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:

Cycle Bottom / Early Recovery
Expansion
Exuberance
Contraction / Early Downturn
Full Downturn / Recession

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. Every 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. To limit downside risk, buy in markets that are currently in Phases 1 and 2, and sell in Phase 3. If a market is currently in Phase 5, wait it out.

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