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The Natural Cycle of a Real Estate Market BlueRoof Blog- News and Opinion About Real Estate & Technology

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The Natural Cycle of a Real Estate

Market
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As the real estate market was rising nationally the last few years the media went hog wild over the
frenzy and everywhere you looked there was someone or something telling you that real estate
was HOT HOT HOT! Prices were going through the roof and there was unprecedented growth
and people were becoming multi-millionaires from selling their homes. It was craziness.
Now the national market is going through a correction because it has to- there was too much
too fast. In some areas prices and inventory levels are going to decrease. Is that a good thing? Yes,
it is. Its healthy for each market to go through its cycle. This ebb and flow is good and allows
each market to grow and then collect itself and catch up, and then eventually grow again.
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Often when an area does go through a slowing or correction, the prices do not actually go down,
but rather just dont go up as fast. Usually the decline of a market is actually just a decline
in its growth rate.
Areas can see rapid appreciation for different reasons. Usually its because of either speculatory
(investment) buying or a major influx of people in a short amount of time. When an area has too
many properties being bought and sold solely for investment purposes, the market values rise
quickly, but this can create hollow values, because the values rise faster than the populations
ability to afford them.
When an investor buys a home for $200,000, puts $70,000 into remodeling and then sells that
home two months later for $400,000, that home gained 100 percent appreciation in two months.
No worries. But if that happens to 20% of the homes being sold in an area over a year, and the
prices are now growing exponentially while the area wages are staying the same, you have
trouble.
Eventually this can catch up to the market when people are no longer able to pay the prices of the
homes. The other thing that happens during this time is people begin to notice how much these
neighboring homes are being sold for and they want in on the action. When a market heats up
and prices begin to rise quickly everybody starts throwing their homes on the market and the
market becomes flooded with property.
Eventually when the demand slows, but people are still wanting to sell for more and more, those
home-sellers (who are always the last to accept the end of a growth period) will need to adjust for
this and the market can correct itself. Historically this has happened through a period of prices
staying relatively flat and growth slowing for a period of time until the demand increases again.
When both factors happen at the same time (investors flipping homes and people throwing their
homes on the market to get the high prices), and when new homes are built rapidly in the area
because of the demand and the construction brings jobs related to that construction it can really
make things interesting. Because these jobs are created by, and sustained by, the real estate
market.

This is what happened in Vegas between 2001 and 2005- people began to move into the area, then2/7

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The Natural Cycle of a Real Estate Market BlueRoof Blog- News and Opinion About Real Estate & Technology

This is what happened in Vegas between 2001 and 2005- people began to move into the area, then
investors starting buying and flipping homes, and then home builders began building homes as
fast as humanly possible and they were hiring people to help build all of these homes and to staff
the expanding casinos and the market appreciated over 50% in a year. When the market reached
the point where the demand was no longer there (everyone had bought a new home?) and all of
these builders no longer needed the help and the construction crews needed to sell but couldnt
and the prices had been artificially driven up by the investors, what happened to the market? Its
now in a period of decline.

According to Marc Garrison, founder of The National Association of Real Estate Investors (NAREI
(http://www.narei.com/)), there are four main components of the real estate cycle every area
experiences. These are Expansion, Equilibrium, Decline and Absorption.
Its important to note that this cycle not only applies to large geographic areas, but also
applies to cities and even neighborhoods.
Expansion brings job growth, population growth and a high demand on the infrastructure of an
area. Roads need to be built, restaurants open, hospitals expand and prices rise.
Equilibrium is when things begin to slow and settle. Prices have reached their limits, or beyond,
and this period of time brings high prices and as a natural consequence less businesses move into,
or expand in, the area. Governments are less likely to offer incentives to businesses to move into
the area and job growth slows.
Decline then occurs as the job growth stops and businesses begin to relocate to save money and
the demand for housing decreases. During this time, prices become stagnant or even decline as
rents and occupancy go down. Usually this decline is merely a slowing of the growth rate, but in
markets where the rise was too fast the decline must result in a correction (decline) of prices.
Absorption occurs as the lower prices and occupancy fall below the national averages and/or the
area becomes attractive again to businesses looking to relocate. Governments again begin to
incentivize business to move into the area and the population begins to grow again.
These four periods of time are all necessary and this is why real estate is so local. One market may3/7

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The Natural Cycle of a Real Estate Market BlueRoof Blog- News and Opinion About Real Estate & Technology

These four periods of time are all necessary and this is why real estate is so local. One market may
be in a period of decline, which pushes another market into expansion. This helps explain why
Utah always seems to follow California. As business move from the left coast into Salt Lake City,
Provo or Odgen, the market here expands as their markets decline.
Currently the Salt Lake market is in a period of expansion while much of the country, especially
along the coasts are in decline. Hopefully, with all of the job growth, our market will see this
period last for another couple of years.
Just as nature has its seasons, real estate markets have a healthy way of transitioning from period
to period. Experiencing these transitions and understanding them can give home buyers and
sellers not only an understanding around them, but hopefully, more peace while trying to
navigate through the moving process.
Originally posted August 27, 2006
June 9, 2007August 29, 2007 Greg

