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Inflation, Home Price Swings, and Wealth Distribution

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By Rick Tobin

Between January 2020 and October 2021, the M1 money supply (cash or cash-like instruments) quickly rose from $4 trillion up to $20 trillion in just 22 months. Money velocity, or money creation speed, is the true root cause of rapidly declining purchasing power and skyrocketing inflation. The more money in circulation, the less purchasing power for the dollar.

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In January 2024, Americans were paying $213 per month more to purchase the same goods and services one year earlier in 2023 because of rising inflation and the declining purchasing power of the dollar. As compared with two years ago in 2022, Americans are paying $605 more per month. Sadly, we’re now paying $1,019 more PER MONTH ($12,228 more per year) today for the same goods and services we purchased three years ago in 2021.

Shipping, trucking, and other transportation costs are quickly rising amid geopolitical tensions. Historically, increasing transportation and energy costs are a root cause of inflation trends. Don’t be surprised if inflation rates and interest rates are both higher later this year instead of lower.

Home Value-to-Income Ratio in the U.S.

The U.S. home value-to-income ratio is calculated by dividing the $342,000 median home value by the $74,580 median household home, according to Economy Vision. If home prices had grown at the same rate as income since 2000, the median U.S. home would cost nearly $294,000, or 31% to 32% lower than today’s prices.

U.S. households need an average income of $166,600 to afford a home, but the median household income is $74,580. The lowest home price-to-income ratios in large metropolitan regions are in Pittsburgh (3.2x), Buffalo (3.5),and Cleveland (3.5), while many California regions are near 10 to 20x. Some smaller suburban or rural regions in Southern Illinois and other Midwest regions are closer to 1.5 to 1.8 for home price-to-income ratios.

Increasing Distressed Residential and Commercial Mortgage Numbers

Millions of Distressed Residential Mortgages

The federal government keeps extending the millions of distressed FHA and VA loans, or offering discounted loan modifications, partly so that they don’t push the national home listing supply skyward and reduce home prices at the same time.

The C-19 foreclosure or forbearance moratoriums for millions of FHA and VA borrowers began back in the fall of 2020. As a result, many of these home borrowers haven’t made a mortgage payment for more than three years.

The FHA forbearance moratoriums for FHA borrowers expired on November 30, 2023 while the VA forbearance moratoriums were extended until May 31, 2024. At some point, these loans will need to be brought back current, sold, or foreclosed.

In the previous housing crash that was especially bad during 2008 to 2012, only about 2% (or 1 in 50 mortgages) of all residential loans were delinquent. Yet, these distressed home mortgages became future lower value comps for the nearby homes while driving their prices downward too, sadly.

If and when the national home listing supply numbers rapidly increase this year, it will eventually have a negative impact on home price trends because it’s all supply-and-demand economics at the true core. When supply of a product or asset rises and exceeds buyer demand, then prices tend to fall (and vice versa).

Concerning Commercial Mortgage Trends

An estimated 44% of office buildings nationwide with mortgages in place are claimed to be upside-down with negative equity here near the start of 2024. Some office buildings are selling for as low as $9 per square foot, not $900/sq. Ft. By the end of 2024, the underwater office building numbers may be well over 50% and the overall underwater or upside-down numbers for all commercial property types may be somewhere within the 20% to 25% range.

Physical and Online Retail Store Numbers

  • In Q3 2023, the amount of U.S. retail space available for lease plunged to an all-time low since the CoStar commercial real estate group started tracking back in 2007.
  • The previous seven years in a row (2017 – 2023) shattered all-time retail space closings per square foot in U.S. history.
  • Through just September 2023, 73 million square feet of retail space closed in 2023, as per Coresight.
  • 140 million square feet of retail space has been demolished in the last decade, according to CoStar.
  • Top 6 online sales percentages in 2023: 1. Amazon (37.6%); 2. Walmart (6.4%); 3. Apple (3.6%); 4. eBay (3%); and 5. Target and Home Depot (a tie at 1.9% each), per Statista.
  • 10.4% of total annual U.S. retail sales were online in 2017;
  • 12.2% of total annual retail sales were online in 2018;
  • 13.8% of total annual retail sales were online in 2019;
  • 17.8% of total annual retail sales were ecommerce in 2020;
  • 18.9% of total annual retail sales were ecommerce in 2021; &
  • 18.9% of total retail sales were online in 2022, per Statista.
  • The full 2023 online year results weren’t published yet.

