Wednesday, September 28, 2005

Real Estate Cycles -- The Nature of Declines

In all notable cyclical downturns since WWII, prices have declined at a fairly steady rate during each year of the decline, and at about the same “real” rate in each cyclical decline. The inflation adjusted decline has typically been around 8% per year. Usually this means about a 5% nominal rate of decline.

The declines have lasted about three years in every decline, except during the real estate depression of the 1990s, when the decline lasted about six years. Even during that longer decline the real rate of decline was about the same as during the previous declines (same rate but more years). The one notable aberration that I know of is the Great Depression, where prices declined for about four years and at a greater rate.

When will the market peak?… Except in specific localities, the housing market will not have a single month that can be identified as the peak. The last few declines demonstrate the rolling nature of the declines. The various markets reach their peaks at different times, and then decline in the standard pattern. The rolling peaks have been spread over a period of about two years during these prior cycle declines.

The cycle of fundamental economic factors driving the various markets have also varied by about two years. The local price cycles have tracked with these factors… no surprise there. However, the economic fundamentals in the various markets are currently very closely synchronized. Because of this I expect the window to be much tighter this time. I am estimating a one year spread for the rolling peaks.

P.S. These comments pertain only to the "hot" cyclical major markets.


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