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 Anatomy of Today’s Homebuyer

The real estate market is somewhat of an enigma these days, with some metro markets booming while others are showing signs of slowing. But no matter whether we examine supply shortages or interest rates, rising rental costs or increasing urbanization, there is one thing that matters most: home buyers.  In fact, homebuyers are so important to the housing market they’re like the engine, the fuel and the steering wheel of the car!

For sellers looking to gain a competitive advantage and net top dollar, understanding homebuyers is more critical than ever. By looking at who they are, what they value, and how they operate we can really market your home sale with maximum efficiency.

So what do today’s homebuyers really want?

Modest floor plans

Surveys show that American homebuyers are starting to walk away from the cavernously large McMansions, and want slightly smaller floor plans with more warmth and style instead.

The ideal home size in 2000:

9%   800-1,400 sq ft

28% 1,401-2,000 sq ft

27% 2,001-2,600 sq ft

13% 2,601-3,200 sq ft

9%   More than 3,200 sq ft

The ideal home size in 2015:

9%   800-1,400 sq ft

32% 1,401-2,000 sq ft

27% 2,001-2,600 sq ft

12% 2,601-3,200 sq ft

6%   More than 3,200 sq ft

We can also look at new home construction for clues as to what the home buying public wants. In fact, the estimated average size of new homes has declined as such:

2008 2,520 sq ft

2009 2,480 sq ft

2010 2,377 sq ft

2015 2,152 sq ft

Interesting real estate fact:

Just how much has our preference for bigger homes grown over the generations?

In 1950 there was an average of 290 sq ft per person in the American household.

These days each person has about 924 sq ft in an American household!

It’s not just married couples buying homes!

9% of all single males buy a home, while an impressive 16% of single females buy a home!

These days, 13% of homes are purchased by multigenerational households.

Why are multiple generations in the same family buying a home together? Here are the top reported reasons:

24% Cost savings

23% Adult children moving back in

18% Caretaking for aging parents

10% Spending more time with aging parents

Where are home buyers searching for homes?

The top six sources for home searches are now:

1.     Online websites

2.     Real estate agent

3.     Mobile website or app

4.     Mobile search engine

5.     Yard sign

6.     Open house

By the way, the typical home search takes 10 weeks!

Tech is playing a more important role than ever

76% of buyers visit a home after first finding it through an internet search!

43% of buyers looked for properties online as the first step in the process.

89% used the internet throughout their home search.

78% visited more than 3 sites prior to taking action on a real estate site.

Where are buyers looking to live?

50% Suburbs or subdivisions

16% City centers or urban areas

11% Rural areas

3% Resorts/recreation areas

First-time homebuyers are trending a little older.

Age of first time homebuyers:

68% 34 and younger

29% 35-49

14% 50-59

7% 60-68

3% 69-89

Millenials are holding off on buying far more than their cohorts in previous generations.

Reportedly, saving a down payment is the biggest obstacle to buying for most people. It seems like high debt load is the main reason people can’t save the money to buy a home, including:

50% Too much credit card debt

46% Too much student loan debt

38% High car loans

When they do buy, the 5 most important factors that influence their buying decisions include:

1.     Quality of neighborhood

2.     Easy commute to their job

3.     Overall affordability

4.     Close to family and friends

5.     Quality of school system

How do home buyers differ by generation?

Gen Y

32% of all buyers

Average Age: 29

Household Income: $76,900

Size of Home: 1,720 sq ft

Median Price: $189,000

Gen X

27% of all buyers

Average Age: 41

Household Income: $104,600

Size of Home: 2,100 sq ft

Median Price: $250,000

Younger Boomers

16% of all buyers

Average Age: 54

Household Income: $96,900

Size of Home: 1,890 sq ft

Median Price: $216,000

Older Boomers

15% of all buyers

Average Age: 64

Household Income: $76,400

Size of Home: 1,800 sq ft

Median Price: $215,000

Silent Generation

10% of all buyers

Average Age: 73

Household Income: $63,600

Size of Home: 1,800 sq ft

Median Price: $190,100

What are they buying homes for?

