Just like weather cycles, real estate has its seasons as well. Whether it's a positive or negative economic climate, real estate investors can deploy winning strategies. The key to timing the real estate market is to always be ready with a strategy that accommodates whatever market you're facing: buyer's or seller's markets. A savvy real estate investor prepares for any scenario, good or bad.
Here's an overview of real estate cycles, how seller's and buyer's markets affect real estate investors, and when real estate investors should try to get in on the action.
Real estate cycles
Understanding the four general phases of real estate cycles is critical for investors trying to time the market. Once you're familiar with these phases, you can look at your own local, state, and federal economic picture to better understand your own situation.
Phase 1: Recovery
This is the first phase following a recessionary period. High vacancy rates and low prices permeate real estate markets, and if timed correctly, low-priced assets can be scooped up at a discount. This is challenging, as a recovery period still feels like a recession to many, and predicting the bottom is always a gamble.
Phase 2: Expansion
This is where the economy grows and housing is balanced between supply and demand. Investors are typically active during this phase as economic confidence grows.
Phase 3: Hyper supply
This is where we see massive amounts of housing stock coming on the market, moving from a balanced market to one characterized by peak housing prices. We may be in this type of real estate phase shortly, with both prices and starts rising. The real opportunity here is to take some money off the table by liquidating some assets, particularly your poorly producing properties or ones with larger capital expenditures on the horizon.
Phase 4: Recession
We are certainly in a recessionary period at the moment, but that hasn't slowed down real estate, making it difficult to optimize your position for this phase. Typically, this real estate cycle involves overinflated growth, with rental and real estate prices dropping significantly, high unemployment, and businesses shuttering.
A buyer's market simply refers to the imbalance between supply and demand. Here, there's typically low demand and high supply, meaning real estate prices are lower. You may be able to tell it's a buyer's market if:
- Home prices are historically low.
- Buyers are hard to find.
- Listings are high.
- Home prices are falling.
- Sellers are willing to offer concessions on price and terms.
Phase 1 and 4 noted above can be technically classified as buyer's markets, although there are always exceptions. During a recovery (phase 1) and recession (phase 4), economic confidence is low, and therefore so are prices.
This can put buyers and investors in a position of control in most transactions. When considering trying to time a real estate market, these are the optimal phases to hold most control if you're a buyer. Real estate investors can control negotiations and dictate prices much better in these circumstances than during phases 2 and 3 of the real estate cycle.
All that said, all real estate is local. You must be intimately familiar with your local housing market and economic indicators. What's going on nationally or at a state level may not be true for the local markets where you invest.