Question

INDUSTRY OVERVIEW (Competitive Opportunities and Threats)

Industry: Real Estate

Industry growth:   What is the rate of growth in percentage terms of the Real Estate Industry (increase in industry sales averaged for five-year period). Where is the Real Estate industry in the life cycle - emerging, rapid growth, maturity, decline? Provide supporting evidence for your conclusion.

List credible sources for your information.

(This question is asking for information from the ACTUAL real estate industry in the US as of this date)

Answer 1

After six years of strong house price growth, the U.S. housing market is now cooling. House price rises are decelerating gradually. Demand and construction activity are falling, amidst rising interest rates. Homebuilder sentiment is also at its lowest in more than three years.

The S&P/Case-Shiller seasonally-adjusted national home price index rose by 5.16% during the year to November 2018 (2.92% inflation-adjusted), a deceleration from the previous year’s 6.09% growth and the lowest pace in more than two years.

Despite this, all 20 major U.S. cities continued to experience house price hikes, according to Standard and Poor’s, with Las Vegas posting the highest increase of 12.07% during the year to November 2018.
Home prices are estimated to rise in 2019, but at a much slower pace, and the number of homes for sale is expected to increase by a mere 1%.

The Four Phases of the Real Estate Cycle

The real estate market isn’t completely random. As far back as 1876, Henry George observed that housing is a cyclical business.

Phase I: Economic Expansion

• When businesses are growing and consumers are buying, the housing market tends to boom. Buyers flood the market and housing prices go up. It becomes a seller’s market, as properties are frequently overbid.

Phase II: Hypersupply

• At some point, either developers overbuild or consumers can no longer afford the sky-high home prices. Houses sit vacant on the market much longer.

Phase III: Recession

• A combination of factors such as high housing costs, rising interest rates or a cooling economy contributes to a housing slow down.

• Homeowners find their mortgages underwater and walk away. We see begin to see an uptick in foreclosures.

Phase IV: Recovery

• Eventually, property prices fall enough to lure buyers and investors back to the market. So begins the cycle again.

So Where Are We in the Cycle?

• Keep in mind that the housing market is really thousands of local markets: it can be the case that Seattle is cooling while Pittsburg is just getting started. However, looking at national indicators, it does seem that we are in the Hyper-Supply phase of the real estate cycle.
• Properties are sitting on the market for longer, and we are seeing a record number of vacancies.
• Whether this is a temporary slowdown or the harbinger of worse conditions to come is anyone’s guess.
• However, buyers should be especially restrained about dropping a lot of money on real estate this late in the game.

Housing markets as well as the overall economy develop unevenly. Business cycles are the result of the diverse dynamics of their development. The housing market, as one of the components of economic systems, is influenced by business cycles, at the same time affecting them as well.

In the terms of the business cycle stage as asked in the question, Hyper-Supply stage is very similar to the Maturity phase of the business cycle.