Sacramento Appraisal Blog

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real estate cycle

Talking real estate cycles at the dinner table

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Let’s talk about real estate cycles. Are we at the top of the market? Lots of people are wondering, so I figured I’d throw out some charts to help fuel conversation. My goal here isn’t to say YES or NO, but to focus on stats for the sake of discussion. Well, and if you need something to talk about at Thanksgiving dinner besides politics… 

CYCLE CHARTS: Here’s some charts to show the annual median price in various local counties. What do you see? Look at price changes and cycle lengths. If you’re not local, what would charts like this look like in your market?

NOTE: The market started increasing in the late 90s, but stats from then are limited. Just know the first cycle above would have been a couple of years longer.

What about the ’70s and ’80s though?

Someone in the comments wanted to see price trends in previous decades, so here’s the 70s and 80s for context from the Freddie Mac Price Index. I’d love to expand my charts above, but I don’t have quick access to mass stats to make that happen. I’ll keep my eyes open though.

THOUGHTS ON REAL ESTATE CYCLES:

1) Up and down: Sometimes we get stuck talking about real estate like it only increases in value, but that’s fiction. The reality is markets go up and down – just like relationships, the stock market, or my pants size. The truth is we see longer periods where prices increase, decline, or persist in stability.

2) The seven-year cycle: Some say the market changes every seven years, which is a nice idea, but there’s no universal rule that says the market has to behave a certain way after a specific period of time. I definitely buy into the idea of market cycles, but I’m not dogmatic about a fixed number of years.

3) Momentum change: Right now as charts show we’re seeing momentum slowing in the market. What I mean is we’re typically seeing more subdued appreciation rates over the past few years. That’s not really a surprise though as affordability is becoming more of an issue with today’s prices.

4) Other: What is point #4?

I hope that was interesting or helpful.

HAPPY THANKSGIVING: From my family to yours I wish you a very happy Thanksgiving. I’m glad we’re in this together and I appreciate our weekly conversations. Over coming days I hope you get some time off and find refreshment. I honestly hope you don’t bring up real estate cycles at the dinner table. But then again if you do, let me know how it goes….

Questions: What do you see in the charts above? What stands out to you most? I’d love to hear your take.

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An open letter to buyers worried about a housing bubble

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Dear Buyers-
 
There is growing concern about another housing bubble. What will the future hold? Is now a good time to buy or should you wait? Since I’ve been getting so many bubble emails lately, I wanted to offer some perspective and give you some things to think about. I hope this helps.
 
 
Timing the market perfectly: The truth is markets go up and down, and everyone wants to sell at the top and buy at the bottom, but so few actually pull that off. In fact, most of the time when I ask people if they bought on purpose in 2012 at the bottom they say, “Nope, I just got lucky.” This reminds us timing the market isn’t as easy as it sounds.
 
Riding down the market: If the market did crash, which neighborhood do you want to ride down the market in? This is a very relevant question that I heard last year from Mike Gobbi. Remember, the equity in our homes means very little unless we are taking money out or selling.
 
No bubble formula & real estate cycles: There is no formula for how a real estate bubble has to pop. For example, the median price in Sacramento County in 2005 was $392K and we’re about 10% lower than that right now. In short, it doesn’t mean the market will “pop” if we get back up to $392K. The same thing holds true for national metrics like the Case-Shiller index. Others say there is a 7-year cycle in real estate, but let’s remember the market does not have to behave a certain way every seven years. Granted, there is something to be said about a cycle, and it does feel like we are toward the higher end of a cycle, but it’s still a guess to say how much the market might change in the future.
 
 
Spotting bubbles: It seems easy to predict a real estate bubble, but it’s actually not. Freddie Mac has a thoughtful article called “The ‘B’ Word” that might be worth a read. I know, you might be thinking, “It’s so obvious we’re in another housing bubble because of how high prices are.” I get that, and it’s not that I deny prices are inflated because I think they are. But when people talk so definitively about the future of the market, I like to ask two questions: 1) When exactly is the bubble going to pop?; and 2) What is going to cause the pop?; In my mind it’s not enough to simply say the market is going to change in the future because that’s a very soft non-specific prediction. Of course it’s going to change.
 
False prophets: There are countless examples online of people saying the market was going to start declining in 2013, 2014, 2015, 2016, 2017, and now 2018 or 2019. It’s as if the prediction keeps getting pushed back when the market doesn’t pop. That alone ought to give us pause and evoke humility in our ability to predict the future. The irony though is if a person keeps making the same prediction every year, at some point that person could be right.
 
It does feel inflated: One of the reasons why many people feel concerned about the market is because we’ve seen expansive price growth that reminds us of the way the market felt from 2003 to 2007 in many parts of the country. Thankfully we haven’t seen growth like Bitcoin that’s up 1000%+ over the past year, but home prices are still much higher than they used to be. My big concern about the past five years is price growth is due in large part to investor activity, less new construction for a decade, and historically low interest rates – as opposed to the local job market and economy (for Sacramento at least). In short, there is less room to see prices rise without more wage and economic / job growth.
 
Different than 2005: Let’s remember the climate of today’s market is different from what it was in 2005 when unqualified buyers were given loans with adjustable rate mortgages. If you’ve tried to get a loan recently, you know it’s a different ballgame because lenders scrutinize your income and assets.
 
The power of lenders: Part of looking to the future is wondering how creative lenders will get with financing. If values did begin to soften at some point, lenders could easily compensate for that by offering more creative products to help buyers artificially afford higher prices (and therefore keep prices high). Sounds healthy, right? What lenders do is going to make all the difference. 
 

So should you buy right now? Honestly, that’s a personal issue and it would be presumptuous for me to answer for you. But I do have a few questions. Are you comfortable with the mortgage payment? If the market did correct in the future, would you still be okay with the payment? Does it make sense for your lifestyle to move? What do you think of all of the issues above?

Flipper & Appraiser Conversation: Last week I was on the Six Figure Flipper podcast. Here’s an hour-long conversation about flipping homes, choosing comps, and all sorts of things.

Questions: Anything to add to the conversation? What if anything concerns you about this current market? I’d love to hear your take.

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