Where are we now in the real estate market cycle? John Burns Real Estate researcher, Rick Palacios, says we’re probably somewhere near the 7th inning.. He says the market is still expanding but keep your eyes on those final few innings.
Palacios says the housing market has moved ahead nicely since it’s bottomed out in 2008 and almost upended the U.S. financial system. But he says the market works in cycles and we’re about to come full circle.
While he doesn’t feel there’s an imminent threat of another housing crisis, he says each market has its own unique set of factors that provide momentum or obstacles. Right now, there are a few markets that have had the wind at their backs for a while and are getting close to a cliff.
Palacios breaks the market cycle into five phases with a gentle arc up that quickly falls in the last phase. That’s the cliff we want to protect ourselves from. He looked at 20 markets with the largest volume of new homes and came up with a ranking of cities that are moving through this cycle.
Phase 1 is the “Cycle Bottom and Early Recovery”. During this cycle, you find flattish home prices and normal sales volume. Investors are able to find distressed properties. He says Chicago is the only city that’s still in this first phase, eight years after the 2008 market crash.
He says home values in Chicago are 23% below their pre-crisis high, and that new home sales are lagging 85% below that peak period. He blames much of that on an economy that continues to underperform. The weak sectors include manufacturing, financial services, and government.
Chicago also has budget and pension problems, and that could result in higher taxes to resolve those problems. He says that’s a risk that many local builders, developers, and homebuyers are not interested in taking.
Phase 2 is the “Expansion”. That’s when capital investment picks up speed with more home sales and rising prices. During this phase, Palacios says homes are affordable, construction activity is low but healthy, and jobs lost during the recession return.
He says most of the current “Expansion” markets have recovered all the jobs they lost but that home prices have not yet rebounded 100%. Markets such as Las Vegas, Riverside-San Bernardino, Phoenix, Orlando, and Tampa are still 20 to 30% below their pre-2008 peak.
We like the sound of job growth and low home prices for Orlando and Tampa. Those are two of our hottest markets for single-family rentals right now.
Palacios says they measured investment risk for all these markets with their “Housing Cycle Risk Index”. This index compares supply, demand, and affordability in each market. He says it shows the risk is “muted” in all Phase 2 markets except Denver, Nashville, and Orange County. Those three areas are very close to the next phase.
Phase 3 is aptly named “Exuberance”. Palacios says that capital has flowed freely into these markets for several years, that prices and sales volume have surged, and that smart investors are now more cautious.
There are four markets listed in the “Exuberance” phase. Going up that curve are Dallas, Seattle, Austin, and, at the very top, the San Francisco Bay Area. So all those hot properties in the Bay Area are now closest to that cliff. In fact, the curve is flattening right under the Bay Area.
Palacios says that Texas never experienced the big drop-off in home values during the Great Recession — they only fell 3%. But, they’ve gone wild since then and have risen almost 50%.
Some of that appreciation is due to job growth. He says both Dallas and Austin have 20% and 30% more jobs than they did “before” the recession. And, they are higher-paying jobs in tech, health care, and construction.
He says San Francisco and Seattle have already experienced a “renaissance” with tremendous job growth, a construction boom, and soaring home prices. As prices continue their march upward, there’s now increasing concern about affordability and a slow-down in the all-important Bay Area tech economy. There’s also a surge of people moving away from the Bay Area to places like Sacramento. He says these signs are all too similar to previous boom-bust cycles.
Phase 4 is the “Contraction and Early Downturn”. Houston is the only market in this phase. That’s due to the falling price of oil and a big cutback in jobs. He says higher-priced homes have been hit, but that lower-priced homes have held up pretty well. Palacios says Houston will likely remain in Phase 4 for 2017 and will probably “avoid a full-fledged downturn or recession”.
That “Full Downturn and Recession” phase is Phase 5. That’s when major capital losses become the norm. We were there in 2008. None of the 2016 markets are there yet.
The good news from this market cycle breakdown is that many of the markets are still in the “Expansion” phase. Some are in the early part of that phase. Palacios says there are still plenty of innings left in the game for those markets.
If you want to check out the colorful, curvaceous chart that shows the housing market cycle click here. We can also help you find cash-flowing rental properties in markets on the upside of that curve. Take the first step with a free membership to the Real Wealth Network.
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