18 thoughts on The Natural Cycle of a Real

Estate Market
1. Todd Tarson says:
August 31, 2006 at 4:24 pm
I was having an interesting conversation about why the market become so smoldering hot, the
causes and the like. I really think much of it was due to lending practices changing.
Traditionally folks had to save up quite a bit money for a down payment, downpayment was
hardly a consideration to sellers or buyers during the hot market. Lenders were doing low
downpayment or zero downs and getting deals done with buyers who may not have
otherwise qualified for a more traditional loan product.
Of course investors got really involved and took advantage of the low interest rate and the
creative financing options available to them (as well as what I call modern buyers).
The only problem was that there wasnt enough inventory of listings to meet the demand. Of
course the builders stepped up as fast as they could and were able to name their price, AND
were able to put pretty profits in their pocket as well.
But like your article points out, there is always a limit and I think weve reached that limit for
now. Rates are higher, lenders are a tad more stringent but the sellers attitude of making
large gobs of money still remains.
Reply
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3. Pingback: Factors that Affect a Homes Selling Price BlueRoof.com Blog
4. john harper says:
June 11, 2007 at 2:21 pm
Damn Boy, You should be teaching college! I recall an email from you that you were going to 4/7

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The Natural Cycle of a Real Estate Market BlueRoof Blog- News and Opinion About Real Estate & Technology

Damn Boy, You should be teaching college! I recall an email from you that you were going to
try shorter posts, more often.
Is this an example?
This huge county I live in Contra Costa has a wide range of disparity. Some areas have 1
year and a half of inventory while others only have 2 or 3 months of inventory. Foreclosures
are booming 30 miles away from where I sit typing this. I saw foreclosure auction sign the
other day in San Ramon first one for me.
Reply
5. bigredonion says:
June 11, 2007 at 3:23 pm
Nice explanation of Real Estate. More importantly, where on the Real Estate Cycle chart
would you place the Salt Lake and Ogden area?
Where do you see those two areas in 6 months, 1 years and 18 month points.
Reply
6. Greg says:
June 11, 2007 at 4:03 pm
Onion,
As of today I see the local market in Salt Lake (and surrounding areas) as a good, balanced
market. Prices remain good so sellers are making money, but there is also a good amount of
inventory so buyers have a great selection and can find what they want. Prices continue to
appreciate, but at a moderate rate, Id say this year the area will have an average appreciation
rate of around 5-8%.
Reply
7. Brad Wood says:
June 16, 2007 at 11:53 pm
Thought this might be of interest The President/CEO of PMZ Real Estate in Modesto,
California has a really straight-up, honest assessment of this market situation. Despite all the
fortune tellers and clarvoyants out there, this guy tells it like it is. You might find his
perspective interesting coming from the highest foreclosure market in the US (San Joaquin
and Stanislaus Counties of California). Heres the link to video from a Real Estate Conference
held this past week. Its on their website and available for anyone to share, PMZBuzz.com or
http://www.pmzbuzz.com/2007/06/14/218/
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Reply
Pingback: BlueRoof.com Blog Salt Lake City Real Estate Market is Healthy, Balanced
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Pingback: Salt Lake City Real Estate Market BlueRoof.com Blog
Alan Kendall says:
May 19, 2008 at 3:57 pm
Thanks for telling the truth. So many Bank Presidents are just plain lying. The market is
going through a correction.
Reply

12. steven georgiadis says:

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The Natural Cycle of a Real Estate Market BlueRoof Blog- News and Opinion About Real Estate & Technology

12. steven georgiadis says:

March 14, 2009 at 7:56 pm
very pleased to have found this website.
Reply
13. The DeClark Team says:
May 30, 2009 at 6:55 am
Along with this graph, also consider to keep the inventory in mind when you are calculating
the right time to buy. During the boom, in Florida there were only a few weeks of inventory
and at the peak, there was a saturation of inventory, 30 months in some areas.
Reply
14. Pingback: The Natural Cycle of a Real Estate Market - City-Data Forum
15. propertyglasgow says:
August 3, 2009 at 6:40 am
Hi All,
If its not too rude, Id like to come in on your conversation and change direction a wee bit.
What do you all think of the idea that full-time university students are in a position to be
BUYING a property for themselves to live in during their student years. It seems to me that
now especially since the housing bubble has burst there is an opportunity for students to get
an early foot on the property ladder during their years in full-time education.
It seems to be the next big thing thats coming.
What do you think ?
http://www.propertyglasgow.biz/student_accommodation_glasgow/
http://propertyglasgow.wordpress.com/
Thanks,
Francis
Reply
16. Greg says:
August 3, 2009 at 7:40 am
Glasgow,
Feel free to enter any conversation Students certainly buy property, although not nearly as
frequent as their parents do. Most kids in college struggle simply to get through, and many
dont have the income or career to qualify for home ownership.
If they can buy, more power to them
Reply
17. Saint George Homes says:
October 2, 2009 at 6:36 am
I live in a small college town and I would have to say that there are some serious pluses and

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The Natural Cycle of a Real Estate Market BlueRoof Blog- News and Opinion About Real Estate & Technology

I live in a small college town and I would have to say that there are some serious pluses and
minuses to students purchasing for the short term. Pluses are it is building credit, they arent
paying rent, and they can often rent out rooms and cover most if not all of the rent. Minus is
they are now a landlord, if prices drop they cant sell, and the short term loan payoff will most
likely not help them.
Reply
18. ttnex says:
February 12, 2011 at 1:38 am
Feel free to enter any conversation Students certainly buy property, although not nearly as
frequent as their parents do. Most kids in college struggle simply to get through, and many
dont have the income or career to qualify for home ownership.
If they can buy, more power to them
Reply

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