Timing the Real Estate Market: 5 Phases in the Cycle

October 11, 2016 – A majority of real estate observers tend to see markets in one of two states: climbing or falling.  In fact, this is not unique to real estate, but is a common trait seen with investors in stocks and commodities as well.  However this view naturally leads people to invest at market tops and sell at market bottoms (sound familiar?). 

There are actually 5 Phases in the Real Estate Cycle:

  1. Cycle Bottom / Early Recovery
  2. Expansion
  3. Exuberance
  4. Contraction / Early Downturn
  5. Full Downturn / Recession

Take a look at the chart below, which shows the 5 Phases along with where certain US cities fall along the cycle as of September 2016:

5 Phases in the Real Estate Cycle

Each phase may last a few months to a few years, depending on the market.  What's more, each phase rewards very different investment strategies.  And local markets can be in different phases at the same time.  If you happen to live in the SF Bay Area for example, the daily noise from the real estate market would lead you to believe that all real estate is on fire.  But if you happen to live in Houston, your perception is likely quite the opposite. 

As an example, in 2009-10 the SF Bay Area market was in Phase 5: Full Downturn / Recession while the Austin market was in Phase 2: Expansion.  Today, you can see that both are currently in Phase 3: Exuberance. 

What happened? 

The SF Bay Area moved through Phase 5 -> Phase 1 -> Phase 2 -> Phase 3 in just 4 years.  Austin took the same amount of time to move from Phase 2 -> Phase 3.  Each market is different, and requires a knowledge of which phase that market is in and what factors are driving it from one phase to the next.

It is important to note that although each market goes through the five phases, the degree to which prices will swing also varies by market.  That is to say, do not expect to see the wild price swings of a coastal city such as a New York or San Francisco in more stable areas such as a St. Louis or Cleveland.  To limit downside risk, buy in markets that are currently in Phases 1 and 2, and sell in Phases 3 and 4.  If a market is currently in Phase 5, wait it out.

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