The Real Estate Cycle: Are we entering recession?
Real estate is one of the oldest and most stable forms of investment, with cycles that are predictable and repeatable. Understanding the long-term real estate cycle is crucial for anyone looking to invest in real estate, whether for personal use or as part of a diversified investment portfolio.
The real estate cycle can be divided into four stages: recovery, expansion, hyper-supply, and recession. These stages are influenced by various economic and demographic factors and are predictable, with each cycle lasting for around 10 to 20 years.
The first stage of the cycle is the recovery stage, which follows a recession. In this stage, demand for real estate begins to increase as economic conditions improve, and interest rates remain low. Property prices are typically low, making it an excellent time for investors to purchase properties at discounted rates.
The second stage is the expansion stage, characterized by strong economic growth, increasing demand for real estate, and rising property values. Construction activity increases, and developers begin to build new properties to meet the growing demand. During this stage, it is still a good time to invest in real estate, but investors need to be selective and focus on properties that offer the best value.
The third stage is the hyper-supply stage, characterized by a glut of property listings on the market. The increase in new construction during the expansion stage leads to short-term oversupply, which causes property prices to decline. As the market softens, more estate investors list their properties to cash in their accumulated equity. During this stage, investors should be cautious, as properties may take longer to sell, and the market may become saturated. Many would-be buyers step aside to the sidelines concerned that they might pay too much since prices are trending downward
The fourth and final stage is the recession stage, the number of purchases hits a trough, and economic growth slows down because economic activity is a function of completed sales. At this stage, some property flippers and financially strapped investors are forced to sell at a loss. Property prices drop significantly, and more properties go into foreclosure. As the market hits bottom, this presents an excellent opportunity for investors to buy properties at low prices, but it is essential to have a long-term investment strategy to weather the storm.
Understanding the long-term real estate cycle is crucial for investors looking to build a successful real estate portfolio. By analyzing economic and demographic trends, investors can identify the stages of the cycle and make informed decisions about when to buy, hold, or sell their properties.
It is also essential to diversify your real estate investments across different locations and property types to minimize risk and maximize returns. By taking a long-term approach and staying informed about market trends, investors can navigate the real estate cycle and build a successful and profitable real estate portfolio.
Sources:
"Real Estate Cycles: They Exist...And They Matter" by Forbes Link: https://www.forbes.com/sites/forbesrealestatecouncil/2019/03/06/real-estate-cycles-they-exist-and-they-matter/?sh=17ce9af023fa
"The Four Stages of the Real Estate Cycle" by Investopedia Link: https://www.investopedia.com/articles/mortgages-real-estate/08/real-estate-cycle.asp
"The Long-Term Real Estate Cycle: Understanding and Profiting from the 18-Year Cycle" by Business Insider Link: https://www.businessinsider.com/long-term-real-estate-cycle-understanding-profiting-from-18-year-cycle-2011-11
"The Real Estate Cycle: Where Are We Now?" by CBRE Link: https://www.cbre.com/research-and-reports/The-Real-Estate-Cycle-Where-Are-We-Now
"Real Estate Cycles: How to Predict the Next Market Crash" by Mashvisor Link: https://www.mashvisor.com/blog/real-estate-cycles-predict-market-crash/
