The real estate market is actively linked to the general economy. Still, it’s also prone to regular cycles characterized by booms and downs. Knowing the four primary processes of the real estate market and the housing market’s complex nature is essential for home buyers or investors. It is crucial to decide on wise strategies to adjust to market fluctuations.
What Is the Real Estate Market Cycle?
The cycle of the real estate market is an economic pattern of activity in the housing market with four phases:
Recovery
Expansion
Hyper-supply
Recession
The concept of forecasting cycles in markets is a concept that dates back over a hundred years. The U.S. housing market is believed to be in one of the four phases at any moment. Real real estate agents, homeowners, investors, home buyers, and many others may utilize the current stage in their plans to purchase, hold, or sell.
Although it’s hard to estimate their exact duration, studies suggest that most real estate cycles run for between 11 and 18 years. Events such as those caused by the COVID-19 pandemic can be a significant factor in the accuracy with which experts can predict how the housing market will be affected.
The Four Phases of the Real Estate Market Cycle
Four phases in the cycle of real estate can be categorized as follows:
Recovery
The recovery phase usually occurs after a low-point in recession, when rental and occupancy rates are lower and new construction is slow. The stage of recovery may be difficult to see for many homeowners and renters, but it is still akin to recession. Experts look for trends like increases in the number of people who visit homes, occupancy rates, and rising demand to determine if the market is in the recovery phase.
Expansion
In the expansion stage, there is an era of expansion and increased optimism for consumers as the economy grows. The rates of vacant homes are low, rents and the value of property are growing, and the rate of new construction has risen with demand and supply reaching an equilibrium.
Hyper Supply
Hype supply is an extreme term in which supply has surpassed demand. This may result from an oversupply of inventory on the market, an economic slowdown, or a triggering event that has caused demand to decrease.
Recession
A phase of recession phase is an economic period or market contraction. In a recession, things can be difficult for investors and homeowners since property values decrease and financial pressures increase. The interest rates may rise, foreclosures will increase, and supply outweighs demand. This is accompanied by high rates of vacant homes.
Why Is the Real Estate Market Cycle Important?
The real property market plays an integral part in the U.S. economy. Its performance, in conjunction with its cycles, can be a sign that reflects the general state of the economy.
Understanding the real estate market cycles is crucial to making informed decisions when buying, selling, or retaining properties. Also, knowing what stage the real estate cycle is in lets homeowners and investors predict the property’s value or potential income more accurately.
What Factors Affect the Real Estate Market Cycle?
The markets for real estate are subject to influence by many factors, but the most essential variables to take into consideration are:
Economic Situation
Economic indicators like GDP growth, employment rates, and consumer consumption can influence the market for real estate. Consumers can spend more and easily buy real estate when the economy is growing or trending upward. In contrast, if the economy is slow or is trending downward in its direction, the real estate market will follow suit.
Demographics
Population increase, along with trends in migration, can influence the real estate cycle. For instance, the entrance of large numbers of people into the market for housing, like millennials, can cause trends to change, such as renting instead of purchasing, or induce an increase in the demand for housing. Baby boomers who are retiring, however, on the contrary, may drive shifts in the market when they reduce their size or move to areas of vacation.
Rates of interest
Interest rates set by central banks influence the rates of mortgages and borrowing costs. The high-interest rates can limit a prospective homeowner’s buying capacity and prevent people from buying. Lower interest rates can reduce the costs of financing a house more affordable. They may cause an increase in the market for housing.
Policy of government
Government policy, including tax credits, tax deductions programs for home buyers, incentives, and stimulus plans, can aid in reviving the economy and spur investment in the housing market.
Strategies for Buying or Investing Based on the Real Estate Cycle
While no specific strategy can be followed when buying a home or investing during a particular market phase, the investment trends tend to align with the real estate cycle.
Recovery
This stage is generally an ideal time to invest in properties with a low value, like foreclosures in regions with growth potential. Home buyers can benefit from affordable prices but should be cautious in leveraging too much of their financial resources or investing in an area that may not appreciate much in the future.
Expansion
With the market gaining momentum, demand and prices are increasing. Investors may think about value-add strategies, such as renovations, in addition to more traditional buy-and-hold investments, multi-family properties, and commercial investments. Buyers of homes should be prepared for increased competition and more expensive prices. They should concentrate on areas with a solid chance to grow or develop over time.
Hyper Supply
Due to the oversupply of homes available, the prices will begin to stagnate or decrease. Investors generally put off buying new homes and instead concentrate on securing their properties. Still, they must be cautious about spending too much. This can be an excellent moment for buyers to buy as prices stabilize or decrease due to a drop in demand. However, buyers should consider your property’s location and long-term perspective.
Recession
Suppose the market is in an economic downturn. In that case, the prices are likely to drop dramatically, and there may be a more significant number of distressed homes. A few investors will be looking to avail of substantial discounts by exploring foreclosures or bank-owned houses. It could be an excellent opportunity to buy for those in good financial health. But keep in mind that recessions are often regarded as high-risk timeframes.
The advice we’ve shared is basic guidelines. Researching the past data economic indicators, and other developments in the areas you’re looking to put your money in is essential. Consider your risk tolerance, and talk with real estate experts knowledgeable about the market you’re considering. Ultimately, you must be prepared and willing to alter your plan of action based on current market conditions and be flexible, as it is crucial to achieving success in real estate.
