Expert Commentary

How Long Before U.S. Real Estate Suffers Deflation?

Can U.S. property prices really keep advancing for a few more years?

Financial and commodity market analysis is such a broad field and encompasses many different specific subjects. On the technical (or charting) side of market analysis there has always been a reverence for original works and copies of classic books are sought after. One such is “Cycles – The Mysterious Forces That Trigger Events…” by Edward R. Dewey and published in 1971. In that book, Dewey looks at cycles across a vast array, from the abundance of lynx (wild cats) in North America to stock market prices. In one chart he shows a very rhythmic cycle in U.S. Real Estate Activity lasting eighteen and one third years on average from 1795 to 1958. The “ideal cycle”, around which actual activity had tracked very closely, showed a trough around 1953.

Well, that has proven to be quite prescient for subsequent cycles. Property busts, after booms, have occurred around 1971, 1989 and 2007, all adhering to the 18-year cycle. Given this extraordinary accuracy of cycle prediction, we must have in our thoughts that the current property boom in the U.S. might last until 2025! With the current extreme level of froth and speculation in U.S. real estate, that is an utterly incredible scenario to imagine.

Remember, though, that 18-year cycle is the “ideal.” Actual activity can vary around it. It therefore makes sense to think about time windows when examining cycles. Still, it is only 13-years since the last real estate trough and so, perhaps, it is too early to think of a bust occurring just yet.

However, never in any previous cycle has the property boom been sponsored so directly by the government or central bank. In that regard, we might allow ourselves to conjecture that the intensity of the outright speculation stage in the cycle has been brought forward, and that would seem to align with what is happening with regards to “flipping” activity and prices as well as the explosion of realtors.

What is particularly interesting about this U.S. real estate mania is that it hasn’t been accompanied with an outperforming real estate sector in the stock market as was the case in the early-to-mid-noughties. Perhaps that speaks to the fact that this boom has to a large extent been artificially created and will ultimately turn out to have been a transitory illusion.

US Real Estate Sectpr Relative to S P 500- April 2021