As a homeowner or renter, you may look at the real estate market—which is notoriously difficult to predict, even for top analysts—and decide it’s better to leave figuring it out to the professionals.
However, understanding the basics of it can help you determine when it’s the right time to buy or sell. So if you’re considering making a real estate move, use this guide to better understand market shifts and learn how you can use this knowledge to your advantage.
Phases of the real estate cycle
The real estate cycle, which can last a decade or more, is the core influencer of the state of the real estate market; it’s what drives expansion and contraction and what causes market swings. This ultimately affects home prices, inventory levels, interest rates, mortgage availability, and investment opportunities.
This cycle is categorized into four phases: recovery, expansion, hyper supply, and recession. It’s also circular—when one phase ends, the next one begins. Understanding these phases and how they flow can help you decide when it’s the right time to buy or sell.
This is the first and longest phase of the cycle. It has many of the same characteristics of a recession, such as high unemployment rates and low demand for goods and services. Although the market is still in a recessionary period, it is beginning to show signs of growth: home prices are becoming more affordable and inventory levels are increasing.
Businesses are growing and hiring, and consumer spending is on an upward trajectory during this phase. The real estate market has yet to heat up, but the oversupply of inventory is being absorbed, and the number of days houses sit on the market is decreasing, even as pricing remains affordable for buyers.
In this phase, the market begins to shift and the demand for real estate reaches its highest point.
Prices are escalating and supply is dwindling, so it can be an opportune time for homeowners to sell. However, buyers should closely monitor market trends to determine if purchasing during this phase is prudent.
At this point, the economy begins to contract, and, as a result, most industries reduce their production, causing layoffs. Consumers are also conserving their money and pulling back their spending on goods and services. In addition, home supply levels and days on the market are beginning to creep up and interest rates are rising to help control inflation, making it challenging for buyers and sellers alike to make the moves they want.
The key influencers
The real estate cycle is impacted by several factors that can cause the market to shift, affecting your ability to purchase or sell a home.
Interest rates and affordability
Rates are constantly changing, and the demand for housing will always follow suit. As rates increase and affordability drops, a shrinking market occurs. But when rates are on a downward trend, potential homeowners become incentivized to buy, ultimately driving up the housing demand.
After an expansion, the economy reaches its growth potential and begins to contract. Likewise, the real estate cycle peaks and the demand for housing decreases, resulting in a market slowdown.
As unemployment rises, people begin to fear losing their jobs, which may discourage them from purchasing homes. Conversely, a low unemployment rate means more people are earning an income and are likely able to afford a home.
A robust economy usually goes hand in hand with high consumer confidence. When the real estate market is positive, buyers are more likely to feel comfortable taking out a home loan. However, when the market begins to waver and the word recession starts permeating conversations, buyers may put their home purchase plan on the back burner.
Government policies and subsidies
Legislation can also affect the real estate cycle phases. For example, when the government offers tax credits, deductions, a first-time homebuyer’s tax credit, and other subsidies, it can temporarily stimulate the demand for real estate.
Population changes can cause major shifts in the real estate market. For instance, baby boomers have been entering retirement age, and many have downsized their homes and moved closer to their adult children and grandchildren. As a result, states like Florida, Arizona, and Nevada have had the highest net migration in the past two decades, making these states more likely to experience a market boom as the trend continues.
If you’re thinking about buying or selling, consult with your real estate agent to better understand the current real estate cycle and how it may affect your decision.