The Investor’s Guide to the Real Estate Cycle

By Michelle Clardie on 03/07/2024.
Reviewed by Dan Gatsby .
When investors talk about timing the market, they’re referring to buying and selling during the most advantageous phases of the real estate cycle. But there’s a lot of confusion (and misinformation circulating) about the real estate cycle.

In this article, we’re giving it to you straight. As a successful real estate investment firm that produces average annualized returns of over 20% for our investors, we’ve studied the real estate cycle as a concept, analyzed the real estate cycle in the real world, and applied our findings to our active investment strategy. And we’re excited to share that information with you.  

What is the Real Estate Cycle?

The real estate cycle refers to the set of recurring phases one typically sees over time in the real estate market. You have probably noticed that supply and demand are rarely perfectly balanced; the housing market typically leans toward being a buyer’s market or a seller’s market. Whether you’re in a buyer’s or seller’s market depends largely on which phase of the real estate cycle your local market is currently experiencing. 

Understanding the real estate cycle will help you make well-informed decisions as a real estate investor. It can help to increase the accuracy of your income and expense projections and help you decide on an exit strategy for your investments.

The Four Phases of the Real Estate Cycle

1. Expansion

The expansion phase is all about steady growth. Confidence in the market is strong, and more buyers are interested in purchasing property. You’ll see prices increasing and homes selling at (or very near) the listing price.  

In the rental market, we see modest rental rate growth, balanced supply and demand for available rental units, and everyone is generally content.

There is little fanfare around the expansion phase because most people view this as being what a “normal” market should look like.  

2. Hyper Supply

Hyper supply is when expansion reaches a fever pitch, and buyer demand greatly exceeds seller supply. Imagine the bull market of the pandemic era. You had offers way over asking price, bidding wars, and even waived contingencies

This phase is wonderful for sellers who hold all the leverage. And it’s horrible for buyers who watching prices rise while they are getting outbid on multiple homes. This is when some markets become overpriced. The news headlines are a mix of Look How High Home Values Are! and When Will the Market Crash?

3. Recession

Inevitably, hyper supply will reach a tipping point where buyers are no longer willing or able to pay the price of homeownership. So they stop buying. At this point, homes sit on the market for months without interest from qualified buyers. New construction comes to a standstill. Buyers are effectively absent, and sellers are frustrated.

Recessions can also lead to temporary dips in home values. The Great Recession of 2008 is an extreme example of a housing recession. Homes lost a substantial percentage of their value. And, because of loose lending practices, many homeowners went “underwater” on their mortgages, meaning that they owed more than their home was worth. This led to a devastating rash of short sales and foreclosures

Interestingly, rental markets can potentially hit the recession phase earlier than the housing market, particularly if many renters become homeowners during the expansion and hyper supply phases. Home purchases can pull would-be renters out of the rental market. However, the rental market may also recover more quickly than the housing market, which leads us to the fourth phase.

4. Recovery

The market won’t stay down forever. Recovery is as inevitable as the other three phases of the real estate cycle. 

Recovery is when buyer confidence begins to increase and demand starts to return. Recovery tends to start slowly. And it’s often thanks to investors who are willing to take a risk. Investors recognize that prices are lower than normal, and they decide to buy while buyers have leverage. As more buyers trickle into the market, prices rebound, and we eventually return to the expansion phase. 

Factors that Influence the Real Estate Cycle

The real estate cycle is fueled by supply and demand. And these two forces are influenced by multiple factors. 

  • Interest rates. Interest rates serve as an incentive or deterrent to taking on a mortgage loan. When rates are low, buying power goes up, and demand increases. When rates are high, buying power goes down, and demand decreases. The historically low interest rates of the early pandemic era are a prime example of low interest rates triggering a shift from expansion into hyper supply. 

  • General economic conditions. Typically, a strong economy helps buyers feel confident in their job prospects and earning potential. This makes people more likely to purchase property. Economic uncertainty, however, can cause buyers to hesitate.

  • Population shifts. Population shifts can impact the real estate cycle on a local level. For example, a thriving local job market can incentivize people to move to the area, potentially pushing the area into recovery even while most of the country is stuck in a recession.

  • Government incentives. In addition to interest rates, there are certain levers the government to pull to either slow growth or expedite it. For example, by offering financial assistance and tax benefits to homebuyers, the government can entice people to buy. 

