The General Real Estate Cycle
The real estate cycle is a four-phase wave pattern through which commercial real estate and housing markets move. It may take any number of years to move through each phase and an entire cycle. The four phases of the real estate cycle are: Recovery, Expansion, Hyper-Supply, and Recession. The real estate cycle affects everyone entering the market whether you are an investor, home buyer or seller, a landlord or tenant and understanding the real estate cycle can help you predict upcoming trends and make informed decisions as they relate to your involvement in real estate whether you are renting, buying, and/or selling commercial property, vacant land, or residential real estate. Here, I summarize each phase as they relate to residential real estate.
The Four Phases of the Real Estate Cycle
Recovery. The recovery phase is often listed as the first phase of the cycle but the real estate cycle is circular which means the recovery phase happens after the recession phase. This is when the market is at its lowest point as it moves from the recession phase into the recovery phase. In this phase, we see less available inventory, lower occupancy and rental rates, and slowed new construction. The market strengthens as it gradually moves into the recovery phase. If there is any rental growth, it occurs below the rate of inflation. It can be difficult for individual homeowners or renters to differentiate the recovery phase from the recession phase because the market looks very similar at those two stages.
Expansion. In this phase, the real estate market has completely recovered from the recession phase and is thriving. In this phase, we see less available inventory, higher rental rates, higher property values, and increased new construction.
Hyper-supply. In this phase, we see an overabundance of inventory as the supply finally catches up and exceeds the high demand as previously started construction comes to an end. We see an increase in vacancies and rent growth slows down. Rental rates and property values decrease as the cycle moves into the recession phase.
Recession: In this phase, supply has over-exceeded demand, and demand has plummeted which causes higher vacancy rates and negative rent growth (or rent growth below the rate of inflation). Some opportunistic investors will look for accessible investment opportunities during this phase since properties will be at rock-bottom pricing (especially foreclosures). Then, they wait until the real estate cycle circles back towards the recovery or expansion phases for a higher rate of return on their investments.
The Annual Seasonal Real Estate Cycle
The seasonality of a market varies from location to location. Every year, in nearly every market, transactions and pricing tend to be above trend in the warmer seasons while activity slows down in the colder ones. Seasonality plays an important role in the housing market since it impacts the overall supply and demand within a specific location or region.