Article summary
It’s a familiar mantra: buy real estate when prices are low (but likely to increase in the future), and sell when they’re high. You've probably also heard that real estate values ebb and flow depending on whether it's a "buyer's market" or a "seller's market." What you may not realize is that those ebbs and flows can be, to a large extent, predictable.
Whether you're buying a home for your family or to generate income, find out how you can leverage seasonal and cyclical changes and get the right property for your needs
Home values are based on seasonal and market cycles
Home values are susceptible to periodic market declines and upticks based on seasonal cycles throughout the year. Property values are also tied to market cycles. Unlike seasonal cycles, these aren't based on the calendar.
The Weather & School Calendar Dictate Seasonal Shifts
Let's start by looking at two sides of the same real estate market coin: the buyer’s market and the seller’s market. In a buyer’s market, interest rates are low, sellers are willing to make concessions, and the neighborhood where you’re looking to buy may even have some vacant properties. In a seller’s market, the seller has the negotiating power. Homes may be selling above fair market value and bidding wars are common.
Either market can happen at any time of year; however, some of the characteristics of each are more common during certain months.
January-March
After the holidays, buyers start to look for deals. New construction has slowed (or even stopped completely in the coldest parts of the country), and having fewer homes for sale is causing prices to creep up.
April-June
Home prices, like the weather, start to heat up. Families are motivated to buy because they want to be settled in their new homes before the school year starts. This gives sellers an upper hand in negotiations, even in markets that are relatively “ho hum” otherwise.
July-September
Home sales start to decline. Sellers feel motivated to get their properties under contract before it gets cold and the market becomes even more sluggish. Prices typically plateau, but they aren’t necessarily going down. House-seekers enjoy more and more buying power as the days grow shorter.
October-December
This is traditionally when prices start to drop (although in the last couple of years we’ve simply seen them rise more slowly). It’s hard, these days, to find sellers who’ve had their properties listed since before summer. But when you do, you may find that they’re willing to accept lower offers. In other words, it’s a great time to buy.
The Economy Dictates Long-Term Real Estate Cycles
While the weather and school calendar drive seasonal market fluctuations, economic and population growth drive long-term, cyclic fluctuations. The four real estate cycles are recession, recovery, expansion, and hypersupply.
Recession
“Recession” sounds like a bad thing, but this cycle actually indicates a great time to buy. Demand for houses is low, which means prices are too.
What to know: If you’re poised to buy, you can get rock-bottom pricing during a recession. When the downturn is over and the market recovers and expands, your investment will grow in value. Just don’t expect to see a profit right away—historically, these cyclic changes take years.
Recovery
The recovery phase looks like recession to most people. However, a closer look shows vacancy rates decreasing and interest from buyers increasing. That rock-bottom pricing during the recession, coupled with population growth and economic growth, spurs investment.
What to know: This is a good time to jump in with both feet. If you’re looking to invest in a “fixer-upper,” the potential return on investment is high. Already own but looking to sell? It’s a great time to get your property ready for market by making some cosmetic and structural improvements.
Expansion
What goes down must come up, right? A newly-robust economy means a growing job market, and real estate markets across the U.S. now look very different from what we saw during the recession. New construction. Low vacancy and high rents. High property values.
What to know: Early in the expansion phase is the best time to build if a new home is what you want. If you’re looking to “flip” a property, this is the time to buy. Interest rates are low and credit comes relatively easy. If you're looking to sell, try to wait for the tail end of the expansion phase to get top dollar.
Hypersupply
As the strong economy inevitably contracts, the market plateaus and begins to decline once again. Construction projects are completed, new projects aren’t started, and the supply finally catches up with (and exceeds) demand. Unoccupied properties start to appear on the market and prices tumble. The cycle comes to completion and begins all over.
What to know: This cycle, characterized by too many houses on the market, seems unfamiliar as of late.. But when it comes, it will be a good time to scoop up properties from sellers nervous about a looming recession. This is called the “buy and hold approach.”
Knowing the patterns gives you an advantage
There’s no perfect formula for knowing when to buy (or sell) real estate, but there are patterns. Whether you’re a first-time buyer or an investor, understanding that they exist and influence home prices will empower you.
Does all this scare you? Home Price Protection from REZITRADE allows buyers to purchase downside protection so if home prices in their area decline, they receive a payout. There’s no claim or proof of loss, it’s all automatic and available for around the cost of a homeowners insurance policy.
There are always unpredictable factors that influence home prices. Utilizing all the information and tools available increases the chances of success, whether your end goal is buying or selling.
Takeaways
- Real estate trends follow two patterns, which are seasonal and cyclical.
- Seasonal patterns are dedicated by the weather and school calendar.
- The cycle of the real estate market is based on the state of the economy.
- There is no way to completely predict market trends or the future state of the economy, but Home Price Protection can act as a safeguard during downturns.