Phase 3: Hyper supply
In the hyper supply phase, we see a tipping point from a balanced supply and demand to oversupply. There are more houses for sale than the market demands, which causes prices to slowly lower. Construction slows as market inventory remains high and rental rates remain high while demand decreases, although we often see new construction continue through a hyper supply market. Job growth, GDP, and interest rates remain stable. Prices typically peak in this phase, just before the tipping point where we enter a market decline.
- There is an oversupply of housing, meaning supply exceeds demand which causes prices to lower. This can happen on a micro level, in just one market, or at a macro level.
- Rental rates remain high, but demand for rental housing decreases.
- GDP, job growth, and interest rates remain stable.
- Emotions tend to reflect overconfidence in what the market is delivering and believe the high prices, rental rates, and growth will only continue. Eventually, as indicators become too strong to ignore, emotions shift to anxiety, fear, and possibly denial.
- Selling your assets, capturing any forced equity you may have gained. Prices will peak in this phase, and timing the market will almost never be perfect. If you can get a fair but higher price for your asset, you should likely sell.
- Great opportunity to buy a fully stabilized asset that can provide long-term positive cash flow, and can hold you over until the next recession and recovery phase.
- Trying to time the market perfectly. Many people feel the decline of the market is coming and will sell their assets too soon. This means they leave money on the table that may sit idle for many months or possibly years before the next recession. Another error of trying to time the market perfectly is waiting too long to sell -- believing prices aren’t at the peak yet. If you wait too long and the market starts to decline, it’s often hard to cut the cord on your losses and you end up selling in panic during a recession.
- Overconfidence and not heeding the warning signs. Most savvy investors are getting out of the market or investing in stable assets that will carry them through the next downturn. This typically is the worst time to buy, as prices are at their peak.
- Continuing to build new construction when demand is slowly decreasing. This contributes to the oversupplied market and can end up in disaster for the investor.
Phase 4: Recession
The recession phase is the result of over-inflated growth. We enter a declining market where prices, jobs, rental demand, and new construction plummet. Default rates on mortgages, loans, and credit cards increase. Businesses close, unemployment rises, and foreclosures increase. We will eventually hit rock bottom for this cycle, where prices for real estate will be at their lowest.
- Housing prices and rental rates decrease rapidly as housing demand is reduced and supply is increased.
- Unemployment rates and defaults increase. Many businesses shut down.
- Spending halts as people try to save what they can in a moment of panic.
- This is when pricing will likely be the best. If you are liquid and have available capital you could have the opportunity to purchase properties at extremely deep discounts. This is the cycle where people can change their financial circumstances.
- The biggest opportunities are in value-add. Buying non-performing mortgages, REOs, short sales, or other types of distressed sales.
- Not having enough capital reserves or liquidity. When a homeowner or investor sells real estate during a recession at rock-bottom prices, it’s typically because they need money. They did not have enough capital reserves, stable assets, or liquidity to ride through the economic downturn.
Can you really time the market?
There is always a debate where we are exactly in the cycle at any given time. The economists at Epoch Times believe the cycles change on average every 18 years, with mid-stage mini-recessions about halfway through the cycle. The interferences of World War I and II are the exceptions. Although it’s important to note their sample size is small from a statistical analysis.