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Market Cycles and Posture

Written by Christopher Collins

Where are we in the cycle?

We probably get that question more than any other, and the truth is, it is a hard one to answer. Not because there isn’t enough information, but because there is too much of it.

Every economist has a forecast. Every brokerage firm has a market view. Funds, lenders, operators and sponsors all have opinions of their own, and those views do not just describe the market—they help shape it. You can read all of it, talk to every expert, and somehow come away less sure than when you started.

That is why we built the Clear Bay Multifamily Cycle Monitor. We wanted a way to cut through the noise with a system grounded in academic research and first-principles thinking—something that could give us a more sober view of the market, protect us from getting pulled into the narrative of the moment, and help us think more clearly about how we should be positioned.

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The Paradox

Market cycles are easy to see with hindsight. The tops look obviously expensive, the bottoms obviously cheap, and the warning signs seem clear once you already know what happened.

In real time, it is much harder. Near the top, fundamentals are usually strong and there are plenty of good reasons to believe they will stay that way. Near the bottom, the problems are real and waiting for more clarity feels prudent.

That is the paradox: what feels safest can carry the most risk, while what feels most uncomfortable can offer the most opportunity. The goal is not to call the turn, but to recognize when the balance is shifting—and position accordingly.

How The Machine Works

At its simplest, we separate the market into two things: what is actually happening and what the market appears to believe will happen next.

The first is fundamentals. Occupancy, rents and committed supply give us a relatively grounded view of the physical market.

The second is harder to observe directly. We cannot see every forecast in every investor’s head, but we can see what those forecasts cause people to do. Buyers change what they are willing to pay. Deals either clear or they do not. Lenders extend credit or pull back. Developers commit capital to projects that may not deliver for years.

That is the key idea behind the framework: rather than asking people what they think, we measure what they are doing.

Those actions become our read on Market Mood—the market’s revealed expectations for what comes next.

The Clear Bay Multifamily Cycle Monitor quantifies those forces and distills them into a single view of where the market is leaning—and ultimately how we should be positioned.

The Instrument

The headline output is The Hour—a simple position on the real estate cycle clock.

That Hour is supported by three related readings:

• Fundamental Phase tells us what is happening in the physical market: Recovery, Expansion, Hypersupply or Recession.
• Market Mood tells us how investors and lenders are behaving, from Despair and Disbelief through Optimism and Euphoria, and eventually Anxiety and Fear.
• Investment Posture translates those conditions into how aggressively we believe capital should be positioned.

We display the reading two ways.

First, as a wave. The wave shows how fundamentals and market mood are moving through the broader cycle and where the two may be diverging.

Second, as a clock. The clock turns that same information into visual shorthand: Recovery runs from 6–9 o’clock, Expansion from 9–12, Hypersupply from 12–3 and Recession from 3–6. Nine and three o’clock represent the points where the market crosses its longer-run norm.

What We Measure

Underneath those visuals, the Monitor is intentionally built from a relatively small number of inputs.

Fundamentals

At the center of the physical real estate cycle are occupancy and rent growth and committed supply.

• Occupancy: Investors spend enormous amounts of time tracking supply, demand, permits, deliveries, absorption, population growth, household formation and renter demographics. For all of that complexity, their combined effect ultimately culminates in one observable condition: occupancy. Research going back to Rosen and Smith (1983) and Wheaton and Torto (1988) shows that rents tend to strengthen when vacancy falls below its natural equilibrium and weaken when it moves above it. Where occupancy sits—and which direction it is moving—therefore provides a grounded read on the underlying balance of the market.
• Rent Growth: Rent Growth. If occupancy is where the market’s physical forces culminate, rent growth is where many of its broader economic forces show up. It reflects occupancy, but also income, affordability, rent-versus-own economics, willingness to pay and renter preferences. Hendershott and Shilling (1982) and Sinai and Souleles (2005) show how the economics of renting versus owning can shift housing demand between tenures, while other research shows that income shocks and changing preferences can move rents directly. Rent growth therefore gives us a second highly distilled fundamental—not simply how full the market is, but how much pricing power those underlying conditions are producing.
• Supply: Development is one of the clearest places where a view of the future becomes a real commitment. Once a project breaks ground, financing, equity and construction plans are generally already in place, so the project usually continues even if market conditions change. With multifamily projects often taking roughly two years from start to completion, strong markets can induce supply that does not arrive until after conditions have already turned. DiPasquale and Wheaton (1992), Wheaton (1999), and Grenadier (1995, 1996) all show how these construction lags can amplify real estate cycles, with development decisions made in one environment delivering into another. We therefore view the pipeline as one of the clearest pieces of the future already committed.

Mood

While fundamentals tell us what is happening, market mood tells us what investors, lenders and developers appear to believe comes next.

Rather than rely on surveys or forecasts, we infer that mood through behavior.

