Is the Real Estate Market Actually Predictable?

by | BiggerPockets.com

Whether you’re looking to buy your first rental property or you’re a seasoned real estate investor looking to add yet another property to your growing portfolio, you’ll want to reassure yourself that you’re buying at the right time. It’s a common belief that the real estate market fluctuates in cycles, with prices rising and falling at predictable intervals—but is that really the case? And if so, is it really possible to time the market?

Annual and Multi-Year Cycles

First, let’s draw a distinction between annual cycles and multi-year cycles.

Annual cycles are somewhat predictable and based around home sales for each season. For example, one study by Redfin found that in Spring, 18.7 percent of homes sold above list price—and Spring was responsible for approximately 32.6 percent of all home listings. Compare that to Fall, when 14.7 percent of homes sold above list price, and it only featured 17 percent of all listings. In general, Spring is a better time to sell your home, but it’s not a total blowout, and can still vary by area. In other words, the annual cycle of property prices is fairly reliable—though not entirely make-or-break.

Then, there are multi-year cycles—an area subject to much more speculation and folk wisdom. Many people believe that home prices consistently rise, peak, and then either fall or stabilize based on somewhat fixed cycles. For example, home prices might rise for five years, then fall for a year, then stabilize, then begin a new growth cycles—a rotation of “boom” and “bust” periods.



Related: The 4 Phases of the Real Estate Cycle (& What All Investors Should Know About Them)

These multi-year cycles, if predictable, would almost certainly vary by location. For example, Rose & Jones has stated that the property market in Sydney grows in seven-year cycles, with a four-year “boom” period, followed by a few years of stability or decline. However, the market in San Francisco could be completely independent from these cycles due to geographical, political, and other factors.

That said, housing prices (and economics in general) aren’t the purely rational systems we’d like them to be. There are exceptions to every rule, so just because the home prices in a given area have historically grown consistently in five-year periods doesn’t mean a sudden economic downturn or disruption in the neighborhood couldn’t sabotage that growth period.

Key Variables to Consider

There are many events and changes that could influence how the housing market changes, even within a historically consistent cycle:

  • Broader economic conditions. First and most importantly, any major change to the broader economy could impact housing prices, and quickly. For example, if interest rates go up, making it harder to buy houses, there will be a sudden drop in housing demand, and the average price of homes will fall. If a city sees the emergence of a massive employer, increasing the average income of the city’s residents and providing more career opportunities, you could see an increase in home prices (or the turnaround of a local decline).
  • Local installations or removals. You can also see a dramatic shift in general cycles with a new installation (or removal) in the neighborhood. For example, if a new park is introduced the neighborhood, or if a school receives top marks unexpectedly, it could significantly increase the value of all the properties in the area—regardless of where in the cycle those prices would otherwise be.
  • Neighborhood shifts. If the neighborhood undergoes a significant demographic change, it could also change how property values evolve. For example, if a property investor starts buying up all the houses in a primarily owned community and starts renting them out, it could cause a dip throughout the neighborhood.

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Related: 5 Reasons I’m Not Worried About the New Real Estate Market Correction

Making the Call

You can use historical property prices in a given area to get a better understanding of both the annual and multi-year property value cycles in that area. Chances are, you’ll be able to find some general patterns. However, those patterns shouldn’t be used as the sole basis for your property purchasing decision; not only can cycles be disrupted by new and unexpected information, they also can’t tell you things like whether a home is, by itself, being sold for a fair price.

All in all, market cycles are real and somewhat measurable, but they aren’t perfectly reliable, nor are they consistent across the board. They’re best treated as a single tool in your decision-making toolset, and not as the biggest motivating factor for your investment decisions.

What do you think? To what extent is the real estate cycle predictable?

Weigh in with a comment!

About Author

Larry Alton

Larry is an independent, full-time writer and consultant. His writing covers a broad range of topics including business, investment and technology. His contributions include Entrepreneur Media, TechCrunch, and Inc.com. When he is not writing, Larry assists both entrepreneurs and mid-market businesses in optimizing strategies for growth, cost cutting, and operational optimization. As an avid real estate investor, Larry cut his teeth in the early 2000s buying land and small single family properties. He has since acquired and flipped over 30 parcels and small homes across the United States. While Larry’s real estate investing experience is a side passion, he will affirm his experience and know-how in real estate investing is derived more from his failures than his successes.

3 Comments

  1. Paul Merriwether

    SUPPLY & DEMAND have a lot to do with prices going up or down. Too many homes for sale push prices down. Too few push prices up. Land availability as with the San Francisco Bay Area. Finding a vacant lot is increasingly difficult. Yet with recent fires north of San Francisco many homeowners are choosing to cash out. They’ve collected money from insurance, chosen not to rebuild, now selling those vacant lots for premium $$$$ !!!
    relocating to more affordable areas of the country, possibly pushing up prices in some areas. You just never know could case prices to go up or down and what is or isn’t cyclical considering fires happen every year in our area.

  2. Estelle Angelinas

    Personally, I don’t believe that housing prices are predictable at all. Almost anything can affect them. From natural to man made disasters. Population or demographic shifts, economic crises… not to mention a surge of foreign investments that could drive the price of property up.

  3. brian ploszay

    Follow good analysts such as Case / Shiller. They pointed out lots of concerns preceding the last downturn. Since deep real estate crashes reflect a decline in new mortgage issuances, look for any negative changes regarding mortgage delinquencies.

    For many, today’s market seems a bit overheated and pricing is high. The market doesn’t always respond with a crash, but often a sluggish slowdown that can last for years. This is a type of market correction. Often, a sector can disappear for awhile, such as new home construction in a certain area where there is oversupply. Eventually the market corrects itself in time.

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