Rental and Real Estate Trends and Market Cycles

If you're into real estate investing, you know how important it is to keep an eye on the housing market. This means understanding the real estate market cycle, which moves along with the country’s economy. Investors should always know where we are in this cycle.

The market has been pretty unpredictable in recent years, which means (now more than ever) it’s even more important to understand how these cycles work. We’ll be breaking down what real estate cycles (or market cycles) are, how they work, and why they matter in this article, so stick around!

What is the Real Estate Cycle?

Since the 1800s, researchers have noticed that the real estate market follows an 18-year cycle. Economist Fred Harrison was one of the first to map out this cycle and its phases. This cycle ran smoothly until around 1925 when government regulations started to change things.

These changes eventually shaped the market cycle into what we see today. The real estate market cycle is meant to help predict the best times to buy, sell, or hold properties. It has four main phases: recovery, expansion, hyper-supply, and recession.

We’ll be talking about these phases in more detail shortly, but first, let’s discuss why it’s so important for investors to understand the real estate cycle.

Why is it Important For Investors to Understand the Real Estate Cycle?

As a real estate investor, it’s very important that you have a solid understanding of the real estate cycle. Here’s why:

• Predicting Price Movements: Knowing why property prices go up and down will help you as an investor make better decisions (and trust that prices will eventually go up again).
• Navigating Market Crashes: Market crashes are unfortunately a part of the market cycle. As long as you have a good understanding of this, you’ll be able to stay calm during market crashes and minimize your losses.
• Identifying Market Changes: Over time, you’ll learn how to spot signs of upcoming market changes. This means you’ll be able to make more strategic moves.

The Four Phases of the Real Estate Cycle

Now let’s take a closer look at each phase of the real estate cycle below. This will help you get an idea of how investors can benefit.

Recovery Phase

In this phase, the economy is starting to recover from a recession. Unemployment is high, new construction is slow, rental growth is low, and consumer confidence is weak. However, real estate prices are starting to rise.

Investors can often find properties below market value and begin renovations. As the economy improves, these properties can be sold or rented out at a profit.

Expansion Phase

During the expansion phase, the economy is bouncing back. The job market gets stronger, people feel more confident, buying power increases, and demand for houses goes up. This is when the real estate market picks up and home prices start to rise.

Investors should pay attention to what buyers want and renovate properties to meet their specific demands. Once these properties have been renovated, investors can sell them for a profit or rent them out as demand continues to go up.

Hyper Supply Phase

After a certain point, the supply of houses exceeds demand because of all the construction going on during the expansion phase. The economy might shift again, which could lead to more homes on the market than people want to buy. House prices may still rise but at a slower rate. Eventually, prices start to plateau as the market reaches its peak.

For this reason, investors should hold onto their properties or look for new ones that could be profitable later during the hyper supply phase. Keep an eye out for rising vacancy rates and unsold homes — both of these things could be signs of an upcoming recession.

Recession Phase

The recession phase hits after an economic downturn, with high vacancy rates and too many houses on the market. New constructions from the expansion phase are completed but demand has already peaked and dropped, leaving many new homes empty.

It isn’t all bad, though — investors can find great deals on distressed properties (often sold by owners who can't pay their mortgages). These properties can be renovated and held until the market improves. It could be a great way to make a profit in the long run.

Current Rental and Real Estate Trends

The third quarter of the year marks the end of the prime real estate season as summer turns into fall. Even so, home prices are expected to stay high due to low inventory and steady buyer demand. Mortgage rates aren't expected to drop much either.

Many homebuyers are finding it difficult to afford homes these days, especially with the median price for existing homes hitting a record high (around $420,000) according to the National Association of Realtors. Once again, prices and mortgage rates are unlikely to drop anytime soon.

Rental Market Trends to Watch Out For in the Future

Keeping up with rental market trends is absolutely essential for investors. Let’s take a closer look at some rental market trends to watch out for in the future below:

Changing Demand

Demand for rental housing can change for a number of reasons, including demographics, economic conditions, and even different lifestyle preferences. For example, with more people working from home these days, there might be more demand for rentals in suburban or rural areas.

Impact of Inflation

Inflation, of course, can significantly affect the rental market. Over the past couple of years, we’ve seen living costs go up a whole lot. When living costs rise, so do rental prices. As inflation continues, landlords might raise rents.

Diversified Spaces

These days, there’s a growing demand for more flexible living spaces. Renters want homes that meet their specific needs (i.e., perhaps they want to have an extra bedroom or office space, or a spacious outdoor area). By offering diverse rental options, you’ll have a much easier time attracting tenants and keeping the occupancy rates high.

Rising Rent Prices

Rent prices might keep going up because of increasing demand, limited housing supply, and higher construction costs. If you’re thinking about increasing rents, make sure to consider the market conditions and what tenants can actually afford. You’ll also want to keep the local rent control laws and current market trends in mind when setting rent prices.

Regulations in the Market

Rental markets are influenced by changing regulations, which can affect landlords. These regulations might include rent control, tenant protection laws, and requirements for property standards and safety. If you want to avoid running into legal issues as a landlord (and maintain good relationships with your tenants), you should definitely keep up with these changes.

Strategies for Homebuyers and Sellers

When it comes to investing in real estate (whether you’re trying to buy or sell property), you might be wondering what you can do to make this process easier. Here are some tips you can follow if you want to make the most out of your real estate investment experience.

For Homebuyers

• Be Realistic: Understand that prices, rates, and competition will stay high this quarter.
• Shop Around for Rates: Since mortgage rates are likely to remain high, you’ll want to try to find the best rates possible.
• Focus on Long-Market Properties: Homes that have been on the market for a long time may offer more room for negotiation.
• Evaluate Your Finances: Make sure you have enough savings for a down payment, maintenance, utilities, insurance, and other homeownership expenses. If you plan to stay in the home for a while, it might be a good time to buy — but you should avoid overextending yourself financially. Remember, you can always refinance later if rates drop.

For Sellers

• Consider Timing: The third quarter is the end of the peak season, so you should expect slightly longer times on the market and lower prices compared to the summer.
• Plan Your Next Move: Make sure you know where you’re going next and what it will cost. Selling your home for a higher price might mean your next purchase is more expensive too.
• Downsize or Move to a Cheaper Area: Ideally, you should sell to downsize or move to a less expensive area. If you’re staying in the same area and upgrading to a more expensive home with a higher mortgage rate, you’re going to need to prepare yourself for higher costs.

The Bottom Line

Perhaps this goes without saying, but it’s very hard to make smart investment decisions if you don’t really know what you’re doing. This is just one reason why understanding the real estate market cycle and current market trends is so important.

By keeping an eye on the market cycle, you’ll be able to navigate the different phases more effectively. This means you’ll get to maximize your returns (and minimize your losses). The best advice we can give you is: stay informed and be prepared.

The real estate market is ever-changing, but there’s no reason you can’t succeed in your investment endeavors as long as you have the right information and tools on hand!