What is the Zarnowitz Rule and what is the connection between this odd sounding rule and your decision to invest in real estate? Well, the Zarnowitz Rule has been named after Victor Zarnowitz. He was an economist in the University of Chicago and did pioneering work in business-cycle analysis. In simple words, the Zarnowitz Rule says that steepness of an economic recovery normally mirrors the steepness of the economic decline. An economy that slumps into a deep recession will enjoy an equally sharp recovery. So, what is the connection between this rule and your real estate investments?
Well, real estate investments contributed 6.2% of USA's GDP in 2005. By early 2011, this figure had fallen to 2.4%. This represented a very steep fall of close to 62% in a span of just six years. To put things in perspective, the share of real estate investments in US in early 50s was 7.4%. In the late 60s and early 70s, this had come down to 5.6%, a 24% fall 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 equally sharp. Economists are of the opinion that the share of real estate investment in the GDP may return to 5.6-5.8% by 2015. If this happens, it would indicate a spectacular recovery in the housing market in a span of just three years.
Of course, one cannot blindly make real estate investments on the basis of this rule alone. However, one should understand that business-cycle analysis indicates a good run for the US real estate market.
Another important factor to be considered is the performance of property market related entities in USA. Freddie Mac has seen an increase in net profits for the fourth consecutive quarter. Net profits have increased in every quarter starting from September 2011. This increase is being attributed to the improvements in the housing and property market in USA.
Recent surveys indicate that USA has become the top choice for property investments amongst foreign investors. This is the first time since December 2011 that USA has occupied the top spot. It moved from third to second place a few months ago and displaced Spain to occupy the first position.
This means that you can consider adopting an optimistic approach towards the option of investing in housing and properties. Of course, you cannot invest money at random and hope to earn good returns. Further, you cannot ignore local factors, which continue to affect market sentiments. Investing money in states like California, Georgia and Michigan, which have witnessed significant improvement in the housing market, can prove beneficial.
A conservative investor may prefer consider the option of waiting for the recovery to be strengthened further before investing. It depends on your risk tolerance levels. However, there is no denying that the local, national, and international sentiments towards the US property market are very optimistic.
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