Real Estate Triggered Recession

Real estate crashes have led to recessions in the U.S. economy the majority of times major recessions or economic depressions have developed since the early 1800's.

In California, Santa Clara University economist Fred Foldvary may have been the first to predict a recession for 2008 back in 1997. "Macroeconomists are not always familiar with the real estate literature," Foldvary said, "and I wanted to use it to come up with a better explanation for the causes of business downturns."

Not all recessions are real estate related, but the majority of real estate busts start most recessions. There have been six economic depressions in the U.S. since 1837.

Foldvary made the prediction in a paper called "The Real Estate Cycle and the Depression of 2008," published in the journal GroundSwell. He researched the studies of real estate economist Homer Hoyt, who identified an 18-year cycle of real estate in Chicago, and other historical trends to come up with his forecast.

Real estate values peak a year or two before a recession. A real estate boom and a growing overall economic boom proceed the recession. Real Estate depressions can be tracked every 16 to 20 years roughly since 1818, which indicates real estate slowdowns are a harbinger of things to come for the overall economy.
Real Estate Cycles
Peaks in
Land Value

Interval (Years)

Peaks in Construction

Interval (Years)

Depressions

Interval (Years)
1818

—

—

—

1819

—
1836

18

1836

—

1837

18
1854

18

1856

20

1857

20
1872

18

1871

15

1873

16
1890

18

1892

21

1893

20
1907

17

1909

17

1918

25
1925

18

1925

16

1929

11
1973

48

1972

47

1973

44
1979

6

1978

6

1980

7
1989

10

1986

8

1990

10
2006

17

2006

20

2008

18
* Note: Table Summary by Fred Foldvary, Economist, Santa Clara University

It is Foldvary's belief that it is land inflation not other real estate appreciation, and the primary belief in society that inflation or price increases will continue that causes a land grab sort of mania to develop.

Isaac Newton, who may be the greatest genius in history, invested in the real estate bubble of the early 1700s, selling at a large profit. But when prices continued to rise he bought back in and suffered a large loss when the bubble turned to panic. Disgusted with himself as a result, Newton wrote, "I can calculate the motions of the heavenly bodies, but not the madness of people."

"Mortgages are paid from wages and profits, so eventually real estate prices stop rising," wrote Foldvary. "When that happens sales volume drops. New construction is dampened. The demand for furniture, appliances and office equipment goes down and unemployment and interest rates rise, and a recession is around the corner."

Foldvary expects this recession or economic depression, if it in fact turns into one to be particularly hard hitting because the growth of the secondary loan market, fraud and Wall Street manipulations made this boom bigger.
Published October 31, 2008