How Predictable is the Housing Market
If you want to be successful as a real estate agent, then you need to know how the housing market works!
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Some very experienced sellers don’t quite understand how predictable or unpredictable it is. However, knowing when the right time to buy is and the right time to sell will allow you to provide better service to your clients and hopefully build a bigger profile as a result.
The very basic common belief is that the housing market goes in cycles. The prices go up for a while, stay there for a little longer, and then go back down. For many, it seems like it behaves relatively predictably, although when it’s up or down might depend on the location. However, is this belief the truth? If it is, then knowledgeable real estate agents, investors, and the average homeowner could make killings by predicting the cycles. Let’s examine things to see how predictable the housing market really is.
Multi-Year Cycle Vs. Annual Cycles
One of the confusing things about real estate markets is that there are different types of cycles. For one, there are annual cycles, and then you also might see multi-year cycles.
As you might imagine, annual cycles are shorter and thus easier to predict. You can examine the historic home sales during each quarter or season and see where the prices stand. As an example, you might find that homes sold over listing price more often during the spring. The fall may also have had a big number, but close to spring. If the percentages are close, then you might not see much of a difference between the two time periods. That would not tell you much about whether it’s that much better to sell during the spring than the fall. You would need to see a large separation to make that determination.
It’s much trickier to try to predict multi-year cycles. Some real estate experts feel that they are completely unpredictable and that people see what confirms their beliefs and assign a pattern to it. That belief is that there are multi-year cycles where you can predict with accuracy when markets will rise, peak, decline, and stabilize. For some areas, there might be a rise for as much as five years, then stabilize for a year or two, and then decline again. After the decline, it will eventually rise again. This cycle then repeats itself for perpetuity.
While it would be comforting to believe in predictable multi-year cycles, the truth is that it’s difficult because they would have to be different depending on the area. Those areas wouldn’t even have to be far apart. You could have a five-year cycle in a large city, and then a seven-year cycle in a rural town an hour away. There are geographical factors, along with political and economic factors involved. For instance, while there may have been predictable cycles in regions all over the world, a crisis like Covid-19 or like the downturn in 2008 would have disrupted them completely.
The truth is, the housing market in some areas can be predictable, but it can be disrupted. However, in other areas, it may not be predictable at all, whether on an annual or multi-year basis. If you are selling a client on an eventual boom to come, then make sure that you have professional liability included in your real estate agent insurance policy, just in case.
Important Factors
Predicting the housing market is confounded by the fact that there are several events and factors that can affect the changes that a market undergoes. These can all disrupt what you might think is a consistent and predictable cycle.
Probably the most important factor is the current economic condition of a specific market. Any change to the economy can have a massive impact on the prices of houses. For example, when society moved away from using paper for documents and started emailing everything, towns and cities that relied on the pulp mill employment started to empty. Housing prices plummeted along with demand. However, if a new employer or industry comes into town, then more people will come along with it. This will create a greater demand for homes, and prices will go up.
Sometimes prices can be affected by local buildings and installations. If a neighborhood has been stagnant for a long period of time, it may experience a boost if a new park or amenity is installed nearby. This could even be a school that is recognized nationally for its academics. Families will start to move into the catchment area for that school raising property values. These are all things that can happen at any point in a cycle and disrupt it.
In other cases, it could be the natural evolution of a neighborhood that affects a cycle. Sometimes when neighborhoods go into disrepair or property values plummet, an investor will move in and purchase a lot of the land and houses. If they then build up new houses and reinvigorate the neighborhood, then property values will go up in that area.
Making a Decision
If you are trying to get a handle on where property values for a certain neighborhood will be shortly, then you need to do the work. Check out the historical housing prices in the area, and see how they’ve evolved. Then see if you can find out whether anything will be changing, such as a new installation or an investor buying up homes. Not only will this help you make a call as to whether you can expect a boom or bust, but it can also help you tell if a home a client is looking at is priced reasonably.
When it all comes down to it, there is a lot that goes into creating value or decreasing value in a home, neighborhood, or market. While you can see what a cycle has historically been, you should understand that cycles are not perfect, and be prepared for something to disrupt it. Predicting housing markets is one tool you can use to assess a market. Check into all of the factors influencing a market to make a better judgment on what to expect going forward. Your clients will thank you for it.
