In 1987, when the stock market took a dive and people were looking for a place to put their money to work, real estate was almost peaking and providing a high return on investment. It happened again, in 2000 and 2001, when the stock market crashed and people started to take their money out of the stock market and invest in real estate. The next opportunity for this to occur will be the next drop in the stock market. What would happen if there were a major stock market correction in 2017? It could spark a significant shift in investments back into real estate. When that occurs, we will see another peak for real estate that will go even higher than the 2006 peak. See the figure below for a graphical depiction of the real estate cycle.
Figure 1. The Real Estate Cycle
If the peaks of the last two real estate cycles were in 1988 and 2006, and the cycle is 18 years long, then the next peak will be in the year 2024. I believe that this peak will be driven by inflation. In addition, the following 9-year business cycle (previously discussed in this blog) will peak about 2023, and that will affect the real estate cycle (the recession phase of the business cycle always negatively impacts the real estate cycle). The real question is, since the next inflation peak will not occur until 2036, what else will drive real estate prices back down? As you have already seen in the stock market section, I believe that the stock market will be booming at that time, and money – always seeking the highest returns – will move from real estate to stocks.
The next driving factor for real estate prices will be inflation. As inflation goes higher, the value of hard assets – gold, commodities, and real estate – will rise. I have already defined the cycle for inflation as being the 54-year Kondratieff cycle; the upward portion of that cycle is starting or will be starting soon. The inflationary cycle, like a rerun of the 1970s, will put pressure on real estate prices throughout the country and probably in the rest of the world. This is good news for the millions of property owners who are currently underwater on the value of their properties – their mortgage obligations are larger than the current value of the properties. Hopefully, most of those people have refinanced to a fixed-rate mortgage, because interest rates, like inflation, have only one way to go – up!