FEATURE
What Real Estate Investors Should Know About Economic Cycles and Coronavirus By Lou Forino, Gauntlet Funding
R even
eal estate and economic cycles
up and down, the market (i.e. the
values and activity level reach an
are inherently dynamic and
“pendulum”) will inevitably trend
unsustainable
thus largely unpredictable,
back towards the threshold line.
a subsequent downswing as the
for
the
most
pendulum
experienced
point—resulting
plummets
below
in the
industry insiders – despite what some
The
of
threshold line and into the negative.
would have you believe.
the pendulum’s swing from the
This downward trend continues until
threshold line is relative to the
the momentum generated by the quick
It can be helpful to think of the market
momentum with which it moved
rise is countered by corrective actions.
as a giant pendulum, constantly
away from that line. In other words,
fluctuating above and below a set
the greater the pendulum increases
Understanding our Position in the
threshold that shows normalized
above the threshold, the greater it will
Cycle Leads to Better Investing
long-term economic growth. These
decrease. The subsequent outcome
Developing an idea of the pendulum’s
fluctuations are prompted by the
can range from a modest correction
current location in its cycle can
collective decisions of market players
to a catastrophic plummet like the one
provide insight as to whether your
that dictate supply and demand, and
experienced in the 2008 market crisis.
investment
speed
and
amplitude
strategy
should
be
aggressive or reserved.
any number of other variables. Overall, the market cycle can be The aforementioned threshold line
explained in uncomplicated terms.
Still, it is risky to attempt to ‘time’
is always pulling the pendulum back
As the pendulum travels upward,
the real estate marketplace. Be wary
towards
prices
The
of making snap investment decisions
equilibrium—a
principle
are
pushed
higher.
often referred to by economists as
elevated
inevitably
because you predict a quick rise or
mean reversion. It indicates that,
relent to higher risk, prompting the
fall of the pendulum — that kind
despite
pendulum to reach its apex. Asset
of reactionary approach is all too
24
temporary
vacillations
price
points
