What Are Real Estate Cycles?
The term real estate cycle is very similar to the economic cycle and is something we all should know and understand. These phenomena affect not only our lives, but the lives of everyone who came before us and everyone who will come after us as well. An economic or real estate cycle refers to the natural and inevitable fluctuation of the economy between periods of expansion (booms) and contraction (recessions). Factors such as gross domestic product (GDP), interest rates, levels of employment, and consumer spending are all pieces of the puzzle when trying to determine the current stage of the economic cycle.
Because the real estate market is directly linked to how well the economy is doing, when the period of the cycle changes in one, it changes in the other. When there is a recession in the economy, no one has money to buy houses and so prices plummet thus creating a real estate recession. To quote Charles Dickens, “Change begets change.”
A key point to recognize when trying identify the current state of an economic/real estate cycle is paying attention to what investors are investing in. During a period of expansion, an economy will have a GDP that is increasing rapidly. Thus, investors will try to purchase companies in technology, capital goods, and basic energy during these times. During a period of contraction, investors will look to purchase companies in the utilities, financials, and healthcare fields. Essentially, they want to capitalize on whatever people are interested in during that time. When times are good and the economy is doing well, people have excess money for new technology, capital goods, etc. When times are bad, people’s focus is more on basic necessities of life such as healthcare and keeping the lights on in their house.
Key aspects of an economic boom include higher than average GDP growth, higher disposable incomes, less unemployment, increased consumer spending, and better wages. As you would expect, key aspects of a recession include below-average GDP growth, lower disposable incomes, higher unemployment rates, and decreased consumer spending. The real estate market will be very good during economic booms and people will be looking to move into bigger and better houses.
Economic cycles are more than just fluctuations in the economy. The economy fluctuates every day with not much notice, but a cycle change has far reaching effects that nearly everyone in every sector will feel. Historically, a recession is defined as when the economy has two consecutive quarters of negative growth. Most recessions have a lifespan of 18-24 months. During that period, people will be sitting on their properties, not wanting sell or buy for fear they might lose everything. There is much less movement in the real estate market during economic recessions.
Recessions are never good, but they are natural and will happen. When they do, keep in mind that it’s only a matter of time before things start picking up again. How long the recession will last is tough to predict so it’s always smart to be prepared. Start saving. Talk to a financial advisor. Make sure your finances are in order so that when times do get tough, you’re ready.