According to historical market cycles, when will the next real estate crash occur? (Hint: not for a long time!)

Imagine if you had sold all of your real estate in 2007, right before the historic crash? Understanding the predictable phases of every real estate cycle can empower the average person to make incredibly prescient decisions about their real estate far ahead of the curve, cashing in when others are losing money.

In part one of this blog, we outlined the first two phases of every real estate cycle, Recovery, or Phase I, and Expansion, or Phase II.

We’ll now explain Phases III and IV, and answer the trillion dollar question: When will the next real estate crash happen?

Read on to find out!

Hyper supply

Phase III of the real estate cycle

In Phase III of the real estate cycle, we see a pronounced rise in rents, as the demand for affordable housing to rent outnumbers supply, driving up costs.

Rising rents makes the building of new units more attractive and financially feasible again, so more builders break ground on new projects.

As long as this upward pressure on rent is exerted, the demand for new construction is hot, with builders scrambling to meet that demand for financial gain.

This expansion of new units and rental housing is characteristic of both the expansion and hyper-supply phases of the real estate cycle, as building projects take a long time to initiate and finish.

The first sign of trouble in the real estate cycle

At a certain critical point, the amount of new inventory for both rental and owner-occupied real estate units will start to saturate the market.

Prices on rentals and homes have also been driven up by demand, but now supply has finally caught up with demand thanks to two cycles of consistent building and expansions, reaching a point called hyper supply.

That brings the first leak in the boat or indicator of a downturn in the real estate market: increases in unsold housing inventory and higher vacancy rates for rentals.

As all of these builders finish the new home and new rental unit projects they started back in the expansion phase, the number of available units bypasses the need, so we see the occupancy rate climb above the long-term average.

However, rental process and home prices are still rising, although their rate of growth begins to slow, as the saturated market no longer can justify these prices.

At this point, the market is at a crossroads. What happens next will determine the severity and timing of the inevitable recession, or Phase IV of every real estate cycle

If builders and developers pay attention to the declining growth in rental rates and demand and choose to stop building, the market correction begins. The same can be said for home sellers pricing their houses for sale, although the home buying market finds its true value and corrects itself much faster as there needs to be a willing buyer (and appraisal) for every single transaction.

However, if builders ignore the warning signs and keep churning out more apartments, condos, townhomes, and new home subdivisions, they further flood the market at the worst possible time.

Unfortunately, few builders or developers hit the OFF switch themselves, as they’re motivated by squeezing out every drop of financial incentive possible and not wanting to be the first one to leave the party.

Recession

Phase IV of the real estate cycle

With that critical sign of trouble, we’ve now moved into Phase IV of the real estate cycle, or recession.

As the market shifts from hyper supply to recessionary conditions, we face the second warning sign of trouble as occupancy rates fall below the long-term average.

Builders and developers are forced to stop new construction, but the multitude of projects they began during the hyper supply phase are still reaching completion.

This additional unneeded inventory leads to lower occupancy rates but also lower rents (and home prices), as buyers and renters have more and more to choose from, which start devaluing real estate.

The third warning sign is upon us, an increase in interest rates, which acts like a match thrown on a pile of dry timber to ignite a full-on housing recession.

Sooner or later, the Federal Reserve is driven to increase interest rates to fight inflation brought by the rapid expansion of prices we saw through the expansion and hyper-supply phase.

As interest rates climb, developers and builders slam on the brakes and stop building any new projects, as an increase in borrowing costs doesn’t make new development feasible or attractive.

However, the market is suffering through dropping occupancy rates, lower rents (and housing prices) because of oversupply, and higher interest rates for home buyers.

In combination, this quickly creates a negative ripple effect across the real estate market and affiliated industries, from builders and developers to home sellers desperate to cash in on the (missed) high point of their equity, landlords, income for realtors, loan officers, bankers, appraisers, title company reps, inspectors, attorneys, construction companies, laborers, etc. all the way down the line.

When vacancy rates start plaguing landowners, sellers, and builders, values plunge, with foreclosures soon following. The real estate cycle has come full circle.

How long do these real estate cycles last, and how often do they come around?

While it may seem like prices drop and the market changes overnight, the real estate cycle is as predictable as clockwork. By carefully studying the real estate market and every pattern of ups and downs throughout our history, respected economist Homer Hoyt discovered that the real estate cycle gone through this course of the four phases once every 18 years, all the way back to 1800.

The only two exceptions to this rhythm were in for World War II (he earlier noted that wars and world events could disrupt the cycle) and when the Fed inexplicably double the interest rates in 1979.

So according to Hoyt’s research, when will we see the next real estate crash?

The housing crash of 2008 and subsequent Great Recession definitely triggered our movement into Phase IV of the real estate cycle.

