Summary: This blog post is your all-inclusive dive into the real estate cycle. Learn about each of the four phases so you know what’s up when it comes to your own investment decisions! Ready to navigate the changing housing market like a pro? Dive in!
You’ve probably heard talk about the different phases of the real estate cycle – and for goooood reason. They’re kind of a big deal for anyone trying to make money in real estate investing.
👉 Here’s why: the real estate cycle will help you predict returns on a property and decide what moves to make while investing.
The great news is you absolutely CAN succeed in all phases of the real estate cycle…as long as you know all the deets. And, well, we just 🧡🧡 looove spilling the tea when it comes to upping your real estate investing game!
So, we’re about to teach you what the 4 phases of the real estate cycle are, what they mean for the market, and strategies to find success in each phase.
Here’s what we’ll cover today:
- What is the real estate cycle?
- The 4 phases of the real estate cycle in depth
- The factors affecting the cycle
- How to use your real estate cycle knowledge when investing
Let’s start with the basics: what is the real estate cycle?
The real estate cycle is a 4-phase wave pattern that reports on the status of the real estate and commercial markets. The 4 phases are recovery, expansion, hyper supply, and recession.
While the phases are closely tied to the changes in the economy, they give deeper insight into how to make investment property decisions – like how long to hold and when to exit.
Analysts recognized these unique trends in the housing market that kept repeating and created the loose framework we now use to make real estate decisions.
Now, we say loose for a reason here. Because the market still has some unpredictability. But hey…that keeps life exciting, right? 🤣
Lots of factors can affect how long we’re in each of the 4 phases, and exactly what that looks like. But for now, let’s get clear on what each of these phases are, so we know how to recognize and navigate them.
Real Estate Phase 1: Recovery
The recovery phase cannnn be tricky to recognize but occurs when the market is at its lowest point. Some characteristics of this phase are high unemployment, increase in bank foreclosures, and stagnant construction.
Property values also drop to their lowest point of all 4 cycles.
That’s why this is actually a perfect time for investors to get in on below-market property values because there’s really nowhere to go but up 👆
If you can invest in a property at a low price in the recovery phase, you probably have to put some work into it. Give it a little love, repairs, upgrades, and all that jazz. 🎷 Then, you’ll be ready to make some serious cash when the market is up again.
The recovery phase usually lasts the longest of all the phases.
Real Estate Phase 2: Expansion
Expansion is the more noticeable change in the market as the overall economy gets stronger. Demand for homeowners and renters begins to go up, which makes this a great time to invest with minimal risk.
Employment rates start going up, as do property values. Existing properties start getting rehabbed and bank foreclosures decrease (👈 which increases competition on foreclosures).
If you buy in the expansion phase, you’ll see the quickest turnaround time for a return. Markets start going up, so the hold time goes down.
Something to be aware of, though, is that it’s tricky to know when you’re purchasing at the bottom of pricing as things rise. Sooo, to weigh the pros and cons – less risk and shorter hold times, with possibly less of a return than buying at the bottom of the market.
Real Estate Phase 3: Hyper Supply
Eventually, there comes a tipping point where supply exceeds demand – which brings us to the hyper-supply phase. Unemployment and time on the market are low, while property prices and new developments are increasing.
Sometimes the decrease in housing demand leads to a bit of fear from investors, resulting in liquidating all their inventory. Here’s our advice during this phase… hold strong.
It takes a bit of courage – we know. But have some faith. Selling at this stage will not give you a high return, so it’s best to have an extended hold time. You won’t make as much money right away, but this will lead to long-term gains in the future 🙌.
Real Estate Phase 4: Recession
The recession phase doesn’t exactly inspire the most positive emotions. It usually follows some sort of financial crisis and means that buyers and renters can’t afford the current housing prices.
Supply hugely exceeds demand in this phase. Landlords might even be forced to lower prices to attract buyers or renters.
Here’s where understanding the real estate cycle works to your advantage. You know the recession won’t last forever, and you know what the next phases are.
Use this time to buy properties at a deep discount.
The amount of property foreclosures goes way up, which means you can purchase for pennies on the dollar 😏
Hold onto these properties and upgrade what’s needed. When the market starts to look up again, your returns will likely also go up.
Factors that affect the real estate cycle
Now that we have a good understanding of what goes on in each phase, let’s look into what drives the real estate cycle. Generally, cycles are averaged at about 18 years, BUT there’s really no way to know exaaactly how long each phase will last.
Why is that?
Because there are tons of things that can affect the timing and changes of real estate cycle phases. Here are the top 4 factors:
Demographics
The makeup of different populations and generations has different needs and desires. The baby boomer retirement age is looking like a lotttt of downsizing homes and moving to vacation rentals. But that may not be the case for the next generation.
Interest rates
High-interest rates can keep people from buying, and low-interest rates can cause too many people to buy. Sooo basically, interest rates will always create changes in the market.
General economy
The overall economy affects incomes and moods. An upwards economy creates hope in the future and finances, which increases homebuying. When the economy is headed downhill, welllll… the opposite occurs.
Government policies
The government has power to influence the market through incentivizing people to buy real estate. To perk up the market a bit, policymakers can create things like tax breaks, deductions, and subsidies that can change the course of the market.
It’s also important to remember that there are multiple real estate cycles occurring at all times.
So, different major cities across the country might be in different phases of the cycle – despite the national economy as a whole.
➡️ Be sure to look closely at the market you want to invest in aaaand research the heck out of it.
How does all this help you know when and where to invest?
Understanding the phases of the specific real estate cycle you’re in AND how to navigate the factors that drive them will help you gain long-term investment success.
Is there one perfect, fail proof strategy that will get you rich?
Of course not.
There are tons of ways to navigate the changing patterns of the market.
This is why we want you to be able to determine what phase you’re in at any time – so you can live YOUR best investment life 😍
Look up the job growth, household growth, and demographics in your area of choice. Then decide what phase of the real estate cycle you’re in, and how that will affect your buying, selling, or holding decisions.
And ya know what else?
Trust your gut ✨
If you’ve done the research and an investment is aligned with your financial goals? Get after it!
We’re allll about setting you up to be totally in charge of your financial future.
Need help along the way? We’re always here for ya 😘😘
Reach out with any questions, and let’s get you on your way to financial freedom through real estate investing.
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