As we enjoy the remaining warm days and quiet evenings of another wonderful summer in Valmonte, it’s time to take inventory of the local real estate market and get an idea of where things are headed. To put things in perspective, we have enjoyed over 43% in average sales price appreciation over the last 4 years. These rising home prices have largely been driven by limited inventory and low interest rates, which further aided buyer demand. But as this current growth cycle matures, the $100,000 question is how long can the market continue to rise? To answer that question, I like to turn to three indicators that give us some historical perspective of what’s statistically going on with the market – month’s supply, list price to sales price ratio, and days on market.
History lesson: Market Cycles
In 2005 and early 2006, our last market peak, homes were selling on average 98% of the asking price in approximately 22 days. In fact, in the market run up from 2002 through early 2006, homes were selling in an average of 19 days over that time period. In addition, home prices appreciated 56% and inventory was much like it is today – tight supply with less than 2 month’s worth of inventory. We can look to less stringent lending standards during that time period as one reason for the shorter days on the market, but clearly demand outpaced supply and sellers were willing and able to take advantage of that imbalance. Of course, we all know what ensued -the market flattened out for a couple years before dropping nearly 30% over four years, before before seeing a recovery in mid-2012.
[googleapps domain=”docs” dir=”spreadsheets/d/14kf4J3e9ATXWyuEXFCZVw2KSO2FLG4ror-P-vlqxfJA/pubchart” query=”oid=1249737409&format=interactive” width=”600″ height=”371″ /]
But here we are today, sitting comfortably in our newly appreciated homes and feeling pretty smart about our 43% price appreciation over the last four years. During this growth cycle, homes sold on average in 64 days – three times the amount of time it took in the last bull market. Months supply is roughly the same as the 2002-06 cycle with around 2 months of inventory available.
How long will it last?
If you arelike most folks, the memories of the last market crash are hard to shake, and you’re thinking, “how much longer can prices continue to rise?” Looking at 21 years of sales data from the MLS as our guide, we’ve seen three growth cycles since 1995, each lasting about 4-5 years, followed by 2-3 years of flat growth, then 2-3 years of declining values before the next growth cycle kicks in. Getting deeper into the weeds, when we look at price/foot comparisons over the same time frame, prices grew over a 10 year cycle before declining for 6 years. This tells us that the base price tends to expand and contract over a shorter time frame while price/foot changes over longer cycles. What this means is that if you are a buyer during a down cycle, you are likely getting more home for your dollar while seeing a stronger appreciation if you can make some improvements leading into the next growth cycle. Just as in stocks, buy low and sell high, right?
It is important to note, over the last 20 years, the growth cycles have been stronger and lasted longer than the contractions. And in most cases, price gains have outpaced declines by a factor of 2 to 1. But if we really step back and look at the net results, if you held a property in Valmonte since 1995, you have enjoyed an average price increase of 192% and a price per foot increase of 178%. Not too bad for living in a beautiful neighborhood with excellent weather, friendly neighbors, and great schools.
So to answer my own question, if you were to ask me to bet money on how much longer prices will rise, I will be inclined to tell you we are coming to an end of the growth cycle, and that more than likely, we’ll see a leveling out for the next couple of years before we see any downward momentum in home values. What could change my prediction? Without a mortgage debt crisis looming like we saw in 2008, the headwinds for price growth today are the potential for rising interest rates and the inability of recent college graduates to pay off student loans to free up more capital to purchase their first home. When that next reality hits is anyone’s guess, but for now I’m going to enjoy the nice weather and finish a few projects around the house before cooler weather and the holidays come back around.
See you in the neighborhood!