18.6-Year Real Estate Cycle

By Aqualand Real Estate

June 5, 2022

If we look back over the last several hundred years of real estate in the United States, we’ll find a repeating pattern, a real estate cycle. This cycle varies a little bit here and there, but typically, each cycle lasts 18.6 years, broken essentially into two parts: approximately 14 years up followed by 4 years down.

This cycle and concept is very clearly detailed in Phillip J. Anderson’s book The Secret Life of Real Estate and Banking (ISBN: 978-0-85683-263-5), which can be purchased on Phillip’s website: https://propertysharemarketeconomics.com/shop-property-share-market-economics.

As an over-simplification, here’s a basic overview of the cycle from the book:

Phillip and his associates at Property Sharemarket Economics symbolize the cycle with the face of a clock with the various points above showing up as times on the clock face, which you can find on their website.

The cycle also shows that during the 4-year downturn, residential properties generally recover first, followed by commercial properties. Looking at the last cycle, if 2007-2008 was the top (starting in 2006 in Florida), then late 2011/early 2012 was the bottom. If you recall, bankruptcies were at an all-time high and the ‘too big to fail’ banks needed a massive bail-out. See also Michael J. Burry in ‘The Big Short’.

All those new tallest buildings were completed right around the top. If you watched the highrise condo market in Miami during that time, many buildings were completed at a time when few could actually afford to get a mortgage to close on the property – especially once it became apparent that the buildings had fallen well below their preconstruction pricing. Entire buildings sat vacant for months. But once the market ‘cleared away the wreckage’, investors started buying up properties in bulk. Hedgefunds were gobbling up single-family homes, renting them out, and waiting for the market to turn back up… which it obviously did.

So, where are we now?

At the moment, we’re cruising along with the real estate market in full swing with the top projected to be 2026ish, according to Phillip J. Anderson (@Phil_J_Anderson) and his associate Akhil Patel. (@AkhilGPatel). Many of the world’s tallest buildings have been announced or already under construction with completion dates in… you guessed it… 2026.

In the meantime, pundits and talking heads are screaming that the sky is falling and that a housing crash is upon us. I do not agree. As Keynes said, ‘The market can remain irrational longer than you can remain solvent.’ While generally associated with stocks, the same applies to real estate. Just because things seem ridiculous doesn’t mean they can’t get MORE ridiculous before sentiment changes and the market finally turns. After all, market sentiment rarely follows the crowd, in fact, it often trades in exact opposite of the crowd.

Reversals often come during periods of peak pessimism and crashes tend to come during peak optimism.

Hedgefunds Investing in Real Estate

Hedgefunds have been and are outbidding buyers for single family homes and putting renters in them. They’re also buying or building entire subdivisions and using them as rental properties. Why? In my opinion, for two reasons. The first, as a store of value. Money is still relatively cheap, and they can leverage that money to acquire assets (new and newish homes) that should continue to appreciate at an annual rate higher than their mortgage interest rate costs. In addition, once they have $100 Million blocks of performing assets (portfolios of houses with tenants and solid leases where the total value is $100mm or more), they can sell those packages to other investors – like Pension Funds.

Keep in mind that when selling performing real estate assets, investors look at Cap Rate (Capitalization Rate) to determine price – not just the value of the land and the structure. A hedgefund or investor could acquire a $100,000 property and rent it for $1,000/month. $1,000 x 12 months = $12,000/year. $12,000 divided by the acquisition and operating costs of that property equals the Cap Rate. For simplification, I won’t give the entire equation that includes vacancy, repairs, taxes, etc.. but let’s say it Nets $11,000 per year in this example. $11,000 / $100,000 = 11% Cap Rate.

Depending on the geographic market, 11% is a fairly amazing Cap Rate for an investment property. They could market the property as a performing asset (house with a solid lease and rental history of on-time payments) at a Cap Rate that is attractive to other real estate investors. I’ve recently had investors ask me to look for properties with a 5% or 6% Cap Rate. If we use the example of $11,000 per year, a 6% Cap Rate equates to an acquisition price of $183,333! ($11,000 / .06 = $183,333). It’s the same house… it’s still worth $100k to a buyer who plans to live in it… but to a Cap Rate conscious investor who wants a 6% rate of return, the house could be worth over $180k. Again, these are hypothetical numbers for example purposes. I’m not aware of many $100k houses you can rent for $1,000/month in Florida.geo

You can see now why a hedgefund or investor might be interested in acquiring a property, leasing to a renter, and reselling it as a performing asset. In the case of hedgefunds, they’re bundling properties together in a package with a total value of $100mm or more to sell in a single transaction.

Current Market

At present, the market seems to be digesting the idea of higher interest rates. Houses that were previously highly overpriced are reducing their prices to more reasonable (but still high) levels. As folks realize that they have tons of equity, they’ll either tap that equity or sell. For the moment, inventory remains low and demand is still high.

Where buyers seem to be making the most adjustment is getting more reasonable with the difference between their ‘needs’ and ‘must haves’. If you haven’t already perused our website, we have extensive overviews of the Home Buying Process and the Home Selling Process that explain in more detail what to expect when buying or selling your property here in Florida.

Expect additional posts on the economics of waiting to buy or buying versus renting. Until then, thank you for the opportunity to earn your business.