By Brian Rodgers
We all know that the economy has its ups and downs, and we’ve certainly seen that over the past several years. Like the broader economy, real estate is also a cyclical market. Here in Southwest Florida, real estate is a vital part of our economy and what keeps many people employed. As a buyer, investor, or potential seller it’s important that you understand the four stages of the real estate cycle. By understanding the stages you’ll be able to better determine whether now is the right time to buy, sell or hold onto property.
Recovery
The Recovery phase marks the beginning of an upturn following a downturn in the real estate market. It is a period of transition and stabilization, often coming after a market correction or downturn. This phase is characterized by subtle yet significant shifts that signal the beginning of improvement in the market.
Demand for property initially starts out low but gradually increases. Encouraged by lower prices and better economic conditions, buyers begin to return to the market. A sense of urgency is still lacking during this phase.
As this phase continues prices begin to stabilize, making it a potential buyer’s market and more predictable for both buyers and sellers.
Hesitation is the keyword for builders. New construction is slow to take off as contractors wait for clearer signs of market improvement before committing to new projects. This lack of new inventory can contribute to price stabilization.
Expansion
The peak period of the real estate cycle is known as the Expansion phase. This phase is characterized by robust growth and optimism. It’s a period marked by significant increases in demand, rising property prices and hammers hitting nails as the market responds to growing confidence among buyers and investors.
With economic conditions improving, confidence is growing, and more buyers are entering the market. This leads to more demand for properties, ultimately leading to competitive buying scenarios such as bidding wars and shorter listing durations.
Saturation
The Saturation phase marks a turning point in the real estate cycle. This is where we see the balance between supply and demand beginning to shift. Following the booming Expansion phase, the Saturation phase is characterized by an overabundance of properties due to excessive construction and a slowdown in buyer demand.
Because of all the construction, many new properties are entering the market. This is a result of the optimistic building during the Expansion phase. As supply increases, demand begins to slow, and buyers are fulfilling their real estate needs. Economic conditions also start to cool off.
Due to the abundance of supply and decreased demand, property prices begin to level off and, in many cases, decrease, leading to more negotiable market conditions, favoring buyers.
Correction
The final phase of the real estate cycle is the Correction. This is where we see a noticeable downturn in the market. This downturn means a significant reduction in buyer activity leading to a decrease in demand and a decline in property prices. As in the Saturation phase, supply continues to grow. Economic conditions and market overvaluation typically drive this downturn, impacting the confidence of both buyers and sellers.
As consumer confidence wanes, fewer properties are sold. Uncertainties in the economy and stricter mortgage conditions often lead to this diminished demand.
Prices continue to fall because of the lower demand which may lead to situations where recent buyers find their properties valued at less than their purchasing price. This is known as being “underwater” on a mortgage.
Finding long-term success
The real estate cycle is a concept that any real estate buyer, seller and investor must understand if they strive for long-term success. All four phases of the cycle cause the real estate market to shift significantly. There are opportunities in every phase of the cycle, so staying on top of the shifts is important to maximize those opportunities. When the market is shifting, the right real estate agent can make all the difference for a successful transaction.
About the Author
Brian Rodgers is owner and qualifying broker for Worthington Realty, a boutique real estate company specializing in residential sales, rentals and development across Southwest Florida. For more information, call 239-437-3334, email info@worthingtonrealty.com or visit WorthingtonRealty.com.