60% of home sales are for the buyer’s primary residence

21% of home sales are for vacation or second homes

19% of home sales are for investment or rental properties

It’s all about the amenities

According to surveys, the top 10 amenities homebuyers are looking for include (in no particular order):

1. Walk-in close in the master bedroom
2. Low-E windows
3.  Linen closet
4. Separate shower and tub in master bathroom
5. Programmable thermostat
6. Great room
7. Energy-efficient appliances and lighting
8. 9-foot plus ceilings on the first floor
9. Separate laundry room
10. Insulated front door

Other polls of single buyers report that important amenities differ by sex:

Single female buyers prefer:

New kitchen appliances

En-suite master bath

Single level home

Single male buyers prefer:

Stainless steel and granite

Cathedral ceilings

New homes

Walk-in closets

Energy efficiency and working towards Green Homes is key

 These environmentally friendly features are critical to home buyers:

Heating and cooling costs

35% very important, 49% somewhat important

Energy efficient appliances

22% very important, 45% somewhat important

Energy efficient lighting

22% very important, 45% somewhat important

Landscaping for energy conservation

10% very important, 37% somewhat important

Environmentally friendly community features

10% very important, 34% somewhat important

Solar panels installed on homes

2% very important, 9% somewhat important

Green homes made up 17% of overall residential construction in 2011, but 38% of all new homes in 2016!

***

Look for part 2 of this blog where we reveal far more interesting statistics, trends and facts about today’s homebuyer!

8 More reasons why we're absolutely not looking at another real estate crash

It may seem like just yesterday that we were in the midst of the dark days of the real estate market with little reason for hope, but things are looking downright rosy now. While it’s true that these cycles usually go through 7-10 year trends, we’re here to tell you with 100% certainty that we’re not looking at another real estate crash like in the mid 2000s.

In part one of this blog we spelled out the first five reasons why we’re absolutely not looking at another impending real estate crash.

Here are reasons five through seven:

6. The Millenials are coming as first time buyers

The demographics of homebuyers will change dramatically in the next years and decade, but it’s not just the Baby Boomer selling, retiring, downsizing, and facing new needs that will change the face of real estate. In fact, there are about 80 million Millenials – those aged 18-34 who will make a significant impact on housing. So far, they have been reluctant to buy, perhaps jaded by what happened to their parents during the Great Recession and, more likely, saddled with unprecedented levels of student loan debt. But as time goes on, their jobs will stabilize, incomes increase, and the black hole of rent payments will swing them to home ownership en masse.

7. Housing affordability is solid – and a realistic goal

Not only are interest rates still hovering at very enviable levels, but also banks are lending money again. The strength of loans sponsored by the Federal Housing Administration still allow borrowers to put far less than 20 percent down for a home. Additionally, the FHA reduced its annual mortgage insurance premiums by up to $900 per year, a smart chess move that will most likely spur first time and younger buyers. The National Association of Realtors predicts the dropping of FHA premiums alone will increase sales by up to 5.6 million homes and lure 140,00 new buyers into the market – a diversification that points to cash, not crash.

8. New-home construction remains low

We’ve come a long way, baby, but the levels of single-family new home starts still remain 60 percent below where they stood at the peak of the market in 2006. Those numbers aren’t just anomalies – our current new home inventory is also about 25% less than the average for the last 15 years. Add to that the fact that the supply of existing home sales is lower than it was in 2000 despite a 14 percent increase in population and you have a heavy indication of demand without over-supply.

9. Our banking system is recapitalized, re-regulated, and reloaded

The circus of bank affairs before the mortgage meltdown and financial crash fired most of it clowns and started over. These days, banks are on a much tighter leash, no longer allowed to rapidly grow their balance sheets and make risky bets with borrowed money. A key indicator of the new and improved of the banking system is the fact that credit losses are running at generational lows and U.S. banks are enjoying unprecedented liquidity. If the banking industry hasn’t learned their lesson then the people watching them has, and we won’t see reckless and wanton abuse of the system that facilitated the house of cards collapse again.

10. Savings down, debt up

At the peak of the real estate bubble, the American personal savings rate fell to an all-time low of 1.9%. Those numbers were equally as bleak after the bubble burst and into the financial crisis in the late-2000s. But now, our savings rate has more than doubled to a rate of 4.8%.

While this is still small potatoes compared to the average national savings rates in through past decades and then 10% financial advisors suggest, more personal savings means more money for down payments, mortgage instead of rent, and paying down debt – all key elements of home ownership.

11. Stocks may be in for a bumpy ride

The stock market and real estate market are usually like two trains running on opposite tracks – when one is speeding ahead full throttle, the other is chugging along in the opposite direction. Right now, there are signs of some volatility and over valuation in the stock market, with near record-high corporate profit margins and a slow down in earnings growth something to keep our eye on, as well as the threat of trouble in foreign markets like Europe and China sending shock waves through stocks.  In fact, the S&P 500 has now retraced about 17 percent of its gain since the Great Recession trough of March 2009. All of that is good news for bonds, mortgage rates, and the real estate market – a train that looks to keep its momentum and not be derailed.

