The Four Stages of a Real Estate Cycle


Stage One: Sales increase/Prices flat

THE RECOVERY.  Property is cheap and bargains are everywhere.  The industry has contracted: developers go out of business, agents leave for other careers.  The media is completely negative.  Buyers’ emotions say “don’t buy,” despite the fabulous value available.  People focus on the dark clouds in the rear view mirror, instead of looking forward into the blue skies and sunshine.  Now is when savvy investors can make the most profit.  It takes objective vision, resolve and a strong will to buy now – everyone will tell you to do so is nuts.

Stage Two: Sales increase/Prices increase

THE GOLDEN AGE.  Real estate prices rise along with demand.  The media becomes increasingly optimistic about real estate.  Investors who have been on the sidelines take action.  The market feeds upon itself, causing prices and demand to rise together.  Double-digit rates of appreciation become the norm.  The earlier buyers act in this phase, the more money they will make.  Those who wait miss out on huge profits.  For sellers, the end of this phase is the ideal time to maximize profits, but their emotions will say to wait; they will be poised to lose if they give in to greed for too long.  By the end, there is complete euphoria in the market.

Stage Three: Sales decline/Prices increase

THE PEAK.  Prices reach a peak.  Real estate is overpriced.  Everyone that is going to be in the market is already in, so there are fewer buyers.  Sellers try to hold out without reducing prices until a reluctant few are forced to lower their prices a little bit.  Buyers at this level still think they are getting a good deal, even though value is not there and indicators signal it is not time to buy.  They do not suspect that the music has already stopped.

Stage Four: Sales decline/Prices decline

THE UNRAVELING.  Things unravel.  Continued lack of demand causes prices to fall.  This is the most dangerous time to be invested in real estate.  Prices fall, but sellers remain in denial.  They hold out and think things will turn around.  Reality sets in and more and more sellers are forced to lower prices.  Greed is replaced with fear.  The economy is bad, unemployment high, the media negative.  When despair is most severe, the market finds a bottom.