For a real estate investor, it is important that you have an eye on the real estate cycle, both on a macroeconomic and microeconomic level, and that you know where we are in the process. The housing market cycle is closely related to the general economy, but you can not say that it is necessarily because the general economy is doing well, that the housing market is doing well, or that the commercial property market has stayed solid.
Real estate cycles are rather complex. The good news, though, is that it’s important to achieve success as an investor no matter what step of the real estate business process we’re in — there are tactics to help you make the best of the situation. Keep reading to learn how the real estate cycle works, what the different phases are, and how best to plan for each phase.
How Long is the Average Real Estate Cycle?
Studies found that the average real estate period is 18 years. In this situation, the term “average” is loose – real estate periods are volatile, and some can last much longer than others. We’re currently in the tenth year of what experts call the bull market, where prices continue to rise. Over the last few years, many have consistently predicted that the bull market will slow down, but we still have to see a slowdown.
The real estate market is also changing in the face of the coronavirus pandemic.
Factors Affecting the Real Estate Cycle
There are quite a few variables impacting the real estate cycle, so that it’s almost impossible to extend a concrete listing. But, specialists can jointly agree that these factors are some of the chief contributors:
- Demographics: The overview of the populace, and major changes within this population can induce an industry significantly. As an instance, as most choose to downsize or proceed to holiday locations, the retirement of the baby boomer generation is anticipated to cause big changes in the home market.
- Interest rates: Interest rates significantly affect the purchase power of prospective homebuyers. It might function as a hindrance for many buyers when interest rates are high. When interest rates are reduced, it might promote a spurt in home action, since the expense of financing a house is more economical.
- General economy: The total health of the market can be a heavy-hitter in regards to forecasting the housing market cycle. Once the market is in an upward trend, or is performing well, buyers feel much more encouraged to purchase real estate. They believe that their wealth will enhance the value of the house would continue to raise. If the economy is performing well, the real estate market is doing well. The real estate market tends to follow suit if the market is slow.
- Government policies: The authorities will sometimes intervene with policies to help promote a marketplace that’s especially slow or in a lengthy recession. Policymakers have the capability to execute homebuyer programs and tax deductions, subsidies, tax credits to incentivize customers to buy property. The US housing market cycle can be considerably influenced by these kinds of mechanisms.
Four Stages in the Process of Real Estate
The real estate process consists of four major phases: recovery, expansion, hyper-supply and recession. This means that historically, there has never been a prolonged period of inflation or hyper-supply without an inevitable recession, preceded by a rebound. This may induce some anxiety for you as a real estate investor, but fear not! The good news here is that there are investing approaches that make it possible to invest effectively in every of these periods.
- Recovery. Identifying the turnaround process of the period can be difficult, because much of the country will already experience the repercussions of a recession and have a gloomy outlook. Rental demand would remain slow, with no sign of new development. However, this is where real estate investors will hold a close eye and move quickly for any signs of recovery. This is a great time to pounce on below-market value properties that are in various states of financial or physical distress. You can wait out the remainder of the recession time by adding interest to these assets, so that they are able to sell or rent out just as the economy moves into the growth process. Timing is the key.
- Expansion. The overall economy is growing, job growth is high and demand for land and accommodation is rising. The growth period is where the general public starts to recover its trust in the economy and thus in the real estate industry, and individual renters and homebuyers can once again begin to create demand. When the economy is on the upswing, it is beneficial to spend your resources in creating or redeveloping assets that cater to the tastes of the new consumer and sell for more than market value.
- Hyper Supply. During the expansion phase, investors and developers have taken a frenzy to ensure that supply meets growing demand. Inevitably, there will be a tipping point at which production starts to surpass demand — either from too much excess on the market or from a drastic shift in the economy by which demand withdraws. As an investor, this is a time to be strong. Property owners will often liquidate their inventories out of fear that their property will become abandoned or unsold. This is a perfect time to take an opportunistic approach; to find properties that you feel confident would do well in the next real estate cycle. This is a great time to recruit a buy-and-hold approach so that you have promising properties already in stock when it becomes a perfect time to re-sell.
- Recession. Unfortunately, the recession phase is one that we are all too familiar with. The global financial crisis of the early 2000s, accompanied by a prolonged recession, has left the entire country recovering for many years. During the recession, supply exceeds demand by a large margin and property owners suffer from high vacancy rates. However, not only is rent inflation not present, certain landlords are forced to offer discounted rental rates in order to attract renters who are also suffering from the economic downturn. As an investor, it’s a great idea to save a rainy day fund for the next recession – it’s not the time to sit back and feel sorry about the state of the economy. The slump gives the opportunity to buy distressed properties at a deep discount. There will be an increase in real-estate properties, which are investments that have been foreclosed and repopulated by borrowers. This is your chance to buy great properties with great savings. You should hang on to these assets (or add value if you see fit), so that they are ready to hit the market just as the economy begins to recover.
The real estate process is a phenomenon that every real estate developer has to consider if they are searching for long-term growth. All four phases of the process – recovery, expansion, hyper-supply, and recession – are triggering a major change in the real estate industry, and buyers will remain on the top of their feet if they want to find opportunities in each. The big news is that strategies are in place to remain vibrant and successful throughout the real estate market cycle, even if the economy feels sluggish. Your homework assignment is to sit down and build a long-term company plan based on the ideas you’ve just learned here.