Worried about the next housing bubble? According to Ted Nicolais, who teaches at Harvard Extension School, the Great Recession of 2008 wasn’t really a surprising tsunami disaster as so many people refer to it. While it certainly was a painful crisis, it actually followed a consistent pattern… and was predicted by Fred E. Foldvary in 1997.
“The next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war.”
The housing market has followed a fairly consistent pattern for more than two centuries! Henry George recognized the pattern in 1876 and broke it down into four phases.
Phase 1 – RECOVERY
The recovery phase follows a recession characterized by high unemployment and low consumption. There is an oversupply of properties for sale and real estate prices fall to their lowest point in the cycle. Typically the government steps in with lowered interest rates to help the stagnant, depressed market.
Phase 2 – EXPANSION
The transition from recovery to expansion takes place as properties are again being sold, new construction resumes and prices begin to rise. This phase can take a long time, especially with new construction, because new developments can take 2-5 years from beginning to end.
We are currently well into this expansion phase, but it can take a long time for inventory to catch up with demand once it is needed. As our inventory supply struggles to catch up prices rise, driven by the laws of supply and demand.
Nicolais talks about how prices in this phase can accelerate at an increasing rate, as people buy based on anticipated growth to come.
It seems like I have been talking about a shortage of inventory forever, and just checked my blog posts… found a January 2012 post headlined ‘Listings Needed!” It will be interesting to see if inventory finally starts to rise again this year.
Phase 3 – HYPERSUPPLY
The first indicator of this phase is an increase in unsold inventory. We definitely aren’t here yet… our months supply of inventory is still hovering at the lowest in history!!!
This phase is also often where building expansion plans that have been in the works for a number of years are coming to fruition… finally having a noticeable impact on the housing supply.
An indicator to watch for is an increase in interest rates… which we are starting to experience. This can cause a slow-down in affordability and drop in sales coupled with growing inventory which can push us into the next phase.
Phase 4 – RECESSION
If we follow the historic trend based on on the predictions of George and Foldvary, the next peak should happen around 2024… followed by the next crash. Of course, trends are just that and reality can be different.
Nicolais predicts that “aside from the occasional slow down and inevitable market hiccups, the real estate industry is likely to enjoy a long period of expansion.” According to him,
The reason for the price appreciation we are seeing is due to an imbalance between housing supply and demand. This has created a natural increase in prices, not a bubble in prices.
Perhaps the most interesting aspect of the real estate cycle is its regularity. Economist Homer Hoyt found that the real estate cycle has been running its course in a steady 18-year rhythm since 1800.