How to Invest Based on the Real Estate Cycle

Let’s be clear: if you’re investing for the long term, you don’t need to change your real estate investing strategy to match each phase of the real estate cycle. The housing market may go up and down, but a solid buy-and-hold rental property can provide favorable returns in any market.  

Consistently timing the market is nearly impossible. Typically, by the time you see enough signs to indicate that the market has entered a new phase, you’ve already been in that phase for a while. So you’ve likely missed your chance to sell at the peak of the market or buy at the bottom of the market.

Having said that, certain real estate investment types tend to perform best during specific phases. If you’re looking to align your investments with the real estate cycle, consider when these common real estate investment strategies perform exceptionally well:

  • Fix and flips. You can make a lot of money flipping houses, particularly when property values are climbing due to general market conditions. And they can be risky when demand is dropping. This is a good investment for the expansion and early hyper supply phases.  

  • Wholesaling. Wholesaling is like flipping but with purchase contracts instead of homes. You get a property under contract, then sell the contract to the final buyer, and pocket the difference. This is best reserved for hyper supply markets when property values are increasing quickly.

  • Short-term vacation rentals. There are many pros and cons of vacation rentals, and this isn’t the best fit for every investor. But if you’re interested in vacation rentals, they generally perform best in expanding and hyper supply markets when people have money to go on vacation. However, short-term rentals in smaller, more affordable destinations can do well in recession and recovery markets when people are looking for more budget-friendly vacations.  

  • Build-to-rent (BTR). Build-to-rent homes perform best when would-be buyers have been priced out of the market and are looking for long-term accommodations that feel more like a home than an apartment. This is an opportunity for hyper supply markets, but also for recession markets when would-be buyers are afraid to make the leap to homeowner.   

  • Distressed property investing. Recessions often lead to an increase in distressed properties. Properties that are in pre-foreclosure or foreclosure may be available at a deep discount. But they also require more work than a turnkey property to get market-ready. 

  • Multi-family development. Multi-family developments can perform well in any stage of the real estate cycle, so long as there is enough renter demand to justify adding units to the local inventory. There may be more demand for luxury developments during the expansion and hyper supply phases, and more demand for affordable housing developments during the recession and recovery phases.

How to Invest in Real Estate During Any Phase of the Real Estate Cycle

Many investors want to build a real estate portfolio, but they are hesitant to take action because of where they currently are in the real estate cycle. Even if you understand the cycle in theory, it can be difficult to recognize the signs of changing phases and shift your focus quickly enough to take advantage of those changes. 

This is just one of the reasons why more and more investors are turning to real estate syndication. Syndication pools capital from multiple investors to fund a professionally managed real estate project. The project can use any of the strategies listed above (flips, BTR, multi-family development, etc.). Because each project is professionally managed, you have dedicated experts pre-vetting each deal to make sure it’s a good fit for local market conditions, including the current phase of the real estate cycle. And your returns are completely passive. Plus, because funds are pooled from multiple investors, you can typically buy into a deal for a fraction of what you would pay to purchase a property on your own. 

Lower cost of entry, expert management, and passive returns…there’s a lot to love about real estate syndication!

Real Estate Cycle FAQs

How long is the average real estate cycle?

Current data estimates that the average real estate cycle is 18 years: 14 years of growth plus 4 years of decline/stagnation. However, the cycle can be disrupted by the factors discussed earlier, forcing the expected timeline up or holding it back.

Do you have to change your investment strategy based on the real estate cycle?

Not necessarily. If you’re investing for long-term appreciation and stable passive income, a buy-and-hold rental can serve you well through any phase of the cycle.

Should you avoid investing in real estate during any phase of the real estate cycle?

No. There are always deals available under any market conditions. You might just want to be more cautious about investing in certain ways during certain phases of the real estate cycle. For example, wholesaling is inadvisable during a recession because demand and property values are both declining. So you would be less likely to find a buyer willing to pay more than your purchase contract.  

The Bottom Line

Understanding the real estate cycle can help investors make more informed decisions, but the cycle doesn’t need to dictate your investment strategy. If you have a solid long-term strategy, like buy-and-hold rentals and/or real estate syndication, you can ride out the phases of the real estate cycle with minimal changes to your portfolio. 

Instead, look at the real estate cycle as an opportunity to incorporate some interesting time-sensitive real estate projects into your portfolio. Projects like house-flips and distressed property acquisitions can give your portfolio a bump during specific phases of the real estate cycle while your long-term projects are always working for you. 

Interested in learning more about real estate syndication? Read up on how it works and choose your real estate syndication investment(s) today!  

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