What Is The Real Estate Cycle?
The real estate cycle, sometimes called the housing market cycle, is a model that represents economic changes within commercial and residential real estate industries. The cycle is made up of four parts: recovery, expansion, hyper supply and recession.
The real estate cycle refers to the fluctuations in economic activity, defined by periods of expansion and contraction.
Expansions are phases when the economy is growing. Typically, during an expansion period business grows, unemployment is low and consumers are spending money. The period leading up to the 2008 recession is an example of an expansion. From 2001 to 2007 the American economy experienced steady growth in business and low unemployment, resulting in the economy expanding.
When economic growth begins to stall, economists refer to this as the peak of a real estate cycle. This is when the economy has reached its highest growth potential. The peak of an economy occurs after a time of expansion and before it begins to contract.
An economic contraction is when the economy begins to shrink. During economic contraction, many businesses reduce their production because consumers are spending less money. The reduction in production can lead to layoffs and contribute to increased unemployment.
Depending on the severity of the contraction, economists will refer to this phase as a recession or depression. The trough is the lowest point of contraction and occurs before the economy begins to grow into 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 running well, interest rates tend to be higher. There are more people buying and investing and most consumers don’t need an incentive to continue spending.
When the economy is performing poorly, interest rates are lowered to encourage spending. When experiencing economic contraction, consumers are more conservative with their spending. By lowering interest rates, consumers have an incentive to purchase more, even if unemployment is up and the productions of goods is down. The lower interest rates give home buyers an incentive to purchase and homeowners an incentive to refinance.