Real Estate and Recession, Charts

“Let’s start with this chart, which shows that over-investment in real estate (let’s call it a massive mis-allocation of capital) is followed by recession. Is this causal or just bad luck? It’s causal; over-investment in any sector produces diminishing returns as supply builds and demand is slaked. At some point, money dumped into the “hot” sector no longer returns a profit or positive cash flow; at that point it is mis-allocated because it would have earned a better return left in a savings account.

This chart suggests the recession which will begin in the 4th quarter of 2006 or early 2007 will be a humdinger. Look at the last peak in 1972-73. Those of you alive during the ensuing recession recall that it was the most severe economic downturn since the Great Depression. The next spike of over-investment was followed by another devastating recession in the early 1980s.

You can blame Iran or inflation or a host of other factors, but this chart strongly suggests that mis-allocation of capital in residential real estate sets up a very vulnerable economy. ”
– Charles Smith, oftwominds.com