Real Estate

Real Estate Cycle

housing market life cycle

The real estate market typically moves through four economic phases before cycling through and repeating again.

Those phases can be described as:

  • Phase 1: Recovery ⛑
  • Phase 2: Expansion 🏠
  • Phase 3: Hyper supply 🏙
  • Phase 4: Recession 🙁

Recovery

Recovery is the phase that follows a recession. In a recovery, conditions stabilize and the outlook for the market is just starting to look brighter. Distinguishing characteristics of a recovery phase include:

  • High unemployment (but it’s not getting any worse)
  • Lots of home foreclosures
  • People are hesitant to buy homes
  • Government lowers interest rates to encourage investments

Expansion

During the next phase, expansion, market activity really picks up. Businesses are hiring more, and people tend to view real estate as a good investment again. Signs of expansion include:

  • Most available properties have been bought or rented, driving vacancy rates down
  • Rent and home prices are rising
  • Construction for new homes and commercial buildings starts

At the end of the expansion phase, people may pay more for real estate than it’s worth because they are anticipating future increases in value.

Hyper Supply

The real estate industry has been booming and new properties are popping up left and right. This is about the time when the market enters the hyper supply phase, in which supply catches up with (and eventually surpasses) demand. The first warning sign is an increase in vacant or unsold property. Property valuations are also at a high point.

Recession

The final phase in the real estate cycle, recession, starts when occupancy falls below the long term average. Homes sit on the market, unsold. Prices are at their lowest. Foreclosures abound, especially when the real estate recession is coupled with an economic recession that leaves homeowners unemployed and unable to pay their mortgages.

A recession is a period in which economic activity drastically declines and stays declined for more than six months.

The cycle goes on to repeat itself.