The Current Economic Depression May Be One Of The Ideal Times In United States History To Purchase R

Understanding the long-term real estate cycle is the only sure anecdote to the nervous fright that churns in your gut during economic hard times

. Knowing what to do and when to do it is your ticket to survival and success.

When it comes to patterns in trading real estate, economists think in terms of a 3-phase cyclical movement. This pattern parallels the business cycle and repeats itself every 18-20 years: Development, Contraction, Absorption. The expert investor can harness this cycle the same way a surfer captures the pent-up energy of a wave that is poised for its final assault on an unyielding shoreline.

Economic recession follows prosperity like night follows day. Understanding what's going on at each point in the cycle enables us to respond with appropriate action and conquer anxiety. Knowledge is power when we can deny our intuitive feelings and recognize the best time to invest is when things look the worst.

Development Phase

During the Development Phase of the real estate cycle there is a seemingly endless period of growth and prosperity. Typically the boom is triggered by a surge in population, government spending and business expansion. Demand drives higher prices and production, which eventually runs ahead of demand due to unrealistic producer optimism. This gradually quells the inflationary pressure and leads to a downturn in the economy.

The year 2002 marked the beginning of our most recent Development Phase, which extended to late 2005. It was characterized by an attitude of "irrational exuberance" and a nearly mad scramble after real estate. It finally exhausted itself when production outpaced supply and irresponsible lending practices finally came home to roost. A buyer's market emerged as the three leading indicators -- rents, rates of occupancy and prices -- reached their peak.

Another good time to invest in real estate is early in the Development Phase if you can read the tea leaves. Where people usually get hurt is late in the cycle when most of the equity plays have already been made. When the popular press starts telling tales of unending prosperity, prices have already begun to moderate, but the novice jumps in anyway.

Contraction Phase

Contraction is that phase of the real estate cycle which everybody dreads. Our current period of contraction followed the historical pattern with prices lingering at their high between late 2005 and 2006 before beginning to decline. The recession began in earnest about two years later in 2008. The unsold housing inventory led inevitably to a tapering off of building permits issued. The slowdown in new construction was felt immediately in related industries such as wood products, furniture, and appliances. As a consequence many businesses and banks went under, which was followed by a wave of unemployment and home foreclosure.

As President Ronald Reagan once described the psychology of hard times, "when my neighbor loses his job its recession. When I lose my job it's depression."

This feeling of depression and/or actual loss drives most people out of the market with the onset of the Contraction Phase. The economy winds down and prices decline with the flagging demand. Ironically, this economic environment makes the Contraction Phase the ideal time to purchase real estate. We find a parallel in the stock market where a bear market yields a plethora of bargain stocks for the investor who is equipped to take advantage of them. The same is true in real estate when the drop in price/value is accentuated as the horde of buyers vacate the market. This leaves easy pickings for the opportunistic real estate investor.

Absorption Phase

As excess supply is gradually purchased and the population expands, the economy begins to recover. This Absorption Phase is characterized by an increase in demand for office space and housing.

With the U.S. population increasing by 3 to 4 million every year we are adding 90,000 households annually. Normally, when the Absorption Phase has done its work the market would call for new construction. Obviously, there are other economic factors at work in our current economy, based on long-term government intrusion in the marketplace, that are suppressing the normal recovery.

Believe it or not this actually favors the intrepid investor. Deals are everywhere and people with cash are looking for them. By bringing the two together you can profit immensely.

This explains why the economic depression of the 1930s - just a few years after the stock market crash of 1929 -- was the best time to buy real estate in American history and people like the Rockefellers, the Kennedys and the Melons took full advantage of it. We're in a similar phase in the cycle right now. Don't miss the wave!

by: Oliver Woods.

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