18 Year Real Estate Cycles - Next Bust 2024?

46 Replies

I have been researching real estate cycles and found real estate economist Homer Hoyt theory of 18 year real estate cycle in the 1930's. In the early 90's economist Fred E. Foldvary predicted the real estate crash in 2006 using this same methodology. 

"The chart above, was used by Fred E. Foldvary - in his now famous report - to predict the recession of 2008. If you look again at the chart, you will notice that the 2008 prediction was right in line with the 18 year cycle - which Foldvary uses as the basis for his report. In his report, Foldvary even explains why Hoyt's 18-year cycle theory diverged so drastically between 1925 and 1973. Foldvary points out that the cycle does not always function on a precise 18 year schedule, but - baring catastrophic events like a world war - for the most part the cycle should be right around 18 years. I'm not going to go in depth into all the various factors discussed by Foldvary in his report, but if you want to know more, I encourage you to read Foldvary's full 40 page brief."

http://www.nuwireinvestor.com/articles/the-real-estate-cycle-where-are-we-now-59319.aspx

http://www.cato.org/publications/commentary/great-18year-real-estate-cycle

Based on this information, it seems that the next top of the cycle will be in 2024 pending any wars or a large scale disasters. I know 10 years away seems like a long time from now but reading over the data and Fred E. Foldvary report, it seems to all make sense. 

BP Nation, what are your thoughts on this theory?


Yes I am a believer in this theory. However you can't count on exactly 18 years. Another researcher said 16 years. It takes about a generation to forget the risks of the market. I believe true fortunes are built on market cycles. They really are not hard to see. 

@Johnson H.   When we bought our first property in Pleasanton CA (San Fransicso Bay Area).  I bought the condo in aprox. 1992 from a friend who had it for a year or two.  She lost money, we bought it lower than she got it for.   We moved a couple of years later and bought a house from a couple who also owned their home for a couple of years, they lost some money on the sale but needed a larger home.  We kept it for 2.5 years and made money on our sale which we used towards our down payment in our current home.  

Real estate is cyclical and the cycles are not always well defined and happen more frequently sometimes than I think people will admit.  We still have the condo and have watched the value change sometimes going in the right direction and then losing ground.  Over time it has been a good investment and we are happy with it.  As long as people who own real estate can own for long term if needed and buy with some skin in the game it usually turns out ok.   I wonder if we are also at the top of a mini bubble in some markets and may lose value once again.

@Ned Carey   - I totally agree with you, it may not be 18 years. I want to figure out the best metrics to track for the next bust so that I don't get caught up with it.

@Anna Shaver - My thoughts are aligned with yours. I wonder if we are at the top of a mini bubble or are we flat lining a bit before the next run up. New home sales are slipping in cities like Phoenix, Las Vegas and Atlanta as FHA cut loan maximums and those who got a FHA loan last year, only half would qualify this year. The median new home price is $100k more than a resold house in Phoenix.

Other negative economic trends I'm seeing:

  • 10 Year Treasury rate slipped to 1.99% today which is very bearish. 
  • 30 year fixed rate mortgage fell to 3.75% yesterday and will fall again today due to the above.
  • Oil prices continue to decline. I am not sure if this is due to too much supply or not enough demand. This makes a very big difference to me.
  • Softening economies in Europe, China and Japan.
  • Ebola fears.
  • The Dow is at 16100, a drop of 1000 points. What is the market scared of?
  • Underemployment in the US is stubbornly high.
  • Velocity of money is low compared to other upswings.
  • New venture capital backed companies are at new highs in terms of cash burn rates. 

A good deal in real estate today may not be one three months from now. I don't want to be like one of your friends Anna!

Well said @Ned Carey .  I disagree we are in a mini-bubble.  We're not done with the run up yet for various reasons.  As much as the indicators you mentioned above sound relevant, the market always looks ahead so those are lagging indicators.

I wrote on another thread that was created by @Jon Klaus .  I believe we were on the verge of getting a 20% correction for the stock market.  Then another article came out shortly saying consumer sentiments were at 7-year high.  This article validated my charting theory that the 20% correction is imminent.  

