Recently I was speaking to a client of mine who was distressed about this “crazy new real estate market” and how “prices are just too high these days.” It got me thinking about how important it is that I do everything I can to set the record straight among my clients so they can better recognize where we are in the current market cycle. For folks who are interested in real estate and might be considering buying or selling a property, understanding the big picture is critical. Critical! So here’s where the market stands.
The majority of folks I speak with think this tremendous sellers’ market and super tight inventory is something new and something that’s going to come to a head and suddenly erupt overnight. Neither is true. Here’s the truth: we are SEVEN YEARS PAST THE BOTTOM of our last real estate cycle as you can see clearly from the below graph. Just because the Denver Post is suddenly aware of the real estate market and Zillow writes screeching articles about the tight market in order to sell ad space don’t be fooled into thinking this is something new. It’s not. It is a logical continuation of a market that is reacting correctly to the overselling we saw between 2006 and 2008, dropping 25 percent during that period. It’s doing exactly what real estate market cycles do, go up and go down over long periods of time. But remember, over the past 40 years residential real estate appreciation has averaged about 6 percent per year and there is no reason to think that it is going to change over the next 40 years.
We tend to erroneously think of market cycles in short terms, spiking and crashing over narrow periods of time and generally messing everything up. A quick look at the last market cycle shows clearly this is not how real estate works. Real estate cycles tend to move in much broader periods. Our last market upturn was from1990 – 2007, 17 years! This is why predicting short-term market movements can be very difficult, whereas recognizing the market will move in much broader cycles is more accurate. It’s what we learn by studying real estate market cycle history.
Let’s talk about where we are in today’s cycle. We are currently seven years past the bottom. The past seven years have been a sellers’ market with plummeting inventory, rising prices, nervous buyers often involved in multiple offers, and happy sellers more often than not getting the price they wanted.
But the client I referred to above was a potential buyer and he was very nervous. He tries to stay informed, reads news articles, watches TV reports and concludes the market is teetering on the brink of a crash and is therefore afraid to buy. And he’s been thinking this for years! He wants to buy because his rent is skyrocketing, up 10 percent this year alone, but he’s confusing the short-term media screeds about this tremendous market with the long-term patterns of market cycles, thinking that the minute he buys a home the market is going to crash.
So let me be clear: no one can predict the real estate market with 100 percent accuracy. I can’t, the Federal Reserve can’t, the banks with all the money can’t (obviously!), no one can. But, understanding how market cycles work, and recognizing how low our current inventory is, I can say with confidence I do not see any impending weakness in the market over the next couple of years. We are seven years into what will probably be a very lengthy cycle of low inventory and rising prices.
I can’t tell you what the Dow Jones will finish at next Monday. I can’t tell you if the Rockies will win their fifth game of the season. I can’t tell you what the weather will be on April 6. But I can say with confidence that real estate tends to move over predictable long-term trends, and this market cycle has a long way to go.