The market moved from the recovery phase to the expansion phase around 2014 or so. In fact, some major metro markets like Boston, New York, Denver, and San Francisco, etc. are already seeing a hyper-inflated rental market, accompanied by builders scrambling to meet demand and cash in as quickly as possible

So according to those projections and the typical pattern of this cycle, real estate values will peak in 2024, after which the recession phase begins anew.

The Four Phases of the Real Estate Cycle (and when we'll see the next crash)

The Four Phases of the Real Estate Cycle:

“The next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war.” — Fred E. Foldvary (1997)

If you want to read the ups and downs of the housing market, there may be no better place to turn than the venerable halls of Harvard University to check in with some of the most noted economics and real estate minds in the world.

Just like the cycle of any market, what we do know is inevitable – some call it a downturn or a correction; others a bubble or even a crash – is that what comes up must come down, and then up again.

In fact, these same Harvard economists accurately predicted the financial crash in 2008, or at least the timing of it if not the severity. They didn’t know some complex algorithm or hidden financial secret that the rest of us don’t, they just understood one thing: that any real estate market cycle goes through four phases.

In fact, as early as 1876 an economist named Henry George noted that all real estate cycles move through four phases.

Understanding these market shifts, what causes them and what happens next can empower the average person to make incredibly wise decisions about their real estate holdings far ahead of the curve of public sentiment or knowledge.

Imagine if you had sold all of your property in 2007 before the historic crash? What would it look like if you had kept liquid in anticipation of the Great Recession and had the means to snatch up properties so discounted the banks almost couldn’t give them away? If you knew these signs of a housing market ready to expand and appreciate wildly, you could certainly take advantage of that and when you could ascertain the warning signs that the roller coaster was at its peak and about to go on a wild ride, you could sell, sell, sell way ahead of your unsuspecting and vulnerable neighbors.

Believe it or not, all of that information is readily available. So when will the next real estate crash happen? Read on to find out!

Recovery:

Phase I of the real estate cycle

Having gone through the dark days of the last economic downturn, we all understand the characteristics of a recession, at least anecdotally. Recessions are characterized by:

High rates of unemployment

Decreased levels of consumer consumption

Downturn in corporate investment and expansion into buildings, factories, machinery, etc.

The price of land is depressed. In fact, property and real estate are at their lowest value any time during the four-phase cycle.

But during this phase, the population doesn’t stop increasing, and that means a higher demand for goods and services.

The government typically intervenes during this phase, aiming to spark the economic recovery in the form of lowered interest rates.

While demand inevitably marches on and the cost of borrowing money and investing is lower than ever, smart companies start looking to expand their businesses. There might be some small businesses that have to close their doors, but the larger corporations see this valley as a golden opportunity to expand and snatch up invaluable market share.

This expansion includes hiring new employees, building new factories, plants, stores, etc., and investing in new technology, machinery and infrastructure.

At the latter end of this phase, the extreme rates of vacant offices, retail spaces, plants, and homes starts to decrease. There is just too much inventory, prices and interest rates too low, and demand too high for economic expansion not to start in earnest.

Expansion:

Phase II of the real estate cycle

The real estate market leaves Phase I and enters Phase II of the cycle once companies and consumers have started to purchase or rent most of the available properties, easily tracked by low vacancy rates and shrinking inventory. In fact, occupancy rates surpass long-term averages during this period.

With vacant or available properties becoming far scarcer, opportunistic landlords start to raise rents. Most real estate expenses are fixed so their revenues and profits also increase with these inflated rents. With rents unprecedentedly high, buying vacant land or existing properties for development is more attractive than ever.   

New construction and development begins to boom, but the problem is that these projects could take a long time to get underway and reach completion – sometimes several years. In fact, the average new development takes two to five years to finish. So we still have strong demand but supply to fill that demand can’t be built or developed fast enough, resulting in increased upward pressure on rents, land and housing prices.

So by the time this new supply becomes readily available, the climate of high demand, high rates, low occupancy rates, low interest rates and low supply has been active for five to seven years, a period of robust economic expansion. 

But very soon, people start overpaying for existing homes, land and properties. “Investors” and consumers alike start basing the price their willing to pay on the scarcity of supply and the anticipated growth of rent and housing prices – not actual market conditions.

This is a critical point in the real estate cycle where perception of future growth outpaces the facts, and setting up the perfect storm of conditions for the next phase in real estate – the boom, the bubble, or, as economists call it, hyper-supply.

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Tune in for part two of this blog coming soon where we examine the two remaining phases of every real estate cycle – and share these Harvard economists’ predictions for exactly when we’ll see the next real estate downturn.

The vital and growing role of Hispanics in US housing.

