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What drives housing cycles

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Housing cycles can be challenging for people whose jobs are directly related to the volume of home sales or mortgage originations. In the two decades from 1980 to 2000, there were approximately 620,000 to 820,000 Realtors in the United States. That figure jumped from approximately 750,000 at the end of 1999 to more than 1.3 million last August, according to a recent commentary by Lawrence Yun, chief economist of the National Association of Realtors, or NAR. Due to last year's downturn in home sales, the association's membership "now is turning sharply lower," Yun wrote.

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U.S. mortgage companies, which hired like crazy during the mortgage boom of the early 2000s, shed more than 111,000 jobs in the 12 months that ended Feb. 29, 2008, according to U.S. government data. More than 14,000 jobs were lost in the first quarter of this year alone, according to an industry newsletter. Large numbers of construction jobs have disappeared as well.

How supply and demand work
Housing markets are cyclical because "the relationship between supply and demand is not in equilibrium," says Retsinas. This lack of equilibrium results in booms and busts that recur in cyclical patterns of varying duration.

A real estate boom, or "seller's market," occurs when buyers want to purchase more homes than are for sale at current prices. These top-of-the-cycle markets typically are characterized by rising prices, multiple offers, fast sales, easy financing and expansion in new home building.

A real estate bust, or "buyer's market," happens when more homes are for sale than buyers want to purchase at current prices. Characteristics of these bottom-of-the-cycle markets typically include falling prices, slower sales, financing and affordability constraints, short sales, foreclosures and a contraction in new home construction.

Home prices turn up and down over time
U.S. median home prices have climbed steadily upward each decade for at least the last 40 years. In 1987, for example, the national median was $85,600. Ten years later, in 1997, the median was $126,000, and 20 years later, in 2007, the median was $219,000, according to the NAR. But home prices also experienced a severe downturn in the early 1990s and, most recently, a major boom in the mid-2000s.

Median home prices
1987 1997 2007
January $82,900 $123,400 $209,300
February $85,600 $121,200 $212,400
March $85,200 $123,700 $216,200
April $86,000 $124,700 $219,300
May $86,000 $128,000 $221,900
June $85,900 $131,400 $229,200
July $88,300 $131,000 $228,500
August $86,500 $131,600 $223,700
September $85,500 $131,300 $208,600
October $84,600 $129,300 $204,800
November $85,000 $129,500 $207,300
December $85,400 $131,400 $205,000
Source: National Association of Realtors
 
 
Next: Homeowners who plan to stay put needn't worry ...
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