Cliff Droke looks at declining housing prices and sees deflation at work…
An oft-repeated maxim is that real estate is one of the best long-term investments. For the better part of the last 60 years or so this certainly held true. In a typical “long wave” or 60-year Kress cycle, real estate benefits almost from the start of the inflationary leg of the long wave and prices tend to increase even after the 60-year cycle of inflation/deflation peaks, and real estate prices can continue to increase in the ensuing dis-inflationary years of the cycle. It’s mainly during the final “hard down” part of the cycle — which is defined as the final 8-12% of the cycle — that the real estate market struggles under the weight of deflation.
Real estate hates hyper-deflation and the final 5-7 years of the 60-year cycle are always hyper-deflationary. In the current 60-year cycle which began in 1954, the final “hard down” phase began in 2007 — right on schedule as this was 7 years from the cycle’s scheduled bottom in 2014. The real estate boom also had its end around that time and since then housing prices have struggled in the ensuing deflationary “winter” phase.
The bear market in real estate which began over four years ago has had a devastating impact on mortgage holders. Hyper deflation is never kind to debt holders but it’s doubly damaging when the value of one’s home is declining while the relative cost of the debt is rising. This exacts a negative toll on psychology, which in turn effects all aspects of consumer spending. The real estate bear market is a prime indication that deflation is the dominant theme in the U.S. economy and will be for at least a few more years.