Real Estate & The Business Cycle


QUESTION: Hi Martin,

I live here in Fairfax County, VA. Wow! The government largesse almost feels like 2006 again. Real estate values have almost climbed back to 2005 levels. I cannot believe that people here are paying 600k for 15-year-old townhomes under high tension wires. I guess it is the low interest rates. Those units can rent for about 2500/month. All the traditional investment ratios are screaming code red. Ratios like Price/Rent. GRM, Cap Rate, etc, indicate extremely overbought again. However, the rents are higher than in 2005-06, so prices are not as overbought as back then – though they are getting there.
The anecdotal evidence for a top keep piling up. I know of a few couples who are buying bigger homes and keeping the older homes, and using them as rentals.
This brings me to a paper I read that you wrote back in November, 2009, while you were in prison. It seems so prescient. You stated that 2015 would be the high, as you stated 2015.75 would be for the debt bubble.
From this paper you wrote over five years ago, you predicted a bump up into 2015 with a drop thereafter for years. It worked out perfectly so far – a 2012 low to a 2015 high.
How bad will it get for the average mortgage payer? How bad will it get for residential real estate? I own several paid down/paid off rental houses in Maryland, across the Potomac that generate a ton of cash flow. What should I do? I kind of have become dependent on the free cash flow. What will happen with rents? They have gone way up over the past several years, as the foreclosures have displaced (continue to displace) so many wage earners.
I ask, because you have mentioned real estate in passing, but I have not seen you directly address it like you did in that 2009 paper.
Anyway, I intend to come to Princeton this time around later in the year. I am a quiet person, so I will be the one keeping to himself.
Thank you so much for all that you have done. All these cycles make so much sense now that I have been studying your work for the past couple years. It answers the questions I have had, but couldn’t answer.
Best regards,

ANSWER: Yes, 2007 was the broad market peak. The 2015 high is the higher-end market that has been driven primarily by capital inflows which people trying to get off the grid. The concern here is that property taxes will now rise and the real net value of property may decline relative to everything else. Parking money in real estate at this time may produce the equivalent of negative interest rates when all is said and done. There are advertisements in Asia and Europe as well as Russia offering real estate in New York City for a little as $10,000. This is speculation once again.


The majority of mortgages are conventional with 20% down so this is not the same type of high as took place in 2007. Banks are transactional now so they will write the mortgage and resell it. With interest rates negative and mortgages at least offer collateral, they are still better to invest in compared to sovereign debt where you will get nothing.


Our problem is what Rome faced. The greater the economic turmoil in government, the more aggressive they become in taxation. In this regard, real estate is not a movable asset and it can cross the bell curve and decline due to taxation and the lack of mobility. Romans just began to walk away from their property. Therefore, property in North America will tend to be the safest only because it is extremely difficult to invade with troops and tanks. Blow it up with a nuke – sure, but then nothing matters anyway. So staying within the realm of reality, the greatest threat will be taxation.


Those interested in real estate, run out now and take the longest possible mortgage at a FIXED rate in the domestic currency of where the property is located and/or you wealth with rates this low. If you use a cross-currency, then you better pay attention to hedging. This is a hedge so if it ever gets that bad, you can just walk away as did the Romans. DO  NOT assume real estate is a store of value. That depends on the taxation level of the local government and the location.