One of the hallmarks of the second half of the 18.6-year real estate cycle is that asset prices continue to increase.
It’s the speculation stage.
This means the amount of leverage required to buy these assets also increases. Prices are going higher, and investors only have so much liquidity. So they borrow.
Therefore, if you are using credit to buy assets, you’re left with two choices.
Below, I will outline these choices and show you how higher credit drives the 18.6-year real estate cycle.
There Are No Good Choices as Far as Debt Is Concerned
To afford something that is appreciating, you can do one of these two things.
On the one hand, you may take on a larger amount than you may be comfortable with and accept higher monthly payments.
It’s bad for your cash flow.
Or you can look to stretch the term of the same loan over a longer period, which reduces your costs per month.
…But you stay in debt longer.
New research shows that for the United States, it is the latter option that is driving almost all new loan applications.
New car loans over six years have risen from 28% of all car loans in 2018 to 35% in 2022, according to research from auto information site Edmunds. (Note: the emphasis below is mine.)
“It’s a reflection of the world we live in: Transportation affordability is a significant problem, as is housing,” said Ira Rheingold, executive director of the National Association of Consumer Advocates.
“More and more dealers are offering extended loan terms: Instead of three or four or five years, they are now going way beyond that,” Rheingold added. “It’s the same thing with housing: Sometimes the only way to get someone into a house is to increase the mortgage length.”
When most investors read a sentence like this, they don’t make much of it.
But for those of us who study the history of the 18.6-year real estate cycle, it signals something else entirely.
And demonstrates what a huge advantage timing the markets has…
Here’s How to Time the Market Cycle
My proprietary “property clock,” is currently at 14. I moved it just a few days ago, when it dropped that Joe Biden unveiled plans to allocate nearly $42.5 billion to build out high speed internet networks to help lowincome families.
This lavish government spending for public works is classic for the second half of the cycle – and it means prodigious amounts of infrastructure building and credit creation.
Image: Phil Anderson
When assets such as home (really land) prices continue to increase for the next few years, ever more credit is required to enable the average buyer to get it.
It places pressure on buyers to find ever larger deposits to secure the loan they want.
How are banks overcoming these issues?
Precisely the way Ira Rheingold stated above.
Don’t decrease the loan size; simply increase the length of the mortgage. As land prices soar, you simply can’t expect to borrow less in the future.
In other words, the key to securing your next mortgage from now on is serviceability. In other words, the question becomes: can you afford the monthly payments?
By stretching the length of the loan, you can reduce the monthly costs.
That means borrowers can overcome the ever-increasing size of the loan.
This means new credit creation can continue to increase.
Which allows ever more money to be bid into the land market.
And at the end of the day, it is land that ultimately takes all these gains. And continues to keep increasing.
And around we go. This is the 18.6-year real estate cycle.
This Cycle Has Been Repeating Since the 1800s
This is exactly what’s been happening to the U.S. land market since 1800.
And if the land market continues to increase in price moving forwards, this cycle of credit creation can continue indefinitely.
So what happens when the property market stops rising? What happens if the property market crashes?
And more importantly – “when” will the land market finally break?
This is the single most important question to ask for the remainder of this decade.
And my readershave the timing of the real estate cycle to guide them right up to the eventual peak and then bust of the U.S. land market.
What an incredible advantage to have.
When will you turn such knowledge into your own personal market edge?
Regards,
Phil Anderson
Editor, Cycles Trading with Phil Anderson
P.S. I go into detail about my real estate clock in my premium newsletter, The Signal. I also give specific plays for each stage of the real estate cycle… with one of our picks up 45% in less than three months. Check it out here.
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