Real Estate Cycles

P.P. Pulben

[Originally published in the Banking Journal of the American Banking Assocation.
Reprinted from Land and Freedom, July-August 1937]

A careful study of past real estate cycles, using all of the available data at hand, shows a fairly well defined pattern and a logical sequence of events.

Thus, starting at the bottom of any of the depressions, gradual betterment in general business, increased wages and employment cause families that have "doubled up" for the sake of economy to seek new quarters and families that have curtailed their dwelling space to expand it once more toward their normal requirements. This causes dwelling occupancy to increase and gross rents to begin to rise. Since mortgage interest is fixed and since the expenses of operating buildings advance more slowly than gross rents, net rents rise even more rapidly.

As a result of the rise in rents the selling prices of existing buildings begin to advance sharply, and since the present structures can be purchased at prevailing low prices (low relative to the cost at which they were constructed) very little new construction takes place until the buildings already on the market have found new owners. When the existing crop of structures has been absorbed new construction starts, slowly at first, but gains impetus as the construction industry recognizes that at last it is profitable to build once more.

Since the bottom of any depression is always followed by low interest rates and an accumulation of idle capital seeking new investment, the volume of building is stimulated and sustained by a liberal supply of credit. The ease of financing new buildings attracts many subcontractors and even building mechanics into the construction field as operative builders and since the amount of capital outlay which they are required to make is small they flourish and add to the volume of new construction.

THE WILDFIRE PERIOD

The new buildings absorb vacant land and thus give earning power to land long dormant. As a result the tracts adjoining the settled area become ripe for development, prices of close-in areas advance rapidly and the movement spreads beyond the recent confines to outlaying farm areas. Acreage is subdivided into building lots, improvements are installed and lots offered at many times their value as acreage. Speculators make large profits and the news of fortunes made spreads like wildfire among the public.