to implode just like we did back then,” but the truth is there isn’t a market formula where prices always drop by the same amount. I hear things like, “The market will drop again by 50%,” or “The market will likely dip by 10%.” Both of these statements have one thing in common. They are guesses about a future that has not happened. As I always say, nobody has a crystal ball. That doesn’t mean we ignore trends today, but it does mean we are humble about our ability to know the future. But if you do want to test your prophet skills, tell me this. Who is going to be president in two years? What will bitcoin be worth in three months? And will mom jeans be more or less popular next spring?
2) Fixation on last time: I think in some cases we get so fixated on the previous bubble that we start saying a correction like that is locked in for the future. Look, I’m not glossing over rapid price growth lately that feels unsustainable. All I’m saying is when we back up and look at a few more price cycles, it’s clear not all up and down cycles have unfolded the same way. In my mind it’s like having multiple kids. There are similarities, but there can also be big differences.
3) The previous peak doesn’t matter: Getting back to the previous price peak doesn’t hold any power for the market today. In other words, there is nothing magical about crossing that threshold – especially since that market was full of fraud. The truth is we are way beyond the peak already when you consider prices without being adjusted for inflation. This is true on the national level also. But there isn’t anything noteworthy about getting back to the peak when adjusting for inflation either. Case-in-point. Around 2002, we were back to the prior peak from the 1990s in Sacramento. People could’ve said, “Bro, we’re about to drop because we’re back!!!” But then the market kept going for three more years…
4) No seven-year rule: The market doesn’t have to behave a certain way every seven years. Bottom line. Some people talk about a seven-year price cycle where prices go up for seven years before they go down. Well, here we are in year eleven of price growth in Sacramento.
5) There is a cycle: There really is a rhythm where prices go up and down, but it’s not so easy to perfectly predict either. In many locations the market tends to change every decade or so. But keep in mind some markets are flat over time rather than super cyclical like California. Here’s a post I wrote called, “Is the housing market going to crash?” The goal of the post isn’t to say YES or NO, but rather to think through some of the bigger issues.
Data Sources:
FRED CPI
Freddie Mac Price Index
How to adjust for inflation (YouTube video)
MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.
Thanks for being here.
Questions: What stands out to you most in this post? What did I miss? I’d love to hear your take.
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Great article Ryan,
You are always able to break it down in a very easy way for those who are not in real estate.
Funny thing about timing I have had buyers & sellers sometimes ask why we as Realtors always tell them NOW is a great time to buy or sell. I let them know it’s not because we just want a sale. I tell them it depends first on their goals and remind them it is because we know what is happing right now in the market and we know how to navigate and how to get across the river we are crossing in the moment. We can’t predict a national or global event that might happen. The crystal ball only has a 30 day window at best.
Thank you for the kind words. I really appreciate it. In so many cases people absolutely obsess over prices and the future, which I completely understand. But in the meantime lifestyle is ignored. What does your lifestyle mandate? Where do you want to be? What are your goals? The trump card in real estate is not just prices – as if that was the sole indicator for marking real estate decisions. I’m not diminishing the reality of lofty prices today. I’m just saying in so many cases it’s easy to overemphasize prices while putting the importance of lifestyle on the back burner. And yeah, my crystal ball is broken too. I struggle to even pick Super Bowl winners…
Nice job Ryan.
A big difference between now and the prior peak is interest rates. Affordability is better now than the past because of the low rates we see today. It’s important to pay attention to affordability going forward.
Thanks Joe. I really appreciate it. And for any onlookers, Joe helped me think through which CPI to use when adjusting for inflation (thanks man).
I wish I would’ve made that point above. When we look at prices, we have to understand the bigger story that is influencing prices. In other words, it’s a mistake to only blindly look at price metrics without considering context.
I have lots of graphs I’ve been making with affordability lately. I’ve been tending to share them in presentations, but I should put them here a bit more often. Typically the visuals show affordability is better than 2005, way worse than 2012, and it’s dipped over the past two years since prices skyrocketed.
No worries. Hat tip to Bill McBride at Calculated Risk for educating the rest of us.
