Like all markets, the real estate market is cyclical. Price range, location, the economy and a host of other factors all come together to determine how good or bad your market will be. The question is, how can you predict what’s ahead for your market?
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In a recent column, I explained why we cut our listing price just two weeks into the listing period. My gut told me we were a bit high. What sealed the decision was that there were 12 to 25 months of inventory in our price range, depending on how you set the search parameters.
Based on my experience in previous downturns, this was a clear sign that price reductions were coming, even though other parts of the Austin market were still strong.
When I discussed the issue with our listing agent, she checked the activity on the MLS. Activity was down in both the condo market and the luxury market.
The spring-summer selling season was also much shorter than it was in the past several years. Moreover, the brokers in her office were also complaining about how dead the market was.
When I inquired about other places in the country, a majority of the agents, brokers and senior leadership noted a slowdown. In fact, one major franchise reportedly has seen enough evidence of a downturn that they addressed the issue in their October leadership meeting.
What’s unclear is whether this is an early beginning of the holiday slowdown or a harbinger of a longer-term trend.
The 10-year real estate cycle
The real estate market seems to run in 10-year cycles. The beginning of the last downturn began in 2006-2007. If the market repeats that pattern, the next downturn will start in 2016-2017.
Because these cycles vary by market and price range, check the patterns for your market to make your own determination.
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The 2016 presidential election — a wildcard for real estate
Historically, presidential election years are good for real estate. This particular election cycle has caught everyone by surprise.
For example, the difference between a Donald Trump and Bernie Sanders presidency would have radically different implications for the real estate industry.
Both candidates want to change how we are taxed. Trump says that he wants to protect the mortgage deduction and supports the repeal of Dodd-Frank. Hilary Clinton and Sanders would probably expand existing regulations and could eliminate or reduce the mortgage deduction.
Be prepared no matter what’s ahead
For the 30-plus years I have been in the business, the number of months of inventory has consistently been an accurate harbinger of price changes and market shifts.
The rule of thumb is that if there are six or fewer months of inventory on the market, you are in a seller’s market with too little inventory and upward pressure on prices. Focus on taking more listings.
If there are seven or eight months of inventory on the market, you are in a flat or transitional market with stable prices and good opportunities for both buyers and sellers.
If there are nine or more months of inventory on the market, you are in a buyer’s market with downward pressure on prices. Prospect for buyers and only take listings if they are priced right.
Why market statistics matter
Market statistics and inventory knowledge are the two most powerful tools in your arsenal to help buyers and sellers arrive at realistic prices.
Mastery of the market statistics also allows you to:
- Have a more realistic discussion with your clients about how pricing impacts market time
- Identify the areas where there is the most activity and that will yield the greatest return on your marketing efforts
- Spot opportunities to do more business by shifting your focus from sellers to buyers or vice versa
For example, if you notice that the amount of inventory is decreasing, it’s smart to obtain as many listings as possible to meet growing demand. On the other hand, when the inventory is increasing, it would be wise to work with more buyers.
It’s also important to realize that you might have a seller’s market in some price ranges and a buyer’s market in others, especially if the market is in transition. In most areas, the luxury and move-up markets are the first to experience a slowdown.
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The lag factor
What makes tracking the inventory so powerful is that inventory changes precede actual price changes by approximately six months to 18 months.
For example, the warning signs foreshadowing the last downturn were evident in 2005 and 2006, even though the market remained strong in most places through 2007.
The savvy agents who tracked these numbers strongly urged their sellers to reduce their prices. They also focused on working with more buyers.
Given that you can have a strong buyer’s market in one price range and a strong seller’s market in the same area, how can you know what to expect?
To learn about predictors other than the months of inventory, look for the second part of this series next Monday.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles and two best-selling real estate books. Learn about her training programs at www.RealEstateCoach.com/
