Author: Michael Douville
Our ancient forefathers knew that the everything cycled. Night became Day. Winter became Spring which became Summer then Fall to start the cycle again. Some of my favorite Wisdom from the Old Testament, Ecclesiastes 3: For everything there is a season, and a time for every matter under heaven. For thousands of years the cycle of Life has played out. In more modern times, the Business Cycle and Economic Cycle has been recognized to exist with uncanny regularity. Currently, attention is centered on the US and Global Stock markets which seem to have a 7 to 7.5 year cycle. This 20 year graph of the S&P helps illustrate:
The Global Markets are now all inter-connected and the World Indexes are marching together.
The US Markets have been averaging 7 to 7.5 years in length. Same with the Global Indexes. The Global Indexes presage the US by 12 to 18 months; the US Market, Chinese market, and the DAX seem to also be correlated. Economic slow downs are evident in Europe, Russia, the Arab Oil Exporters, Japan again, Canada for at least 12 months, Brazil, and Venezuela to name a few, plus many, many more are in trouble. Globally, there is not an Economic engine to pull the World forward; no strong market to sell goods and services into. The US Market peaked in July of 2007 with the S&P at 1552 then a huge decline; the high in the S&P was 2130 achieved on May 21, 2015; it took another 14 months to achieve 2190 on August 15, 2016. Over nine years since the 2007 peak! That is 9 years in a cycle that runs 7-7.5 years!
Pundits and Bloggers proclaim the influence of the Central Banks in extending the rally. Maybe so; it has taken another year since the S&P managed to climb to a record; a whole year without a significant increase in the Index. Just a 60 point gain; less than 3%. Another year of risk with very little gain. Prudence may dictate re-allocating Capital. However, Risk might dictate a more conservative Investment!
Real Estate in the US is Regional and direct ownership of property has an extremely low correlation with Wall Street. Another reason to re-allocate may be that Residential Rental Property has a USE Factor and a NEED Factor as one of the basic requirements of life; a place to call Home!! Further, the US population is still increasing at a faster pace than construction in most of the Growth Markets resulting in Housing pressure and a steady annual rental increase, higher demand and a declining Vacancy Factor. The Cash Flow generated by rental property acts to mitigate any Economic Downturn and is a conservative Passive Income Generator that may very well serve as an Asset Preservation vehicle should there be a “Black Swan” event.
As an added bonus, the Real Estate Cycle is much longer than the Stock Cycle averaging 18 years in duration. Everyone will agree that if 2008 was the bottom, then 2026 +- will be the bottom again. This chart is adapted from the research of Harrison (1983) and Phil Anderson (2008) and published by Ascendant Strategy and Investments (2013). It is valid today as well clearly showing the peak of 2007 and extrapolating the length of the next 18 year cycle to 2025 and a bottom then of 2026.
This excellent chart shows the expected corrections in an ongoing Bull Market in Real Estate. The correction should be evident in the next 6-12 months and be similar in nature to the swings in the early to mid 1980’s. The depth of the correction will be affected by the ending of the Equities Cycle on Wall Street and their affect on Main Street. Obviously, the more severe the downturn and panic, the more severe for local and regional economies; However, the correlations are very low. The Wall Street turmoil of 2001-2003 resulted in the NASDAQ losing 78% of it’s value, yet the National Real Estate Market of that period was largely unaffected; rents continued their steady increase unabated. The correction may be scary, however, it should prove to be a buying opportunity. The more severe the economy, the better the buying opportunity and this could be an opportunity for generations to come.
Prudent Investors might consider reducing their Equity positions and Re-allocating Capital to Growth markets in the US. Further, Real Estate is expected to thrive in Phoenix, Las Vegas, Houston, Austin, San Antonio, Orlando, South Florida, and North Carolina. Some markets are considered frothy such as Silicone Valley, San Francisco, New York City, Seattle, and Vancouver to name a few. Some States are losing population due to mis-management of tax dollars, huge debt, and onerous tax burdens such as Illinois, California, and New Jersey with the highest Real Estate taxes in the Nation. These factors are huge benefits for the Sunshine States of Arizona, Nevada, and Florida that are projected to have stellar growth for the next decade. The Real Estate Cycle projects much higher prices nationally with a peak in the early 2020’s, plenty of time to season and grow a cash flowing Income portfolio. Positioning Capital in the Sunshine States should accelerate the Investment. With an expected correction coming, properties that will be bought using leverage, should be bought now! Rates are near a Historic low and should trend much higher becoming more difficult to obtain as Underwriting Standards are tightened. A Prudent Investor should consider deploying at least half of any re-allocated funds to cash flowing properties today. The remainder to be used for Investments of Opportunity and Cash purchases. Stocks and Bonds are presumed to be a source of funds. As always, consult with your Financial Professional, your Significant other, and any other Adviser before Investing.
My very best to you ALL!
Author: Michael Douville
Mr. Douville has been in the Real Estate Business since 1974, over 41 years. He started his career during the 1974 recession in the Southwest suburbs of Chicago, where he experienced an inflationary period followed by the crash.
In 1981, having experienced enough cold and snow, he and his wife of now almost 36 years moved to beautiful Scottsdale, Arizona. For the last 34 years, Mr. Douville has advised clients, coached Basketball at the YMCA and Boys and Girls Club, participated in innumerable Boy Scout outings, and played Golf three times.
From 1982 through the early 1990’s, the Douville’s executed their well-thought-out business plan to accumulate income producing single family homes; the strategy has now been published. Michael currently represents and consults with investors for Acquisition, Wealth Management, and Asset Preservation while overseeing a portfolio of investment properties.
Michael has traveled with his family extensively within Australia and New Zealand, has journeyed on numerous occasions to the South Pacific, Europe, Mexico, Canada and the Caribbean, and of course throughout the US.
- Which Direction Are You Headed? - February 15, 2018
- Wells Fargo Downgraded - February 14, 2018
- Better One Day Early Than One Day Late - January 25, 2018
- What’s Your Plan B? - January 18, 2018
- Part 1: Riches to Rags - January 15, 2018
- Consider: Another Good Year For Real Estate - January 13, 2018
- Signs of a Forming Top - January 2, 2018
- Global Conglomerates Wobble! - December 20, 2017
- Bitcoin Mania - December 17, 2017
- Money Troubles Breed Very Bad Judgment - December 13, 2017