How long will this downturn last? - Posted by Mike

Posted by Jimmy on May 19, 2006 at 07:12:46:

Austin has jumped 15-20% in past year. Check Houston and Dallas.

Get away from the coasts, and its a different world

How long will this downturn last? - Posted by Mike

Posted by Mike on May 10, 2006 at 09:34:21:

It’s pretty clear that we’re now in a buyer’s market. The media is hyping a real estate slowdown which is probably exacerbating the situation. No doubt we were due for a down cycle.

I’m just wondering how long should this phase of the cycle last? What’s typical? Is the last 5 year run-up so out of the ordinary that prices need to fall for the next several years?

This is my first experience on this side of the cycle. I expect that we’ll see much better deals out there, but, getting out, however, does concern me.


Re: Don’t be caught with your pants down… - Posted by Ed Garcia

Posted by Ed Garcia on May 11, 2006 at 11:37:57:

A Prudent REI makes money regardless of the market.


A prudent REI who makes their money on the buy and their deal cash-flows, can do well in both markets. I?ve been waiting for this market to come for 18 months. That?s how long ago I figured it to arrive, so it took longer to get here then I had predicted.

With gas going to $3.35 per gallon in California, housing not only doubling but tripling, the incomes not meeting the demand of housing costs, and interest rates on the incline, you?ve had to see the writing on the wall that this is not just a temporary scenario.

TRUE, there are different housing markets or pockets across the country that will still be dictated by supply and demand, but for the most part what is occurring is a necessary correction.

Many REI?s and real-estate brokers are still in denial. They are saying prices have not dropped as the media is saying and that it is an overreaction of the media.

NOT SO. Before major drops in prices occur, you experience inventory buildup which were experiencing now. The next thing that will happen is property will take longer to sell, which will create prices to drop. Prices dropping will make most buyers want to WAIT to see how far prices will drop or to see where it bottoms out, before jumping in the market. This will intern make prices drop even more. I could go on and discuss REO?s and what is going to happen with the banks and financing becoming more stringent, but I think you?ve got the picture.

Interesting enough, on the commercial scene, prices have never been stronger. Cap Rates on quality properties are in the 7s across the board meaning from cost to cost and the market is more then stable. I personally foresee a reverse trickle down economics. I see that eventually with the cost of housing, fuel, increase of interest rates, incomes not meeting the demand, just to name a few, there is no question that the public will be cutting back on their spending BIG TIME. So eventually the commercial market will feel the sting.

If I?m sounding like gloom and doom, that?s not my intention. My intention is to say Prudent experienced investors, knew this day was coming and have been preparing for it.

My message is that as you become a more experienced investor, you will remember these market changes and adapt your investing to make money when the market is hot and make even more money when the market cools.

Food for thought,

Ed Garcia

Re: How long will this downturn last? - Posted by David B

Posted by David B on May 11, 2006 at 07:09:58:

I think there are overall trends to the RE market, but it also is very local
as others have noted in other posts. Here was my experience in
Northern California (Redwood City, Palo Alto area) in the early 90s.
The market in the mid to later 80s had gone bonkers with killer
appreciation. Then, suddenly, after the Loma Prieta earthquake in 1989
(just seemed symbolic of the gathering downturn), the market turned. I
sold a townhome that I had bought for $160K and had gone as high in
the up market to $310K for $275K. So I didn’t sell at the highest point
but I was happy. I then bought a single family home in Palo Alto for
$375K in 1990 (not sure what the high point had been on this home).
At this point the market continued to tank and I’d say by 1995 it had
fallen to its lowest point of about $340K–or roughly 10 percent. So
the total down market was probably about 5 or 6 years and prices
dropped maybe 10 to 13 percent. Fortunately, I didn’t have to sell at
that point or I would’ve lost money.

Then, it started to turn once again, and turn up quickly in a blazing
market. By 1998 when I sold it was an amazing seller’s market with
multiple offers and I sold the home for $492K.

So in my experience a market could have a downturn for 5 to 6 years
until it changes. Palo Alto is in Silicon Valley so the upturn/downturns
pretty much track with the crazy technology-driven economy. Whatever
your area is will also be driven by local factors, though I do also worry
about global factors such as our large borrowing from China and
elsewhere and how ultimately that will affect our economy nationally
and the real estate market.

Hope that helps.

Re: How long will this downturn last? - Posted by Marc

Posted by Marc on May 10, 2006 at 20:52:11:

You can get historical data, including by region, from the house price index (HPI)

Of course history doesn’t always repeat itself exactly, but you can get an idea of what we might reasonably expect. In the Boston area, the last sharp runup of prices in the late 1980s was followed by 5 years of flat prices while inflation caught up (i.e. negative appreciation in real terms).

