To some people, that question will seem ludicrous. If you are buying or selling a house every 7 years or so, you may not care about this somewhat complex answer to the question raised. I am writing this post for real estate professionals, rather than the individual who may be buying or selling a home every 7 years or so. My hope is that if more real estate professionals understood the housing market, more consumers would be better served by those professionals.
For those that want to hear that the market is doing much worse than expected, I give you Detroit. I heard on the news yesterday that home prices in Detroit have rolled back 8.5 years. That is much worse than “expected”. For those that want to hear that the market is doing much better than expected, I have to say “jury’s still out” on that one, as the down market has not yet completed its “expected” cycle.
Yes, real estate prices always go up. But when did real estate professionals en masse start thinking that meant it looked like the chart below? It DOES NOT!
Housing Prices do not go up in a straight line!. I can honestly say that 20 years ago the only agents I met who thought this way were the salesmen vs. the professionals…and they were few. The first time I overheard an agent at an Open House talking to a first time home buyer explaining the real estate market in terms of “AWAYS GOING UP!” and drawing a chart like the one above for them, I thought “What an Idiot!”
It is only in the last couple of years that I have seen MOST of the professionals, and consequently the general public, setting the unrealistic expectations noted in the chart above. Many of those professionals have left the business, and more will follow. For the benefit of those who will continue in the industry, and for the public at large, lets get back to basics and set our expectations properly. First you set realistic expectations based on an Annual Cycle of Real Estate markets. The one below is primarily for single family residential housing. Not condos, not multi-family, not commercial – Single Family Residential Housing Market.
Annual Cycle of Home Prices
When home prices increase from year to year, most of that appreciation happens from March through July. Even when home prices decrease from year to year, prices are still expected to be up from March through July vs. January and November. THAT is the expectation.
Think of it this way, retail sales are expected to be higher in November and December than in February. They may not go up as much as expected, and that is not good. But if sales in November are lower than in February, that’s really bad. So up vs. down is NOT the barometer…it is up when expected to be up, down when expected to be down…and then it is all a matter of degree.
If you heard a store owner who only sells Christmas Ornaments complaining that his April sales were lower than his Nov/Dec sales, what would you think? That’s how I scratch my head when I hear someone saying “I’m waiting for the lowest possible prices, so I’m going to buy a house in May or June. Does not compute! I’m not saying it could never happen, I’m just saying that is not an appropriate expectation. As long as you are willing to wait until 4th Quarter of 2009 or even 2010…fine. But if you are determined to buy within 12 months, wanting the lowest price and wanting to buy in June is not a match. You will likely get a better house if you wait until May…but not a better price. Again, not impossible…just not likely. Go back and study the graph above before we move to broader market descriptions.
For this next part, different people will have different market theories. Mine are primarily based on a “7 steps forward, 3-5 steps back” theory, that I attribute to having entered my head via Alan Greenspan many years ago. Nationally the market started moving up past it’s previous peak in 1998. Consequently the expectation would be for it to go down in 2005. When it did, people freaked out while I said “DUH”.
The market performed as expected. But when professionals don’t know what to expect, they react inappropriately, which creates an unexpected market condition. It’s like playing a sport where half of your team is not performing their role “as expected”…it throws the whole game off. When your quarterback starts throwing to the guy in the wrong colored Jersey…all hell breaks loose. As a real estate agent, you are the quarterback, time to learn the plays. The people in the stands have a harder time betting on the game, when the quarterback is messing up the plays to the degree that we as professionals have been screwing up. STOP sending GOOD NEWS! C-R-A-P. This is NOT an industry based on consistent and continual “Good News”! STOP wishing ONLY for Good News, and blaming market conditions on the purveyors of “bad news”. Get Real – Real Fast…or suffer the consequence.
Another analogy. The market went down when the Dow hit 14,000. If most people said “DUH”, there wouldn’t have been panic selling. Yes the market still would have gone down, but the market loses all semblance of sanity when expectations are set at unrealistic levels. Momentum created by panic forces markets out of their natural cycle. That is true both on the up side and on the down side. The Dow was supposed to go down when it hit 14,000…in fact it should have gone down when it hit 12,000.
This is my expectation of the housing market. Yours may differ. Lacking an informed and valuable opinion from the professionals, the public will start imposing their own opinions like “markets should only increase at the same level as median income.” That is not correct BUT professionals have no one to blame but themselves for all of the Bubble Blogs. When professionals started lying both to themselves and to the public, the public had to move in a different direction. You hate Bubble Blogs, you say? Well then stop acting like you don’t have a freakin’ crystal ball! If you don’t like the public not relying on your opinion…well then go get yourself an opinion! OK, here’s mine. Beyond the Annual Cycle above for single family homes, there is the YOY expectation in a long term cycle.
Home prices up for 7 years; down for 3-5
Now let’s define what a Housing BUBBLE is. A housing bubble is when the market outperforms expectations…not when it goes UP. A housing slump is when the market underperforms expectations…not when it goes DOWN. Bubbles ALWAYS burst. That is why you need to know the degree to which the market should go up (like Christmas Ornament sales in November and December) so that you know when you are entering a bubble zone.
I learned this many years ago…so long ago I don’t know where. A market will ALWAYS reach and surpass a level it has previously achieved. It’s not a matter of IF…it’s a matter of WHEN. If it happens too quickly, the downside of the cycle will hit harder. If it happens as expected, the people betting on that expectation will do well. We want to be a Country that always does WELL…not that always goes UP beyond normal market expectations and never, ever goes down.
Once you set a realistic expectation, you can predict markets. When the market moves outside of predictable levels, you know you are in a bubble or a slump. If you think every batter is supposed to hit a home run…you will spend your life in misery and disappointment. If you expect the batter to always hit a home run…one day he will hit you instead of the ball.
Real Estate Prices are supposed to stop going down, nationally that is, somewhere between 2009 and 2011. They were supposed to go up from 1998 to 2005 and down from 2006 through 2009 – 2011. The degree they went up was “bubbled” by the loose lending practices in the latter part of the up cycle. First that bubble must pop, as it did, and now we’re looking for the end of the down cycle. If the government wants to make sure the down cycle is only 3 years and not five, then they have to do something to cause interest rates to stay at or below 5.75%, even if that is an artificial stimulus level.
No one can, nor should anyone try to, force the market to be always up. That kind of talk is for salesmen, not professionals. If you don’t want to hear ANY bad news, ever. If you don’t understand that there should be at least 3 years of “bad news” following a consistent 7 year trend of “good news”, please go do something else for a living. That’s like a lawyer who tells everyone they can win a case, cause they get paid whether the client wins or loses. That’s like a doctor ordering MRI’s every week for a hypochondriac, because he makes money whether the patient is sick or not.
Don’t want to be compared to a Used Car Salesman? Then stop acting like one.