Thanks Joe. Bill McBride is awesome. I love his stuff. For those that don’t know him, he runs the Calculated Risk blog. At the very least he’s worth a follow on Twitter. https://twitter.com/calculatedrisk
I just lost my husband and was getting ready to sell my house and flee to a more America friendly state than California. Talk about lifestyle? I had to question what a change would mean to me and would I accidentally put myself in isolation?
So now I have decided to stay put and work at the local level to straighten our state out. The interest rates
rising plays a part as well. To replace what I have now is unattainable for my situation.
Thank you for keeping me educated these past three plus years! You rock!
Sarah, I’m so very sorry to hear about your loss. My heart goes out to you. I think you are smart to consider isolation vs community. Right now I suspect you need your people more than ever. If there is anything I can do for you on my side of things, don’t hesitate to reach out. Hang in there. Blessings to you.
Great Analysis Ryan.
So, is the Freddie Mac Price Index showing the national prices and your comparison is to show vs Sac.? Or is the FMPI you’re showing local numbers?
Love, love, love that you put it in inflation adjusted dollars as well. (Thanks Joe!)
Great question. This is the Sacramento index for Freddie Mac. It is not national (though they have stats for lots of markets and probably national also). Yes, inflation matters with this big of a view. I did push out graphs a few years ago, but I really needed to update these. In fact, I’ve been giving presentations with an inflation graph, saying, “And I know the graph only goes through 2019, but I’ll update it soon.” Haha.
Freddie Mac has national, regional, and MSA numbers. Ryan is using the Sacramento MSA numbers (right?).
Yep. Exactly. I could have clarified on the vertical axis title on my visuals, though the main graph title does say “Sacramento.”
You always stir up some great visuals. If you pretended that the big peak and valley from the early 2000s didn’t happen and just tried to extend the previous average trend line, today’s peak would also seem historically large and I’m not sure fundamentally what is driving that. Is it that we people are just better off now compared to the 70s, 80s, and 90s, is it lending practices, is it the interest rates, are we simply more willing to put more of our income into homes, or maybe all of the above and more?
Thanks Gary. That sounds like a dissertation. 🙂 Great questions. I do know when doing retrospective appraisals from the 80s and 90s, and comparing the market then vs now, I typically see massive price growth beyond inflation. It’s important to consider inflation when looking at price stats from decades ago, but inflation does not explain all the price growth we’ve had at all. So yes, there are other factors involved here that have created the market we’ve had.
Gary, also there was a lack of Supply coming online during the 2010’s through now. New houses weren’t being built to even keep up with scrappage rates (tear-downs, fires, etc.). So you have the limited supply for the last 13 years or so, then add in the millennials that have put off buying a house until more recently.
Well said. And for years we’ve been seeing larger homes built compared to smaller stuff many decades ago. So today’s product is simply more suitable for lots of people. In part this likely plays a role in keeping people in their homes longer. Of course stats have been showing this for years already – even before the pandemic. On that note, I’ve been seeing stats that show 60% or so of all mortgages are under 4%, so it’s going to be interesting to see how that plays into the equation in terms of longevity in one place and even supply maybe not hitting the market. I think we need some time to understand that. In my market talks lately I’ve been having people raise hands. Who has a rate below 3%? And who is probably not going to move unless you have a really good reason? Lots of hands. But like I said, we’ll see how it plays out. All we have now are ideas. People move for lots of reasons and lifestyle is ultimately the trump card (though rates below 3% especially are certainly a bigger thing to give up).
Ryan, yeah, that will be interesting. Ultimately, I think more new builds have to happen for the growing population.
Also an interesting proposition about more people living together in bigger houses. Any stats or charts on that?
We do need more units. I’m not necessarily saying more people are living together, but I am stating objectively we’ve seen home size increase in the Sacramento region over the past few decades. We’ve also seen people staying in their homes longer even before pandemic data (stats are out there from Redfin and NAR in particular to substantiate this). I’ve written about home size before, so I’m sure I have some published content floating around. I might push out some size graphs this next month to help show what I mean. If not this month, soon though.