The Great 18-Year Real Estate Cycle

As you may already know, the real estate market is cyclical – defined by ebbs and flows that might seem completely arbitrary to individuals without a lot of background or knowledge in real estate.  Whether you consider yourself a novice investor, or an experienced one, “The Great 18-year Real Estate Cycle” should interest you.

In the 1930’s, a real estate economist by the name of Homer Hoyt discovered a semi-consistent real estate pattern that occurred about every 18 years.  While this pattern is not without flaw, it does provide an understanding of what indicators market-savvy investors can look for to determine where the market if headed.

Using the above chart, you will undoubtedly notice a huge discrepancy between 1925 and 1973.  However, Fred E. Foldvary used this chart to predict the housing market crash in 2008 in his now famous report, The Depression of 2008.  Here are some key excerpts from Foldvary’s report:

The real estate cycle world-wide follows a consistent pattern. There is first an expansion of money and credit by the monetary authorities. That expansion artificially reduces interest rates, which then increases borrowing for long-duration capital goods such as real estate construction, as well as the purchase of real estate. The expansion of the economy reduces vacancies and then raises rentals and real estate prices. Speculators then jump in to profit from this increase, adding to the demand and accelerating the increase in land values. The expansion of money causes price inflation, so the authorities cut back on the money expansion, raising interest rates.

Higher interest rates and higher prices for real estate then reduce business profits, reducing the rate of increase in investment in new capital goods. Note that at first, investment is still expanding, but it expands at a slower rate. The negative rate of increase eventually makes growth negative also, and output falls. Rising interest rates increases mortgage payments, and as prices and equity no longer increase, those who can barely afford a house or condominium and bought with minimum payment plans have to sell. Rising unemployment also increases foreclosures. Real estate speculators switch to buying foreclosures at below-market rates and flipping them for quick sale…”

Sound familiar?

So now you may be trying to predict when the next boom will occur.  Based on this analysis, Colin M. Brechbill, the Managing Partner at WRI Capital Group/USA Property Dealer feels that we can expect to see home prices peak again around 2020.  While this peak may not be anywhere near what we experienced in 2005, it does at least provide some very valuable insight for real estate investors.

If you are interested in investing in Silver Spring, MD real estate, contact Emcee Arah of the EMA Real Estate Group online or by calling 301.452.5252.  Emcee is both a Certified Investor Agent Specialist (CIAS) and a Certified Distressed Property Expert (CDPE).  Don’t forget to leave your comments below and on the Facebook page!