The real estate cycle is the pattern of market activity observed by economists and other experts who track the economic activity in the real estate industry. The cycle real estate consists of four phases: expansion, recession, hyper supply, and recovery.
Economic factors that affect the cycle include interest rates, demographic trends, and government intervention. By identifying these factors and understanding how they affect real estate markets, investors can identify opportunities during each phase of the cycle and determine whether or not to take action before a change occurs.
Real Estate Cycle: Definition
Researchers have observed the predictable 18-year cycle of real estate through which real estate markets move. Until 1925, this real estate market cycle ran like clockwork through four main stages:
- Recuperation with decreasing vacancies and no new structure.
- Expansion combined with new housing and decreased vacancies.
- Hyper supply combined with rising vacancies and new infrastructure.
- Recession where the number of new constructions coming online causes vacancies to rise.
However, beginning in 1925, the average 18-year real estate cycle was interrupted by government regulation. The Great Depression from 1929 – 1939 and World War II were periods when skyrocketing government intervention impacted the normal process of the real estate market cycle.
Factors Affecting The Real Estate Cycle
The current state of the U.S. and global economies have significantly impacted real estate market cycles. When the economy is doing well, folks have more money and are driven to invest in real estate or move to an ideal home. Because the real estate market can produce recurring profits and gain from possible recognition, more people want to put their funds to work by investing in real estate.
● Income and Statistics
Changes in population makeup, income levels, and housing type can affect the real estate cycle. For example, a more significant percentage of households were in the prime home-buying age groups, with higher incomes, and large-scale housing subdivisions became available during the 1940s-1960s.
Since then, however, the homeownership rate has remained at around 60%. This is because single-family rental homes have become more popular among younger generations who want to rent their properties once they have retired.
● Rate of Interest
High-interest rates can act as a deterrent to home ownership. The higher the monthly mortgage payment is, the fewer people there are that may be able to afford to own a home. Although reducing interest rates generally make homeownership more affordable, low-interest rates can also cause property prices to rise.
The Bank for International Settlements has analyzed the effect of interest rates and house prices in the United States and worldwide. According to a working paper by BIS, interest rates in the U.S. play a shockingly imperative role as drivers of house prices both within and outside of the country.
● Government Interference
Government clauses and tax regulations impact real estate market cycles and the need for real estate investment. Low-interest rates designed to spur investment have contributed to the rapid rise in housing prices, leading to an increased demand for single-family rental homes.
Institutions such as Lennar Homes and Roofstock are targeting this asset class, with 12% of new single-family construction being purchased for rentals.
In conclusion, real estate market cycles are based on several factors, including local economies, population and employment trends, demographics, etc. Therefore, it is essential to know how the cycle of real estate operates and what factors influence it.
External events such as natural disasters and wars affect these real estate market cycles. In addition, these real estate market cycles are also affected by internal factors such as interest rates, inflation rates, and other financial indicators. Being aware of these factors will help you make informed real estate decisions.