The month’s time between September 15 to October 15 is designated as Hispanic Heritage Month annually, a period of recognition accomplishments of Hispanic Americans in the United States. During this time, we can take a moment to celebrate the dynamic and important culture of Hispanic and Latino Americans including their vital contributions to the housing market and economy – which we’ll cover in this blog.

 The Hispanic population 

There are 57 million people of Hispanic origin in the United States, with California and Texas the #1 and #2 states with the highest Latino populations.

The United States is truly a melting pot of diversity, with more than half of all babies born last year minorities or multiracial.

In California, Hispanics and Latinos are expected to make up 44% of the population by 2020, 50% by 2030, and 56%, or a sound majority, by the year 2040.

 Hispanic spending power and the economy

In recent years, Hispanic job growth accounted for about 50% of total U.S. job growth.

There are about 3.5 million Hispanic-owned businesses now in the U.S, contributing more than $465 billion to the economy annually and employing more than two million workers of all nationalities.

Hispanics also have significant levels of wealth and income, with 43% of Hispanic households earning more than $50,000 annually, 35% making more than $75,000 per year, and 14% of Hispanic households bringing in $100,000 or more annually.

In 2015, Hispanic household median income reached $42,490 as poverty declined to 23.7%.

Between 2012 and 2014, Hispanics were the only major U.S. population group to lower their poverty rate and increase their annual household income simultaneously.

Hispanics are now the second-largest consumer group in the United States (behind only Whites/Caucasians.)

Since 2010, the combined purchasing power of U.S. Hispanics has grown from $1 trillion to $1.5 trillion, and economists forecast Hispanic purchasing power to grow to $2 trillion by 2020.

Hispanic homeownership rates

32% of Americans consider buying a home the symbol of success, while 56% of Hispanics believe the same thing.

From 2000 to 2012, Hispanic home ownership rates grew by 51.7% while the non-Hispanic and overall rates fell slightly.

Mirroring the overall numbers for homeownership through the real estate boom and bust, Hispanic homeownership rates climbed to an all-time high of 49.5-49.7% from 2005 to 2007, but declined in the subsequent years of the Great Recession.

There are plenty of signs that homeownership is on the rise again among Hispanics, such as the fact that from December 2014 to December 2015, homeownership boomed from 44.5% to 46.7% among that population, which was the largest one-year spike in more than a decade.

In 2015 alone, Hispanic home ownership rose by 245,000 households. In fact, Hispanics accounted for 69% of total net growth in U.S. homeownership!

Hispanic attitudes towards the American Dream of homeownership 

Hispanic households are twice as likely to be comprised of a married couple with children as non-Hispanic white households.

Since 2000, the Hispanic population accounts for more than 50% of all homeownership growth.

In fact, second-generation Hispanics have a strong 50% homeownership rate.
 Owning a home is still highly coveted among Hispanics, with 67% of those polled saying that they prefer homeownership to renting.

68% of Hispanics believe that purchasing a house is a good financial opportunity, compared to only 57% of all Americans.

73% of Hispanics believe that owning a home is a good way to accumulate wealth that can be passed to their families,

Hispanics and first time homebuyers 

Since 2006, about 77% of first time homebuyers have been white/Caucasian, with Hispanics accounting for about 8% of all first time homebuyers.

But now, 75% first-time homeowners are White/Caucasian and 11% are Hispanic.

That’s an increase of 38% since 2010 for Hispanic first time homeowners, the largest increase among any racial group or population.

Shifting demographics within the Hispanic population

Hispanic women now have a huge positive impact on our economy that’s increasing rapidly. In fact, 91% of Hispanic women believe that buying a home is the best financial investment they can make, and 61% believe they will play a more important role than their partner in the next real estate purchase.

There is also a significant and fast growing population of affluent Hispanics and Latinos, There are now about 15 million Hispanics that earn $50,000 to $100,000 a year, accounting for 29% of all Hispanic households. This group of strong-earning Hispanics spends about $500 billion every year, representing 40% of the total $1.3 purchasing power.

Hispanics and homeownership going forward 

Continuing that trend, Hispanics are expected to account for 52% of all new homeowners between 2010 and 2030.

By 2020, at least four out of every ten U.S. households will be Hispanic.

Over the next decade, Hispanic household growth is expected to increase by 5.7 million, out of a total expected household gain of 12-14 million.
 
Hispanic Heritage Month fact

Why does Hispanic Heritage Month start September 15, instead of just being in September, or October? The date September 15 is significant in Hispanic and Latino culture because it’s the anniversary of independence from the Spanish for many Latin American countries, including Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. Likewise, Mexico celebrates their Independence Day September 16.

A Snapshot of the U.S. Housing Market, 2016.

We often keep you abreast on home prices and real estate trends in our local market, but we thought it would be good to present a snapshot of housing data from the entire United States. So we crunched the numbers from multiple credible sources on ten different housing factors, like home ownership, home buying & selling, jobs in housing, home building, equity & distressed homes, and more.

