The 4 Phases of the Real Estate Cycle (& What All Investors Should Know About Them)

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The first principle is that you must not fool yourself, and you are the easiest person to fool.” — Richard P. Feynman, Nobel Prize-winning physicist

Real estate goes through multiyear cycles of boom and bust periods. I break the cycle into four periods: peak, contraction, trough, and expansion. This is a mental model to understand how many properties tie into the general real estate market.

4 Phases of the Real Estate Cycle

To illustrate the cycle, I use the California Association Realtors affordability index. According to C.A.R.’s website: C.A.R.’s Traditional Housing Affordability Index (HAI) measures the percentage of households that can afford to purchase the median priced home in the state and regions of California based on traditional assumptions.


Everyone wants to buy real estate. The fear of missing out is leading to panic buying. Real estate prices have reached a new high. Appreciation is decelerating. Properties are taking longer to sell. Housing affordability is not within the range of an average family. The housing affordability index for the state of California in 2006: 12.25%. And 2007: 13.25%.


Related: The Real Estate Market: How to Analyze and Predict Cycles


The selling begins. Home prices fall. Unemployment increases. Houses are languishing on the MLS listing, and housing affordability increases. New home construction freezes. California CAR index for 2008: 33%, 2009: 50.75%, 2010: 48%.


Housing prices begin to stabilize. Few people are willing to invest in real estate. Investors with experience, capital, and track records are able to raise funds for investing. Think when the CAR affordability index was 52.75% in 2011 and 51% in 2012.


Housing prices start to rise. New home construction starts increase. Unemployment decreases. Real estate becomes popular again. Think when the CAR affordability index was 36% in 2013 and 30.75% in 2014.

The real estate cycles can last decades or more. No one knows where we are in the cycle. It only becomes clear years later.

So if we can’t time the cycle, why should we care about it?

The wisdom of the crowd can influence even the most sophisticated investors. The only way we can lessen its hold is to recognize what’s transpiring in the market. This provides us with physiological distance from the world around us.

People who are unable to do so will find themselves trying to buy real estate for the sake of buying or due to the fear of missing out. There’s a huge difference between buying a property and investing in a property. You buy a home to live in. You invest in a property because it will provide you with a healthy return on your dollar.


Related: Understanding the Real Estate Cycle (& Why NOW is the Time to Buy!)

When the market becomes overheated, you’ll start hearing, “Well this market is different because X won’t happen again, and interest rates are low, so I better pull the trigger before the Fed takes action.” The specific property you are looking at should drive your investment decision. Not macro economic forces. You shouldn’t pull money out of our house to buy any piece of property because interest rates are low. And if interest rates are high, you aren’t going to pass on an investment that makes financial sense.

Macro economic indicators are great for cocktail parties and useless debates. But if you want to be successful in real estate, you need to know what your financial goals are. What’s going on in the neighborhood you invest in? What makes a good deal for you? How you can go about financing the deal?

Happy hunting.

Investors: Do you try to predict real estate cycles? Where do you think your local market is now?

Let me know your thoughts with a comment.

About Author

Jordan Thibodeau

Jordan Thibodeau is a contributor for blog. He works a full-time job and invests in Buy and Hold Real Estate in the Sacramento Area. Jordan is dedicated to helping people become better real estate investors by helping them clarify their investment criteria and goals. He was featured in BP Podcast Show 74. Jordan is the author of a free monthly investor’s newsletter called Investor’s Therapy. The newsletter will helps investors understand their own psychology to make better investment decisions. Also, Jordan has created an online course to help investors build stronger networks to increase their investment opportunities and knowledge.


  1. Jerry W.

    Thanks for posting Jordan. It can be hard to see the different phases of real estate. Having gone through a few full cycles can help. Hopefully your article can help others without having to see it over a 40 year cycle.

    • Julie Ferrier

      IMO, we in California are just at the tipping point between peak and contraction (like mid-2007). I’m watching bay area (peninsula) home prices and they appear to have stopped increasing dramatically (semi-stabilized), but are staying on the market longer. I expect that we’ll start seeing a bit of a contraction within the next couple of years. Some of the other articles I’ve read though predict that we’re moving into a stability period, unlike anything shown above, but apparently fairly standard for the Bay Area. I’m starting to read about mass-layoffs in some tech companies and a slowing of venture capital funding for start-ups, which could tip us into a contraction period. Only time will tell.

  2. Great overview of the different phases of a real estate cycle Jordan! You mentioned the rate of construction a couple times as another indicator of what phase in the cycle we’re in. During expansion, new home construction is growing and during a contraction, new home construction is shrinking.

    For anyone interested, the US Census Bureau puts out a ton of useful data tracking new building permits, home starts, completions, etc by state, county, and even metros. Here’s a link to their new residential construction:

  3. Jim Garcia

    Great article. All real estate goes through cycles and I agree with you. Douglas County CO real estate market is interesting. Prices have been going up steadily (about 1% per month since 2011). Price of housing has risen such that some new home Buyers can’t purchase a home even with 4% interest rates. I agree with you 4 cycles. For our market it continues to keep going higher and higher as people continue to relocate here. Our cycle may be a bit longer than the norm. If there is a norm in real estate. Thanks for sharing.

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