The Real Estate Cycle in 2006

The residential real estate market stands at a pivotal position in the spring of 2006. Over the previous few years, home values have risen rapidly almost everywhere. In many coastal areas, prices have more than doubled since 2000. Depending on the local area, prices are rising at single-digit levels, flattening, or slightly declining - indicating that conditions have returned to normal after a strong bull market. Proprietary mathematical techniques were used to classify markets and investigate their present status and likely future behavior.

A key finding of the study is that markets in areas where prices have not yet risen rapidly, affordability and job availability are high and economic conditions are strong, may offer the best opportunities for investment during 2006.

To take a long-term look at where the residential real estate market stands in a historical context, this study begins by analyzing the median sales-price index for existing single family homes published by the National Association of Realtors®, for over 100 metropolitan areas, from 1988 through 2005. Proprietary mathematical techniques were used to classify markets as cyclic, linear, or hybrid, and thus to investigate their present state of affairs and likely behavior.

Market Type

The concept of market type is presented and discussed in detail, with four distinct market types identified:

Cyclic Markets

Typically located along the coast and where there is little available land, this market type exhibits a behavior profile that moves in waves of ten to fifteen years in length. Examples include:

• San Francisco Bay Area
• Southern California
• Miami
• Honolulu
• New York City

Linear Markets

Exhibiting prices that move up a few percent per year with little variation and not in great waves or cycles, this market type is typically found in the interior of the country where there is abundant land available and slow, steady economic growth. In recent months a great deal of attention and investor interest has been focused on these markets, which are not likely to have tested their affordability limits and are not likely to be vulnerable to a downturn of magnitude. Examples include:

• Atlanta
• Nashville
• Wichita
• St. Louis
• Indianapolis

Hybrid Markets

This market type exhibits both cyclic and linear features and includes:

• Chicago
• Seattle

Catch-on Markets

The study also identifies some areas that required special investigation – particularly those which had behaved in a linear fashion, but recently experienced a strong move in prices up or down, in a departure from their long-term character. This surprising behavior has been classified as a catch-on phenomenon and was exhibited in:

• Las Vegas
• Phoenix
• Detroit

Scenarios
The analytics applied in the present study were used to suggest a variety of possible scenarios using current information and future conjectures about prices, interest rates, and metropolitan income. The advanced techniques of this study made it possible to discuss and analyze the effects and likelihood of five scenarios ranging from strongly optimistic to strongly pessimistic.

About the Author
Dr. Christopher Cagan, director of research and analytics for First American Real Estate Solutions, has more than a decade of experience in the areas of market research and competitive strategy for the real estate and financial services sector. Since joining RES in 2002, he has developed several patent-pending mathematical and algorithmic inventions, built multiple analytical products, and written numerous technical papers, presentations and studies. Dr. Cagan earned his bachelor’s, master’s and doctorate degrees in mathematics from the University of California at Los Angeles.