Is the Real Estate Market Actually Predictable?

Whether you’re looking to buy your first rental property or you’re a seasoned real estate investor looking to add yet another property to your growing portfolio, you’ll want to reassure yourself that you’re buying at the right time. It’s a common belief that the real estate market fluctuates in cycles, with prices rising and falling at predictable intervals—but is that really the case? And if so, is it really possible to time the market?

Annual and Multi-Year Cycles

First, let’s draw a distinction between annual cycles and multi-year cycles.

Annual cycles are somewhat predictable and based around home sales for each season. For example, one study by Redfin found that in Spring, 18.7 percent of homes sold above list price—and Spring was responsible for approximately 32.6 percent of all home listings. Compare that to Fall, when 14.7 percent of homes sold above list price, and it only featured 17 percent of all listings. In general, Spring is a better time to sell your home, but it’s not a total blowout, and can still vary by area. In other words, the annual cycle of property prices is fairly reliable—though not entirely make-or-break.

Then, there are multi-year cycles—an area subject to much more speculation and folk wisdom. Many people believe that home prices consistently rise, peak, and then either fall or stabilize based on somewhat fixed cycles. For example, home prices might rise for five years, then fall for a year, then stabilize, then begin a new growth cycles—a rotation of “boom” and “bust” periods.

These multi-year cycles, if predictable, would almost certainly vary by location. For example, Rose & Jones has stated that the property market in Sydney grows in seven-year cycles, with a four-year “boom” period, followed by a few years of stability or decline. However, the market in San Francisco could be completely independent from these cycles due to geographical, political, and other factors.

That said, housing prices (and economics in general) aren’t the purely rational systems we’d like them to be. There are exceptions to every rule, so just because the home prices in a given area have historically grown consistently in five-year periods doesn’t mean a sudden economic downturn or disruption in the neighborhood couldn’t sabotage that growth period.

Key Variables to Consider

There are many events and changes that could influence how the housing market changes, even within a historically consistent cycle:

Broader economic conditions. First and most importantly, any major change to the broader economy could impact housing prices, and quickly. For example, if interest rates go up, making it harder to buy houses, there will be a sudden drop in housing demand, and the average price of homes will fall. If a city sees the emergence of a massive employer, increasing the average income of the city’s residents and providing more career opportunities, you could see an increase in home prices (or the turnaround of a local decline).
Local installations or removals. You can also see a dramatic shift in general cycles with a new installation (or removal) in the neighborhood. For example, if a new park is introduced the neighborhood, or if a school receives top marks unexpectedly, it could significantly increase the value of all the properties in the area—regardless of where in the cycle those prices would otherwise be.
Neighborhood shifts. If the neighborhood undergoes a significant demographic change, it could also change how property values evolve. For example, if a property investor starts buying up all the houses in a primarily owned community and starts renting them out, it could cause a dip throughout the neighborhood.

Making the Call

You can use historical property prices in a given area to get a better understanding of both the annual and multi-year property value cycles in that area. Chances are, you’ll be able to find some general patterns. However, those patterns shouldn’t be used as the sole basis for your property purchasing decision; not only can cycles be disrupted by new and unexpected information, they also can’t tell you things like whether a home is, by itself, being sold for a fair price.

All in all, market cycles are real and somewhat measurable, but they aren’t perfectly reliable, nor are they consistent across the board. They’re best treated as a single tool in your decision-making toolset, and not as the biggest motivating factor for your investment decisions.

What do you think? To what extent is the real estate cycle predictable?

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.