Real estate is a cyclical business and like any other industry or market, it goes through periods of contractions and expansions. These booms and bust takes place in different cities, states, and countries. Understanding the real estate cycle is critical for real estate investors, realtors, and developers.

A common misconception among many real estate investors is that prices are always going towards equilibrium and that the market sets a fair price. This belief is misleading because markets are rarely in equilibrium – they fluctuate between overvaluation and undervaluation, like a pendulum. The market swing between phases of excess and shortfall due to market imperfections and time lags as information slowly spreads among market participants. Excess inventory and shortfalls are caused by time delays of new housing developments. Shortages in inventory make developments profitable; while excess inventory curtail prices and limits the profits of the real estate developers. This process creates a cyclical real estate market.

Real estate is also a function of jobs – and a strong local economy will produce a health real estate market. A vibrant economy with high paying jobs is the foundation for high property values. Looking at a home price to income ratio you can determine whether housing is overvalued or undervalued based on historical data. Specific geographic information can be found at zillow.com

The table below shows the highs and lows in the real estate cycle in the United States over the past 200 years. The average length of the real estate cycle is about 18 years. 

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