In Real Estate Cycles Part 1. we covered some very important concepts about real estate cycles in general and investor emotions that sabotage your investing success. If you have not read part 1, please do so now.

In part 2, were going to dive into the 4 phases in a real estate cycle, and then were going to map the real estate investor emotion cycle from part 1 onto the real estate cycle for a revealing look at how your emotions are wreaking havoc with smart investor actions.

Lets start with a high level look at the the 4 phases in a real estate cycle .

Phase 1 – Market bottom. Real estate is at bargain prices. Many sellers are desperate. No one wants real estate.

Phase 2 – The uptrend starts. Prices start to rise. The media reports on rising prices creating more demand,  causes prices to go even higher. As more and more people notice the rising prices, more and more people buy, driving up prices until demand slows and real estate becomes over priced.

Phase 3 – Real estate prices hit their highest point and reach a plateau.

Phase 4 – Down, down, down. Prices begin to fall. People stop buying real estate until they can find bargains and it becomes under priced.

The 4 Phases of a Real Estate Cycle

This is the general real estate cycle that repeats itself over and over again throughout history. Now lets take a look at this cycle with an emphasis on our emotions.

Phase 1 – Property is cheap and bargains are everywhere, prices are depressed. Home builders are going out of business, real estate agents are leaving the business. The media is completely negative.

In this phase your emotions are screaming at you not to buy, regardless of the incredible value that is available. Your emotions cause you to look in the rear view mirror at the dark stormy skies instead of looking ahead through the windshield where there are blue skies and sunshine.

As difficult as it may be to buy in this phase, this is when you can make the most profit in real estate. Your friends will think you are nuts. Experts will think youre nuts. It will take objective vision, resolve and a strong will to buy at this point.

Phase 2 – Real estate prices are slowly rising along with demand. The media becomes more and more optimistic about real estate. Investors on the sidelines start jumping in. The market starts to feed upon itself, causing prices and demand to continue to rise. Soon double digit rates of appreciation are the norm.

The earlier in this phase you invest the more money you will make. If you wait until the middle of this phase for the double-digit increases, youve missed out on huge profits. And if you wait until late in phase 2, when everyone is talking about real estate and even the skeptics have joined the party youre investing at a very dangerous time. Your emotions are telling you “Buy! Buy! Buy!” but your gains, if you have any, will likely be short-lived.

Greed

Selling near the end of phase 2 is the ideal time to maximize existing profits, but your emotions are telling you to do the opposite. There is complete euphoria in the market and your emotions, along with everyone else, are shouting at you to keep buying.

Actions in this phase are driven by greed, an investors worst friend.

Phase 3 – In this phase prices reach a market cycle peak and flatten out. Real estate is overpriced. Everyone that is going to get in the market is already in, so there are fewer and fewer buyers. Sellers try to hold out without reducing prices until a few are forced to reluctantly lower their prices a little bit.

The buyers at this level feel like they are getting a “good deal”. Their emotions are still telling them to buy, even though value is still not there and key indicators do not signal its time to buy.  Little do they know whats lurking around the corner in phase 4.

Phase 4 – In phase 4 things start to unravel and continued lack of demand causes prices to fall. This is the most dangerous time to be invested in real estate. Even though prices are starting to fall, sellers are still in denial. They hold out and think things will turn quickly around. Eventually, reality sets in and more and more sellers are forced to lower prices. Incentives from home builders and sellers becomes the norm but its not enough to create demand, prices continue to fall even further.

Fear

The greed from phase 2 is now replaced with fear. The economy is in the tank, unemployment is high, the media is extremely negative. Foreclosures increase dramatically. Sellers become desperate.

When despair is the most severe in this phase, the market finds a bottom. It is the optimum time to buy, the time when huge profits can be made, but theres no one ringing the bell to tell us its the bottom. And our emotions, completely controlled by fear at this point in the cycle, are telling us wed be crazy to buy now.

As you can see, your emotions are not your friend when it comes to investing. To be a successful real estate investor, you need to learn to control your emotions and take actions based on key indicators that foretell the current point in the real estate cycle. Fortunately, such indicators do exist, and they are very accurate.

Will you hit a home run every single time by using these indicators? There are no guarantees in investing, however, by understanding real estate cycles, investor emotion cycles, and these indicators you will give yourself the highest probability of making large gains. Youll be in the markets at the right time to make big returns, and youll be out of the market during periods of large losses. This is how the smart money invests.

In Real Estate Cycles Part 3, well examine the key real estate cycle indicators. what they mean, and how to use them for big profits. Its like having your very own investing crystal ball!

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