Over the past year, we’ve experienced a fresh transition in the economy from inflation to recession. The economic intricacies of the market are difficult to predict and navigate. The real estate market, too, moves in cycles that are directly linked to the economy at large.
There are benefits and drawbacks to be found at every stage in the cycle: don’t listen to anyone who says otherwise! While timing the market may be an exercise in futility, developing proper strategies for each stage of the real estate cycle and its transitions will keep your wealth-building efforts on track.
Here’s what investors need to know:
Navigating the 4 Stages of the Real Estate Cycle
Stage 1: Recovery
Characteristics
Recovery follows the lowest point in a recession. This stage is the slowest and often the longest. Recovery ends when the market has returned to a “healthy” state, which involves increasing demand among buyers and renters and growth in real estate development.
Advantages
Recovery is the beginning of a market upswing. In later parts of this phase, we begin to see home values and demand recover. This makes it a great time to acquire properties as values start growing again. Interest rates may also be lower to incentivize homebuyers.
Drawbacks
Timing can be very important during this phase, and it’s a long phase, too! It’s not always easy to see recovery as pessimism from the recession bleeds over into it. Investors much watch very carefully to identify signs of recovery and its opportunities.
Strategy
Keep an eye out for deals on distressed properties. This is a buyer’s market. Speculative investments are more common as we know recovery will eventually be followed by expansion, which comes with higher rental rates, property values, and overall housing demand.
Stage 2: Expansion
Characteristics
The market has fully awoken to recovery at this stage, exemplifying all the markers of a healthy market. The economy is strong, developers are busy building properties, and demand is high on all fronts. Home values rise with demand.
Advantages
Expansion is a flourishing time in the real estate market. If you’ve been wanting to sell a property, now is the time to do it to maximize your profits. Just remember, the cycle repeats itself. It’s not your only chance and you can just as easily capitalize on increasing rental demand, too.
Drawbacks
As expansion continues, deals will be fewer and far between. Some markets will become overvalued, so investors need to target their investment markets wisely. Chasing the hottest thing can end in disaster with subsequent market shifts.
Strategy
Don’t let market hype cloud your judgment. Continue to perform due diligence. If your investment markets become too expensive for your tastes, focus instead on renovating and maximizing the potential of your current properties.
Stage 3: Hyper Supply
Characteristics
When expansion hits its tipping point, we get hyper supply. Homebuilding efforts eclipse waning real estate demand, resulting in a glut of properties on the market. Hyper supply can be triggered by overbuilding or sudden economic shifts that cause demand to recede.
Advantages
Investors may be able to get deals on properties that nervous companies may be trying to offload. This is a tricky stage, though, so there are fewer advantages.
Drawbacks
Oversupply can make selling difficult. Prices won’t have yet dropped to compensate, and interest rates may rise to combat inflation. While you certainly can make acquisitions in this period, be particularly detail-oriented when assessing your deals.
Strategy
Buy and hold and don’t panic. This is the time to think ahead to the next market cycle. Look for markets that demonstrate strength and stability and focus your attention on investments with staying power. Focus on cash flow and building up your emergency funds.
Stage 4: Recession
Characteristics
During a recession, vacancies tend to rise while buyer and renter demand drops. This results in lower home prices as supply exceeds demand. Typically speaking, this is a great time for investors to make new acquisitions at lower price points.
Advantages
During a recession, home prices decrease and foreclosures become more common. This creates ample opportunities for investors to buy as the market transitions into recovery. Interest rates may begin to lower to incentivize buyers.
Drawbacks
Depending on where you are in a recession, buying may be tricky. Early on, prices may still be high and interest rates along with them. Many homeowners fall into foreclosure or other financial distress.
Strategy
When the market bottoms out, investors can capitalize on low prices. Make wise acquisitions in preparation for the coming recovery and expansion phases. Continue to buy and hold.
Reminders:
- The real estate cycle tends to last for 18 years; however, this is not a hard and fast rule. Certain stages can last much longer than others. For example, we spent over a decade in the recovery phase after the Great Recession.
- Your individual markets will be impacted to different degrees. Be mindful of where you invest to minimize fluctuations.
- Your success at any stage depends on your due diligence and the quality of your properties and management.
