The real estate market, like any market, has cycles. Being able to recognize and take advantage of potentially great investments through the ups and downs requires an understanding of how the real estate market works on a deeper level.
Understanding the Different Phases of the Real Estate Cycle
There are four main phases of the real estate cycle. Understanding these phases and developing the ability to predict them helps one better navigate potential investments.
Stage 1: Recovery
Recovery is the first stage after a market pullback or recession. Here, investors will find low housing demand and high vacancy rates. It is a great time to buy properties, as the prices are low.
Stage 2: Expansion
During this stage, the real estate market starts showing signs of healthy recovery and expansion. As GDP stabilizes, housing supply and demand balances. Rental rates go up, and new construction projects begin. Investors tend to be active during this time.
Stage 3: Hyper Supply
Hyper supply is the tipping point from a healthy balanced supply and demand to oversupply. Real estate for sale increases, and it exceeds the market demand, eventually causing the prices to decrease.
Stage 4: Recession
A recession is the result of overgrowth. A declining market soon follows when jobs, rental demand, and construction projects sharply decrease. For investors, this is an excellent time to get in, as prices are at their lowest.
Can You Time the Real Estate Cycle?
There are countless debates regarding whether or not people can time the real estate cycles. Some say that we can expect a recession to occur roughly every 18 years, while others believe that it is a waste of money and time to try to plan investments around these predictions. Regardless, if you keep your eye out for the phases mentioned above, you will have a much better chance of making profitable investments.
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