What is the real estate cycle?
The real estate cycle, sometimes referred to as the housing market cycle, is a model that represents economic changes within the commercial and residential real estate sectors. The cycle is made up of four parts: recovery, expansion, hyper supply and recession.
The real estate cycle refers to fluctuations in economic activity, defined by periods of expansion and contraction.
Expansions are phases when the economy is growing. Typically, during a boom, business is growing, unemployment is low, and consumers are spending money. The period leading up to the 2008 recession is an example of expansion. From 2001 to 2007, the US economy experienced steady business growth and low unemployment, resulting in an expanding economy.
When economic growth begins to stagnate, economists call it the peak of a housing cycle. This is when the economy reached its highest growth potential. The peak of an economy occurs after a period of expansion and before it begins to contract.
An economic contraction is when the economy begins to contract. During economic contraction, many businesses reduce production because consumers are spending less money. Reduced production can lead to layoffs and contribute to rising unemployment.
Depending on the severity of the contraction, economists will label this phase a recession or a depression. The trough is the lowest point of contraction and occurs before the economy begins to enter a new phase.
Real estate cycles and the economy
The Federal Reserve oversees and sets interest rates based on the performance of the economy. When the economy is doing well, interest rates tend to be higher. There are more people buying and investing, and most consumers don’t need the incentive to keep spending.
When the economy is doing badly, interest rates are lowered to encourage spending. When experiencing an economic contraction, consumers are more conservative in their spending. By lowering interest rates, consumers have an incentive to buy more, even though unemployment is rising and the production of goods is falling. Lower interest rates encourage buyers to buy and owners to refinance.