Real Estate Cycles – What Does the History Say?
Read Time: 5 minutes
Over the past month or so, I called into a Webinar hosted by our local Cincinnati REIA group for rental property investors and property managers. The Webinar was not strictly focused on rental property management in Cincinnati, but real estate investing in general. It was a rather long Webinar, but I always manage to pull out a few gems while dialing into them. I have been pondering over the past month regarding the history of our real estate cycle that was reviewed during the Webinar. The review revolved around the commonly known four phase real estate cycle with dates applied to them. The host reviewed the 18-year economic cycle and we scoped out what was happening during the previous years. I’ll review them for us next and see what we can learn.
The 18-year economic cycle has four phases that are commonly known. Those four phases are as follows:
1. Recovery – Typically a seven-year phase.
2. Mid-Cycle Slow Down
3. Hyper Supply – Typically a seven-year phase.
4. Crash – Typically a four-year phase.
In the first phase of the 18-year economic cycle, we start to see the devastation from the previous cycle get cleared away and the markets move from recession back to growth. In the most recent real estate cycle, this time frame began roughly around the year 2009. At this point in the cycle, housing prices are typically at their low. This was seen during this time frame as foreclosures were high and deals were abundant.
The second phase of the 18-year economic cycle that may occur is the mid-cycle slow down phase. Examples of instances that can trigger this phase are recessions, governmental intervention, supply outrunning demand, and likely a mixture of several different things occurring. History shows we saw mid-cycle slowdowns in the years of 1979 and 2001. Following mid-cycle slowdowns is phase three, hyper supply.
Hyper supply was last seen in the real estate cycle roughly between 2001 and 2008. It is generally a seven-year phase of the 18-year economic cycle and is the second boom. During this cycle in real estate, there is a “speculative building boom” that can be seen along with an increase in vacancies and foreclosures. In the real estate cycle, there is typically a higher demand for land and it is typically more expensive to acquire.
The fourth and final phase of the 18-year economic cycle is the crashing phase. The crash phase has historically taken about four years in length. The most recent crashing phase occurred back in 2006/2007 when the subprime lending market started to see many loans go into default. This caused a chain reaction all the way from institutions underwriting loans to go into economic turmoil and rising foreclosures dropping values of homes nearby. This chain reaction was observed during this four-year phase of the 18-year economic real estate cycle.
What does this mean for real estate investors and rental property managers? It is important to understand the past and recognize history will inevitably repeat itself. In theory, right now we are in the first seven-year period of the cycle, the recovery period. History would indicate the next phase of our cycle we should see is going to be the mid-cycle slow down phase. If, and when this will occur, is difficult to predict, but history shows this is the next phase. If we look at the beginning of the recovery phase in 2009, this would theoretically indicate a mid-cycle slowdown is coming soon. If a mid-cycle slowdown is indeed upon us, we could potentially see inventory temporarily rise along with a temporary drop in prices. This would create a good buying opportunity during this phase of the cycle.
Whether you are a landlord, property manager, investor, renter, or a home owner in Cincinnati, this is valuable information to study and get more familiar with.