Real Estate

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We have all witnessed the greatest bubble collapse in history.  We are talking not in the millions or billions, but trillions of dollars’ worth of equity wiped out.  The real estate boom of the early 2000s was worldwide, affecting real estate property prices from Europe, to the United States, to the Far East.  In 2012, prices were down 50% off their pre-2006 peak, and in some areas (like Phoenix, Las Vegas, and some California municipalities) as much as two thirds (66%).  The rates of foreclosures have come down, but due to the severe reduction in property tax receipts in many cities across the nation caused by non-payment of property taxes and people “walking away” from their homes, many cities have even gone bankrupt (the largest of which occurred to the city of Detroit, Michigan).

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Many economists and academics have recognized the existence of the real estate cycle.  The work of Simon Kuznets is particularly noted, as he is credited with identifying the 15-25 year “building cycle” which is now generally referred to as the Kuznets wave.  This wave is associated with the construction cycle and is related to the real estate home building wave.  Since the building cycle is so long, it is not easily discernible by most business people, and because most people don’t see it in their careers more than once.  This is because most people have business careers that are less than 40 years.  Most people would see one market peak (or bubble) and not think about it or recognize the second one, because it had been so long since the last one.

 

What will drive the Housing market (prices) up again?  The answer is twofold: 1) the next stock market correction, and 2) inflation.  The next stock market correction, as stated in another section, is happening now and could last through the end of 2019.  This will be driven by the next recession, and as we all know recessions are bad for the stock market.  As investors look for return on investment for their hard-earned cash, the next obvious place to put their money will be Real Estate. In addition to the stock market correction, inflation will drive prices up, because real estate is the best inflation protection that most investors have access to.

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Since the cycle for Real Estate is 18 years, and half of the cycle is 9 years, the bottom of the current cycle occurred around 2015 (2006 + 9 = 2015).  The next peak of the Real Estate cycle should occur around 2024 (2006 + 18 = 2024).

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