Historical Cycles Should Keep Optimism High Despite Florida Housing Market Down Swing

Anybody thinking about buying or selling a house this spring probably is asking the same question, writes real estate columnist Kenneth Harney. In terms of historical real estate cycles, is this a smart time for me to be buying or selling in the market? After a record five-year boom in prices and sales, isn’t it obvious to everybody that the party’s over?

Particularly in the South Florida housing market, along with other red-hot areas such as Phoenix and Las Vegas, is there any doubt? Will Florida home loans increasing in cost and the rapid pile up of inventory cool the market even further? Could appreciation rates sag, or even go negative, in the near future, making any purchase made this spring look like a dumb move a year or two down the road?

All intelligent questions. Ones nobody has the answers to.

We can’t predict the future, but research on the periodic ups and downs of real estate cycles offers some new insight into the timing, lengths of ownership and rates of return on housing investments. Research is showing that from 1986-2005, appreciation in some parts of the U.S., including California, Texas and New England, went through boom and bust cycles. In other areas, especially the Midwest, appreciation was steady and modest with almost no declines.

The study was conducted by Mark Milner, chief risk officer for PMI Mortgage Insurance, a major home loan underwriter that could lose large amounts of money when and if property values decline. The research used quarterly price data provided by the Office of Federal Housing Enterprise Oversight, which tracks home values in more than 300 metropolitan areas. Milner says that his experience on timing home purchases hasn’t been without setbacks.

“I’m one of the unlucky ones,” he said. “In 1989, I bought a home in Los Angeles — right before the bottom fell out of the market. When I got a job in another city and sold seven years later, I lost my down payment and everything I’d put in since, and I even wrote a check to the bank for a little bit extra.”

Ouch. Many homes in the Los Angeles area lost 25-30 percent of their value during the early 1990s, but leveled off and began appreciating rapidly again by the middle of the decade. Over the long run, Milner says he has made good on his investments in real estate.

“Here’s the thing. I bought another house, and then still another after that,” Milner said. “Despite a loss during the first seven years, in 17 years of homeownership, I’ve recouped that initial loss and a lot more — enough to make sending two kids to college a lot less daunting.”

Milner’s study assumes a 20 percent down payment on the median-priced home in each of the 50 metropolitan markets. It tracked the quarter-by-quarter appreciation performance of the median home, and came up with a statistical proxy for returns on investment in each market area. Some of the report’s broad conclusions are relevant to the questions posed above about timing and cycles and profits and losses:

• Anybody who thinks real estate values can’t go down is out to lunch.
• When local economies lose jobs, demand for housing drops and property values do as well. Markets where prices have shot up because of investor speculation are particularly vulnerable if and when local economies go flat.
• The risk of loss is especially high for buyers who do not hold on to their properties for extended periods. A simple rule is that the longer you own a house, the greater the probability of making a profit on it, even if the local economy goes stagnant for a while.
• When looking at all 50 metropolitan areas from 1991-1995, owners who sold after just five years experienced the biggest losses, with 12 percent of owners losing about 10 percent of their investments. People who purchased during that period and hung on for 10 years ultimately made money, despite the recession years at the onset.
• From 1996 to 2000, buyers who sold within five years of purchase had a 1 in 20 chance of losing money, with annualized losses averaging 10 percent. From 1986 to 2005, 99.6 percent of home buyers who held on for at least 10 years made money.

The bottom line? Timing most definitely matters — if you buy at the top of an inflation cycle as a speculator and sell into an economic down cycle a couple of years later, you can lose a lot of money. But if you buy a house and live in it for 5-10 years, the odds are good that you will come out ahead. Even if you’re entering the Florida home loan market at what seems like the wrong time.