Just look at the stock market volatility in the last month.  It's outright human psychology.  You have to move against the herds.  I still remember people telling me not to buy investment houses in 2009 because it would drop another 10% by next year.  Right then, I knew it was the bottom of the housing market.  

Since consumers are optimistic, this correction will drive some fear back into the market.  I'm looking to go all in when S&P hit 1,600.  In fact, I will throw an additional $50k into the stock market once it hit my target number.  Right now, I'm preparing to refinance 3 properties since interest rates dropped recently.  Planning on locking it this Friday or early next week.  :0)

Originally posted by @Nhi Nguyen:

ok, my big flip is safe then. :). 

Scheduled to be finished in about 2-3 months. 

Actually, I believe the stock market correction will end in late Dec or mid Jan 2015.  With the stock market in full mode correction, home buyers tend to look for a bargain when the market is weak.  In addition, Dec and Jan are bad months to put your property on the market.  March would be ideal.  Best of luck with your flip.

Originally posted by @Johnson H.:

@Ned Carey  - I totally agree with you, it may not be 18 years. I want to figure out the best metrics to track for the next bust so that I don't get caught up with it.

 Here is the number one metric that has been foolproof. It was told by humorist and Author Dave Barry. Dave is a funny man but certainly not the guy you would look to for financial advice. However the following has proven to be the best indicator I have ever seen.  While it was written about the stock market it applies perfectly to the real estate market too. 

When you go to a cocktail party and everyone is bragging about how much they are making in the stock market, it is time to politely step away from the conversation and when no one is looking RUN to the nearest phone and tell your broker to sell everything.

You may laugh but when the average person who wouldn't normally have any interest in real estate (or any investment) starts talking about it, the market is overheated.

The market is certainly cyclical. I think the key with real estate more so than stocks is that the value has in most areas has gone up over the years. An areas where appreciation plays a place in the valuation, the prices keep rising. My parents house they bought in 1985 and later sold. Is still worth more in now than then. Personally we are in it for the long term. I think knowing your market is important and the areas. 

@Ned Carey  

Too many mainstream press articles about "income properties", a growth in the number of flip shows on television and, yes, folks who wouldn't know a stacked townhouse from a duplex talking about real estate .... it's why we haven't been buying much up here for the past 18 months.

I would like someone to just pull the rug and get on with it .... we're ready :-)

Originally posted by @Roy N.:

@Ned Carey  

Too many mainstream press articles about "income properties", a growth in the number of flip shows on television and, yes, folks who wouldn't know a stacked townhouse from a duplex talking about real estate .... it's why we haven't been buying much up here for the past 18 months.

I would like someone to just pull the rug and get on with it .... we're ready :-)

 Agree with both of you. I see a lot of new investors on the forum these days. Coupled with the income property and flip shows, it feels frothy. However, the difference from 2004-2006 is that we don't have no doc loans and investors speculating with new housing yet. 

@Johnson H.  

In Canada, we have still to see a significant correction ... in almost a generation.  There are still lots of politicians (including the Minister of Finance and PM) who are still preaching no pending real estate crises or, worst case, a soft landing ... however, fewer and fewer economists are certain.

Economists are only get paid for their opinions and the more they get their views and perspectives published and touted, the more they get paid - a vicious circle to be sure! Great post though!

Originally posted by @Johnson H.:

@Roy N.

My biggest fear in the Canada market is a sharp increase in interest rates shocking variable rate loan holders and making it harder to refinance. Its too bad Canada doesn't have 30 year fixed rate mortgages.

http://www.bloomberg.com/news/2014-10-07/millennials-spurring-canadian-condo-boom-bet-on-rates.html

Johnson, 

The shock is just part of it all.  However, most Canadian homeowners go with fixed rate mortgages, so are only exposed at term renewal.   The TO condo market is an entire world of frothy silliness unto its own.  It, downtown Vancouver, and, to a lesser extent, Calgary stand ready to bring the most harm to homeowners ... housing prices in parts of Vancouver are over 11 times household income.

