Understanding Real Estate Cycles & Factors That Affect Them

As a real estate investor, it’s important to stay on track with the real estate cycles so you make smart investing decisions when buying or selling real estate. While the real estate cycles are closely tied to the economy, there’s no guarantee if the economy is doing well that the real estate market is too, and vice versa.

Fortunately, there are ways to make money in each of the real estate cycles. You just need familiarity with each cycle so you make appropriate decisions for your investments.

Why Are Real Estate Cycles Important?

As a real estate investor, you must know the real estate cycles to plan a proper entrance and exit strategy. You’ll likely have different strategies based on where the industry is at when you want to buy or sell. Some investors hold off buying or selling in certain cycles, and others adjust their expectations.

What Are the Four Real Estate Cycles?

There are four real estate cycles - recovery, expansion, hyper-supply, and recession. These cycles show that even the real estate industry is prone to ups and downs. You won’t see a recession go on forever, just like you won’t see a hyper-supply phase go on forever.

While all phases have their own nuances and can cause some anxiety, it’s comforting to know that everything typically comes full circle, and if you plan right, you can invest during each of the four cycles with the right strategy. When you’re ready to invest - Roofstock Marketplace is a great resource to help you find the right home no matter the real estate cycle the economy is in at the time.

Recovery
The recovery phase is when the real estate industry is coming out of recession. This is a difficult phase to maneuver because many naysayers refuse to believe the industry is improving.

It doesn’t happen all at once or overnight. It takes time. You’ll see small signs of hope, and if you jump on those opportunities, you’ll ride the wave back up as real estate values increase again. Knowing how to find the little glimmers of hope that things are looking up again is key.

Why?

Because you’ll have access to below-market rates, but then ride the wave as values increase significantly. You’ll do what every investor dreams of doing - buy low and sell high, but you have to have faith in yourself and trust your gut when it tells you it’s time to buy.

Signs the Industry Is in Recovery
Slight growth after a stagnant period

• Interest rates stay low
• Buyers slowly get more optimistic about the industry 

What You Can Do in the Recovery Phase

• Buy properties at below-market rates
• Get financing at low-interest rates and/or refinance existing loans

Expansion
During the expansion phase, most people have caught on that the industry is improving. Unemployment rates drop, and the housing demand increases quickly. Slowly, the economy as a whole gains more confidence in the industry, and people come out of the woodwork to get their hands on real estate.

During the expansion phase, you’ll do your best to cater to the current demands. Whether building properties from the ground up or redeveloping existing properties, listen to what buyers and renters want. This is when the market and demand are growing, and they need every investor with their hands on deck.

When you focus on the latest trends, you’ll watch as values increase even more, giving you an even larger return on your investment when you sell. During the expansion phase, picture yourself expanding in your business - reaching for the stars which are right within reach if you make the right choices.

Signs the Industry Is in Expansion

• There’s a much higher demand for housing from buyers and renters full circle.
• Increase in new construction
• Consumers are more optimistic about the real estate industry

What You Can Do in the Expansion Phase

• Build, renovate, and capitalize on the growing industry
• Tap into current property’s equity to take advantage of the growth 

Hyper Supply
As the industry transitions from the expansion phase, the market becomes saturated. Where demand once exceeded supply, the opposite occurs during the hyper-supply phase.

Suddenly the supply exceeds the demand, and prices begin to fall. Rather than a seller’s market, it quickly becomes a buyer’s market because buyers have so many choices. Hyper supply can also happen when industry experts suspect demand will decrease because the economy is slowly dwindling too.

During this time, it’s important not to jump ship. Many investors will, just like they do when the stock market falls. That’s not the answer.

Instead, this is a great time to take inventory of your real estate investments and decide which ones will weather the storm. Which properties will hold their value and/or bounce back as you work your way through all the cycles?

These are the properties that you buy and hold. Yes, their values may fall, but they will also come back if you can be patient and work your way through the cycles. If you buy and hold, you’ll likely earn monthly cash flow (rent) during that time while you wait for the home’s value to bounce back.

Signs the Industry Is in Hyper Supply

• Housing supply greatly exceeds demand
• Rental demand decreases
• Interest rates remain stable

What You Can Do in the Hyper Supply Phase

• Sell your property quickly before the phase changes to a recession and values fall.
• Hold onto your property through the next couple of phases, collecting monthly cash. Flow from rent until you reach the expansion phase again.