1. Home Ownership

In 2016, the percentage of U.S. adults that owned their home was 62.9%.

That’s a 50-year low, as we haven’t seen a home ownership rate below 62.9% since 1965.

Our diminished home ownership rates aren’t a function of the recession, as only three years ago in 2013, 65.2 % of families owned their primary residence.

2. Home Selling

The average person selling their home is 54 years old, has a median household income of $104,100, and has lived in their current house for 9 years.

89% of home sellers use a real estate agent to assist them in the sale.

To put that in context, in 2001 only 69% of home buyers used a real estate agent.

Currently, sellers are closing on their home transactions at 98% of their original list price.

Although 43% of home sellers report reducing their listing price at least once.

The average home is on market for 30 days or less before entering escrow.

72% of home sellers would “definitely” use their real estate agent again.

3. Home Buying

First-time buyers make up about one-third (32%) of all current home purchases.

The median first-time buyer is now 31 years old, compared to a median age of 54 for repeat buyers.

The median first-time buyer has a household income of $69,400, compared to a median household income of $98,700 for repeat buyers.

The average home purchased these days is 1,900 square feet in size, contains three bedrooms and two bathrooms, and was built in 1991.

           

Buyers who used a mortgage loan typically financed 90% of their home price.

78% of home byers say that neighborhood is more important than the size of a home when buying, and 57% would sacrifice yard size if it meant they’d have a shorter commute to work.

Home buyers were willing to pay a higher dollar value for waterfront property than anything else.

The home characteristic that is rated as the highest value

Within their first three months of owning their home, 53% of home buyers do some sort of home improvement project, with a typically cost of $4,550.

4. Housing Units

There are approximately 134.7 million housing units in the United States.

About 115 million of those are occupied.

Almost 100 million U.S. homes have air conditioning (central or window unit), compared to only 68% that had AC in 1993.

5. Jobs in Housing

As of May 2016, 2.6 million trade contractors made a living in residential building.

But employment among residential home builders and construction contractors is still 25% below the peak in 2006.

Every time a single-family home is built in the U.S., it creates an average of 2.97 jobs, measured by enough work to keep one worker employed for a year.

Housing is one of the largest sectors of employment for Americans, with an estimated 1.7 million people receiving a paycheck for real estate, leasing, or rental housing work.

6. Home Sales

5,250,000 existing homes sold in 2015.

Last year, 510,000 newly constructed homes were sold.

As of June of 2016, we’re on track for 5,570,000 existing home sales this year.

The U.S. median sale price for existing homes is now $239,700.

That number is higher than the 2005/2006 peak of housing prices, but well below the sale price during that period if we adjust for inflation.

7. Home Building

In the 30 years from 1970 to 2000, housing starts on single-family homes averaged almost 1.1 million per year.

As of May of this year, the average is only 764,000 housing starts.

U.S. private sector construction spending has totaled $18.8 billion in the last twelve months.

Ranked by revenue, the Pulte Group is the largest homebuilder in the U.S., with $416,819 million in homes built to date.

The average price of a new home for sale is now $292,200.

8. Equity and Distressed Sales

As of the end of Q1 of 2016, 6,703,857 million homeowners were still underwater in their homes.

However, that’s much lower than the astounding 17 million homeowners that were underwater during the worst of the housing crisis and recession in 2009.

As of June 2016, there were 912,872 homes in some stage of foreclosure (default, auction or bank owned).

That’s down 6% from May 2016 and 19% less than June of 2015.

The average foreclosed home now sells for $121,824.

With rising home values padding equity, it’s expected that by the end of 2016 the number of underwater homeowners in the U.S. will be down to 5 million.

9. Home Dimensions

Builders are now constructing larger homes than in past decades. From 1999 to 2015, the number of new, the number of new homes 4,000 square feet or more increased by 22%.

During that same period, single-family homes under 1,400 square feet fell by 75%.

In 1999, only 17% of homes were larger than 3,000 square feet or more, while 31% of homes sold in 2015 were 3,000 square feet or larger.

In 2015, homes smaller than 2,400 square feet made up 21% of the new construction market, while 37% of new homes had less than 2,400 square feet in 1999.

10. Renting

About 35% of the U.S. population lives in a rental property as opposed to owning their home, which adds up to more than 110 million people, or 43 million households.

35% of renters live in single-family homes, compared to 18% that live in 2-4 unit properties, 42% that live in properties with 5 or more units, and 5% of all renters living in mobile housing.

Gauging by their 52% rent-to-income ratio, rents in New York City are the most expensive in the U.S.

The median asking price for renting an apartment in the U.S. is $1,381 per month.