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The 80 Year Demographic Cycle – Consider How this Effects Investments | International Residential Real Estate Investors Association
Monday September 25th 2017

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The 80 Year Demographic Cycle – Consider How this Effects Investments

The emerging demographic cycle described by some economists may be a factor in the real estate investment cycle.  As investors we should understand this concept and allow some of the ideas to influence our purchasing goals as a point of risk mitigation.

Economics are cyclical and the real estate industry is especially sensitive to these cycles.  Of this, there is no question. Moreover, there are clearly shorter and longer cycles. Recently, I saw the idea of an 80 year cycle ending in a very deep dip. This discussion maintains that this is where the economy is today. Certainly, this is a more painful period than we’ve faced before and the idea deserves attention.

Under the 80 year cycle theory, an argument exists that we have not hit bottom yet and that in fact a much deeper trough lies ahead. Economic forces that would drive such a dip exist and are pressuring our economy. For example, the tremendous amount of sovereign debt (debt held by the governments of countries around the world) is likely to put intense pressure on rates in the not distant future. The current U.S. federal stimulus is not carrying the impact that officials had hoped for and as it is waning signs of weakness exist across the economy. Under some who espouse this theory the housing market should drop to pre 2000 market prices with very large drops in California, Florida, and areas of the East Coast leading the way. Along with this, commercial properties will take even heavier losses than have already been seen (Commerical is down 43% nationally since the peak with most of the drop occuring in the past 12 months).

From my perspective, I can’t find significant fault with the ideal of an 80 year demographic cycle. Moreover, I believe continued significant drops in some housing areas are likely to continue placing pressure on that sector of the economy.  Indeed, I believe the likelihood is we will not see a return to precrash constructions for decades if ever.  Also, a prolonged almost stagnant recovery period seems to be emerging as many economists have predicted. Given, the size and length of strong bank profits we’ve seen since the crash, I do not expect a sharp second dip. Also, I believe the Federal Reserve’s capacity to add liquidity through buying of notes, buying federal debt, and other bank supporting ends combined with U.S. government support for  guaranteed lending to certain home buying programs and multifamily construction plans provides the needed additional lift to prevent a second crash. Instead, I believe continued drops in some geographies and some market spaces is likely. I think employment growth will only be strong enough to chip away at but not sharply reduce unemployment. Nevertheless, the total employed base will grow significantly during this weak period helping repair state budgets and beginning to turn the corner on fedral budget pressures. I expect this period to last until the last of the pre-peak mortgage discontinuities (mortgages who because of rate and loan to value aren’t supportable in a higher rate lower loan to value market) are washed out of the market.. Also, the still continuing significant deflationary value issues caused by the bank losses on consumer debt and real estate debt, the loss of much of the real estate and real estate construction sector of the economy must fully wash through the market before the cycle will be behind us.

With these thoughts in mind, real estate investors should consider that investing for short term gain is especially risky now.  Investments should be on a buy and hold basis.  Investments should be set up to prevent a dominoe effect if weakness develops.  Investments should focus on cash flow and avoid appreciation or perceived inherent value over a given price.  Value based and appreciation based investing in this environment is especially risky at this point in time.  Therefore focusing on high occupancy commercial and multifamily and  rental property in general is  significantly less risky than other alternatives.

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6 Responses to “The 80 Year Demographic Cycle – Consider How this Effects Investments”

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