January 8th, 2019 12:17 PM by Gregg Mower
As we embark into 2019 I enter my 35th year in the industry. Not saying I have seen everything but I have seen enough to know what is around the corner for Real Estate and Interest Rates. History seems to have a way of repeating itself over and over especially with Real Estate and market trends. So as you read this you will see references to the past as that is how the future is formed and it has worked consistently for the last 100 years now as we have become a society of growth and invention. But over time we as humans seem to follow the same trends and patterns in Real Estate and the Stock and Bond markets are no exception and we call this the “Business Cycle”.
The Business Cycle is a repeating cycle of booms and busts or good markets and slow markets. In Real Estate and the Stock markets you can really see how this plays out with increasing home prices and lowering home prices and the Stock market going up then sagging back down over the business cycle. The business cycle in Real Estate starts with investors entering the market picking up good deals (as they perceive it to be be) usually after a bust in Real Estate prices. Once investors have taken a good hold in fixing and flipping or creating rental portfolios you start to see the first-time buyers enter the market. When the first-time home buyers are buying and home prices begin to rise again you will see the move-up buyers enter the market creating more inventory. Eventually, over time the supply from the move-up buyers and the new home builders cools the prices from rising as the supply of housing catches up with the demand for housing. When the supply or quality homes for sale becomes greater than the demand you then get a cooling down of the Prices of homes. You will also see new home builders entering the market when the demand for homes is the highest and the supply is the lowest creating a greater supply of housing. This is the Real Estate Cycle that has existed since the beginning of private land ownership.
This is important to know as if you can pin point where we are in this cycle you can formulate a plan to buy or sell Real Estate. As far as interest rates are concerned the cycle is about the same but a little lagged compared to the Real Estate cycle. This is simple economics, as well, when the demand for money is the highest (generally the peak of the Real Estate Market) is when the Federal Reserve starts to see inflationary numbers such as lower unemployment, and rising consumer prices. You see housing drives the US economy as most products and services are designed for your home and when there is a high demand for these goods and services you will see prices start to rise. That will trigger the Federal Reserve to raise interest rates to combat the possibility of inflation and the devaluation of the dollar. I know this is a whole bunch of economic principles here, but this is how the business cycle works. I could go into specific details as I hold a degree in economics, but this would bore you and I want to inform you so you can be ahead of others that are not smart enough to read anymore.
As you see interest rates start to rise you will see almost an instant slow down in the demand for housing and goods and services as people can no longer afford to purchase the high-priced homes with high interest rates. This, in turn, slows the whole economy down. The Federal Reserve (the Fed) can’t possibly know how much interest rates should rise to slow the economy down to an acceptable inflation rate of 3-4%. The Fed will generally raise rates too high initially and slow the economy down too much then rates sag back down until the economy is stimulated again then they raise them to get to the right inflationary numbers. Since it is not an exact science we see volatility and this is where I believe we are at in the business cycle currently. The Fed has not landed on the right interest rate combination yet and thus we are seeing volatility in interest rates and coincidentally the Stock Markets as well. The Stock markets knows this cycle and reacts to it, as well, that is why we have seen record swings in the Stock markets in the last several months.
So, we know where we are in the “Business Cycle” and we have seen the higher rates and the Real Estate Market slowdown in the 4th quarter of 2018. Does this mean we are in for a bust? I don’t think a bust is in order, but I do see a slow down and a leveling off in Real Estate prices and in some cases a decrease in perceived values. Coincidently, this cycle has worked over a pretty consistent 10 year cycle with the slow down starting in the 8th year of each decade and going though the 9th year and slowly picking up with investors coming in on the 10th year. For example 2008-2010 was slow for Real Estate as was 1998-2000 and 1988-1990 and so on, history repeats itself. I am not saying that you should not buy Real Estate during these times I am simply pointing out the business cycle in Real Estate so you can be informed. There are always deals out there and with the right Realtor and Lender partner like MAE Capital Real Estate and Loan you can profit. With our experience you can make a plan to own Real Estate and not worry about the business cycle as interest rates are still low compared to history and there are some really good deals out there to purchase. So, beat the investors to the punch and get in the game with your first home or your 20th home, we are here for you. In our site you can look at properties currently listed on the MLS and get pre-approved all from your chair at home or work. Give us a call and let our experience help you plan your future at 916-672-6130.