market snapshot

Recently I was speaking to a client of mine who was distressed about this "crazy new real estate market" and how "prices are just too high these days." It got me thinking about how important it is that I do everything I can to set the  record straight among  my clients so they can better recognize where we are in the current market cycle.  For  folks  who  are  interested  in  real  estate  and might  be  considering  buying  or  selling  a  property, understanding the big picture is critical. Critical! So here's where the market stands.

The  majority  of  folks  I  speak  with  think  this  tremendous  sellers'  market  and  super  tight  inventory  is something new and something that's going to come to a head and suddenly erupt overnight. Neither is true. Here's the truth: we are SEVEN YEARS PAST THE BOTTOM of our last real estate cycle as you can see clearly from the below graph. Just because the  Denver Post is suddenly aware of the real estate market and  Zillow  writes  screeching  articles  about  the  tight  market  in  order  to  sell  ad  space  don't  be  fooled  into thinking this is something new. It's not. It is a logical continuation of a market that is reacting correctly to the overselling we saw between 2006 and 2008, dropping 25 percent during that period. It's doing exactly what real estate market cycles do, go up and go down over long periods of time. But remember, over the past 40 years residential real estate appreciation has averaged about 6 percent per year and there is no reason to think that it is going to change over the next 40 years. 

We tend to erroneously think of market cycles in short  terms, spiking and crashing over narrow  periods of time and generally messing everything up. A quick look at the last market cycle shows clearly this is not how real estate works. Real estate cycles tend to move in much broader periods. Our last market upturn was from1990 -  2007, 17  years!  This  is why  predicting  short-term  market  movements  can  be  very  difficult,  whereas recognizing the market will move in much broader cycles is more accurate. It's what we learn by studying real estate market cycle history.

Let's talk about where we are in today's cycle. We are currently seven years past the bottom. The past seven years have been a sellers' market with plummeting inventory, rising prices, nervous buyers often involved in multiple offers, and happy sellers more often than not getting the price they wanted.

But the client I referred to above was a potential buyer and he was very nervous. He tries to stay informed, reads news articles, watches TV reports  and concludes the market is teetering on the brink of a crash and is therefore  afraid  to  buy.  And  he's  been  thinking  this  for  years!  He  wants  to  buy  because  his  rent  is skyrocketing,  up  10  percent  this  year  alone,  but  he's  confusing  the  short-term  media  screeds  about  this tremendous  market  with  the  long-term  patterns  of  market  cycles,  thinking  that  the  minute  he  buys a  home the market is going to crash.

So let me be clear: no one can predict the real estate market with 100 percent accuracy. I can't, the Federal Reserve  can't,  the  banks  with  all  the  money  can't  (obviously!),  no  one  can.  But,  understanding  how  market  cycles  work,  and  recognizing  how  low  our  current  inventory  is,  I  can  say  with  confidence  I  do  not  see  any impending weakness in the market over the next couple of years. We are seven years into what will probably be a very lengthy cycle of low inventory and rising prices.

I can't tell you what the Dow Jones will finish at next Monday. I can't tell you if the Rockies will win their fifth game of the season. I can't tell you what the weather will be on April 6. But I can say with confidence that real estate tends to move over predictable long-term trends, and this market cycle has a long way to go. 

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