Are We in a Recovery or an Expansion Market?

Economic markets are cyclical, and real estate is no exception. Typically, we see a period of expansion, followed by a contraction, followed then by stabilization and recovery, and again into expansion.  For those of you that have been through more than one real estate boom and contraction, you may be asking, “Where are we in the cycle?” Here's a breakdown of how those cycles work.

Policymakers work on reducing the impact of an unstable economy, and try to move to the path of recovery. Some techniques used by policymakers include creating new job opportunities, controlling inflation, and stabilizing the currency exchange rate. Financing should remain flowing for business start ups and growth plans as a way of injecting money back into the economy. Inflation must be controlled because high inflation discourages investors to purchase products or securities, since they are more expensive than before.The overall goal should be to create consumer confidence, encourage investment, and stimulate business growth.

This is an increase in business activity after the lowest point of the depression has been reached. Entrepreneurs begin to feel that the economic situation was after all not so bad. This leads to improvement in business activity and greater confidence in the economy. This in turn leads to stronger industrial production, which picks up slowly and gradually. The volume of employment also steadily increases. The analysts and economists are able to track by watching for a slow rise in prices accompanied by a small rise in profits. Wages also rise. New investments take place in capital goods industries, which in turn increases GDP and return on investment. The banks also expand credit. Pessimism is gradually replaced by an atmosphere of all round cautious hope. There seems to be
greater demand than supply.

This stage is characterized by increased production, high capital investment in basic industries, and expansion of bank credit, high prices, high profits and full employment. There is a general feeling of optimism among businessmen and industrialists. Production increases to supply demand, sometimes leading to the emergence of boom. In this stage of rapid expansion we see high stocks and commodity prices, high profits, over supply and overfill employment. There is undue optimism among businessmen and industrialists who make additional investments in the various branches of the economy. The number of jobs exceeds the number of workers available in the market. Such a situation is known as overfill employment. Profits touch a new height. Businessmen further increase their investments. Runaway inflation raises its head in all its ugliness. Prices risk sky-high. The tempo of boom reaches new heights. There is an atmosphere of over-optimism all around. This oversupply carries with it seeds of self-destruction. Bottlenecks begin to appear in various sectors of the economy.

Contraction phase
Over-optimism is replaced now by over-pessimism characterized by fear and hesitation on the part of equity and business leaders. The failure of some businesses creates panic among businessmen. The banks begin to withdraw loans from business enterprises. With the downturn of demand and lending, more business enterprises fail. Prices collapse and confidence is shaken. Building construction slow down and unemployment appears in basic, capital goods industries which gradually spread to other industries as well. As more unemployment happens it leads to fall in income, expenditure, prices and profits. Recession has a cumulative effect. Once a recession starts, it goes on gathering momentum and finally assumes the shape of depression. It is a protracted period in which business activity in the country is far below the normal. It is characterized by a sharp reduction of production, mass unemployment, low employment, falling prices, falling profit, low wages, contraction of credit, a high rate of business failures and an atmosphere of all round pessimism and despair. All construction activities come to a more or less complete standstill during a depression. So after that charming and uplifting lesson, where is the nation, Texas and our local metros in the cycle?

US – Stabilization
The Federal Reserve lowers rates, then gradually allows increase, as housing and job growth historically follow. When the rates are at zero, the Federal Reserve uses other stimulus, such as quantitative easing (QE) to encourage growth. This has been mildly effective. As the Fed reduces stimulus, rates will rise.

Texas – Recovery / Expansion
Supply and demand is in balance, and home/land value appreciation meets or beats inflation.

Austin – Expansion
Economic housing formation as well as other real estate channel demand exceeds supply. Housing and real estate appreciation stronger. Austin is about 2+ years from the bottom of the market; we have seen healthy demand and now are seeing banks, developers, and builders trying to fill the void left by no activity the last 6+ years. Austin has a ways to go in this cycle hopefully. The one governing factor in Austin is the length of entitlement, which is about 2 ½ years for development. This has been helpful in preventing quick development and sometimes over development to meet the immediate need.

Houston – Expansion
Economic housing formation as well as other real estate channel demand exceeds supply. Housing and real estate appreciation stronger.

San Antonio – Recovery
Demand has picked up, putting pressure on supply.

Dallas/Fort Worth – Recovery
Demand has picked up, putting pressure on supply.

Why is Texas so different from the rest of the United States? Two words: job creation. Since 2009, 43% of all jobs created in the US were created in Texas. Over the last six months, nearly every facet of the U.S. economy has shown improvement, and the real estate market is no exception. 

Source:Mark Sprague, State Director of Information Capital