subject: Could This Economic Depression Be One Of The Best Periods In American History To Purchase Real Estat [print this page] 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 depression alternates with economic prosperity. Analyzing each phase allows us to know what's going on. Knowledge is power. It enables us to banish fear and move forward with profitable action. Believe it or not, the best time to catch the wave is during periods of economic depression.
Development Phase
The Development Phase is marked by a strong period of growth and development. Typically, it is preceded by population growth, industrial development and public works expenditures. Development is stimulated by consumer demand, but it will usually outpace demand due to inefficiency in the feedback loop. Development naturally increases demand for land and thus higher prices. The development phase is curtailed by overproduction or by a slowdown in the overall economy, or both.
The most recent Development Phase began in 2002 and ended in 2005 because of overproduction and irresponsible monetary policy. This period witnessed a huge real estate run up. This was a time of irrational exuberance. The end of the Development Phase is marked by a peak in the big three market variables at the margin: rents, occupancy rates, and market prices. As supply exceeds demand we begin to experience what is commonly referred to as a "buyer's market."
The Development Phase is a good time to purchase real estate, but the trick lies in your ability to recognize the top of the market. It's probably too late when the media wakes up to the story. At that point many newcomers are lured into a market that is already cooling off.
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
In the final Absorption Phase inventory of unused office space and empty homes begins to disappear. The increase in economic activity and natural growth in the population stimulates production as the economy starts to revive.
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.
Even though distressed properties are "everywhere" there are still people with cash who can't locate them. You, the savvy real estate entrepreneur, can make a lot of money by putting the two together, in spite of the bad economy. The sagging economy actually makes it easier for you.
Never since the Great Depression has the economic climate been better for real estate than right now. Don't miss this opportunity to make a fortune picking up houses for pennies on the dollar just like the Rockefellers, the Melons, and the Kennedys did in the 1930s.
by: Oliver Woods.
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