Real Estate Cycles

We see cycles occurring all around us every day. Some cycles are long, others are short. Cycles also tend to repeat themselves.

For example, we have four seasons that rotate as a cycle. In economics we have expansion and recession – an economic boom is often followed by a recession. “Why?” you might ask.

There are various reasons, such as higher interest rates, bad business decisions and inflation, just to name a few. There are cycles in sports. The Warriors have had a good run, but they were a pretty bad team right before that. After this run, they might go back to mediocrity again. The stock market has cycles going from bull to bear in seemingly a matter of days to weeks.

The truth is, nobody can really predict when these cycles start and end, or oftentimes the reasons behind them. We can guess but can only can tell with certainty after each cycle passes.

And so it is with real estate, we operate in cycles. I often talk about the long real estate cycle and the annual cycle within a cycle.

Most people, when talking about San Francisco real estate, believe that it always goes up and up and every year prices go up some more. I can assure you that’s not the case; people either have short term memory or they remember the up years more because there are more of them.

Our real estate cycles in San Francisco tend to be about 10 years long with seven years up and three-to-four years down. During the up years, we normally have three-to-four years with double digit appreciation. And folks, that’s a 10% or more of a very big number! During the downturn, we normally experience a 10 to 15% drop in prices. So, the best real estate investment would be to buy right before the double-digit appreciations and sell before the down years.

What causes the ups and downs in real estate? It goes beyond supply and demand. Supply is always limited in San Francisco with many owners holding their properties and not having any real reason to sell. So, prices are driven mainly on the demand or buyer side. Factors such as economic expansion, stock market fluctuations, employment and interest rates play a big part in whether prices will go up or down. Currently, supply is limited because owners either bought or refinanced their properties at the low interest rates of the last few years and are reluctant to let that go.

During this last cycle, we have seen a longer up cycle than normal. Prices bottomed out in 2010 and have been going up every year since, fueled by historic low mortgage rates and the hi-tech market in this area until last year.

Different factors start the recession and the downward trend in real estate prices. The 1990 recession was caused by Iraq invading Kuwait and higher oil prices. The 2000 declines were attributed to the dotcom bust and startups going out of business. The 2010 crisis was caused by subprime loans and bad underwriting standards. This one will be because of higher interest rates.

Then there are shorter annual cycles within the long cycle. At the beginning of the year, we came out of the holiday season with very limited inventory. Owners do not like to be bothered with buyers going in and out of their homes during the holiday season and thus do not list their homes for sale or they take them off the market. Due to this, we have a supply shortage come January, and the homes that are on the market get snatched up fairly quickly.

The inventory normally starts coming onto the market after the Super Bowl weekend and we typically have a very robust spring selling season which usually results in some of the highest sales prices of the year. This lasts until the summer months and the market slows down again because many buyers, sellers and agents take vacations and do not conduct business.

The market picks up again after Labor Day in September and lasts until about a week before Thanksgiving. Then it slows down again and the cycle repeats itself again the following year.

However, I must caution that trying to time the market is dangerous. Real estate should be a long-term investment. Over the long term though, real estate in San Francisco has turned out to be a very good investment for most. If you are thinking about buying or selling real estate, I recommend that you consult with a good real estate agent, financial planner and tax consultant before making a decision.

John M. Lee is a broker with Compass specializing in the Richmond and Sunset districts. If you have any real estate questions, call him at 415-465-0505 or email at johnlee@isellsf.com.