While it is often said the real estate cycles proceed over 10 years, I would claim that no matter the time duration, there are FOUR distinct phases in a cycle:
1. When things are GOOD, and getting BETTER.
2. When things are GOOD, and getting WORSE.
3. When things are BAD, and getting WORSE.
4. When things are BAD, and getting BETTER.
Before I describe how we are still in mode 3, creeping very close to mode 4, let’s analyze how each phase is defined.
When things are GOOD, that means that prices are going up. Values are improving, bringing equity, wealth and prosperity to those invested in real estate. The REASON prices are going up is purely a function of supply and demand. If demand, as compared over time, is strong, and supply, or the inventory of property for sale, cannot keep up with demand, prices go up.
The opposite is true when things are BAD. There are more sellers than buyers. Sellers have to lower their price to compete with other sellers, to overcome the scarcity of ready, willing and able buyers.
When things are getting “BETTER (or WORSE)” is when the TRENDS of those supply and demand factors are changing accordingly.
The number of sellers and buyers at any time can be definitively measured with two simple statistics: The number of homes for sale and the number of homes closing escrow. The relationship of those tallies is the most vital information for any good Realtor or real estate watcher.
About 190 homes sold in Malibu in 2007. About the same sold in 2008. But then it went down to 110 last year. That was clearly a TREND for the worse. This year is projected to be about the same as last year.
The sales tally (# of buyers) alone was only half the story, however! The fact that more homeowners went on the market also was a trend for the worse. In May, 2007, there were 180 listings of single family homes in the 90265 ZIP code. In May, 2008, it was 215. Last year in May, it was 259. This year, 254.
You may quickly note the number of sales – AND the number of homes FOR sale – is similar between last year and this! Those two facts indicate that the TREND for the worse has perhaps run its course.
Suppose the number of sales over the next months went from roughly 110, annualized, to 180? Meanwhile, the inventory of about 250 dropped to about 220 next May? That would be a positive movement that would cement our transition into phase 4.
For illustration sake, let me show how the numbers played out through the last 15 years or so, and how the direction of the market was predictable in some cases:
1997 - 300+ listings, going down, 275 homes sold, going up; Market transitioning from BAD and getting BETTER to — GOOD and getting BETTER.
Several years in that mode prevailed. Prices went ever higher as sales units kept increasing and inventory kept decreasing.
2002 - 240 listings, going down, 300+ homes sold, staying steady, Market still GOOD and getting BETTER, but with the buyer demand maxing out. The future markets, to stay good, required less inventory (supply) while the number of buyers (demand) stayed at an historically high level. That indeed occurred.
2005 - 125 listings, still going down, 260 homes sold, going down. Offsetting the reduction in buyers was the reduction in sellers, keeping the market GOOD, but BETTER (though a better that was weakening). The number of listings was approaching its lowest point realistically possible, while the number of buyers was straining in light of the historically high price levels. (We also know now - as myself and others knew then - demand was artificially enhanced by soft lending practices)
2007- 190 listings, going up, 190 homes sold, going down; with clearly WORSE trends in the works, the market was about to transition from GOOD-WORSE to BAD-WORSE. There was no question. When the average number of listings during the year, and the annualized number of sales for the year - in this case, 190 vs. 190, is similar, prices are generally stable in Malibu. But the lines on the graph then were clearly crossing.
2009 - 250 listings, inching up, 110 homes sold, staying down. Last year was a BAD-WORSE year that had no hope of escape. We entered 2010 with similar conditions.
It will be sometime before the number of listings and the number of annualized Malibu sales cross on the graph again (producing, for Malibu as a whole, higher prices). Considering the severity of the discrepancy between bonafide, measurable sellers and buyers at this time, it will take a lot of trending for the BETTER before GOOD is known again.
Meanwhile, much of the real estate news that the public hears is good. That brings up a new twist to this analysis. Malibu is its own unique market. We are in our own little world (as we have wished to be, in many respects). Often the dynamics here are different than the nation, state or even the county of LA. As a general rule, the trends for a long time in the county have been BETTER, such that prices are beginning to go up - a GOOD market has replaced a BAD.
Furthermore, within Malibu are many micro-markets; so many different price levels have different dynamics at any one time. For example, the inexpensive condo market in Malibu has had a long period of BAD-BETTER and now prices are about to turn up into a GOOD-BETTER mode, as they stabilize. The high end has almost the very opposite story.
And much more than meets the eye is involved than this quick dialogue. A long-time knowledge of the behavior of supply and demand and its application to Malibu is vital if you wish to determine at what points the power switches hands between sellers and buyers. You may always feel free to consult me to get an honest handle on the market.
Furthermore, there is much to know about what influences are at play to MOVE the trends, such as the soft lending market once creating more buyers than the market should’ve borne – contrasted to the current state of hard lending practices curtailing buyer enthusiasm. Once lending standards relax and lenders are motivated to lend money, the flush of new buyer demand will accelerate the current phase.
In conclusion, remember this: If news is reported that appears to be good, it may be in one of several forms:
The news really IS GOOD. That is, supply and demand is causing prices to go up.
The TREND is GOOD. The number of sales is increasing and the number of listings is falling. Or, one factor is stable and the other is good, so the overall trend is good.
Lastly, sometimes news just relates to one fact that causes part of a trend to appear moving in a positive direction. This very commentary hints at such a message. To say that sales are picking up (even if they could not much slower in 2009)... while the inventory has stopped increasing (at least at the moment, “shadow inventory” threats notwithstanding), indicates a trend landscape that is adjusting in a positive way.
Before long, the growing gap between supply and demand will stop growing, and begin shrinking. We will unmistakably enter BAD - GETTING BETTER.
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