Real Estate Cycles – Norms, Exceptions, and Expectations Shaping 2023

Reprinted from The Luxury Home Marketing Institute

As we move out of two and half years of one of the most dynamic luxury real estate markets and transition to a new cycle, there is still an underlying apprehension as to what 2023 will bring, especially in the upcoming spring market.

For the most part, expert and media expectations of a recession causing major impacts on the market have quieted, and the talk is now of ‘correction’ rather than ‘crash.’

It has long been a common belief that the real estate market is cyclical, with predictable patterns emerging both in the short term as well as over multiple years. It is contended changes are not random, and most patterns involve cyclical trends that recur both seasonally and in the long term.

However, there is also an expression “there are always exceptions to the rule,” and certainly, the last three years have seen outside influences impact the speed of change and some of the expected norms in traditional cyclical periods.

Cyclical Trends

Understanding real estate cycles are important as they can provide reliable information about how andwhen to buy and sell, particularly when a market is moving through a transition.

Typically, the short-term real Testate cycle in North America happens over the four quarters of the year, when generally the overall market sees definite and distinctive ebbs and flows. In normal years, expectations are that the winter months will see the build-up of interest by sellers to list. This is in anticipation of buyers wanting to purchase in the spring market, which is usually the most prevalent time for buying and selling.

Summer typically sees a decline in sales, and as inventory remains on the market longer, the negotiation power starts to shift to the buyer’s favor. Fall sees inventory levels that have increased significantly during September create the second busiest time of year, only for inventory and sales to decline as we head toward the end of the year.

Driven by economic forces, the long-term cycle usually overlays the short-term’s cyclical pattern sand is responsible for providing a bigger picture of the status of the market (i.e., whether it’s buyer, seller, or balanced) and the overall direction of consumer demand.

It is comprised of four main phases: Peak, Recession, Trough, and Expansion, and unlike short-termcycles, there is no exact science on when and how long each of these phases last.

Historically, these cycles will be experienced consecutively as you cannot have a sustained expansionor peak without an eventual recession and trough. How strongly each of these phases impacts the market also varies considerably.

Norms Return

Current expectations are that the market will return to more normal patterns in 2023’s short-term cycle, so it’s highly likely a marked uptick in properties entering the market will occur this spring.

Equally, it is anticipated that sellers will no longer expect over-asking or multiple bids; instead, their pricing will reflect an understanding that price growth has slowed with the need to counter increased costs associated with buying.

In the long-term cycle, the market has entered into the Recession Phase, an expected transition as nomarket can indefinitely continue in the Peak Phase of high demand and increasing prices, so it naturally finds its tipping point.

Typically, during a Recession Phase, we would see expect to see downward pressure on prices as supply exceeds demand. Our analysis of 125 markets in this report indicates that inventory levels are increasing, and so long as there isn’t a corresponding uptick in sales, the spring could well see a slight correction in prices.

Exceptions and Contradictions

However, one of the reasons that we will probably not see a significant decrease in prices typically experienced in a Recession Phase, is that inventory levels are still below historic norms, and demand for desirable properties remains relatively stable.