The real estate cycle is a predictable and valuable indicator of current risks and opportunities for real estate investors. The real estate market moves in four different phases in the cycle before repeating. It’s important to note that every stage comes with its own unique risks and opportunities. A savvy investor can succeed in any season of the cycle.
Buy-and-hold investors are even less beholden to these cycles, are the length of holding often outpaces that of a single stage. Meaning, buy-and-hold investors aren’t trying to time the market to make a profit.
But what if the real estate cycle seems stuck?
Where are we in the real estate cycle?
Before we talk about what’s stalling the cycle, we need to identify where we are. Now, there’s some debate among experts as to where exactly we fall. Let’s review the stages of the real estate cycle so we can best identify our place in it all.
Recovery
- Flat home sales and leasing that gradually increases over time
- Negative impressions of the market
- Few new home builds
- Low interest rates
Recovery
- High demand for housing, resulting in increasing prices, sales, and leasing
- New construction and activity from flippers increases
- Interest rates stable or increasing
- Optimistic outlook
Hyper Supply
- Supply exceeds demand, prompting price decreases
- Rental rates remain high but demand decreases
- Stable GPD, job growth, and interest rates
- Emotions begin with overconfidence followed by anxiety
Recession
- As demand drops and supply balloons, home prices and rental rates drop
- Spending screeches to a halt
- Unemployment rises, foreclosures rise, interest rates rise
Now that we have a quick overview, we can see why pin-pointing where we are has become so challenging! While we are economically in a recession, housing hasn’t reflected that reality. Instead, we seem to be resting with one foot in recovery and one foot in expansion.
Why is that, and what does it mean for investors?
Ripples from the Great Recession
Throughout the 2000s, the homebuilding industry was riding high. Like the banking and real estate industries, among others, the construction sector took a massive hit from the Great Recession. Many companies shuttered or merged. Between 2007 and 2010, closings dropped 62 percent and revenue dropped by 64 percent for the top 200 home builders.
As Builder Online points out, the industry hadn’t recovered or returned to pre-recession levels as of 2017 — a whole decade later.
The impact of the Great Recession was long-lasting, particularly for the home building industry. This, at the core, is a major reason the real estate cycle seems stuck. The real estate market is far more than simply buying and selling houses. It is deeply interconnected with other industries — chief among them, home building.
Even as the economy improved and markets returned to pre-recession levels, home building struggled to catch up with growing demand. And that’s been the case ever since. If you look back through our articles in the past, you’ll see this mentioned as an obstacle in housing recovery. Supply simply wasn’t meeting demand.
Supply and Demand
Ultimately, when we look at the real estate market as a whole, supply and demand is driving where we are — and where we have remained — in the real estate cycle. Not only has home building been lagging for years, but when COVID-19 hit in 2020, many existing homes were taken off of the market — further reducing active inventory.
This lack of inventory has been what’s kept prices pushing upwards. At the same time, lending standards tightened after the Great Recession, leading us to today’s low interest rates. These rates incentivize demand, even with the frustrations of competition and rising prices.
In 2019, before COVID, experts predicted that we were overdue for a recession. And while we have seen an economic recession, the real estate market doesn’t seem to have received the memo. It’s been a wild and lucrative year in real estate — a trend that experts see continuing into 2021.
For Real Estate Investors...
Take advantage of the stage of the real estate cycle we’re in. Real estate investors must understand the sway of the cycle and how it impacts our decision-making. Don’t miss out on opportunities presented by the market climate — or ignore their risks. While buy-and-hold investors never need to worry about the real estate cycle, paying attention to it with diligence and preparation is key in maximizing your portfolio’s quality and efficiency.
In other words, don’t worry if the cycle seems “stuck” or even when it changes. Instead, know where you stand and stay abreast of opportunities!
Great investment markets are waiting for you. Call your advisor today!
