Ep.14 - The 18 Year Real Estate Cycle

Think back to the last 30 days, have you had a conversation with someone on renting or buying a home? You probably have, because housing is a hot topic everywhere. But why? Here are the main reasons:

  1.  Your pocket feels the pain: Rent is expensive in most cities. If you live in LA, you know what I am talking about. You naturally wonder if it is wise to keep throwing money away without ever owning something.
  2.  You are further away from achieving your homeownership dream every year: It is true. Houses appreciate +10% in LA year over year. On an typical single-family house, homeowners gain $50k to $60k more in net worth each year!  Non-homeowners naturally wonder if they can jump on the bandwagon to get rich quickly as well.  

In this episode, I will explain why I think we are far from the peak of a housing bubble, thus making now a perfect time to invest in a house. Well... only if you have the means to do so. (check out Episodes 1-4 to see if you got what it takes to buy a house in LA)



If you want to get rich via the real estate boom, you'd definitely want to know if the price is already too high. No one wants to be a fool by paying too much for anything. So... How can you possibly know that? Well, history tends to repeat itself. 

In general, there is a 17-year real estate cycle, with 7 years of boom and 10 years of recovery. I emphasize this is the GENERAL trend, as it could be 16 or 20 years. Predicting real estate cycles is similar to predicting the weather, where you can be fairly accurate in the big picture (at the season or month level), but very unreliable when it comes down to the hour. This principle is also true in real estate, I feel confident that the real estate market will come to a halt between 2022 and 2025, but I can't pinpoint the exact year, let alone the month. 



We are currently in the very beginning of a long recovery, with probably 5 to 7 years of consistent housing appreciation.

I feel strongly about this because I've analyzed the Case-Schiller Index, which is tracked by the Federal Reserve. I will use a $300k house in the LA market to illustrate. Feel free to follow along by modifying the timeframe in the embedded Case-Schiller chart to match mine below.

10 Years of Recovery

  • 01/2000 - 01/2010: During this time, a house worth $300k in 2000 bounced back to $300k in 2010.

7 Years of Boom

  • 01/2010- 01/2007: During this time, a typical LA house appreciated 270%, boosting the same $300k house to $810k right before the bust.

10 Years of Recovery

  • 01/2007 - 2017: Presently, the housing market has pretty much fully recovered in LA. The same house sells for $810k again.

Probably 5 to 7 Years of  Recovery

  • 2017 - (2022 to 2025): I feel confident that we are just at the beginning of a boom for the next 5 to 7 years. I think it could be shorter than 7 years, because the mental fear of repeating the 2007 bubble could act as a constraint for a boom to go on for as long as it did. 


I strongly believe we have another 5 to 7 years to go before the housing market hits a peak. In this short amount of time, I have no doubt the typical $600k single-family house in LA can easily double in price to $1.2 million. In fact, between 2000 and 2007, the average house went up even higher, by 270%. But why should you invest in housing, instead of stocks and others? 

As of right now, housing is a better investment vehicle than all the other ones for the following three reasons. 

  1. 20x Leverage: You only need to put 5% down for a $600k house ($30k), meaning you are leveraging 20 times. If you invest the same $30k in stocks, your are only growing the $30k, instead of a base of $600k. If everything works out as I predicted, you can sell it for $1.2 million and end up with $600k in gross profit (before tax and selling fees). To get to that $600k from $30k in stocks, you will need to be a miracle worker or Warren Buffet.
  2. No Tax Up To $250k/$500k: From selling your primary residence, you don't get taxed at all for a profit under $250k if you are single, or $500k if you are married. However, if you make that much from your regular salary, you would be taxed at 50% with federal, FICA and State taxes combined. 
  3. Save 10k A Year with Deductions: You get to deduct your mortgage interests and property taxes. On a house of $600k, you will save $10k a year in taxes. I have already explained this in detail in episode 7, so I won't linger on this topic.



Everyone only has two shots at profiting from the housing market in one's entire lifetime, because it takes about 17 years to complete each cycle.

Here is what I mean: When you start working and have the means to buy a house in a major city, you are probably AT LEAST 25 years old. Let's say you jump in the market now, in 2017. You sell in 2022, you are then 30.  By then, you would have made half a million and then you wait for the next low to buy again.

In fact, you need to wait another 17 years to profit from the cycle, in order to buy low and sell high. The next time you can execute is when you are 47 years old (30+17), and again 64 years old (47+17).  It is very unlikely you want to sell your house when you are in your 60s, because you need a place to retire. In reality,  just like the extremely fortunate 25-year old, most of us only have two shots at making a sizable profit from the real estate cycle.

Time waits for no one. Now is one of those golden opportunities. 


If you found this article helpful, please follow me on Instagram (dollars_and_sense_la).