Exchanging Equity in a Down-Trending Cycle (and other fancy-pants talk)

I attended a Century 21 Seminar this morning. It was up at the Desert Ridge Marriott (which is huge and gorgeous, by the way) and was intended to be the kick-off event for an Arizona-based revitalization of the company that Century 21 is starting.

Basically it was about half hokey-stand-up-and-cheer-yay-Century-21 and half interesting-information-about-the-real-estate-market-today-and-how-to-tackle-it. There were a few bits of the latter that I thought were interesting enough to pass on to you, Dear Readers (or as I like to call you, Dad).

The main speaker, Jim Droz, spoke mainly on the premise that the real estate market right now is a changed place, which we all know. It’s not the hotbed of activity and price increases that it was two years ago, obviously. But he went on to say specifically, we are now in a downward trend that will likely continue for the next 3 to 4 years. His information shows that real estate continues in 4 to 5 year cycles; one for the up cycle, then one for the down cycle; and that our last up cycle peaked in August of 2005. He predicts that our next up cycle peak will happen in 7 to 11 years or the years 2014 to 2018.

Our market is currently overvalued (along with Washington state, Hawaii, Nevada and California out here in the west) and when house markets are overvalued or undervalued they will eventually ‘revert back to average,’ according to Droz.

I know all of this sounds like information one would need a time machine to have. How can you say for sure that home values will continue to decrease for three more years with total certainty? You can’t, obviously, say it with total certainty. However, his information makes logical sense. Here in Arizona we are currently paying more on average for our home loans in respect to our incomes than one can reasonably afford. That fact alone dictates that something has to change. Since it is unlikely that employers across the board will decide to offer 37% raises, it makes sense that home prices will cycle down-wards until we reach stasis again.

Another point Droz made about the market is that to most people, this information about the currently declining prices is irrelevant. The fact is that for most average consumers, if they’re looking to sell, they’re also looking to buy. Basically, they will just be exchanging equity. If they sell for lower this year than they could have two years ago, it doesn’t really matter because they will also be buying lower than they could have two years ago, and they’ll end up in approximately the same position.

If you are an investor not looking to 1031 exchange (again, just exchanging equity), the next three years should continue to be a good ‘buying’ period, and if you can wait six or seven to sell, you’ll be in the money.

Anyway, for me this firmed up some general ideas I had about the market we’re currently experiencing and gave me the verbiage to convey it to my clients. I hope it’s interesting to you, too!