business cycle case zillow real estate


construction subsidy interest direction crash

Real Estate Forecasts 2012 – 2026

by Fred E. Foldvary, Senior Editor, 24 September 2012

The fundamental cause of the boom-bust “business” cycle is the real estate cycle. The period of the real estate cycle has averaged 18 years. Since the previous peak in real estate in the USA was in 2006, the next peak, if the 18-year average holds, will be in 2024. The next depression would then follow soon after, most likely in 2026, 18 years after the Depression of 2008.

Many real estate economists have analyzed the current data to conclude that the real estate cycle has already bottomed out. Inman News on 20 September 2012 announced, “Economists bullish on housing recovery.”

In a survey conducted by Pulsenomics LLC for the real-estate information company Zillow, the conclusion of 113 experts was that residential real estate prices, as measured by the S&P/Case-Shiller U.S. National Home Price Index, will rise steadily during the next few years. That Index has already risen 1.2 percent from the second quarter of 2011 to 2012. The September 2012 Zillow Home Price Expectation Survey average forecasts a price increase of 15 percent by 2016.

Zillow and Pulsenomics also announced the Zillow Home Price Expectation Survey 2010-2011 Crystal Ball Awards, but they have no award for long-term forecasts, i.e. for the next peak and crash.

Economic investment, meaning an increase in capital goods, drives the boom-bust cycle, and the most important investment is real estate construction, because buildings induce also more investment in durables (furniture, appliances, and fixtures) and also more production of materials such as wood, cement, and copper for wiring. When construction revives, investment will rise, unemployment will fall, and the next unsustainable boom will be underway.

The survey also shows that real estate experts understand the negative effects of governmental subsidies. Most of them believe the economy would benefit from the elimination of the mortgage interest deduction from income taxes.

Indeed, subsidies to real estate are the fundamental cause of artificial real estate booms. Since subsidies (rather than business as such) drive the cycle, it is better called the “interventionist cycle.” There are three basic subsidies to real estate: low interest rates, special tax reductions, and the generation of rent by government’s territorial goods.

The Federal Reserve has pushed nominal short-term interest rates down to almost zero, and has been keeping long-term rates low as it buys bonds with newly created money. The tax reductions for real estate continue as before: deductions for mortgage interest, property taxes, and depreciation; and exemptions and postponements of capital gains taxes. The biggest subsidy is implicit: the generation of land rent and land value by government’s public goods, paid for by taxing workers and entrepreneurs instead of land.

This gigantic redistribution of income from workers to landowners is the fundamental source of our economic woes, but it is hushed up in economic textbooks, and nobody talks about it or thinks about it. (“Nobody” here means “only the followers of the economist Henry George,” because to the public, they are nobodies.)

Politicians aware of this redistributive cause of economic problems dare not mention it, lest they lose their campaign contributions from real estate, financial, and lawyer interest groups. Even labor union leaders dare not speak of this redistribution, because if workers could keep their full wage, they would no longer anxiously seek to maintain labor union monopolies. And even the candidates of the “free market” Libertarian Party support the land-value subsidy and redistribution, because rent seekers are a major source of their campaign funds.

Thus political corruption, endemic in mass democracy, prevents the remedy from even being discussed. Georgists or geoists do talk about it, but they scare off potential allies with their misleading rhetoric of opposing the “private ownership of land,” instead of focusing on the force of governmental subsidies. Geoists do favor the private possession of land, conditional on paying a community rent.

At any rate, since “nobody” is even discussing the remedy for the boom and bust sequence, the good news is that real estate shall rise again, and pull up the economy into the next boom, but the bad news is that once again, the economy will crash. All the financial regulations and reforms will not prevent the next crisis, because they do not touch the fundamental cause, subsidy.

And most probably, the Crash of 2026 will be much worse than the Crash of 2008, because after the trillion dollar annual deficits, in the next crisis, the US federal government will be all tapped out, as it will no longer be able to pay the debt service, and it will no longer be able to borrow funds to bail out the real estate and financial industries, or homeowners. But you, dear reader, have time to prepare and brace yourself for the waterfall up ahead.

-- Fred Foldvary

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Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.

Also see:

During this bottom, who catches a break?
http://www.progress.org/2011/zillow.htm

Veteran who called some major market junctures
http://www.progress.org/2011/russell.htm

Lower land prices so at last the cycle can turn
http://www.progress.org/2011/vacancy.htm

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