Ever since the rapid market shift we saw a few months ago, I’ve been doing a lot of research looking for indicators of what comes next. What I discovered–and historical data proves to be true–is that the real estate market has been on an 18.6-year boom-to-bust cycle since the U.S started selling land in the year 1800.
The Real Estate Cycle
Since the beginning in 1800, the real estate cycle in the U.S. has been remarkably consistent. The cycle has been as short as 17 years and as long as 21 years, but these variances were largely due to the two world wars. Otherwise, the cycle has consistently been right around 18.6 years.
The 18.6 year cycle typically plays out like this: 14 years of rising prices from the official bottom of the previous market cycle, followed by a large downturn which lasts about 4 years.
Additionally, the 14-year upswing is characteristically split into two halves: prices rise for 7 years, followed by a minor correction at the 7-year mark. The minor correction is generally short-lived and is then followed by 7 more years of rising prices with increasingly highly speculative investing due to growing competition and loosening lending guidelines.
This time around, COVID fears and HUGE amounts of stimulus money injected into the economy appear to have pushed out the mid-cycle correction. Once through the correction period we are currently in, economists, who put the appropriate weight on the real estate cycle and the effect it has on the overall economy, are expecting rising prices for the next several years.
The official bottom of the market for the greater Phoenix area was May of 2011. The U.S. average for the official bottom nationwide was Q1, 2012. So, based on historical data, if this current cycle follows the pattern—as it is expected to do—the next large correction would happen sometime in late 2025 or 2026.
Inflation Outlook
Federal Reserve Chairman Jerome Powell has said that the Fed is looking for inflation to get down to the 2% mark before the central bank could consider reducing interest rates. The mainstream media is using the Consumer Price Index (CPI) for their inflation projections which would lead everyone to believe that the current downturn will last quite a while. Bad news sells!
The thing is though, the Fed is focusing on the Personal Consumption Expenditures Price Index (PCE), not the Consumer Price Index. Based on current PCE data, if inflation remains flat as it has been since July, we would hit 2% the inflation mark as early as February 2023. While inflation is still considered high right now, it has been coming down over the past few months.
Forecast: The Best Time to Buy is…
Record appreciation, rising interest rates and a previously very tight inventory sidelined a lot of home buyers this year as mortgages became unaffordable for many. Now that conditions have shifted to a more balanced market, buyers have more homes to choose from and seller concessions have returned.
Additionally, the 4th quarter is historically a great time to buy a home. Fall is a very busy time of year, and the holidays are just around the corner. For these reasons and more, many buyers put their home search on pause until after the new year.
Because of this seasonal lull, sellers are generally more flexible in terms of price, inspection repairs and other incentives. Incentives may include closing cost assistance and interest rate buy-downs which can make a significant difference in your monthly payment.
For me, this all points to this 4th quarter being a great opportunity to buy at the best prices we may see for several years to come.
After the holiday season, seller confidence will likely rise as The Super Bowl, The Phoenix Open, the car shows, and spring training baseball bring lots of visitors—and out of town buyers—to the area. And, as we reach the Federal Reserve’s 2% inflation goal and inflation concerns subside, interest rates could begin to drop in winter or early spring bringing in even more buyers who, previously sidelined due to elevated rates, would jump back into the market. All this increased activity would very likely drive-up prices.
So, if you’re waiting to time the market, you may miss out on the best buys we may see for some time.
Be sure to contact me with any questions. I would be happy to help you formulate a plan to achieve your real goals.
