Ambition Capital Group, just spent 6 days in New Orleans at the 47th Annual New Orleans Investment Conference.
This conference is primarily geared toward physical assets (gold, silver, oil, gas, etc.). However, there also was an incredible discussion on the state of the economy and geopolitics that affects investor returns.
The speakers were very approachable, and you were able to ask them any questions on the investing environment today.
The major topics that caught my eye were… you guessed it…
Inflation, the Federal Reserve, and where interest rates were headed in the near future.
While we were at the conference, the September CPI reading was announced to be up 8.2% year over year — which was higher than expectations.
The month over month increase was 0.4%, also higher than expected.
That news was made worse by the fact that 263,000 jobs were added last September, bringing the unemployment rate down to 3.5%.
In this crazy environment that we are in, unemployment decreasing is viewed as a bad thing! Things get turned upside down in these weird, economic times.
If you are to believe the majority of the speakers at the conference, this means that the Fed will continue to raise interest rates at 0.75% or more when they meet in November.
This will most likely lead to higher yields on the 2, 10, and 30 year bonds, and therefore interest rate increases for every day Americans and American businesses.
Real estate prices may suffer (I’ll get deeper into this in a bit), but what is almost guaranteed to happen — if the Fed continues to fight inflation — is that stocks and bonds will decrease dramatically.
Bonds move in an inverse correlation to bond yields. So as yields go up, prices go down. Stocks tend to also move inversely with interest rates.
Many institutional buyers, such as pensions, would typically prefer a “safe” return in bonds at 4% over the volatility of the stock market.
When these big buyers move out of stocks, stocks go down severely.
You can already see this in recent stocks and bond performances.
See this MarketWatch article that breaks down recent performance of a common 60/40 strategy of stocks and bonds. With rising rates, this strategy has had its worst performance in nearly 100 years.
If rates continue to rise, I expect stocks and bonds to be in for much more pain, as did the speakers at the conference. But it isn’t all dread and gloom.
One of the reasons why we love real estate is because the current price is not the only factor that matters.
If you buy a rental property that cash flows at acquisition, the price means close to nothing to you, assuming you buy with the correct financing tactic.
If you’re investing for cash flow, property values could go up or down after you buy. It makes no difference.
If your tenants are paying, history says you will do well.
Take a look at the chart of US rent since 1970.
Oh wait…there isn’t one. That’s because rents are “sticky”.
Even in times when property values decline, rental prices remain consistent.
During the largest downturn since the great depression, rents went sideways, not down. But let’s go back to real estate prices. Sure, they may decline.
However, let’s think through the supply and demand equation and how it pertains to real estate…
Many homeowners refinanced or purchased homes in the past two years, with interest rates at 2.5%-4.0%.
Those homeowners are not going to want to sell their homes, lose their low interest rate and have to buy a home at 7%.
If an American is paying $2,000 per month on a 30 year loan at 4%, their loan balance would have started at nearly $419,000.
At 80% loan to value, that home cost approximately $524,000.
If that same American wants to purchase a home today and maintain a monthly payment of $2,000 with a 7% interest rate, that loan would only be $300,000.
At the same 80% LTV, that would mean the home would have to cost $375,000.
Think of that.
The homeowner would have to sell a $524,000 home and buy a $375,000 home to maintain the monthly payment.
Many homeowners will decide to stay in the current home.
So less homes will be for sale.
Most home builders finance the construction of their properties.
If the cost of capital increases, that means the sales price must increase for them to maintain their margins.
This would mean home builders would be raising their sales price targets in an environment where Americans are not able to afford as much as they previously were.
Because of this, homebuilders will be reluctant to start new projects.
Take a look at the chart below on housing starts.
We are entering an environment where there may be fewer new construction homes for sale and fewer existing homes for sale.
What does all this mean?
If the supply of houses for sale declines, basic economics tells us that price must then increase.
I am not forecasting home prices increases— but I can envision a scenario where in there is a limit to how far home prices can fall simply due to the supply & demand dynamic.
We may be entering a time where rental property investors see steady rents and steady home prices— all the reason to get invested today!
If you have any interest in investing, or simply talking about today’s investing environment, please reach out. You can schedule a call at the link below.
Ambition Capital Group would love to hear your thoughts and strategies in navigating the investing landscape today.
Until next time, go out there and make it happen!