I do disagree with you on the 30 year fixed rate mortgage.   For investors, in residential properties as rentals, it does provide a degree of cash-flow certainty, but for the average homeowner, it discourages saving and ends-up costing them far more in the long run (remember, mortgage interest on a primary residence in Canada is not deductible).   

Personally, I've never used anything but a variable rate mortgage - and I remember 16-20% interest rates in the 1980s as the math solidly demonstrates, if you can handle the bumps, you come out ahead in the long run.  The was a longitudinal statistical study of the Canadian residential mortgages from the end of WWII through to the mid- to late-1990s which demonstrated if you took two 25yr mortgages (the standard amortization for a Canadian residential mortgage), for the same amount, starting in any year of the range covered by the study, one using fixed-rate 5-yr terms and the other using a variable rate, the variable rate always came out ahead (in that the homeowner incurred less interest cost over the life of the mortgage).

While our interest rates have no where to go but up, they won't climb too far - or fast -  as long as there continues to be little exuberance in U.S.A. economy.

Irregardless of the micro/macro economies of the day, I still believe it's timing & a good eye for the deal especially during the crashes. But all CASH remains our weapon of choice.

We just bought a farm with 3 occupied & 2 vacant units. The seller took >$50,000 hit just to unload it after 6-7 years of torment???

The seller had been transferred out of state, barely survived a divorce and had a large impersonal property management company run it into the ground. He was exhausted & we knew it.

25 went through it during the 12 days it sat listed, & the general consensus was it needed too much work!!!!

So we low-balled it; Cash, close in 30 & he jumped at it. He had recently spent a lot of money upgrading a couple of the units in anticipation of a sale closer to asking.

In 20 days I upgraded one unit (secured early occupancy to do the work) to an immediate $750/month & it was rented before the work was completed. The other units will be upgraded as vacancies occur but they currently bring in respectable ontime incomes.

I am now rehabbing the main house for my 20 year old daughter who will eventually occupy & own it all.

Just recently we went to one of our local Tax Lien auctions & watched as junk properties were bid into the stratosphere by the eager 'TV investor mind set'. Apparently a few have since had second more sobering thoughts & walked away from their earnest money deposits.

Look at the demographics angle. If you google wiki boomers you will find some information that validates the coming market cycles. Nobody knows if it will be 18 years or 16 years but it is coming. Our market topped out in 2005 and shows clearly on various charts. I know some old timers that have been involved for 50 years that state they are getting out in 2016!  This creates a dilemma for people that are in this for the long haul. Sell in anticipation or hang on, hope things don't go completely to hell, and ride out the storm. The wiki article shows the correlation between booms and busts and the birth cycles/rates.

@Johnson H.  ,

I'm not much of a "technical indicator" kind of guy. I really like @Ned Carey  's joke about Dave Barry. So true. When everyone and their mom is talking about killing it in RE, you know the party is about to come to an end..

Johnson, how about:

  • Home affordability Index dropping
  • Fed Mortgage Survey on loosening of credit & overall looser lending
  • Recent unsustainable price increase
  • "It's different this time" attitude in regards to interest rates, sustainability of increases, etc..
  • Almost 1MM posts on BP and XXX new users every day! lol

@Johnson H. and @Minh Le

I don't know what it is about you bay area investors, but some of the most financially intelligent and interesting posts I read in Bigger Pockets come from you guys.

@Johnson H. , Excellent recap of what the economic environment is looking like right now.

  • 10 Year Treasury rate slipped to 1.99% today which is very bearish.
  • 30 year fixed rate mortgage fell to 3.75% yesterday and will fall again today due to the above.
  • Oil prices continue to decline. I am not sure if this is due to too much supply or not enough demand. This makes a very big difference to me.
  • Softening economies in Europe, China and Japan.
  • Ebola fears.
  • The Dow is at 16100, a drop of 1000 points. What is the market scared of?
  • Underemployment in the US is stubbornly high.
  • Velocity of money is low compared to other upswings.
  • New venture capital backed companies are at new highs in terms of cash burn rates. 

