Just six days left!

Less than that, actually, since you’re reading this on Tuesday evening. Or maybe Wednesday morning.

Regardless, it’s less than a week from Inauguration Day, when Joe Biden leaves office and Donald Trump takes over. And I, for one, couldn’t be more excited.

As I’m sure you know by now.

I’ve been talking about it for months, after all, including last week in the Wide Moat Daily piece titled “My Next Book.” There, I wrote how “I know Trump didn’t deliver on all of his promises during his first term. He wasn’t allowed to. But it’s different this time.”

How can I be so confident about that? Well, as I also mentioned on Wednesday, many big-name companies are already getting in line with his policies. They recognize that Trump:

  1. Has a long to-do list he wants to implement

  1. Understands how Washington works this time around

  1. Means business

And so these companies are donating large amounts of money to his campaign. They’re also reducing or entirely eliminating their diversity, equity, and inclusion campaigns. And, in some cases, they’re even adding more conservative members to their boards. As I said last week:

When Trump puts together a Department of Government Efficiency board to clean up all the wasteful spending… when he says he’s going to bring business back to the U.S… and when he says he pledges to make us a safer, smarter place to be…

I believe him.

As I’ve said earlier still, we’re coming into a Golden Age of America!

… right after, perhaps, a mild real estate recession.

Homer Hoyt’s Theory About Real Estate Recessions

Does that surprise you?

Look, I never said all of Trump’s policies were going to be implemented right away. Or that they would take immediate effect once they are.

“It might take some time to implement everything he wants to implement,” I said on Wednesday. And the day before, in “REITs Have (Almost) Everything Going for Them Under Trump,” I mentioned how there are factors outside of his control, such as interest rates.

That and Homer Hoyt.

It’s okay if you’ve never heard of him before. But Homer Hoyt was a 20th-century land economist who worked as an appraiser and consultant in the 1930s.

By then, it was widely known that businesses followed a pattern of booms and busts through four distinct stages.

Source: BusinessYield

A given market or the larger economy will begin to grow, with businesses opening and consumer cash flowing. This expansion continues and continues until the market becomes oversaturated and has to pull back. Eventually, though, that downturn will end too, leading right into a period of growth all over again.

With “normal” markets, this cycle tends to last about five and a half years. But with real estate, Hoyt realized the cycle lasts much longer.

On average, it’s more like 18.

This is largely due to construction considerations, since new buildings take time to complete. Typically, there’s a three-year gap between picking out a commercial real estate site and collecting the first rent check.

And that’s why the shortest real estate cycle we’ve seen since 1818 is six years. Most of them are easily in the double digits, as shown in the first two columns below.

I’ll also point out that national and international events can mess with this otherwise pretty predictable cycle. For instance, the 48-year stretch from 1925 to 1973 was due to World War II activities that delayed so much real estate activity.

A crash didn’t materialize sooner because everything was stagnant for so long beforehand. But overall, you can see above that Hoyt’s findings provide a pretty predictable indicator.

Which brings us to today…

Here’s How to Handle the Mild Real Estate Recession I’m Predicting

Back in 2007, Fred E. Foldvary from Santa Clara University’s Leavey School of Business wrote a white paper titled “The Depression of 2008.” In it, he predicted that the U.S., if not the larger world, would “fall into a depression in 2008.”

“The timing” of this downturn, Foldvary continued, “depends on the fiscal and monetary policy of the federal government. Congress is not likely to make large changes in taxes or spending until the recession arrives. So the main policy that can shift the timing is the expansion of money by the Federal Reserve System.”

I just read the whole thing, and I have to acknowledge how right he was. Moreover, I have to acknowledge the mild similarities between then and now.

U.S. consumers are feeling the pinch, as household debt is at an all-time high (average $104,215 per household) and credit-card and auto loan delinquency rates have been on the rise.

In addition, don’t believe the Biden-Harris administration’s job creation claims, with 818,000 fewer jobs than initially reported – marking the largest downward adjustment in 15 years.

Finally, two natural disasters – Hurricane Helene (economic cost of $34 billion) and the California wildfires (estimated cost of $55 billion) – will force inflation to rise which will put added pressure on consumers on both sides of the country.

Last time around, the Federal Reserve kept interest rates too high right before the financial crisis. And that arguably turned a recession into something far, far worse.

It’s vacillating much more under Jerome Powell: refusing to raise rates in 2021… then raising them quickly in 2022… then reneging on its original vow to keep them high until inflation was really under control.

Which, as last month’s jobs report showed, it’s clearly not.

But despite those differences, the Fed is still heavily implementing its own policies to shape the economy – and not doing very well at the job. Combine that with the fact that, according to Homer Hoyt, we’re a bit overdue for a real estate recession…

And I’m going to just call it.

I don’t expect the recession to hit in the next few months, for the record. Not until late in the year or early 2026. Nor do I expect it to be intense, either in duration or severity.

So I’m hardly going to sell all of my real estate investment trusts (“REITs”) regardless. In fact, I’m still buying them if they’re high quality, low priced, and fit into my portfolio – especially now that Trump with his pro-business, deregulation agenda is about to take office.

However, I am going to take a step back from certain economically sensitive sectors: the kind that typically underperform once a recession of any kind hits. That would include lodging, timber, and office REITs.

It seems the prudent thing to do, all factors considered. And we’ll see which of those companies come out ahead after the mild dust has cleared.

Regards,

Brad Thomas
Editor, Wide Moat Daily

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