Real Estate is not at peak yet

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    From long waves:

    This observation is in sharp opposition with the common belief that we are in the midst of a housing bubble right now. The bubble belief doesn't really come so much from the idea that home prices are high as from the idea that mortgage debt is high (home equity is small). Reductions in mortgage interest rates had spurred a great deal of re-financing in which equity is taken out of homes and used to finance consumption. This question of a mortgage credit bubble is really separate from the issue of a house price bubble.

    The evidence from both prices and building activity suggest that a real estate cycle emerged after a forty year absence, but that its length was considerably shorter (about half) what it was before 1933. The data since 1992, in both prices and building activity, is not consistent with this shorter cycle, however. It has been 13 years since the last real estate cycle peak with no obvious boom in progress now, much less any peak. Either the cycle has again disappeared or it is longer than the ~9-year length of the previous two cycles. The price trend in Figure 4 shows some evidence of acceleration since around 1998. If this acceleration continues a boom will develop, which if extrapolated to the upper trend line, suggests a real estate peak to come sometime around 2007, some 18 years after the last one in 1989. Could the 18 year Kuznets cycle of old be reappearing?

    The 12 regular business cycles since 1933 average 68 months in length, much longer than the 41 month average before 1933. The standard deviation is very large (47% of the length) compared to that for the industrial period (22% of length) or even the pre-industrial era (35% of length). This degree of dispersion is even greater than what one would expect for cycles of random length. Closer examination shows that they appear to fall into two categories: eight short cycles, 28 to 64 months in length (average 49) and four long cycles, 88 to 125 months in length (average 108). A t-test on these two sets of cycles shows the hypothesis that there exist two populations of modern busienss cycles of two lengths is significant at only the 80% level (95% is usually considered significant). If we consider the twin recessions in 1980 and 1982 as a single "double-dip" recession, we would then have 11 business cycles since 1933 that fall into two categories, long cycles of 105±16 months and short cycles of 50±9 months. These two populations are statistically different at the >96% confidence level. These two classed of cycles have rather small standard deviations relative to length (15% and 18%), similar to the tight dispersion of the industrial cycles. This suggests that each cycles has its own mechanism, just like industrial era business cycles were linked to inventory cycles. In the next section a mechanism for one of these cycles is proposed. Given the lengths I label the shorter cycle "Kitchen" cycles and the longer cycle "Juglar" cycles.

    Thus, it appears that since 1933 something like a Juglar cycle of about 9 years and a Kitchen cycle of about 4 years are still in operation. The recent ~9 year real estate cycles and possible? current 18 year cycle suggests that a Kuznets cycle of 1 or 2 Juglars in length may be in operation as well. To explore this issue further I now present the SMECT system of nested binary cycles.


 
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