The Real Estate Construction Cycle

Astute real estate investors always look at the real estate construction cycle before planning to invest. An analysis of the history of the real estate construction cycle will help readers ascertain at which point of the cycle we are currently situated. This information is crucial in determining if now is a good time to buy real estate.

Typically, residential real estate has always experienced dramatic boom periods followed by even more dramatic bust periods. The reason for this is the construction cycle. Typically when the economy is good, employment and wages are increasing and interest rates are declining. New cities and suburbs with new construction and new planned master communities begin to sprout around many major metropolitan areas. As more people move to these new developments, demand for housing increases resulting in new homes selling for a substantial premium to their construction cost.

At this point in the cycle there is a shortage of affordable housing, and a scarcity of rental units on the market. Renters are attracted to potential new developments with favorable terms and low interest rates. Usually, these new developments are within 30 minutes commute of major cities. As housing affordability becomes an issue, more and more buyers and renters begin to explore moving to the "suburbs". The allure of these new suburbs is low crime, good schools, new homes and affordable cost of living. This period in the construction cycle is typically the beginning of the boom period and prices begin moving upwards.

Builders are quick to note this opportunity and begin building as many houses as they can with the expectation of reselling these houses at a huge profit. The big development companies and home builders begin acquiring huge tracts of land with the expectation of building and reselling to new homeowners. At this point the boom is solidly under way and the economy is soaring. Unemployment is low, jobs are increasing, salaries are going up and real estate is increasing in value. This boom period can continue for a few years, typically between 3 to 5 years.