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Real Estate Cycles Deeper Than Other Business

By Lewis, Constance | THE JOURNAL RECORD, October 14, 1988 | Go to article overview

Real Estate Cycles Deeper Than Other Business


Lewis, Constance, THE JOURNAL RECORD


Steeper and deeper are the peaks and valleys of the real estate cycle compared to those of the metro area's regular business cycle, according to local analysts.

Plotting the life line of three distinct real estate cycles between 1966 and 1987, a report by the city's Department of Management Information Systems graphically depicts how the market progressed from maturity to overbuilding, adjustment, acquisition and development in each phase.

In the report, titled "Oklahoma City, Status and Change," economic analysts Bob Sweet and Dr. Hong Yih Chang define a mature market as one in which supply and demand are at a parity and they describe how overbuilding occurs.

"Due to the unique nature of real estate, the supply of real property cannot be rapidly adjusted to its demand," they said. "For example, as population increases, developers perceive a rise in demand and they obtain financing based on this concept.

"At some point in time, employment, population, and personal income decrease ... but projects with committed funding continue, causing supply-demand imbalance in the market."

This has the effect of lowering prices and slowing construction, the evidence of which is seen in the adjustment stage, the third of the five stage cycle.

During adjustment, employment picks up, as does demand and the beginning of an absorption phase begins, according to their theory. When demand exceeds the inventory of property, construction begins and the development phase starts.

"Where are we now in this building cycle?" the report asks. "We are clearly in the acquisition stage."

Which begs another question, "How long before we move into the development stage?" The city's economists pinpoint 1985 as the start but they do not extend their graph into the future.

Citing the complexity of the real estate economy and the "unprecedented building boom of the 1980s" (coincidentally the energy boom) they say "the answer to this is not easy to discern."

Yet in observing Oklahoma's "twin towers of strength" - agriculture and oil - the former seems to be pushing ahead of the latter in terms of recovery.

If the trend continues, the ayalysts said it could cause this particualr acquisition phase to last longer than in the last major cycle, "perhaps five years."

But this phase is also different with respect to a decline in employment.

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