The real estate market is a very dynamic and sometime un-predictable sector. There are great chances of succeeding in this sector provided you have the right information at the right time, and are selling at the right location. As an individual looking to buy or sell a home, it is vital that you learn key characteristics of each real estate market cycle. These cycles are based on geographic locations and will be different in every country, state, or city. This explains why you may be trying to sell your house in a certain region and only getting very low price offers. It only means that the market cycle in that area of the country is not currently favorable for property sale.
Therefore, to succeed in selling or buying a home in your locality means you have to learn the history of the area’s real estate market cycle. In general, the real estate market cycles are classified into 4 phases. For those who took an economics 101 lesson, these phases are easy to relate with. They include; Recovery, Expansion, Hyper Supply, and Recession.
Let’s delve into each of these cycles in detail;
The real estate market has no real beginning; so we pick this phase as the arbitrary starting point. This phase begins at the lowest point of the market cycle and occurs when the excess construction that occurred during the previous cycle (Recession) has finally stopped.
Due to the excess construction that was in the previous cycle, this cycle inherits an oversupply of inventory. New construction is virtually non-existent or excessively low in this phase. Instead, the demand growth experienced slowly absorbs the existing oversupply of inventory.
This phase is characterized by high yet stabilized unemployment levels, many home foreclosures, and great fear in the general population. Many individuals will opt to stay as far away as possible from the real estate market in this cycle; citing the fear of losing their properties like in the previous cycle.
However, this is a great phase for one to buy a property. At this time, there are still sellers wanting to dispose their properties because they think prices will continue to fall. Therefore, house prices are low and a great time to make a buy.
During the expansion cycle, there is confidence again in the real estate market as it starts showing signs of growth. The area is experiencing population and business growth. People are coming into the area because of good job prospects, better living standards and access to good amenities and facilities. Due to the growth, home buyers are in a buying mood.
The population and business growth creates demand and real estate developers begin to build new homes and commercial properties to cater for the demand. Prices start rising because of high demand by buyers, rents start going up because of high demand by tenants, and people generally become optimistic about the future. This is also a great time to make purchases or sale of property in the market.
Eventually, the growth accelerates to a new point where now sellers are pricing property at its current value, plus a premium in anticipation of its future worth. This gives birth to the “real estate bubble”, as rents and prices rise further.
3. Hyper Supply
During this cycle, the supply of new construction continues to come in from the previous cycle but now demand starts to decline. People can no longer purchase properties because their income levels are not growing at the same pace as the prices in the real estate market.
Occupancy rates in constructed properties fall and rental growth slows. Worse still, construction of new properties continues and leads to an oversupply in the market. If the construction continues to accelerate more than demand and occupancy drops below the long term average, the real estate market plunges into a severe downtown.
This is a very catastrophic cycle of the real estate market. Here, there is massive oversupply of property and unmatched demand (negative demand growth). This causes rents to be lowered and vacancy rates to rise as people are either moving to new areas in search of cheaper rentals, or moving back to live their families. In the end, many property owners face the possibility of incurring massive losses.
There is a high number of foreclosures in this phase as many homeowners find themselves unable to pay their mortgage with decreasing rents and increased vacancies in their properties. Excessively high prices caused by the Hyper supply phases prompts the Federal reserve to raise interest rates to slow down new construction.
It is paramount for any individual dealing in real estate to understand all the cycles of the real estate market in their area of preference. More importantly, they should know the cycle which their area is facing in order to make an informed decision.