Within each type of Seller’s Market and Buyer’s Market, there are two stages that occur. The first stage is dominated by supply and the second stage is dominated by demand. In this 4-part series, I’ll highlight the four stages of a real estate market cycle based on the two aforementioned factors and the correlating buying strategies of each.
Part 1: Seller’s Market: Stage One
Demand is rising; prices are rising according to the rise in demand. We are leaving the last stage of a Buyer’s Market and this is the first transition into a Seller’s Market.
Characteristics of this Market:
- Supply of properties on the market dwindles
- Properties selling fast, time on market is at its lowest point
- After a long period of inactivity, speculation and development are in full swing
- Unemployment is low
- Property prices and rents are rising
- Demand for real estate is at its highest point
Buying Strategy-When you buy during this stage you have entered the market half past the optimum time to buy for long-term appreciation. The best time to buy is a Buyer’s Market Stage-Two. However, there’s still a lot of money that can be made buying during this stage, as no one knows how long and how far the market is going to increase. If you buy early in this stage, you can afford to pay market prices as you expect the property to appreciate. The strategy is to buy and hold long-term or until you see the market entering Seller’s Market: Stage Two.
Part 2: Seller’s Market: Stage Two
In this stage, due to new construction and owners seeing an opportunity to cash out, supply begins to rise. In this stage demand remains strong and the amount of excess supply is not enough to shift the market to a Buyer’s Market.
Characteristics of this Market:
- Market time begins to increase.
- The number of properties on the market increases.
- Sellers are waiting longer but are still getting inflated prices.
- Land is being purchased for speculation.
- Amount of construction in the pipeline is excessive and the potential for overbuilding is likely.
- Demand for construction and materials is rising.
- Prices for construction and material rises accordingly.
- Business and job growth begin slowing.
Buying Strategy- Sell. Once you recognize that you market has gone into a Seller’s Market: Stage Two. Any property that you own that you do not plan to keep for a long time should be sold. The profits that you make from the sale of your building(s) should either remain in cash until the market changes to a Buyer’s Market: Stage Two or should be used to fund a deal that is an exceptional value. Always try to buy a building that was larger than the last one that you sold. The more you level up, the wealthier you’ll become.
Part 3: Buyer’s Market: Stage One
During this stage, the dominant characteristic of the market is the oversupply of properties now on the market. The market is now overbuilt and both buyers and sellers know it. The market has transitioned from a Seller’s Market to a Buyer’s Market.
Characteristics of this Market:
- Excess supply of properties on the market.
- Prices are falling, rents are falling.
- Demand is falling.
- Time on the market sharply increases.
- New construction is overpriced and stagnant.
- Unemployment reaches its height.
- People in the construction fields struggle for work.
- Bank foreclosures sharply increase.
- Investment property values decline to lowest level of all four cycles.
Buying Strategy- This is the bottom falling out of the market. The only thing you want to buy in this market is a deal that has huge cash flow. Otherwise, keep your money in your pocket. There might look like a lot of good deals on the market but the problem with a Buyer’s Market: Stage One is you don’t know where the bottom is. You don’t know how long the market is going to go or how low rents are going to fall.
Part 4: Buyer’s Market: Stage Two
The market is recuperating from oversupply. Due to over building, new construction has been virtually halted. The market is absorbing the excess supply with fewer and fewer properties coming on the market. Demand for properties begins to increase sharply as more buyers are qualified to purchase at these low prices.
Characteristics of this Market:
- Market absorbing oversupply.
- Time on market decreases.
- Job growth increases.
- Existing properties are being rehabbed.
- Investment properties are at their lowest levels but begin to slowly increase.
- Rents are at their lowest level and have begun to slowly increase.
- Competition for bank foreclosures is fierce as their number declines.
Buying Strategy- Of the four stages of a real estate market cycle, the best time to buy is Buyer’s Market: Stage Two. It is at this time that the market has turned the corner from the bottom and prices and rents start to slowly increase. At this stage, you can pay market prices because the values have already begun to rise and today’s market price is tomorrows bargain. You can also afford to purchase properties with just slightly positives cash flow expecting rents to increase and that cash flow to become larger and larger over the next couple of years.
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