What is the Zarnowitz rule and what is the connection between this strange sounding rule and your decision to invest in real estate? Well, the Zarnowitz ruler is named after Victor Zarnowitz. He was an economist at the University of Chicago and did pioneering work in business cycle analysis. In simple words, the Zarnowitz rule says that the steepness of an economic recovery typically reflects the depth of the economic decline. An economy sinking into a deep recession will enjoy an equally abrupt recovery. So what is the connection between this rule and your real estate investments?
Well, real estate investments contributed 6.2% of US GDP in 2005. By early 2011, this figure had dropped to 2.4%. This represented a very steep drop of about 62% in a span of just six years. To put things in perspective, the share of real estate investments in the US in the early 1950s was 7.4%. In the late 1960s and early 1970s, this dropped to 5.6%, a 24% drop over a span of two decades. So there is absolutely no doubt that the housing market has been hit by a very sharp recession.
Now, according to the Zarnowitz rule, the recovery in the housing market should be just as strong. Economists believe that the share of real estate investment in GDP could return to 5.6% -5.8% in 2015. If this happens, it would indicate a spectacular recovery in the housing market in just three years.
Of course, you can’t blindly make real estate investments based solely on this rule. However, it should be understood that business cycle analysis indicates a hot streak for the US housing market.
Another important factor to consider is the performance of entities related to the real estate market in the US Freddie Mac has seen an increase in net income for the fourth consecutive quarter. Net income has increased in every quarter since September 2011. This increase is attributed to improvements in the US housing and real estate market.
Recent surveys indicate that the US has become the first choice for real estate investments among foreign investors. This is the first time since December 2011 that the United States has ranked first. It went from third to second place a few months ago and moved to Spain to occupy the first position.
This means that you may consider taking an optimistic approach towards the option of investing in homes and properties. Of course, you cannot invest money at random and expect to get good returns. Also, you cannot ignore local factors, which continue to affect market sentiments. Investing money in states like California, Georgia, and Michigan, which have seen significant housing market improvement, can pay off.
A conservative investor may prefer to consider waiting for the recovery to strengthen further before investing. It depends on your risk tolerance levels. However, it cannot be denied that local, national and international sentiments towards the US real estate market are very optimistic.