• Price Growth: What buyers are willing to pay is one of the clearest expressions of market mood. Rising transaction prices generally signal increasing confidence; falling prices signal the opposite. Plazzi, Torous and Valkanov (2010) found that, for apartments, richer valuations tended to predict lower subsequent returns rather than stronger future rent growth. Put simply, optimism can get reflected in today’s price before the underlying fundamentals ultimately justify it. We therefore track changes in actual closed-sale pricing as a direct measure of how aggressively investors are pricing the future.
• Transaction Volume: Price tells us where buyers and sellers agree; volume tells us whether they can agree at all. Activity often rises with confidence, can peak before prices, and then fades as uncertainty and the bid-ask spread widen. Stein (1995) and Genesove and Mayer (2001) show that transaction activity can weaken before measured prices fully adjust. We therefore use volume as a measure of market conviction—how willing capital is to move at the prevailing price.
• National Credit: Real estate is heavily dependent on debt, making lenders’ willingness to provide capital an important expression of risk appetite. Lown and Morgan (2006) found that tightening bank lending standards lead changes in loan growth and economic activity, while Gilchrist and Zakrajšek (2012) show that credit spreads capture investors’ willingness to bear risk. When financing tightens materially, it can overwhelm otherwise healthy property fundamentals, making credit conditions one of the clearest signals of how much risk the market is willing to finance.
• Price vs. Replacement: This compares what investors are paying for existing buildings with what it costs to build new ones. DiPasquale and Wheaton (1992) showed that higher asset values encourage development, while Tobin’s-q logic says that when market values rise materially above replacement cost, the incentive to create new supply increases. Because prices can remain above replacement cost for sustained periods due to regulation, limited land, entitlement timelines, and other barriers to supply, we do not use it as a continuous valuation measure. Instead, we treat it as a broad-market warning signal when the relationship becomes both historically extreme and widespread across markets. At that point, we view it as evidence of systemic exuberance—and a market increasingly creating the conditions for its own correction.

From Reading to Posture

The point of the framework is not simply to say where we are in the cycle. It is to translate that reading into how we should be positioned.

We group the output into four postures:

These postures do not dictate individual investment decisions. An exceptional deal can still make sense in a Defensive environment, and a poor deal can still be a poor deal near the bottom. Instead, posture changes which risks we are willing to accept and how much evidence we require before taking them.

There is also an important asymmetry across the cycle. Near a trough, attractive opportunities can persist for years and capital is often hardest to find, giving investors time to build exposure. Near a peak, the window to reduce risk can be much shorter—often measured in quarters—as capital remains plentiful right up until it is not.

We are not trying to know exactly what happens next; we are trying to adopt the posture best suited to the range of outcomes most likely from here.

Does It Hold Up?

A useful reality check is how the monitor would have read during past points in time. Below is a chart showing a major city from each major region of the U.S. during past parts in the cycle. The chart below shows those historical readings alongside the subsequent two-year change in transaction pricing. It is not a perfect prediction record, but it gives us confidence that the framework is capturing meaningful shifts in the balance of risk.

What We Left Out

A few conspicuous metrics are missing by design.

Cap rates are probably the biggest omission. In theory, they are an elegant measure of valuation; in practice, reported cap rates are notoriously inconsistent. CapEx may sit above or below the line depending on accounting convention, insurance and property tax costs can reset after a transaction, and value-add potential may already be embedded in the price, making headline cap rates a noisy measure of stabilized economics. Buyers and sellers also have incentives to present the most favorable version. Rather than rely on that noise, we use actual transaction pricing and, at the extreme, price relative to replacement cost as cleaner expressions of valuation.

We also exclude CMBS spreads because our testing found they largely repeated information already captured by broader credit spreads and lending conditions—another signal, but not additional information.

Similarly, we avoid sentiment surveys and stated intentions. The framework is built around revealed behavior: what investors paid, what lenders financed, what developers built, and whether transactions actually closed. We would rather measure what people do than what they say they expect to do.

Finally, we deliberately exclude outside forecasts of jobs, demand, rents, rates, or prices. Those may be useful in underwriting, but adding them here would turn independent market reading into a blend market projections.

Limitations

The Clear Bay Multifamily Cycle Monitor is designed to improve our odds, not eliminate uncertainty. Markets do not always move together, and even within a metro, individual neighborhoods, submarkets, and properties can behave very differently. Markets can also remain near a top or bottom for longer than expected.

We think of the Monitor as a canary in the coal mine: a broad market signal designed to cut through the noise, identify when the balance of evidence is shifting and highlight when our posture may need to change. It does not replace local underwriting or property-level judgment; it gives us a disciplined place to start.

Under the Hood

For those curious about the mechanics, the full Clear Bay Multifamily Cycle Monitor methodology is available here, including the underlying formulas, scoring logic and math. To see the current reading for every market, open the Monitor.