Like every market, real estate is cyclical. While there is no reliable way to know what the real estate market is going to do, it is important that investors are aware of overall market trends. Past and present trends reveal a lot about where we are heading. The real estate market typically moves through four phases before repeating the cycle again. Knowing which phase the market is currently in enables you to make more educated assumptions regarding future investment opportunities.
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- Phase 1: Recovery
This is the best market to buy in. The market is recovering from the last downturn, it is no longer in free fall and the trend starts to turn upwards. As the old advice goes; you want to buy low and sell high. High unemployment, foreclosure rates, and general uncertainty are typical for this phase. - Phase 2: Expansion
During the expansion phase, employment starts to pick up and confidence in real estate is once again rising. Lower supply and increasing demand trigger the growth in real estate prices. Developers begin to build new homes. This phase still presents a great time to invest. The problem is that speculators are also involved, so there will be fewer great deals. - Phase 3: Hyper Supply
This is the final stage of the real estate boom. It is characterized by skyrocketing prices, mass building projects, and high interest among the general public in investing in real estate. First, the supply and demand reach equilibrium, then the supply overtakes the demand.
- Phase 4: Recession
This can be an exciting time to buy. After the real estate market bottoms out, it begins to rise once again. The timing of your regional market with regard to housing affordability is key.
- Phase 1: Recovery