Knowing where the real estate market is headed is almost nearly impossible to predict correctly. Not to say that the real estate market in completely unpredictable, we can still analyze the past and make educated predictions about the future. However, before we start to go over the cycles in real estate lets first define the phrase, the real estate market. The real estate market is used to describe the overall economic state of real estate, based predominantly on supply and demand.
The real estate market can look very different for many people because of the different strategies being used in real estate, locations, different niches (Single family, apartments, office building, etc.), and many more factors. This means economists look at the, “Overall real estate market”, to group all these factors into one solid summary of the real estate market. So when you hear, “The real estate market is strong or declining”, understand that depending on the factors and area you are investing in real estate may be completely opposite of what is being said.
There are four cycles in real estate.
- Phase 1: Recovery
- Phase 2: Expansion
- Phase 3: Hyper supply
- Phase 4: Recession
Phase 1: Recovery
During this phase, the market is recovering or begging to start thriving again and is no longer falling; and is now headed upward. When this is happening in the market, it’s most likely a good time to start buying because real estate prices are at its lowest. And while many may be scared because of what the markets just experienced and are afraid to jump in, always remember, “Be greedy when others are fearful and be fearful when others are greedy”- Warren Buffett
Phase 2: Expansion
During this phase, confidence in the markets are starting to be seen and businesses are starting to expand again either in adding more employees or in other similar instances. Prices are starting to rise and real estate is begging to be in more of a demanded due to the confidence in the market leading to more money circulation in real estate.
Phase 3: Hyper supply
During this phase, the entire real estate market summary is, “Booming”, in growth and especially in prices usually causing high demand with falling supply. The real estate market is now being invested more such as new buildings, new homes, remodeling old real estate, increase in investors, and an entire increase of everyone trying to take a piece of real estate. This would be the time to step back and look around at your local real estate market and jump in opportunities that are a nearly for sure profit.
Phase 4: Recession
This is when the entire real estate market collapses beneath itself. Prices are too high, there is little to no more construction being seen, remodeling starts to die off and projects are left unfinished, foreclosures skyrocket, and many investors in real estate lose profits that they believed where once promised. This is the time prices begin to reach the bottom and while others fear the market, it would be a time to start looking at your local market for upcoming opportunities others haven’t seen yet.
Then like any cycle the entire process starts all over again, prices rise, there is confidence and expansion, prices become too high, and everything collapses. The cycle is simple to understand, however, knowing where it’s headed can be tricky due to the timing of the transition from one phase to the other, it can move quickly or slowly. So look around, and be informed of what phase the market is currently at now, it will help you when you are investing or simply just buying property.