@Minh Le, 

I would love to hear your theory why you think that the S&P will only correct 20% into Dec/Jan 2015 and not a 50% correction to 1000 and possibly lower, continuing its decline into 2015 and possibly 2016.

I see that you are a believer of indexing the S&P 500 like I am. 80% of all the fund managers with trophy degrees (Top ten MBA), designations (CFA), with fancy investment banking titles can't seem to beat the S&P 500 over a long run. If you can't beat them, why not join them? 


Originally posted by @Minh Le:

Originally posted by @Nhi Nguyen:

ok, my big flip is safe then. :). 

Scheduled to be finished in about 2-3 months. 

Actually, I believe the stock market correction will end in late Dec or mid Jan 2015.  With the stock market in full mode correction, home buyers tend to look for a bargain when the market is weak.  In addition, Dec and Jan are bad months to put your property on the market.  March would be ideal.  Best of luck with your flip.

Originally posted by @Roy N.:

@Ned Carey 

Too many mainstream press articles about "income properties", a growth in the number of flip shows on television and, yes, folks who wouldn't know a stacked townhouse from a duplex talking about real estate

I would like someone to just pull the rug and get on with it .... we're ready :-)

 @Johnson H. wrote

I see a lot of new investors on the forum these days. Coupled with the income property and flip shows, it feels frothy.

As they say all real estate is local. However the really big cycles 17-18 years generally are national in scope. Some areas are hot right now and ripe for a correction, some are not. A major factor in Baltimore and I suspect nationally is; while interest rates are low, it is relatively hard to qualify for a loan. I believe this makes financing harder than the long term average. As lending eases this will allow more buyers into the market, and allow it to continue to grow. 

@Roy N.   - Good points on using a variable interest rate loan. I think its worked out positively for you as interest rates have declined in your favor. In addition, if rates remained low or slightly increase, it will be in the favor of the borrower as you stated. In addition, many owner occupants move every 5-10 years so they should come out ahead with a variable rate as well. I guess I am more conservative and I enjoy knowing that my rates are fixed and I have the option of refinancing if rates go lower. If we do have massive inflation or if the economy picks up again in the future, I know that my rate is still fixed, for rentals and future primary home. I think it comes down to peace of mind versus less interest costs. I would rather pay for the fixed with higher interest than to worry what will happen in the future.

Bottom line, real estate investing isn't just about the numbers on paper and the money in the bank account, but being comfortable with the risks being taken as well.

@Minh Le   - It already looks like we are in correction mode for the stock market. I have been in cash for most of this year. I have been waiting a long time as well for this correction.

@Pat L.   - Great comments. I agree, as long as an investor has a great cash flowing property with reserves, the investor will be able to weather any financial storm and making the economy irreverent.

@J Martin  - Thanks for those metrics, I'll need to look them up and track them.

@James Park  - Thanks for the kind words, I like to take a step back and look at the global picture once in awhile and try to gleam something that others aren't seeing if possible.

Originally posted by @John Thedford:

Look at the demographics angle. If you google wiki boomers you will find some information that validates the coming market cycles. Nobody knows if it will be 18 years or 16 years but it is coming. Our market topped out in 2005 and shows clearly on various charts. I know some old timers that have been involved for 50 years that state they are getting out in 2016!  This creates a dilemma for people that are in this for the long haul. Sell in anticipation or hang on, hope things don't go completely to hell, and ride out the storm. The wiki article shows the correlation between booms and busts and the birth cycles/rates.

 John, I can't find what you are referring to. Could you post a link for me? Thanks!

Lots of folks post on BP and never pull the trigger, which is why I think they include a question on getting started in the "Famous Four" segment of the podcast. Or, they get frustrated because they can't find a class A, turn-key property with long term tenants in place that yields 2%. There will always be the place for the savvy investor who can get excited about a deal while critically analysing the micro and macro forces at play.

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