My view: I dont view real estate markets as special; they might move more slowly, but fundamentally house prices cannot exceed people’s ability to pay. So I see no reason why it shouldn’t return to the historical norm. With the one caveat that increased population will squeeze prices upward over the long term in urban areas. In Boston, although there have been large swings up and large corrections back down through the real estate cycles, real house prices closer to the city are definitely higher (i.e. inflation-adjusted dollars) then they were when I was a kid some 30 years ago.

As for media hype – you have to take it both ways. I think media hype is also partly responsible for driving prices up in the first place. If it now drives prices back down, well … that’s part of the market.

Re: How long will this downturn last? - Posted by Mike-OH

Posted by Mike-OH on May 10, 2006 at 12:21:22:

Historically, it takes 2 years to the bottom, which I expect to occur in early 2008. Then, it may take another 8-10 years for prices (inflation adjusted) to get back to the previous peak. Do a little research and you can find these charts.

We’re not even close to the bottom yet.

The REI fad is over - now, back to business!

Good Luck,


Re: How long will this downturn last? - Posted by BTI

Posted by BTI on May 10, 2006 at 11:40:30:


I started investing in the nifty-fifties in the S.F.Bay Area, California at 16. You could almost set your watch by the cycles during my career, a recession at the beginning of a decade, a boom at the end of a decade. Then came the 1990’s, and everything changed and we got a very long downtime and a very long up time until the train pulled into the station this year.

With what I see happening nationally and globally I am personally just going to play it month to month, and do turnover deals and take the money and run. If I happen to find a great deal in an A+ area I may buy and hold (On my buy and holds, I prefer to get them to free and clear as soon as possible so If I can’t produce income someday, these investments will produce it for me).

My prediction is a slow slide in my area for five years to market botton, unless the big quake finally shows up (its overdue) and then I will move to Utah and rebuild my empire just in time to watch Yellowstone erupt and bury the east in ash(mmmm,…maybe I better make that southern Utah).

Re: How long will this downturn last? - Posted by Natalie-VA

Posted by Natalie-VA on May 10, 2006 at 10:26:20:


In my opinion, my area went from a seller’s market to a balanced market. I hate to see the media saying that it’s a buyer’s market when it’s really not.

I think a lot of people that have gotten into real estate over the last 5 years haven’t seen both sides, so they’re assuming it’s now a buyer’s market when it’s really not.

I know… not an answer to your question, just wanted to throw it out there for thought.


Regional - Posted by michaela-FL

Posted by michaela-FL on May 10, 2006 at 09:41:25:


Whether buyer’s or seller’s market completely changes from one market to another. Even neighborhoods right next to each other may have completely different experiences.

For example: Take Atlanta - It was growing in leaps and bounds in the 90’s after the announcement of the Olympics. And even after the Olympics people were building and renovating like there’s no tomorrow. There were/are a lot more units available then there were people moving into the City. That caught up around 2000 when the market tanked together with the delayed election, which pushed everything into the holidays and at the end of the year every media outlet was screaming about the terrible economy.

This spring I’ve finally started seeing the intown Market in Atlanta come back. Yet, other cities had a seller’s market during the same 6 years.

So, you really have to know YOUR market as it’s not all the same.


Great post - Posted by Gene

Posted by Gene on May 11, 2006 at 14:33:56:


I think your post is dead on.

The market is changing. Folks that ignore it will get burned. Folks that watch what is happening and play it will do much better.

Re: How long will this downturn last? - Posted by Ken-Orlando

Posted by Ken-Orlando on May 11, 2006 at 18:24:52:

I heard an interesting speaker a couple of months ago at my local REI Club monthly meeting in Orlando. The speaker, John Huguenard had been investing in realestate since 1968 and is a very successful investor and RE broker in Central Florida. He said that the Real Estate market is a cyclical business that has a lifespan of approximately 25 years.

He mentioned we have about 15 years of a flat or downturning market for single family homes for the market to complete its cycle. Although each local Real Estate market varies to some degree, he said that government policy such as interest rates, money supply, and inflation will define the local markets nationally. He pointed out the similarities with the 2006 Market and 1981, 1956, 1931, 1906, and 1881.

He recommended investing in apartment buildings during this period making money through rentals, increasing the value of the apartments by improving the Occupancy rates and raising rents.

Re: How long will this downturn last? - Posted by stan

Posted by stan on May 10, 2006 at 12:58:15:

Yes, particularly invest in those huge “single family” residences in the Colorado City area.

Lending crisis is not - Posted by Gene

Posted by Gene on May 11, 2006 at 14:44:14:

Real estate markets are regional but what is amazing to me is how everything changed at the same time.

Inventory levels started climbing in many communities all at the same time (late summer/fall). West coast, NV, AZ, East Coast, FL, IL…all of them have been behaving very similarly. To me the common factor is FINANCING.

The rules of lending have changed (packaging, insuring and selling of notes) receintly and throw that together with the low rates of a few years ago and the lenders went crazy.

