Understanding each stage of the real estate cycle is a vital part of being an investor. Although the housing market cycle is closely connected to the general economy, you can’t assume that they always correlate. As such, it’s important to understand the four stages of the real estate cycle to help prepare for future investments. Read along as we go over the four stages and the factors that affect each cycle.
Contents of This Article:
- What Is the Real Estate Cycle?
- The Four Stages of the Real Estate Cycle
- How Long Do Real Estate Cycles Last?
- Factors That Affect the Real Estate Cycle
- Invest in Property Management for Your Rentals
What Is the Real Estate Cycle?
The real estate cycle is a four-stage cycle that represents changes within the housing market. The four stages include recovery, expansion, hyper-supply, and recession. Understanding each phase and how it affects the housing market is crucial for investors looking to buy real estate.
After all, the real estate cycle can provide investors with valuable information about potential investment properties. Before buying real estate, you should determine which stage of the cycle it’s in. In turn, this can help you accurately estimate good times to buy, sell, and hold properties. Additionally, knowing the real estate cycle can help you evaluate potential rental income and appreciation.
While investors must recognize each stage of the real estate cycle, it’s also helpful for other real estate professionals. So, whether you’re an investor, real estate agent, or property management company in Philadelphia, read along as we go over the four stages.
The Four Stages of the Real Estate Cycle
Each stage of the real estate cycle represents the status of commercial and residential real estate markets. As such, many investors use the cycle to make business decisions or predict the profitability of rental properties. If you want to learn more, read along as we go over each stage of the real estate cycle and what they mean for investors.
- Recovery
- Expansion
- Hyper Supply
- Recession
Recovery
It can be difficult to recognize the recovery stage in the real estate cycle. During this time, most people feel the effects of a recession without much optimism. Rental markets are slow-moving, and most investors are looking for signs of recovery. Some of the most common signs include:
- Excess supply of properties
- Home and rent prices drop
- Demand falls
- New construction is stagnant
- Investment property values decline
This stage can be a good time to buy below-market properties to renovate and sell or rent when the economy recovers. However, timing is key, and you’ll want to wait to put your home on the market until the economy shifts to the expansion stage.
Expansion
During the expansion stage, the general economy is picking up with solid job growth and higher demand for real estate. In turn, investors, along with the general public start feeling more confident about the future of the economy. So, with more people feeling secure in their investments, more investors are willing to buy real estate.
Some market characteristics of the expansion stage include:
- Properties sell quickly
- Job growth increases
- Existing properties get renovated
- Rental rates start to increase from low levels
- High competition for bank foreclosures
It’s important to take your time while researching properties and developing your investment plan. After all, you don’t want to put all your efforts into a property that won’t give you the returns you’re looking for.
Hyper Supply
Once investors and homebuyers make their moves during the expansion stage, the supply of real estate starts to exceed the demand. This is known as the hyper-supply stage, and it could be caused by too much inventory or a shift in the economy that reduces the demand for real estate.
Some of the main indicators of the hyper supply chain include:
- The supply of properties slowly dwindles
- Properties sell quickly with less time on the market
- Unemployment is low
- Property and rent prices increase
- The highest demand for real estate
This stage of the real estate cycle is a good time to buy and hold real estate. While some owners panic and liquidate their investments, some investors use this time let properties appreciate and generate short-term cash flow.
Recession
The recession stage is generally unfavorable for rental property owners. After all, some owners are forced to lower rates, demand for rentals is low, and vacancy rates are generally high. Some of the main signs of a recession include:
- More properties on the market
- Demand for construction and materials increases
- Job growth starts to slow
- Rent growth slows
However, one plus side of recessions is that they provide investors with an opportunity to purchase foreclosed properties at a huge discount. Then, they can either hold the property, add value, or sell it when the market improves.
How Long Do Real Estate Cycles Last?
Dating back to 1876, researchers have witnessed a predictable 18-year real estate cycle. However, in 1925, government regulation and other factors changed the normal cycle of the real estate market. Now, cycles are much harder to predict due to several outside factors.
Overall, the average real estate cycle lasts around 10-18 years. Nevertheless, it’s hard to give a solid answer on how long each phase of the real estate cycle lasts since it depends on several factors. Next, we’ll review some of the main factors affecting the real estate cycle.
Factors That Affect the Real Estate Cycle
Several factors may affect the housing market cycle. However, the main factors to pay attention to include the following:
- Economic Health
- Interest Rates
- Demographics
- Government Policies
Economic Factors
The overall global and US economies significantly impact real estate cycles. For instance, more people are interested in buying real estate when the economy is up, and people have more money. On the other hand, when the economy is struggling, the real estate market will generally follow suit.
Interest Rates
Another major factor that affects real estate markets is interest rates. When rates are high, it can deter a lot of investors or homebuyers from buying real estate. However, when rates are low, the demand for real estate is generally higher, as total financing is cheaper.
Demographics
The overall population or changes in population can play a significant role in real estate markets. After all, many people today opt to rent instead of buy. First, however, it’s essential to know your target audience. For instance, you have to look at where people want to live and the demand for rentals in a given location.
Government Policies
Finally, government policies can affect the real estate cycle by making changes that cater to buyers’ or sellers’ desires. For instance, policymakers can implement tax deductions, tax credits, or homebuyer programs to create incentives to buy real estate. As such, these factors can majorly influence the housing market cycle.
Invest in Property Management for Your Rentals
Navigating the four stages of the real estate cycle is crucial for all current and future investors. Additionally, understanding real estate markets is beneficial for all real estate professionals. For instance, hiring business professionals well-versed in buying, selling, and managing real estate is important.
Need More Advice? contact us today!
Luckily, our property managers at Bay Property Management Group have the knowledge and expertise to help your rental business succeed. Whether you need help marketing properties, finding tenants, or handling accounting, we’ve got you covered. Contact BMG today if you need rental management in Baltimore, Philadelphia, Northern Virginia, or Washington, DC.
