Waves of the Islands

November 16, 2008

The first question we as real estate agents are asked is, “How is the market doing?” We don’t always tell the truth. Many times we say, “It’s a tough market right now.” That’s not really true. We have one of the greatest markets in our life time! I suppose you would like to have some explanation at this point, so let me explain real estate cycles.

Real estate markets are always in a cycle and constantly on the move. These cycles occur whenever supply and demand gets out of balance. When the sellers supply exceeds the buying demand; it becomes what is referred to as a buyers market. It is hard to predict but if over a period of time, you notice that fewer listings are selling; you are moving toward a “Buyers Market.” When stronger buyer demands exceed the seller supply (fewer listings); it is referred to as a sellers market. If over the same period of time, more listings are selling; you are moving toward a “Sellers Market.” The key factor in cycle movement is always supply and demand. It’s a no-brainer, right? Stay with me now. It just makes sense. The more properties that are listed for sale, the more choices the buyers are given; this lessens the bargaining power of the seller which in turn drives down prices. The fewer the number of properties that are listed for sale increases the bargaining power the seller which keeps prices up.

I wish I had the capability of drawing a graph to illustrate a visual comparison between “Buyers Market”, and “Sellers Market,” but my system doesn’t allow it. I’ll try to explain it in text form. If you’ll follow my instructions you will develop a better understanding of cycle differences. Take a piece of plain paper and draw a big box. Above the box in the top left corner write “Listing Inventory” and just beneath the line in that same corner write “More Listings.” On the same, left side, just above the bottom line write “Less Listings.” Now on the right hand side, just above the top line write “Selling Price.” Just below that line write “Higher” and then drop down to the bottom of the box on the right side; just above the line write “Lower.” You should now have a good template to work with.

Now let’s assume that the width of your template represents a period of one year. Begin at the bottom left corner that says less listings (this is what we experienced in 2003-2005). Draw a jagged line diagonally across to the top right corner of your template stopping somewhere in the higher selling price. The line shouldn’t be straight because it represents weekly sales that go up and down from week to week.

Now let’s complete the illustration by drawing a line from the top left hand corner that says more listings. From that point, again draw a jogged line diagonally downward to the bottom, right side somewhere that says lower price. Congratulations! You have completed your graph so now let’s read it.

On the left side of the graph, between more and less listings, should be a large open space which represents that this period of time we are in a “Buyers Market.” Now look directly across the graph to the right side. This large open space represents the period that is considered a “Sellers Market.”

Now look right in the middle of the graph. This period of time is considered a “Balanced Market” where the advantage belongs to neither the buyer nor the seller. This is the most desirable time during a cycle but it is usually a short period of time.

We never know how long it takes for these cycles to transition but history does repeat itself. Let’s take a look at the last twenty years and see if we can determine the length of our current cycle.

· 1989-1994 Buyers Market

· 1995-1997 Balanced Market

· 1998-2004 Sellers Market

· 2005 Somewhat a Balanced Market

· 2006-2008 Buyers Market.

We do have a great market right now but it is a huge buyers market. I have never seen so many great investment opportunities to present to prospective buyers. At the same time I have never seen so many sellers forced to sell at losses like we are seeing today. We are getting much closer to a balanced market so sellers should hold on if at all possible. We know from looking at history that after the market balances, it will transition into a sellers market.

I realize this is a fairly lengthy report but I hope it will help you have a better understanding of market cycles and transition periods as they relate to real estate market conditions on the Alabama Gulf Coast. Next week I will attempt to discuss global and national cycles.

Respectfully,

James Anderson, CDEI™, GRI

Broker Associate

RE/MAX of Orange Beach

Direct: (251) 980-2505

Cell: (251) 979-2530