Have you ever wondered why property values can vary so drastically from year to year? The real estate market naturally moves through a cycle, and each stage of the cycle brings different levels of demand and value. The real estate market cycles can make properties a more volatile investment but understanding the cycle can help investors capitalize on their real estate investments.
What Are Real Estate Market Cycles?
The real estate cycle consists of four stages: recovery, expansion, hyper-supply and recession. Researchers have studied this cycle and its relationship with government policy and the economic environment since the late 1800s. This four-stage cycle explains and represents the changes that the housing market undergoes regularly. And while each cycle varies slightly, investors and real estate professionals can count on the cycle to understand current real estate trends and predict future movements.
How Long do Market Cycles Last?
The length of a market cycle depends on social, economic and geopolitical factors. For example, changes in government policy or unpredictable disasters, such as a pandemic, can affect the market cycle. Typically, however, real estate market cycles last between 10-18 years. The length of each stage is affected by external factors, but the order of the stages doesn’t change.
4 Stages of Real Estate Market Cycles
Now let’s look at each stage of the real estate market and what they mean for property values and demand.
Stage 1: Recovery
The first stage of the circular market cycle is recovery. Recovery comes after a time of recession when prices and demand drop. In the recovery stage, the real estate market is starting at the bottom and slowly working its way up. As the economy begins to recover, demand for properties slowly begins to increase, which will cause property values to rise.
The beginning of this stage is largely considered to be a seller’s market. Investors can take advantage of under-valued homes. Once property values rise, investors can flip the house or rent it for a higher price. Investors will be able to spot the beginning of a recovery phase when property values stop decreasing and begin to inch upward.
Stage 2: Expansion
In the expansion stage, the economy has essentially fully recovered. Typically, you’ll see solid job growth and low unemployment rates. This economic state will often encourage individuals to purchase properties, leading to high demand and a competitive market. Due to the high property values and demand, times of expansion are considered a seller’s market.
This stage affects each sector of the real estate market. While individuals are often looking to buy homes, many businesses are also looking to open or expand. A solid economy often means that businesses are profitable. Individuals are spending more, so it's a great time for companies to try and increase production and scope. There’s an increased demand for commercial and industrial properties in addition to residential homes.
Investors can spot times of expansion by quick-selling properties, high rental rates and many renovations or pre-existing companies. It may be hard to buy a property during this time, but it’s a great time to try and sell an investment property or rent it out.
Stage 3: Hyper-Supply
Because of the general optimism associated with the expansion stage, many investors and homeowners will try to sell or rent their properties. Eventually, this leads to the hyper-supply stage, where supply begins to skyrocket. This stage will see the highest property values and rent prices, and properties will be on the market for the shortest amount of time.
This is considered the worst time to buy a property but the best time to sell due to high demand. If you are looking to buy, it’s a good idea to sit back and wait for the market to change before thinking about purchasing a new property.
Times of hyper-supply is when the real estate market is at its peak. However, this activity is unsustainable and will eventually fall off. As demand begins to drop, the market is left with an abundance of properties and no buyers. This situation leads to the next and least favorable stage of the market cycle.
Stage 4: Recession
A recession is caused by too much supply and little to no demand. Whether this circumstance occurs naturally or is caused by a political or economic event, spending slows and fewer people buy homes. This forces property owners and sellers to decrease their prices and rental rates. Investors will also likely see too much construction occurring, leading to more properties being built than bought. There’s an excess of properties and a lack of buyers.
An impending recession can cause many property owners to panic and want to sell, but it’s best to sit and hold properties through this stage. This is one of the best times to purchase properties. Property values are at their lowest, so investors can scoop up properties to buy, hold and sit on until the market begins to turn again.
What Affects Real Estate Market Cycles?
The real estate market cycle is impacted by the larger economic environment, as well as government policy, interest rates and social and political activity. For example, when the economy is booming and consumer spending is high, the real estate market will generally go through phases of expansion or hyper-supply, since consumers are willing to pay top-dollar for properties.
Occasionally, the Federal Reserve will raise interest rates in an attempt to slow spending and inflation, as seen in the interest rate hikes in 2022 and 2023. When this happens, consumers are less likely to buy houses because of higher mortgage interest rates. However, when interest rates are low, consumers are more likely to purchase properties.
Times of civil unrest, international conflict and divisive political atmospheres can also lead to uncertainty around investments, which can cause either time of increased spending or recession. Investors must understand how activity in the larger geo-political environment can impact the real estate market and understand the signs of each stage of the cycle.
Prepare to Weather All Cycles
Investing in real estate means that you’ll experience all the stages of the cycle at some point. And while times of recession can be stressful, you can count on the market to rise again. Overall, savvy investors can still achieve financial success in their real estate investments as long as they understand each stage of the cycle and what that means for their investments. The highs and lows of the cycle present unique opportunities for investors ready to take advantage of them.
Frequently Asked Questions
Are real estate prices cyclical?
Real estate prices are cyclical and rise and fall as the real estate market moves through the four stages of the cycle.
What is the peak of the real estate cycle?
The peak of the real estate cycle is the hyper-supply stage when property values and demand are at their highest.
What are the phases of the market cycle of real estate?
There are four phases of the real estate cycle: recovery, expansion, hyper-supply and recession.
About Savannah Munholland
Savannah Munholland is an investment writer passionate about helping people learn more about accessible alternative investments. She has more than three years of writing experience, focusing on alternative and traditional investing, technology, and education. Her expertise in writing about art and wine investments is grounded in an MFA with knowledge of and immersion in a wide range of art-related topics. She uses her skills in creative writing to bring an appealing level of interest to her journalistic work, shifting even the most basic financial and investment topics from humdrum to compelling. Her work has been published on Benzinga, FreightWaves, and Study.com.
