Real Estate Cycle

Real estate markets, cities large and small are subject to the simple economics of supply and demand. Every city goes through a natural ‘heating up’ and ‘cooling off’ period. Historically, the real estate cycle is approximately seven (7) years long, peak to peak.

Growth Phase

As demand increases and supply is constrained, real estate values rise. The point in time that this occurs, i.e. prices begin to consistently rise, is known as the entry into the Growth Phase of a real estate cycle. The Growth phase of the cycle generally last, depending on the market classification, between one (1) and three (3) years. 

Decline Phase

After a period of rising values, a natural balance between supply and demand is restored and the pace of appreciation slows as a city enters the other major phase of the real estate cycle, this is known as the Decline Phase. The entrance to the Decline phase of the cycle is the point at which real estate values flatten and the cost of ownership begins to consistently rise as vacancy increases and rents fall. 

Transitional Zones

Between the two phases of the real estate cycle are two Transitional Zones. First, the Absorption zone of the market cycle is the bridge from Decline (flat values, higher vacancy and low rents) to Growth (rising values, lower vacancy and higher rents). Through the Absorption zone, economic conditions are changing and setting up a positive imbalance with higher demand and short supply. Second, the Saturation zone is the bridge from Growth to Decline. Through the Saturation zone, local construction activity generally remains high. While this period of time closely resembles the Growth phase, a closer look begins to expose less demand, longer exposure times on market and an increasing supply. 

Saturation Zone

Many times this increasing supply during the Saturation zone is a result of the new builder home inventory generated and still available from the recent Growth phase. Because demand is now slowing and new construction supply is rising, builders often begin offering incentives and opening the sale of their inventory to investors. The question must be asked: Is the Saturation zone of the cycle where an investor really wants to buy investment real estate? Before you answer, remember, the Decline phase (flat values, higher vacancy and low rents) comes shortly after the entrance into the Saturation zone! 

Strategically investing in multiple markets and timing your acquisitions during the transitional Absorption zone and early Growth phase, you can diversify your portfolio while potentially maximizing the return on your invested dollar, building equity quicker and, following the 4-Phase process, increase your residual real estate cash flow. 

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