Real Estate Cycles Explained: Seller’s vs Buyer’s Market

The real estate market, like any other market, is cyclical. At different points in the cycle, it can be more financially beneficial for buyers than sellers or visa versa. The idea is to be out before the big drop (i.e. sell when the real estate market is peaking) and in before the big jump (buying when the prices are low, right before they begin to rise). That said, timing the market can be tricky. How do you know if you’re in a seller’s market or a buyer’s market?

It all comes down to basic economics (i.e. supply and demand). It’s typically a seller’s market when there’s less inventory than the year before and it spends less time on the market before sale. Prices are higher than previous years and contracts come in over asking price. A buyer’s market would be the opposite – there is more supply than demand. More inventory is on the market for longer, and prices are lower.

Past Cycles

Fluctuations in the real estate market are not a new phenomenon. In fact, throughout the 4 decades that I’ve been investing in real estate, I’ve seen it cycle several times over.

Some will remember the savings and loan debacle of the late 70s and early 80s. Interest rates on bank financing went up to 20%. There was less demand due to high rates, and more supply on the market, making it a buyer’s market. People were still selling houses, but they couldn’t sell them for what they bought them for because of the high interest rates. But in 4-5 years, the cycle changed again.

There were shortages in gas, global cooling concerns, and Jimmy Carter was espousing conservation. Most Bank loans were floating and as rates came down, real estate became more affordable, tax laws favored home ownership, and more houses were purchased or built. The housing market started to boom, and the unemployment rate was going down. More people could now afford home ownership, and the market's recovery was in full force.

Then there was the housing crisis / financial crisis of 2008/2009. In 2010, everything was frozen. Banks weren’t lending, so there were very few buyers in the market (low demand). Supply was up and prices were low due to foreclosures and motivated sellers looking to offload properties they could no longer afford. Even if they had the property paid off, they still had to pay the taxes and upkeep.

The market started to rebound in 2011/ 2012. More banks started to lend, and property prices began to drop. In some places, such as Las Vegas and Florida, prices went down as much as 75%. The Northeast seemed to have a limited drop in price. Foreclosures slowed, jobs started coming back, and mortgage interest rates were low. New housing starts rose and the recovery cycle began. The real estate and stock markets have seen solid growth into 2020. Most real estate pricing is up. People want or need more space - they want a yard. The “home” has become an office, school, playground, bar, restaurant, and gathering spot. Urban real estate with the hustle and bustle associated with close quarters is dieing on the vine. The suburbs are flourishing, especially in the sun states. As an example, Florida homes are at all time highs and New York flats are at ten year lows.

To put it into perspective, let’s compare 2010 (a buyer’s market) to 2020 (a seller’s market). In 2010, you might have had 1 buyer putting an offer in on 3 houses. In 2020, you could have more than 3 buyers putting in offers on 1 house.

The Current Market

This brings us to today. Regarding residential real estate, we are most definitely in a “seller’s market.” In my lifetime, I have never seen supply this low, and there are a few reasons it’s lagging so far behind demand.

The pandemic has caused mass migration patterns out of urban areas and multi-family properties, such as apartment buildings and condos. This is partly due to safety concerns, but also the increased acceptance of work-from-home arrangements. Bank interest rates are also at an all-time-low, meaning that more buyers can afford higher priced homes.

New construction is not keeping up. There are fewer tradespeople than in previous cycles (i.e. less people working in construction), and due to the pandemic work has slowed down. Even now, after the initial shut down, tradespeople must socially distance at properties. For example, the plumber might come one day and the electrician on another day, and so on. Prices are also higher for supplies, such as steel and lumber, due to factories being shut down and production slowed.

If you were to sell your house now, you would probably get top dollar.

The commercial real estate market, however, is at a completely different point in the cycle. Technology has enabled companies to abandon the brick-and-mortar offices and work remotely. Contactless ordering and online services have decimated retail goods shops (think Amazon vs. Macy’s). Plus, due to the pandemic, many businesses had to shut down temporarily and couldn’t recover from financial losses or they simply couldn’t adapt their business. There are more commercial properties on the market than ever, and much less demand for them.

So, whether you’re investing in residential real estate or commercial, how do you decide whether to sell, buy, etc.?

My Strategies & Outlook

Personally, I always evaluate the return I’m getting with my money in each market cycle. For example, let’s say I purchased a property at $200k and I rent it out for $20k a year, making 10% on my money. Rent doesn’t go up as fast as prices do, so if my property appreciates and is now worth $300k, I would still be making $20k a year, which is only 6.67%. If I sell it for $300k, I can invest that money elsewhere, rather than in real estate right now, making a return closer to 10%.

Of course, even if you’re not intending to sell, sometimes the Godfather quote rings true and they make an offer you just can’t refuse.

In fact, I now have a few properties up for sale, some residential and some commercial. While commercial properties are certainly harder to sell now, I’m more inclined to offer seller-financing at a lower interest rate. Since banks typically make business-owners jump through more hoops when it comes to financing, this is something that buyers appreciate. It provides more demand for my properties, but it also means I need to be selective about who I sell to, ensuring that I will be paid back. For example, I stopped renting to product providers about five years ago.

Moving forward, I expect the residential real estate market to go up further, peak, and then start to swing back the other way. There will likely be new housing starts, especially if the supply chain is re-established. This will cause the price of old homes to go down because they will be competing with new supply. With new supply, pricing will eventually go down across the board. If interest rates start to climb, demand will drop, because, of course, what goes up must come down.