What Cycle Is Your Local Real Estate On the Kondratieff Wave?

Our popular press is consumed with Greenspan and Bernarke. But how about the economist Kondratieff, Professor Nikolai Kondratieff to be percise?

Kondratieff is the founder of the economic long wave theory. Born in 1892 in Russia, Kondratieff rose to prominence through his analysis of historic prices and consumer behavior. He contributed to the Soviet Union's Five Year Plan. Eventually Kondratieff spoke out against Stalinist practices and paid for his criticism with his life in 1938.

Today when we refer to economic cycles or waves, we're really borrowing Kondratieff's brilliance. The gist of the Kondratieff wave theory (R.N. Elliott would also build upon the premise.) is that each economic system moves through four pronounced stages. The typical Kondratieff cycle lasts 50 to 54 years. Our species accumulates and we consume. I have no doubt that Ronald Reagan's chief economist, Professor Martin Feldstein of Harvard, read Kondratieff's work.

Reaganomics sounds eerily similar.

Let's review Kondratieff's wave. Just like any "life" cycle analogy, the end is never pretty.  

1. Phase One -- Inflation. Growth erupts from a static, broad economic base, gaining momentum through the interaction of market participants who purchase more goods and services. The end product is wealth. Production expands. More goods are sold. Prices rise. Think of a dust swirl forming in a barren field and then gyrating into a monster tornado.
2. Phase Two -- Recession. Growth eventually burns out. Too much capital is formed. Most often in the cycle a risky, socially unpopular war is engaged. It is said that the Civil War, WWI and Vietnam all occured in Kondratieff's second wave. The Iraqi War? Hmmm. Pause to think.
3. Phase Three -- Deflation. Many folks do not think deflation can exist. Here inflated prices resulting from the recession do not dampen consumption, even though people cannot afford their desires. A false sense of security abounds. Everyone "feels" rich. Debt skyrockets.
4. Phase Four -- Depression. The current American psyche cannot handle the word depression. As a nation we are stigmatized by visions of bread lines and tent villages. So prevalent and deep is our fear that we summarily block out any prediction of a depression. We stock a blind faith in monetary policy and system "safeguards" to protect us from the Dark Nemesis of Prosperity. An economic depression is a very real possibility.

Now many Kondratieff followers believe we are on the cusp of a Phase Four collapse in the United States, citing the post World War II manufacturing boom as the start of the cycle. Fifty some odd years later we're in 2008. Hyperbole and hysteria aside my blog is starting to sound like a Y2K death knell. Relax.

So far my interpretation of Kondratieff is rather linear. Connect "A" to "B" to "C" and "D." We know the economy does not expand and contract in a linear fashion. But the theory of wave analysis is still a valuable tool when trying to predict the direction of an asset's prices, say real estate. On an intuitive level we all adopt Kondratieff's eye when we look at a chart and attempt to conjure meaning.

So I charted my service area, Monmouth County New Jersey real estate, from 1996 to 2007. I analyzed average sale prices of detached single family homes:

My gut tells me that Monmouth County real estate is in the beginning of Kondratieff's Phase Three cycle. Only two down years over the last twelve years. Yet the number of sales is off almost 25% from the peak of 2005. Prices remain relatively stable but volume is shrinking. The current debt crisis exascerbates fear and restricts confidence. Eventually prices will start to fall off this temporary plateau.

Not a steep nor precipitoius drop. Just a slow driftward decline. Do I see a depression in my tea leaves? No, the water in my cup is rather murky. That and I do not want to consider the possibility of the Big D falling upon the county and country I love.

Either way 2008 will present a genuine buying opportunity in Monmouth County. Wave theories and economic phases aside, folks still need a place to raise their families with exemplary schools, proximity to New York City and Philadelphia and a robust local economy.

We represent buyers and sellers of condos, single family homes and investment properties through most of Middlesex, Monmouth County real estate and Ocean County real estate.

You can call Andrew at (732) 431-9003 or email me or visit me at my company website.

Andrew J. Lenza, ABR GRI MBA 
 Broker/Owner     
ANDREW J. LENZA REALTY 
 73 State Highway 34 Colts Neck, NJ 07722    
 Office Telephone (732) 431-9003 
  
(c) Copyright, 2008. Andrew J. Lenza, All Rights Reserved

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(C) Copyright, 2008. Andrew J. Lenza, All Rights Reserved.