Real estate is often seen as a market that is difficult to understand. When real estate falls, many are shocked and left unsure what to do next. However, real estate follows a continuous cycle, repeating itself over the years. You can predict real estate trends and prepare accordingly as the trends follow these four basic phases.
Recovery is the stage that comes after recession. However, since society cycles through all four phases, starting with any phase will quickly connect you to the basic cycle. In recovery, people are trying to recuperate after a nasty downturn. They have lost money or property and want to take everything they have left and hide it in a safe place. Many do not know how to help society improve. Large businesses and the government usually have plans to help people exit this stage and enter the next, more successful stage of the real estate cycle.
During the recovery phase, efforts to create lowered interest rates and new jobs are expanded. With low-interest rates, people will begin investing again. Because more people are investing, companies will need to expand their businesses and hire more employees. Companies may also begin building more properties and expanding their businesses, possibly needing to purchase land. All of these steps, lowered interest rates, more jobs, and expanding properties, are part of the recovery phase.
Once the recovery stage has been successful, the expansion stage commences. People begin to once again trust in society. The typical consumer understands that the worst has been overcome. More and more people begin buying land or investments. As demand rises and supply remains stagnant, prices rise. Profits are also rising for landowners who are selling or renting. Some companies may attempt to increase the supply by building more buildings or machines. Contractors will buy property and begin new housing developments. Every company wants to get a piece of the profits and take a leap of faith to provide more supply.
Prices rise so rapidly that they are created to profit from the anticipated rise in demand. The prices rise slightly above the actual rise of demand. Renters pay higher prices, because fewer apartments and houses are available. Because wages are also rising, renters or buyers are not as resistant. The long-term occupancy average is stable and on the rise. Many buyers believe their investments will pay off if they decide to sell in the future. The expansion stage lasts up to seven years. However, a certain time level can never be imposed on the cycle. The expansion stage mainly consists of supply trying to catch up with demand.
The problems begin when all the new properties built cannot be sold. Since demand was rising, builders were contracted to build more and more buildings as fast as they could. They built many, and the sales were going well. Now, suddenly, sales are not so easy. Finally, there is enough of the product, and people are not going to buy more at the accelerated price. The rises are not as rapid. While they are still rising, the rate is much slower. Contractors may see the signs of trouble and stop building, as they know any new units will not be able to be sold for the price they are expecting. Those who continue building, expecting the same price, will be left with unsellable real estate. The extent of hyper supply indicates how hard the recession will hit.
In the recession stage, property values begin going downward. Many contractors who have already started building finish their current projects. However, plans for any new housing units are stopped. The lower occupancy indicates what is to come. Then the day arrives when the commercial real estate news informs everyone that interest rates are rising. Because supply and price have increased so dramatically, interest rates are almost forced to increase.
New, possible, and planned projects are halted by the risen interest rates. Those who have not stopped already are now forced to finish their buildings with almost no hope of a beneficial turnover. Landowners begin losing money if they are renting a property, because the interest rates are increasing while rent remains static or even decreases. Landowners need to earn more money, but they cannot charge more rent. Foreclosures and vacancies pepper the economy, leaving some investors to pick up the pieces. Many people are scared and try to sell their properties quickly. Others follow suit, causing property to drop in value. The main reason for these problems in the recession state is the rising interest rate.
How This Affects You
This cycle keeps its regularity, occurring about once every eighteen years. If a major war or crisis interferes, it might change the rhythm. However, its regularity is surprising. With the last crash in 2008, the next can be expected to fall around 2026. While no one can pin an exact date on an economy crash, you can look through the record of market crashes and see how the cycle is repeated. Eighteen years is seen often enough to make it more than a random number. The severity of the recession depends on how much the market was oversupplied and how quickly the prices rose.
The economy is currently in the expansion phase. It is common to see new buildings being built. New construction is good for the economy at this point. However, if you are in the real estate business, or if you are a contractor who creates these properties to sell, be aware of the point when the economy is reaching the hyper supply phase. If you notice that prices continue rising but the products are not being bought as quickly, there may be too much supply. If properties are not able to sell, the hyper supply phase is close. Knowing this, you can be aware of the inevitable recession and plan accordingly so that you do not lose your investments.