The Emotional Real Estate Cycle

The real estate cycle is an extremely important concept and it’s really risky to deal with the real estate market if you’re not very clear on the idea. The good news is that when you fully understand the real estate cycle and know what’s going on in the financial markets, you’ll have a perfect route map heading to greater real estate values.  

To become successful in the real estate industry, it’s essential to know if it’s a good time to invest or if it’s one of those crucial periods when you need to pause the game for a while. The main reason why many people fall in trouble, is that most of them are not aware of the real estate market phase and tend to go for the wrong action. Let’s check out the Four Phases of Real Estate Cycle.

The Four Phases Of Real Estate Cycle

  • Phase One: Buyer’s Advantage (Perfect time to buy)
  • Phase Two: Buyer’s Advantage (Good time to buy)
  • Phase Three: Seller’s Advantage (Okay to buy, but with extreme caution)
  • Phase Four: Seller’s Advantage (No buying, start selling)

There are some extremely important strategies that needs to be followed in each of these four cycles. A single wrong action can lead to disastrous consequences.

Phase 1

During this period, property is available at a very cheap price. Bargaining goes on and the prices never get a chance to shine. Home developers start leaving business, as well as real estate agents. The media has a negative view of real estate.

In this phase, most people are not much interested to buy although the properties are available at incredible prices. When you look at the rear mirror, there are those ominous dark clouds in the sky and you plan to avoid looking through the windshield at the gorgeous blue sky with golden sunshine.

Buying in this phase canl be a difficult situation and yet it is the most profitable phase for buyers. All your friends and the so-called ‘experts’ will stand against your decision and for buying you must have a very strong will and vision in this phase.

Phase 2

In this phase, the prices of real estate starts to increase gradually with the increase in demand. The media starts to have positive predictions about real estate and the investors who were standing on the sidelines can’t wait to jump in. The market becomes lively with the increase in prices and demands. The rates appreciate to double digits.

If you invest money at the beginning of this phase, you’re likely to make more profit. If you plan to wait until the double-digit increases, i.e. till the middle of this phase, you’ve missed the chance to make maximum profit. When everyone starts talking about real estate and the most skeptic investors have put in their money, i.e. the late part of this phase, that’s the most risky time to invest. Your emotions might tempt you to purchase, but your gains will not be long-lived.

At the end of Phase 2, it’s best to sell your property and expand your profits. The emotions, however, will tell you to do exactly the opposite. The market is euphoric and your emotions will want you to buy. In this phase, most investors are driven by their worst friend, whose name is Greed!

Phase 3

The market cycle peak is reached at this point and starts to flat out. The real estate becomes highly expensive and whoever had the least interest to get into the market, are already in. The number of buyers start to reduce. The sellers try to sell at their desired rates but reluctantly are forced to reduce their prices a bit.

The buyers in this phase think that this is a good deal. Despite the signs of falling value, their emotions will tell them to purchase. Poor buyers, they don’t even know what’s lying for them at the corner in Phase 4.

Phase 4

Everything starts to collapse in this phase and fall of demand causes a fall in the price. If you’re planning to invest in the real estate business, there cannot be a worse time to do so. Despite the fall in prices, most sellers suffer from denial and prefer not to sell at lower prices. They think that things will get better. With time, things turn worse and more sellers are compelled to sell of their properties at lower rates.

The Greed that grew in Phase 2 will now be replaced with Fear. Economy will be in a critical situation with high rates of unemployment and the negative opinions of the media. Foreclosures will rise drastically and sellers will become desperate.

The market will reach its bottom with despair reaching its peak. This is the perfect time to purchase and start making maximum profit. The sad thing is, there is no physical bell to ring in our ears that the market has reached its bottom and it’s time to buy again. Our emotions are now totally controlled by fear and tells us that buying now is the craziest idea ever.

As you can clearly see that emotions are not at all helpful when it comes to investing in real estate business. For becoming a successful real estate investor, it’s important to control emotions and take necessary actions based on indicators showing the current phase in the real estate cycle. The good news is that, these indicators do exist in the industry and are extremely accurate for predicting the current phase.

Here’s a chart showing the emotional gradient of buyers and sellers when they plan to invest in the real estate market.

The key to success is to accurately know what part of the cycle you are in. Only having a proper understanding of the cycle will not be helpful unless you have a perfect idea about the emotions accompanied by it. No one can guarantee you profit in a real estate business, but understanding the real estate cycle, the investor emotion cycles and the phase indicators can ensure you the maximum probability of profits. That’s how money is made through smart investing!

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