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What drives housing cycles

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Prices naturally fluctuate from month to month due to seasonality and other factors. Median prices are a relatively crude instrument, because they aren't adjusted for inflation, lump numerous local markets into broad geographical areas and don't account for variations in the mix of homes sold, a weakness that can tilt the median upward or downward. Nonetheless, median prices often are looked to as a broad measurement of housing market trends.

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Bargains may be opportunities for buyers
The chief risk that cyclicality poses for homebuyers and sellers is that local home prices may fall further as the cycle deteriorates.

Whether the current phase is a prudent time to buy depends on an assessment of future prices. Two indicators -- builders' concessions and loan delinquencies -- may suggest prices have bottomed out, according to Dotzour.


2 indicators that prices have hit bottom

Don't sell just to escape price declines
These indicators may also help sellers who've decided to wait a while before they put their home on the market. Discretionary sellers may be able to capture a "normal" price once builders have reduced their inventory and banks have sold off their supply of foreclosed homes. That "normal" price will be "lower than it was a year and a half ago, but not subject to artificial discounts from builders" or the effects of cut-rate bank-owned properties, Dotzour says.

Home sellers also need to consider what they intend to do with the proceeds of their home sale, Retsinas says. Those who plan to reinvest in another property, perhaps in a lower-cost market, may be able to recoup some of the reduced value on their current home through a lower price on their next residence.

Despite the inherent cyclicality, it's extremely difficult to "time" housing markets. Turning points are rarely apparent until after the fact, Retsinas says, and because all real estate is local, national trends may be meaningless in many markets. Even today, some housing markets have strong demand, little supply and prices on the upswing.

Homeowners who plan to stay put needn't worry much about housing market cycles, experts agree. "Over the long term," Retsinas concludes, "residential real estate does OK."

Marcie Geffner is a freelance real estate reporter in Los Angeles.

Bankrate.com's corrections policy -- Posted: April 24, 2008
 
 
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