If you’re new to real estate investing, you may not yet know about the four stages of the real estate cycle — recovery, growth, oversupply, and decline (recession). It looks something like this:
As you can see from the chart, real estate developers, landlords, contractors and real estate investors will experience periods of great plenty — followed by periods of lean famine. While no one is able to predict the date of an exact turning point, savvy investors can at least recognize which stage we’re currently at in the cycle — and adjust their investment strategy accordingly.
Real Estate Market Fluctuation
Before we jump into the specifics of identifying the current stage (and therefore WHEN and HOW to enter the market) we should be aware of the reach that we’re concerned with. Real estate markets vary quite a bit from region to region (New York vs. Kansas), from vertical to vertical (single-family vs. office suites) and even from perspective (buyer vs. seller) so when you’re looking at the data, make sure you factor in any relevant factors.
However, when it comes to the overall cycle, it comes down to brass tacks — supply and demand.
Stage 1 Recovery
The flags for the recovery stage are simple — you’ll start seeing fewer and fewer vacancies and limited new construction. In this stage, tenants are typically looking for a lease. They may have recently been foreclosed on (a spike in foreclosures is also an indicator). At this stage, investors with stores of capital can snap up some low-cost assets.
This is a fantastic time to wholesale, fix-n-flip or buy-and-hold. It’s also a great opportunity to get into multi-family properties due to the increased demand for housing.
Stage 2 Growth
When you start to see new construction and fewer vacancies, there’s a good bet you’re in the expansion stage. This is when everybody and their brother wants to get into real estate. Unlike stage 1 (where funding is difficult), banks will start to loosen their lending requirements. As a result, prices spike for buyers and renters.
Around the same time, you’ll notice the unemployment rate drops, inflation rises — and so do interest rates!
Unfortunately, real estate cycles can last for several years and, just like stocks and forex, we can get false signals. Market indicators may tell us that real estate will soon crash — only to correct and continue to climb. What’s the saying? Hindsight is 20/20 — and more often than not, you can only look BACK at a particular time and identify which stage the market was truly in.
For safety’s-sake, this is a good time to consider buy-and-hold or multi-family investments.
Stage 3 Oversupply
What comes next is a period of overdevelopment — vacancies start to pop up everywhere and even though developers can see the decline in demand, they continue to build.
Prices start dropping. Unemployment might even go up — is it the cause or just an effect? The fed will try to stimulate the market by lowering interest rates.
To prepare for the impending recession (stage 4) you’ll want to stick with buy-and-hold or multi-family properties.
Stage 4 Decline (Recession)
During the recession stage, you’ll start to see housing prices level out. As demand and supply find a happy place to meet, real estate investing becomes more risky.
New construction projects take time to complete and if developers aren’t careful, what ends up happening is a drop in demand — with a simultaneous surge in recently completed new construction. And what happens when demand is low and you introduce even more supply? We can take a little trip back to 2008 to find out (hint: recession).
This is a good time to consider investing with a collective (limiting risk and maximizing leverage) or seek hard-money lenders.
Before the pandemic of 2020, we were on track for a recession to start mid-2021 and all the indicators seemed to point towards a 2-3 year period. When COVID hit and the world governments reacted with economic lockdowns, followed by a quick bounce-back, 2021 may be a period of continued recovery.
The dip we were expecting has likely been pushed off for a few years. What we WILL see though, is a significant increase in distressed properties caused by the economic damage that’s already been irreversibly done.
Investors with cash or access to financing, will be able to take advantage of these bargains around the summer of 2021. Investors can also find comfort by diversifying their portfolio with projects they wouldn’t normally pursue. If you typically stick with single-family fix-n-flips, you might try one of our commercial development projects available to collective members.