“After 2008, the cost of living, the price of real estate and interest rates will begin to drop substantially.”

“I expect small towns and exurbs to hold most of their value through this downturn.”

The economic boom that we have been enjoying through the nineties will continue through most of the first decade of this century. But “the Roaring 2000s” will come to an end, and it is none too soon to think about investment strategies to cope with that change.

For most of us, our largest investment is our home. How can we preserve the equity we have built up when this economic boom ends? Furthermore, what kinds of property will be a good investment after the Deflationary Shakeout, a depression era like the 1930s that will begin between late 2008 and 2010?

To answer these questions, we can begin by looking at how the condition of the economy as a whole will affect all prices, including real estate prices. After this boom ends, deflation is almost certain to ensue for at least a decade and possibly into the early 2020’s. This means that the cost of living, the price of real estate, and the interest rates should drop substantially. This deflationary downturn will offer direct benefits to real estate owners and buyers. For example:

• Owners who decide to sell their homes at their maximum value, sometime before late 2008, will be able to buy excellent property at a lower price and lower interest once the deflation era begins.
• Those who have built their resources during this boom and who are still employed will have the money to buy additional property at greatly lowered prices.
• Property owners with good credit who decide against selling their home will be able to refinance their existing mortgages at a substantially lower rate, perhaps as low as 3% to 5% interest.
• Affordable rental real estate will flourish, since fewer families who would normally shop for a starter home will be able to buy one.

The Deflationary Shakeout that I forecast will coincide with two long-term trends in real estate that you should keep in mind. The first trend is a broad migration pattern towards exurbs and small towns, many of which will continue to hold most of their value through the downturn. This third wave of migration ; an exodus from the suburbs ; will accelerate through the first half of the 21^st century, continue long after this Deflationary Shakeout ends.

The second trend will be a strong and consistent rise in retirement home purchases. As the chart below indicates, baby boomers will drive the market for this kind of property from 2002 into around 2030.

Click chart for larger view

A third long-term real estate trend to take advantage of after late 2008 is the rising demand for rental property in urban and suburban areas. Apartments will be in relatively strong demand through about 2017 due partly to the aging of the echo baby boom generation. Demand will be further strengthened by the effect of the depression era on individuals who are of an age to shop for starter homes, but who must delay this purchase until the economy improves.