Four Stages to the Real Estate Cycle

This is the fourth recession we have experienced in our 37 year career in real estate.  From both study and experiencing the cycle four times, we believe the four stages of a real estate cycle are as follows.

For a more complete discussion and our forecast of the real estate market in 2010 and 2011, please download the presentation we made to the Board of a large community bank entitled "RE/set, RE/position and RE/start".

Stage One - Boom

The real estate market typically booms when the economy is enjoying easy credit.  In a highly liquid market, almost anyone can buy a piece of real estate which means the pool of buyers is greatly expanded.  As a result, all those buyers bid up the price, especially wherever there is any type of restriction on supply, such as growth management.

Stage Two - Declining Market

When some shock occurs in the financial system it results in the reduction of credit being available.  As credit availability is restricted, the number of potential buyers is reduced.  Therefore, there is less competition for the product that is being created resulting in declining prices.

Stage Three - No Market

Towards the end of stage two, the regulators force banks to eliminate credit from being available.  As a result, an illiquid real estate market is created where only cash buyers can buy property.  Typically, this marks the bottom of the cycle in terms of prices.

Stage Four - Recovery

After the regulators see that the market has bottomed and the problem loans have been resolved, the regulators typically allow banks to begin to expand the availability of credit.  Increased availability of credit increases the pool of buyers and the cycle starts over again.