Market cycles, buyer's and seller's markets
Real estate markets do not rise or fall in a straight line. They move in cycles that follow the wider economy, local job growth and the slow response of new construction.
The four phases
Economists describe the business cycle in four phases (St. Louis Fed). Real estate follows the same pattern, often with a lag:
| Phase | Economy | What you see in real estate |
|---|---|---|
| Expansion | Output and jobs grow | Demand rises, sales and prices climb, builders start new projects |
| Peak | Growth tops out just before the decline begins | Prices are high, new homes started during the boom keep arriving, inventory begins to build |
| Contraction | Output falls; jobs usually fall too (a severe, widespread one is a recession) | Sales slow, listings sit longer, inventory rises, prices flatten or fall, construction drops |
| Trough | The low point just before the upturn | Little new building; as demand returns, the excess inventory is absorbed and recovery begins |
The National Bureau of Economic Research calls the period from a trough to a peak an expansion and from a peak to a trough a recession.
Why real estate overshoots: because supply is slow to adjust, builders start homes based on today's strong prices. Those homes arrive months or years later, often just as demand is cooling, which adds to the surplus during the contraction. During the trough little is built, so when demand returns supply is short again and prices rise.
Buyer's market vs seller's market
| Buyer's market | Seller's market | |
|---|---|---|
| Balance | Supply exceeds demand | Demand exceeds supply |
| Inventory | High, many listings | Low, few listings |
| Days on market | Longer | Shorter |
| Prices | Flat or falling | Rising |
| Negotiating power | Buyers: price cuts, concessions, inspections | Sellers: multiple offers, few concessions |
The name tells you who has the advantage. A buyer's market is good for buyers; a seller's market is good for sellers. Don't get it backward.
Months of inventory
Months of inventory (also called months' supply) measures how long the homes now on the market would last at the current sales pace if no new listings came on. The Census Bureau series published on FRED defines it as the ratio of houses for sale to houses sold.
Months of inventory = homes currently for sale ÷ homes sold per month
Example: 1,200 active listings and 200 sales a month gives 1,200 ÷ 200 = 6 months.
How to read it:
- Fewer months of inventory: homes sell quickly relative to supply. That points toward a seller's market.
- More months: listings pile up relative to sales. That points toward a buyer's market.
- The direction of change matters too. Inventory rising month after month often signals a market turning from expansion toward contraction.
Use the monthly sales rate, not annual sales. If a problem gives you sales for a year, divide by 12 first: 2,400 sales a year is 200 a month.