Recession
We’ve all seen a recession, especially if you were in the housing market in the early 2000s. During a recession, home values fall, supply greatly exceeds demand, and buying and selling just don’t happen.

Also, during a recession, many landlords suffer from vacancies and are forced to lower their rent just to fill the property. But there are good sides to the recession too.

If you think like an investor, you want to buy low and sell high. Well, prices don’t get much lower than during a recession. If you have a nice nest egg put aside, a recession would be a great time to invest it in real estate. 

You’ll have a greater chance of finding properties for much lower than the market value, especially if you stumble across foreclosures. You can use this time to improve the property and find renters, preparing yourself for the recovery and expansion phases that will follow no matter how uncertain things seem at the time.

Signs the Industry Is in Recession

• Housing prices fall
• Interest rates decrease
• Consumers stop spending and/or buying homes

What You Can Do in a Recession Phase

• Take advantage of below-market value properties.
• Buy foreclosures or find all-cash deals to rescue homeowners in trouble

How Long Does Each Cycle Last?

It can feel like certain real estate cycles, like a recession, go on forever, but they don’t. Most cycles last, on average, 18 years, but every cycle is different. For example, we are in a bullish market right now and have been for at least ten years.

Many people have said through the years, especially during the pandemic, that we’ll see a downturn soon, but we’ve yet to see it. Houses are still going strong, selling within a matter of days in some cases, and even investment homes are selling fast.

Does this mean we’ll see growth for another eight years? We might or we might not - no one can say for certain, but investors can keep an eye out to see what everyone thinks is coming next.

Most of the time, no matter the phase, there is a mini-recession thrown in the middle of it. Things seem to fall apart at some point and then come full-circle back around.

The Top 4 Factors That Affect the Real Estate Cycles

To predict what real estate will do, it’s important to understand the factors that affect them. Knowing these factors, you can become an expert and predict what will come next.

The Economy
It’s probably no surprise that the economy is a factor in real estate cycles. If buyers can’t afford to buy a home because the economy is down, it’s safe to say we’ll enter a recession or close to it.

The opposite is true if the economy is doing well, of course. If consumers feel confident and are doing well, they’re more likely to invest in real estate. When the economy looks like it’s only increasing, everyone thinks real estate values will, too, so they invest in it so they can make quick profits.

Interest Rates
Interest rates play an important role too. If they are high, buyers can’t afford to finance, and fewer sales happen. When interest rates are low, more people can borrow money, causing the housing demand to increase if housing prices are affordable too.

Demographics
The population and the people who make it up can greatly affect the real estate cycles. If a large part of the population is downsizing, moving away, or experiencing any other major trends, it can affect the real estate cycles.

If a large part of the population all sells at one time, for example, it will cause hyper supply because the demand will greatly exceed the supply.

Government Issues
If the government recognizes large issues within the industry, they sometimes step in to make things better. This usually occurs when the economy isn’t doing well and all other efforts were exhausted.

The government can bring in a multitude of programs to boost the real estate industry, whether it’s tax credits, new policies, or new programs making it easier for people to afford and/or qualify to buy a home.

FAQ

Do Property Values Always Increase? 
Property values are cyclical. Sometimes they go up, and sometimes they go down. Eventually, they find their way back up, but it can take time since each cycle can last as long as 18 years, although most are shorter.

What Causes Property Values to Decrease?
Many factors can cause property values to decrease, but the most common are foreclosures and short sales. If an area has a large number of them, they bring down the values for the area as a whole.

Can You Time the Market?
To time the market, you must have a solid understanding of the real estate phases and the indicators that make them up. There isn’t a fool-proof way to time the market, but with enough practice and research, it’s possible. Using a resource like Roofstock Marketplace is a great way to get the help you need to time the market too.

Why Is It Important to Understand Real Estate Cycles?
If you want to play the game and buy and sell at the right time, you must know the real estate cycles. It’s less important if you plan to buy and hold for many years. You’ll enjoy the cash flow and just need to know when to time the sale of your house when the time comes. If you plan to buy and sell more frequently, though, you’ll need to know the cycles inside and out.

Final Thoughts - Understanding Real Estate Cycles

Understanding real estate cycles are important, and with practice, and research can be done. Knowing where the industry is at any given time and knowing which indicators will point to the industry going in another direction is important.

While you should aim to buy low and sell high, there are many other factors to consider when investing in real estate. Knowing and evaluating as many factors as possible is important to ensure you understand your investments.

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