Speculators were buying multiple homes, with intrest only loans with no documentation. Now those buyers are realizing that appreciation is slowing and that the rent cannot pay the morgages so they are all selling.

I think that the run up was more of a LENDING BUBBLE rather than a Housing bubble. This is a national event (some argue Worldwide).

Can local forces be stronger than the financing issue? YES but in most areas it will not be enough.

In my opinion both Coasts are in for a correction. 2007 is going to be ugly for a lot of folks…and good for a few that play it right :wink:


Re: Regional - Posted by Mike

Posted by Mike on May 10, 2006 at 09:54:37:


No argument here. Knowing your local market is key. My market is definitely a buyer’s market now. But, what I am really talking about is the real estate market overall. Kind of like the stock market. When the DJIA is rising the overall trend of the market is up. Undoubtedly, there’s going to be a lot of stock’s that are going down, but, there’s surely more up stocks than down. Currently, the vast majority of real estate markets are down right now. This is the overall trend of the market in our country.

National factors, like interest rates and lending policies will affect the entire country, not just local markets. Until these forces are put in check with lower prices, I think the nation will be in an overall buyer’s market. So, my question is, how long is this down cycle likely to last?

I still think it’s local to some degree - Posted by CTR (CA)

Posted by CTR (CA) on May 12, 2006 at 22:43:07:


Your on the money about the Coastal areas, and some inland areas like Phoenix and Vegas. But historically certain parts of the country have run countercyclical to the coasts. For example Utah did well in the early 1990’s as CA declined. I think Texas, New Mexico, the Deep South states (TN, GA, NC, SC) will be steady b/c they never saw a run-up to begin with. House prices are still in-line with incomes. Also these areas will get people from the Coasts relocating to escape high housing costs on the Coasts.

National Factors Do Not Overide Local - Posted by Jimmy

Posted by Jimmy on May 11, 2006 at 07:38:01:

If you think rising interest rates will cause a nationwide slide, you are WRONG, WRONG, WRONG. The issues that drive local real estate markets are more powerful than interest rates.

Look at Austin today. Austin shed a lot of blood from 2002-2005. Now it is moving up fast. Compare that with the SF Bay Area. Its showing weakness now, which the “experts” predicted would happen back in 2001-2-3. Interest rates had nothing to do with it.

Look at California during the 1970’s, when interest rates were astonomical. You would have done well to have invested there in 1970 and sold in 1980.

I challenge you to identify any period of time in the past 150 years when all local real estate markets moved together. It just does not happen.

There is no ‘overall market’ - Posted by John Corey

Posted by John Corey on May 11, 2006 at 04:39:34:


Michaela was trying to explain how the premise of your question is flawed. There is no national market and therefore no answer to the question.

Real estate is NOT like the stock market.

I doubt you could show how the vast majority or RE markets are going up, down, or even side ways. In one city there is more than one RE market. Some cities have a market per school or school district. There is no useful definition of RE market.

For some people they are waiting for the up market to start as they have not seen rising prices over the last 5 years. For other people they clearly can see falling prices. Then there are those who look around and see prices rising.

I understand that you are new to RE and have not seen a buyer’s market before. It is difficult to make comments about your specific market without knowing what market you are in (you would have to define the ‘market’).

Interest rates are the key variable that is national in nature. Hence rising interest rates are less positive for most RE markets than stable or decreasing interest rates. Savvy investors find deals in all types of markets as they do not pay retail so they do not care as much about retail prices. Different strategies work in different markets so the key is to recognize the conditions and then pick the strategy that fits. Similar to a tool box with different tools. Knowing when to use a hammer vs. a screwdriver, etc.

You ended with a question about how long the down cycle will last. There is no answer. Many markets I know are in an up cycle (using your definition). Others have been in down cycle for over 5 years. Markets are very local and respond to local conditions plus interest rates.

John Corey

Re: Regional - Posted by Max-Va

Posted by Max-Va on May 10, 2006 at 11:07:28:

If someone could answer this question they would be richer than Bill Gates. No one can answer this a feeling or guess is the best you can get.
Here is my guess somewhere between 6 months to 25 years

Re: National Factors Do Not Overide Local - Posted by JohnK

Posted by JohnK on May 18, 2006 at 22:36:49:

“I challenge you to identify any period of time in the past 150 years when all local real estate markets moved together. It just does not happen.”

It’s happening today. All markets are global these days. Where do you think lenders’ money comes from nowadays…Mom and Pop local buisnesses?

In the past few years, a lot of the money for lending came from overseas. Those sources are about to dry up, because the future returns have more or less evaporated.

So what do you think happens next?

The smart money left real estate LAST year. Good luck!

Great Depression - Posted by Gene

Posted by Gene on May 11, 2006 at 14:29:46:

>>>>I challenge you to identify any period of time in the past 150 years when all local real estate markets moved together. It just does not happen.>>>>

I am not sure it all crashed but most did.