The March S&P/Case-Shiller U.S. National Home Price Index (spindices.com) was announced May 31st to reveal a 5.2 percent increase in home prices. Although down from last March’s 5.3 percent increase, home prices seem to be appreciating at a regular pace, with the metro areas of Portland, Seattle, and Denver leading the way with double digit gains (year-over-year price increases of 12.3 percent, 10.8 percent, 10.0 percent respectively).
And as home prices climb, so too are the claims that we are experiencing a housing bubble. Those concerned about the next bubble have been ringing the alarm bells since last fall, when the combination of limited inventory, multiple offers, and rising prices created an environment in some regions that was reminiscent of the go-go market just prior to the last market bust. And like the broken watch that is correct twice a day, those naysayers may eventually be correct – but it may not be for another eight years.
According to Ted Nicolais, the real estate cycle has been steady since 1800 (How to Use Real Estate Trends to Predict the Next Housing Bubble; dce.harvard.edu; February 20, 2014). Writing for the Harvard University’s Department of Continuing Education’s The Language of Business blog, Nicolais maps out Homer Hoyt’s cycles and found a regular 18-year cycle to the bubble and bust housing market (albeit two exceptions).
The 18-year cycle, as it turns out can be observed by analyzing trends. An applying Henry George’s four phases of the real estate cycle (as modernized by Glenn R. Mueller), Nicolais can determine how and when the next housing bubble will occur. (Henry George was a nineteenth century economist who studied the boom-bust cycle).
The first phase is the “recovery.” Home prices are at the bottom, and demand increases. Real estate vacancies decrease as economic activity increases, which fuels the economy.
The second phase is the “expansion.” Housing inventories dwindle, there is little is available to buy, and finding a rental becomes difficult. Nicolais explains that an issue with real estate is that once demand increases, filling inventory takes a long time. New development can take two to five years. Until new inventory is added, price growth accelerates; and rather than valued at market conditions, real estate becomes priced to future gains. During a real estate boom, people buy into the prospect of “future growth” and believe the escalating prices are reasonable.
Phase three is “hyper supply.” When the completion of new development begins to satisfy demand, inventories fist stabilizes and then swells. Price growth begins to slow. Nicolais stated that the amount of continued development will determine the severity of the impending recession; while demand is satiated, new inventory comes to market and vacancies increase. He asserted that “wise” developers stop building during this phase.
Phase four is the “recession.” New development is stopped, while projects coming to completion add to a growing inventory. Occupancy rates and prices fall; property values and profits dwindle. Developments in mid-construction may not be completed because they are no longer financially feasible.
Following the four phases and the 18-year cycle; Nicolais stated that the great recession was not caused by external forces, but rather occurred on schedule! He figures that the current housing market is transitioning from recovery to an expansion phase. And with the exception of the occasional slow down, he predicts that the next housing recession will be in 2024.
Dan Krell is a Realtor® with RE/MAX All Pro in Rockville, MD. You can access more information at www.DanKrell.com.