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To Every Season, Turn, Turn, Turn

Posted: 21 Sep 2012

Based on research over the past century, the average real estate cycle lasts about seven years. A cycle is defined as either one market peak to the next market peak, or market trough to the next market trough. Understanding where the market is in the real estate cycle can help buyers, sellers and investors make better decisions anywhere, including here in Aspen.

Aspen real estate

Four phases make up the typical real estate cycle. The first phase, referred to as the stabilization phase, is normally marked by a high point in the overall inventory of properties on the market for sale and a slowing or cessation of a decline in values. This stabilization phase is followed by the recovery phase which is a period of time where prices and volume of sales stabilize and the inventory of properties for sale began a slow but steady decline. As the inventory declines and demand grows, the market enters the third phase, referred to as the expansion phase, where property values start appreciating as demand starts to outstrip supply pushing the market to higher and higher values.

The expansion phase of a market can unfold over several years, and as we observed back in the last expansion phase from about 2004 through 2007, can often lead to price appreciation that exceeds the intrinsic value of the underlying assets, or what's referred to as a boom scenario. The extent of a boom scenario is greatly dependent on the availability of capital flowing into the real estate market. As we observed in the mid-part of the last decade, easy mortgage money fueled an extended and excessive boom in the real estate market, not only in Aspen, but across the country. The expansion phase is followed by a correction phase where market reality sets in and property prices adjust to intrinsic value, and in some cases depending on the extent of the expansion phase, may actually decline below intrinsic value offering opportunities for savvy investors. The last expansion phase of the Aspen real estate market ended in the fall of 2007 and the correction phase took hold through the fall of 2009 when the market bottomed. In the stabilization phase, it's often possible for properties to be purchase at prices below their replacement costs i.e. a reasonable land costs plus construction costs.

For savvy investors, this is the time to buy existing homes and commercial properties. The thinking is why build new when you can buy existing for less. This is also not the best time to be a seller, since there are normally more sellers than buyers during this phase and greater supply than demand means lower prices.

The second phase, recovery phase, which is where the Aspen market is likely now, is still a great time to buy existing homes since prices are still at or near their low point; however, as the available inventory declines there are fewer choices to buyers. This is also normally a good time to buy land in anticipation of the start of the next market phase, the expansion phase.

It's very likely that after this year's Presidential election, the Aspen market will enter the expansion phase as prices start to appreciate again as the available inventory of existing homes declines more dramatically. The strength of the market upswing of this upcoming expansion phase will greatly depend on the amount of capital flowing into the Aspen area for home purchases from buyers and lenders. With the hangover from the last expansion phase still fresh in everyone's mind, it's like that upswing in market activity will be healthy, but not excessive, as we experienced in 2004 through 2007.