Understanding Real Estate Cycles

Real estate cycles are the ups and downs of home value appreciation and depreciation. They’re often described as “booms,” “bubbles,” or “busts,” depending on the value of real estate at the time. If you’re thinking of buying or selling a home, you may want to think about how real estate cycles work, and if there’s any way of predicting what will happen.

Many economists believe that real estate bubbles or booms start off as rational and logical up-ticks in the market, but then, as the profits start to accelerate, a speculative frenzy begins, and soon home price values become over-inflated, sometimes wildly so. This process, which is often referred to as irrational exuberance by economists, is indeed a psychological affair. People hear about other people making huge profits on buying and selling homes, and naturally want to get in on the profit. Soon, people are placing big bets on properties that are not worth what was paid for them, under the assumption that the property will sell for a huge profit because the market has “nowhere to go but up.” People even borrow against their home’s value in order to buy more homes, but when their property values plummet when the market declines, they’re left with overvalued assets.

Of course, it’s not just individual homeowners who create the real estate cycle. In fact, it’s often lead by money managers and other investment professionals who are seeking to get the most amount of profit for their clients that they can. They see profits rise in the real estate market, so that’s where they put their money. When the real estate cycle reaches bubble proportions, it’s only a matter of time before it bursts, and the market begins to correct itself. And when prices fall, people see bargains – and so more money flows into real estate, and thus the cycle begins again.

It pays to have an understanding of how real estate cycles work. To learn more, be sure to speak to a financial adviser who can explain it to you in as much detail as you need.