Using the Real Estate Market Cycle to Your Advantage
Like many other markets, the real estate market goes in “peaks” and “valleys” where property values are very high (the peaks) and very low (the valleys); this is done in a repeating cycle. Now, most readers will likely remember the Great Recession of 2007-2009 when all the property values were in the toilet, people were being foreclosed upon left and right, and people were desperate for buyers for their homes.
Now, this may sound like doom and gloom to you, but it’s not always a bad thing if you play your cards right. However, many agents were too scared in the recession, and got out of the business for more secure, 9-5 jobs that paid a consistent wage. Some agents, like Robert and Carolee Rico, did not let the state of the market discourage them - they just pivoted and changed their business model.
The real estate life cycle follows a pattern that is caused by four phases:
Before the recession, values were going up, houses were selling quickly, and it was easy to buy a home for the first time or “upgrade” to a bigger home. This was an increasing market, and it was extremely lucrative to go after sellers, because listings were the guaranteed source of income and it was easy to sell a home. This led up and up, eventually leading to the market peak, where values hit their high and started to decline. This meant that people were “upside down” on their houses, which means that they owe more on the loan, than what the house is worth. Therefore, many people stopped making their house payments and allowed the lender to foreclose on them, or take the property back. This kicked off an enormous recession, the biggest in the US since the Great Depression.
In a recession or depression, the supply is high, and the demand is low. This drives down value, due to basic economic theory. People are unable to pay their bills, due to low demand for their services or labor, and not making enough money. So how are people supposed to buy a house?
Well, one of the facts of the Great Recession was that there were certain sectors of the economy that were actually doing well - and these people were some of the few with money and liquid assets during the Recession. They were able to buy houses, and they were able to get some killer deals on them too! Some Real Estate Agents thought, instead of focusing on the scarce seller’s market, why not focus more on the buyer’s side and help the buyers out there, find the home of their dreams at a steal of a price? The inventory was ample and, although much of the homes were damaged from deferred maintenance, they were mostly restorable through some construction and labor efforts.
As the market slowly recovers, usually through some sort of government intervention, the general public has a little more money to spend and can consider purchasing homes again. At this point, it’s still very good to be a buyer’s agent, but there are going to be a few more listings coming on the market. People are always going to need to sell their homes, and as the market recovers, more and more people will want to sell their homes as well.
The drawback to being a buyer’s agent, of course, is that it’s much more active work (day to day) than being a seller’s agent. If you’re a seller’s agent, once you’ve put the home on the MLS and set up the advertising, you can take days off and just be available on your cell phone! If you’re the buyer’s agent, however, you are going to be more active -- looking for new MLS listings, driving the neighborhoods looking for FSBOs, and communicating constantly with your buyers.
After the market has recovered a little bit more, it will bypass a certain threshold, and the market will now be in “expansion” mode -- when the economy is growing. This means that more construction will start, and the existing housing will be fuller. This raises values, which means it’s becoming a better and better time to be a seller’s agent. More and more people will want to sell, so you can secure listings and earn income in a reasonable manner. If it’s a quick expansion, near the top of the market, home values will soar because the economy is strong. People want to buy homes because they think values will keep increasing, but homeowners want to hold onto their homes for the same reason. At the top of the market, there is very constricted inventory, and a high amount of construction, but a shortage of available homes.
Stability (or Hyper Supply)
Once all the new construction comes available, the market will stable out for the most part -- rents will fall a little from their peak, and values might go down slightly, but for the most part there is a market equilibrium where supply meets demand and everyone is content. However, the downside is that with the new construction, old buildings become less desirable and rent falls on them.
So... the cycle continues... Once rent starts to fall on the older housing stock, rents start to fall in general, and then (due to the cyclical nature of the market) the market begins to trend downward, until it hits the tipping point and starts another recession. As we said, what do we advise you do in this time? Become a buyer’s agent!
Real Estate Agent and Trainer, Robert Rico, explains what a real estate life cycle is, and how to take advantage of the different economic stages. Do you want to see more video blogs? Subscribe here!