ANALYZING THE REAL ESTATE MARK Lyrics

a___YZING THE REAL ESTATE MARKET ..

Real estate, once largely overlooked in our economy, is now carefully scrutinized by economists. Current research confirms that the real estate market is more focal to national economics than originally thought. Millions of dollars routinely flow through the buying, selling, and development processes.

Unique Forces at Work
Real estate has always intrigued researchers due, in no small way, to its unique qualities that make a___ysis and predictions somewhat complex. See illustration below.

The Impact of Fixed Location
Location, location, location! Residential and commercial buyers routinely differentiate seemingly identical properties by focusing on fixed location factors, e.g., access to transportation, proximity to services, surrounding properties, travel distance, distance to market, property taxation, and compatible land uses within the area.

Two similar structures in different locations can realize significantly different prices. The same is not true for other products/services. For example, the car dealer's location does not normally dictate automobile price, nor does the cost of groceries align with the grocery store?s view.

To compound matters, slow/adjustment and local market considerations affect price. One location may offer similar features, but supply is limited. Immediate demand drives up prices of existing inventory, particularly given time delays to bring new construction to market. Other local circumstances may compound the dynamics, e.g., a freeze on building permits due to lack of municipal services.

Overheated Markets and Corrections
Buyers should ultimately balance sellers in a perfect marketplace. But, countless intervening factors make real estate cycles at best difficult to predict, at worst destructive. The amplitude of a cycle can have far reaching effects. Simply put: How far is up and how long is down.

Economists are keenly interested in real estate ups and downs. Little wonder, real estate has displayed disturbing boom/bust cycles. The imperfect allocation of resources can have disastrous economic impact.

Increasing consumer confidence, a seller's market, and lack of supply can give way to frenzied buying and market bubbles.
The bubble of buyer excitement grows from its own momentum, with little or no economic justification.
Frenzied activity in the bubble typically leads to severe market corrections.
Ultimately, the market correction inflicts significant economic damage, e.g., unemployment, large equity (value) losses, oversupply of products and services, and financial hardship including foreclosures and powers of sale.

Unique Real Estate Market Characteristics
No Standard Product
Uniqueness of residential and commercial properties.

Local Real Estate Market
Immobile, impacted by local market forces and situations.

Fixed Location
Largely fixed in nature; cannot be taken to the market.

Market Not Standardized
Centralized control has proven difficult; MLS provides some form of order to trading activities.

Slow Supply/Demand Adjustment
Supply/demand forces impacted by unique market variables, i.e., time to introduce product and to deplete available inventory.

Private Transactions Buyer/seller transactions are typically private matters; lack immediacy of bid/asked and sold information as in the case of the stock market.

How imperfect is the market? The consequences can be devastating, if not properly understood and contemplated.

A Casualty of Imperfect Markets

Activity (Developer A) Market Status Forces and Factors
Contemplates Building Landlord Market/ High Renter Demand No construction.
Adverse rental legislation being reviewed.

Arranges interim financing Landlord Market/Overheated Vacancy rate lowers to less than 1%.
Government offers financial incentives.
Lenders actively pursue developers.

Starts Construction Landlord Market/Bubble Grows Favourable financing-many starts.
Numerous developers enter construction phase.
Rents continue rising given critical shortage.
High migration levels fuel the shortage.
Entry of new units slowed by red tape.
Negative publicity about the shortage increases.

Delays in Completion Minor Market Correction/
Excess Construction Begins Government responds with rent controls.
Financing moves to other opportunities.
Economic downturn and rising interest rates.
New units start appearing on the market.

Completes Building Severe Market Correction Bulk of new construction now on market.
Vacancy rate soars to double-digit.
Financing dries up.

Declares Bankruptcy Recession Developers exit given adverse legislation and
economic realities.

Curiosity

Rising Equity, Financing, and Bubbles

Interest rates may have greater impact on market bubbles than originally contemplated. Financial experts are concerned about equity borrowing. A buoyant market produces increased property values. With mortgage rates hovering at their lowest in decades, owners are creatively addressing other financial burdens by borrowing against increased equity.

Mortgage funds are then used to maintain lifestyle, acquire goods, and pay off high interest credit card debt. To outward appearance, the economy is expanding. Behind the scenes, rising real estate equity is driving the momentum, with the debt boom close behind. No real accumulation of wealth is occurring, only manipulation of mortgaged equity. A correction could prove onerous if real estate values decline in an over-leveraged marketplace.

Study Links

Encyclopedia

Real Estate Market
Real Estate Cycle

Real Estate Cycle

(see also Real Estate Market)

The real estate market generally moves through phases similar to general business cycles. However, real estate may demonstrate more p___ounced peaks and valleys. Prosperity can occasionally linger in the marketplace, buoyed by fervently optimistic consumers and speculators. Conversely, recessions deepen unnecessarily as developers flood an overheated market with new structures, only to see consumer demand vanish before their completion. On a more optimistic note, real estate markets have traditionally tended to be on the leading edge of the recovery cycles as improved economic conditions emerge.
Application

Economists have long debated the existence of both long- and short-term cycles operating in the real estate market. However, to date, both defy the regularity and consistency necessary to permit accurate predictions. Many believe that the long cycle is driven by demographics (e.g., age composition, marriage patterns, population changes, and migration), transportation patterns, macro economic growth cycles, and long-term government policies. The shorter cycle appears affected predominately by interest rates, consumer confidence, and general economic conditions, particularly within the local area or region.

Some argue that the current, long-term cycle originated in the mid-forties with the appearance of baby boomers, post Second World War consumer confidence, substantial immigration to Canada, favourable government regulations, and an expanding easy money policy in both public and private lending institutions. The 1945-2000 period appears as an extended recovery/prosperity curve in a long-term cycle, following the disastrous impact of the depression years. Others dispute the long cycle theory but point to the sustained attractiveness of real estate holdings. Despite various fluctuations, the size and strength of real estate markets have moved in progressively upward trends.

Other industry observers contend that the real estate market has demonstrated consistent short cycles. The duration seems to be approximately every six to ten years. However, it is important to emphasize that the length and intensity of the prosperity, recession, and recovery stages may vary considerably by geographic locale. As with extended cycles, conflicting opinions must be noted. Some a__ert that the existence of short cycles is largely illusory and too simplistic to address economic complexities in the real world. These individuals insist that unique events in the marketplace (e.g., credit restrictions, short-term housing scarcity, government policies, and employment trends), randomly impact the housing market, thereby creating unusual, often erratic activity that defies accurate cyclical prediction. Such movements may not be recession/ recovery cycles but merely statistical evidence of the constant imbalance of supply and demand. Based on this explanation, economists may be force-fitting market blips into neatly packaged cycles where none really exist.

Obviously, the entire topic is one of ongoing investigation.

Figure R.5 illustrates variances in a real estate cycle compared to a business cycle