12. Our economy has stabilized

Overall, we don’t have much to indicate any sort of crash or volatility to come. The economy is growing at 2 to 2.5 percent per year, jobs numbers are up, debt is down, fuel and energy costs are low, housing affordability is up, and interest rates are still low, with the Fed expected to start a gradual increase of rates to temper inflation. Like we said, there will always be ebbs and flows to the real estate market just like any market or our overall economy, but looking ahead they appear to be gentle hills, not sharp cliffs.  

Bonus: How sound is our real estate market in Sacramento?

Certainly the economic and market factors we just outlined still apply in Sacramento, with some even more pronounced. Right now, the Sacramento region has one of the lowest new construction rates in the country, which is putting huge upwards pressure on rents. Homes have risen in value over the last five years but are still within realistic ranges compared to other areas and options in California. Furthermore, the new down town arena project is likely to boost the economy in coming years – or at least invigorate it enough where a real estate crash is highly unlikely.

From micro to macro, examining the most recent national U.S. housing and real estate data.

I realize that we dedicate a lot of time (and words) on this blog on local real estate statistics, focusing on the stats, trends, and topics that are relevant to homeowners in Sacramento, Placer, and El Dorado Counties. So in this post, we wanted to zoom out of Sacramento and even California and instead examine the most recent national real estate data, looking at how the housing sector is doing as a whole. Of course there are prevalent regional and even local factors that go into determining the values and direction of homes in our neighborhoods, but we shouldn’t be remiss in going from micro to macro.

Sales volume:

Across the United States, sales of existing homes (encompassing family homes, townhomes, condos, and co-ops) increased 4.7 percent in September versus August, when sales stagnated a bit. The pace of sales is now 8.8 percent higher than this time in 2014.

Median prices:

The median home price for existing homes climbed to $221,000 through September, a 6.1 percent increase from the same time in 2014. That means we’ve seen price increases for 43 straight months.

Inventory:

Across the U.S., total housing inventory fell to 2.6 percent, or 2.21 million existing homes for sale, by the end of September. That means we have a 4.8-month supply of homes, down from 5.1 months in August. Shrinking inventories are consistent with the yearly trend, with a 3.1 percent decrease in available homes for sale since this time last year.

Days on Market:

As of the end of September, existing homes for sale sat on market for an average of 49 days, an increase from the 47 days it took to sell a home in August. But 49 days is still a significant improvement from the 56 days it took to sell a home as of September 2014. Thirty-eight percent of September’s home sales sat on the market for less than a month.

Distressed sales:

The sale of foreclosures and short sales held at 7 percent of all home sales through September, level for a third consecutive month. That number is down significantly from September of 2014, when distressed properties made up 10 percent of all sales.

Of all home sales, 6 percent were foreclosures and only 1 percent were short sales. It’s worth noting that those levels of short sales are the lowest we’ve seen since 2008.

When it comes to prices, short sales and foreclosures were still great deals, selling for 19 percent and 17 percent below market value in September, on average.

Cash sales:

All-cash sales inched up by 2 percent through the end of September, making up 24 percent of all transactions compared to 22 percent in August. Individual investors paid all cash for 13 percent of all homes closed in September, which hovers near the marks for August (12 percent) and this time last year (14 percent).

Who isn’t buying:

First time buyers and Millennials are still sitting on the sidelines of home ownership. Millennials are generally plagued by high levels of student loans and other debts that keep them from buying. However, the general reluctance to buy a home for other first timers is probably based on fears left over from the recession as well as stagnant wages. In fact, first-time buyers only accounted for 29 percent of all existing homes sales in September, even lower than the 32 percent in August. Add it all up and home ownership levels were still an anemic 63.7 percent as of July 2015, the lowest level since 1967.   

Here’s a snapshot of existing home sale data as of September, broken down into region:

Northeast:

The number of existing-home sales rose 8.6 percent in September, which is up 11.8 percent from this time last year. Median prices for existing home sales reached $256,500, which is a 4 percent increase from last year.

Midwest:

The number of existing-home sales rose 2.3 percent in September, which is up 12 percent from this time last year. Median prices for existing home sales reached $174,400, which is a 5.4 percent increase from last year.

South:

The number of existing-home sales rose 3.8 percent in September, which is up 5.7 percent from this time last year. Median prices for existing home sales reached $191.500, which is a 6.2 percent increase from last year.

West:

The number of existing-home sales rose 6.7 percent in September, which is up 9.5 percent from this time last year. Median prices for existing home sales reached $318,100, which is an 8 percent increase from last year.

*All data according to the National Association of Realtors.