Another mainstream media story has it completely wrong…
Yahoo Finance has published a piece titled “10 US Real Estate Markets To Avoid for Now.”
The article tells you about 10 real estate markets in the U.S., nine of which have seen house prices rising in 2022…
…and recommends avoiding them.
What?
As an investor, would you rather invest in rising or falling markets?
I think the answer is obvious.
You want your home equity to grow in value, not decline.
(I’ll explain why home equity is so important in a moment.)
But that is what this particular piece suggests: to avoid the areas where house prices are rising.
Will They Continue to Rise?
It’s a legitimate question…
Trends don’t continue forever.
At some point, they slow down, pause, or reverse.
Why am I so confident that the real estate trend is going to continue?
Because I have a market “cheat sheet.”
It’s a simple but powerful pattern that has been repeating itself for centuries… and it’s been more pronounced than ever since the land price low of 1955.
After World War II, real estate cycles have lasted almost exactly 18 years, with 14 years up, and four years down.
I get asked this question a lot… “What drives the cycle?”
For one, interest rates. The long-run historical interest rate is about 4-5%. So the number of years required to double your money is about 18 years.
Another factor that explains the cycle is home equity. (I discuss it at length in my book, The Secret Life of Real Estate and Banking.)
In the past, the real estate cycle turned down when mortgage buyers ended up with negative equity.
Note that I didn’t say that prices stop growing or start to decline. They need to decline enough to erode the homeowner’s equity.
This isn’t what is happening now. In its latest home equity report published last December, CoreLogic, a data and analytics company, said that in the third quarter of 2022, home equity soared by almost 16% compared to the third quarter of 2021.
In absolute terms, it grew by $2.2 trillion.
And negative equity fell by almost 10% compared to the previous year.
These trends tell me that the real estate market is growing, not turning… yet.
And investors should act accordingly, regardless of what the media says.
Regards,
Phil Anderson
Editor, Cycles Trading with Phil Anderson