If you’ve been doing your research, then you’ve probably heard dozens of real-estate pundits and salespeople throw out the term “real estate cycle”. Terms like these can fly straight over your head if you’re uninitiated, but this term is actually very simple.
Basically, city real estate prices flow in a cycle consisting of four phases. The prosperity phase, the decline phase, the depression phase and the recovery phase.
Prosperity Phase
The prosperity phase is the time when the neighborhood is at its absolute best. The home prices are at their highest, the schools are at their best, and usually the neighborhood is cleaner and safer than ever.
Decline Phase
The prosperity phase causes home prices and the cost of living to rise. This will cause many homeowners to put their homes up for sale at the same time. This influx of new homes creates an oversupply in the local housing market.
Due to the oversupply, many homeowners will see their properties sit on the market for many months or years with no concrete leads. What comes next is a mad race to the bottom where homeowners will start slowly dropping their prices over a lengthy period of time.
At this point, amenities like specialized boutiques and gourmet shops slowly begin to migrate or disappear.
Depression Phase
Real estate prices have officially hit rock bottom in this phase. New homes are worth a fraction of what they were in the previous phase. Amenities are mostly gone and crime is probably on the rise. The school system may decline as well.
Oddly enough, this is one of the best times to buy a house. Most people don’t have the courage to do so however.
Recovery Phase
The recovery phase starts with several waves of gentrification. In the inner cities it’s sometimes caused by an influx of wealthy college graduates or LGBT people. Specialty shops, boutiques, and high-end grocery stores start to spring up in the downtown areas again. This gentrification also has the side effect of slowly raising the prices again until they hit the prosperity phase again.
The best time to buy a house is on the tail end of the depression phase or the very beginning of the recovery phase. The home prices will be at their cheapest. If you time it correctly, you could get 150~200% of your investment back.
The best time to sell a house is smack dab in the middle of the prosperity phase. You’ll be able to charge a pretty high price and there will be buyers who are actually willing to pay that much.