Real estate has traditionally been viewed as the best example of a cyclical market, as buying activity routinely crescendos, turns suddenly and then falls off, causing prices to drop. Then, the cycle begins again. This cycle easily correlates with the economy; when interest rates are down and employment is up, the real estate market thrives. It’s not rocket science, but paying attention to the signs and forecast of the cyclical market can benefit you and your clients.
By K.K. Snyder
Real estate is dynamic because of its cyclical nature, says Delores Conway, Ph.D., director of the Casden Forecast at the University of Southern California Lusk Center for Real Estate, and considered a national expert on real estate market forecasting. The market is currently in a correction phase that began in spring 2006, following huge price increases year after year. The increases are not sustainable, adds Conway, who has researched real estate markets for more than 10 years. “We’re moving to more normal levels of appreciation like three to 6 percent,” she says.
Builders responded quickly to the correction phase by halting construction last ynning to build and delaying introduction of new units, says Conway, who teaches analysis of real estate at USC Marshall School of Business. She predicts the correction period will last one to two years. “ear and, in some cases, even selling the land on which they were plaThen we’ll see the price declines stop and a flattening, followed by more normal levels of activity,” she says.
In Miami, vacancy rates are indicative of the status of the office market. During a strong market, all the office space gets leased up then suddenly dumps when the cycle turns, says Conway. But the interest rates, which reached an all-time low in 2003, have allowed the market to boost prices, especially on the coast and in large cities: a win-win for the Miami market.
The status of the cycle also determines ease of purchasing, says Conway. Once the banks tightened the lending criteria beginning in 2004, it became harder to buy. “Another factor is that the interest rate movement drove speculators out of the market,” she says. “With so many people buying, the prices went up and priced the speculators out. Miami saw tremendous price increases, as did Philadelphia, New York, Boston and Washington, D.C.”
Long-term demographic movements and factors, such as an increase in the age at which people are marrying, also affect the market. “People are also moving out of the cold Midwest and into warmer climates like the coast, a shift that is driven by factors like fuel costs for heating,” says Conway.
Research from the economists at the National Association of Home Builders finds that for every 1.7 new jobs created, the industry gets one new housing project. If an area has a strong population growth and employment growth, it has a strong housing market.
All economists, builders and real estate agents study the Consumer Confidence Index. This index, as its name implies, measures consumer optimism and is considered an important indicator of the future health of the economy. Unfortunately, this is a highly subjective measurement, since it measures a “feeling” and not an actual product.
“I think there’s been an incredible awareness of the role weather events play in this market, but cycles are more defined by factors like supply and demand,” says Steven E. Scheinberg, a partner with Lehman Development Group in Miami. “This market is very local. It’s difficult to generalize in the Miami market, because there are such distinct little markets. For example, areas such as Brickell and Biscayne have more price pressure than other areas. There are areas in Miami that currently have an oversupply and have more units coming online. That will drive prices down in those sub-markets.”
Yet, in other areas of Miami, where limited building opportunities exist, prices will stay stable if not increase, he adds. “The Miami market as a whole has matured over the last 16 to 17 years,” says Scheinberg. “There’s been a dramatic revival from southern destinations for vacations to internationals destinations for finance and trade. It’s encouraged more immigration to Miami and, most recently, we’ve seen a dramatic increase in real estate and investment as Miami has become a highly desirable location.”
The Miami market is about to go through an adjustment phase following the increased number of foreclosures and defaults attributed to “creative” financing that allowed people to come into the market in recent years, says Scheinberg, who is currently building St. John’s Villas on the water in Palm Beach facing the Ritz Carlton.
“It’s a unique building with 15 luxurious units that reflects the new trend of the mid-rise building,” he says of the units, which start at 2,300 square feet, priced at $1.4 million. “In today’s market, it’s important to have a product that’s different and that people want, not a vanilla 1,100-square-foot condo. It’s important to differentiate your product [with] something that sets you apart.”
Those who study the market for forecasting purposes agree that media heavily influences consumer knowledge and perception. Media reports give blanket statements about the market as a whole. Consumers hear only sound bites of generalized information, which are not useful for seeing the whole picture.
Nancy Hogan, a managing broker for Coldwell Banker’s Coral Gables San Remo office, tells her agents there is a difference between today’s bad market and the bad markets of years ago, when she was selling. “I think that until the last 14 years of a good market, there had never been a good market that lasted longer than five years,” she says. “At least [today’s] interest rates are affordable; not the 17 to 18 percent of my days.”
Hogan, named Florida real estate commissioner in 2003 by Florida Governor Jeb Bush, is concerned about a number of factors that affect today’s market, including the amount of mortgage fraud that exists today. Mortgage fraud has hurt a number of buyers and, ultimately, put them in a position to have to foreclose. “It’s way too easy to get a real estate license because of the good market,” she says. “We’ve had a lot of business models that didn’t protect the public.
“Some Realtors have come before the commission with no idea of what they should have done and have relinquished their licenses, because they didn’t realize how difficult the job was going to be,” she adds.
Hogan’s concern is the effect these factors will have as the Miami market goes forward on the finance industry and the real estate profession. “You start to see people buy condos as an investment [but are unable] to sell them, so our inventory picked up,” she says.
“Real estate is more of a commodity, like gold: The market sets the price, it’s not a product.”
Other factors are much longer reaching, says Hogan. Because Miami is such a hot city with an international clientele, the Latin American political scene directly impacts the real estate market, she contends. But, overall, 2007 looks promising for the Miami market.
“In 2007, the commercial market continues to be very active,” Hogan says. “In Miami, over 65 percent of all housing is vertical, so single-family homes will always be a good investment.”
All in all, the industry has a favorable forecast for 2007 and 2008, concludes Conway. “As long as the job market stays strong, real estate will remain steady,” she says. “But, if we have a recession, all bets are off.”
Even if you don’t fancy yourself a fortune teller, you can learn to predict the real estate market and become a valuable source of knowledge for your clients. It’s simple: Keep your eyes on the unemployment and interest rates, follow the trends of your local market and you, too, can predict the cycle of Miami’s real estate market.