Record-High Car Payments

Some new monthly car payments are reaching $3,000 per month, while average new car payments are near $730 to $750 per month. Additionally, many monthly car insurance payments are reaching $400 to $500 per month in cities like Detroit and Philadelphia. How much are these car owners paying in gas and maintenance as well?

The national average cost for car insurance rose a whopping +26% from last year, according to Bankrate.

The most expensive cities for car insurance are:

Detroit – $5,687
Philadelphia – $4,753
Miami – $4,213
Tampa – $4,078
Las Vegas – $3,626

The cheapest cities are:

Seattle – $1,759
Portland – $1,976
Minneapolis – $2,044
Boston – $2,094
Washington D.C. – $2,430

The average car loan today is valued at 125% LTV (loan-to-value) for the typical car on the road with a loan with an average negative equity balance of -$6,000. This is partly because so many car buyers are purchasing cars with no money down and adding their registration, licensing, taxes, and warranty fees on top of it before driving off of the car lot. New cars usually drop in value about 20% in the very first year of purchase.

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Inflationary or Deflationary Economic Cycles

Inflation has been described as an increase in the general level of prices of a certain product in a specific type of currency. Inflation can be measured by taking a “basket of goods,” and then comparing them at different periods of time while adjusting the changes on an annualized basis.

General inflation measures the value of a currency within a certain nation’s borders, and refers to the rise in the general level of prices. Currency devaluation measures the value of currency fluctuations between different nations. Some related terms associated with inflation are as follows:

* Deflation is a rise in the purchasing power of money, and a corresponding lowering of prices for goods and services. The Fed doesn’t like this economic period of time and will probably cut short term rates to offset it.

* Disinflation refers to the slowing rate of inflation. The Fed may like this type of economic time period, and may stop raising rates at this point in the economic cycle.

* Reflation is the period of time when inflation begins after a long period of deflation. Depending upon the severity of inflation, the Fed may pause the rate hikes or gradually begin rate hikes.

* Hyperinflation is rapid inflation without any tendency toward equilibrium. It is inflation which compounds and produces even more inflation. It is when inflation is much greater than consumers’ demand for goods and services. The Fed, and the rest of America, do not typically like this economic period, so they may enact a series of significant rate hikes to slow inflation.

The Wealth Distribution Imbalance

Wealth distribution across the U.S. has become increasingly concentrated in the hands of fewer people since 1990. Overall, the top 10% of wealthiest Americans own more than the bottom 90% combined, with more than $95 trillion in wealth for the top 10%.

Here in 2024, the share of wealth held by the richest 0.1% is near its peak with a minimum of $38 million in wealth in just 131,000 households.

With $20 trillion in wealth, the top 0.1% earn an average of $3.3 million in income each year. The greatest share of the wealth owned by the top 0.1% is held in corporate equities or stocks and in mutual funds, which make up over one-third of their total assets.

Households in the lower-middle and middle classes as found in the 50% to 90% income and asset brackets are claimed to have a minimum of $165,000 in wealth held primarily in real estate and followed by pension and retirement benefits.

Unless you’re in the Top 0.1%, the odds are quite high that the bulk of your wealth is concentrated in real estate if you’re fortunate enough to own at least one property today. In our next meeting, we will discuss how to find discounted real estate and other investments and how insurance and estate planning can help protect your assets for you and your family.

Extreme Rate Swings, Steady Home Gains

Between 2000 and 2023, the median U.S. home appreciated approximately 10.63% per year. By comparison, California homes rose 12.55% per year between 2000 and 2023.

Doubling Value Forecasts: The Rule of 72 is an investment formula used to estimate how long it may take for an asset to double in value using a projected annual rate of return (72/7 or 7% = 10+years).

A home purchased using the national average annual gain of 10.63% would double in value in just over 6.77 years if purchased this year (72/10.63 = 6.77 years). A California home would double in just 5.74 years (72/12.55) if these same average annual appreciation gains continued.

Home prices tend to go skyward following a Fed pivot when they start slashing rates. When will the Federal Reserve start cutting rates again? Let’s take a look at their calendar for 2024 two-day meeting dates: Jan. 30-31 (no rate change); March 19-20; April 30- May 1; June 11-12; July 30-31; Sept. 17-18; Nov. 6-7; & Dec. 17-18.

Inflation severely damages the purchasing power of the dollar while usually boosting real estate values. Because it’s more likely than not that inflation will continue rising above historical average trends, then real estate may be one of your best hedges against inflation as your wealth compounds and increases as well.

Rates may be lower, the same, or higher by the end of 2024, partly due to our volatile inflation movement and weakening dollar. However, there’s a tremendous upside for real estate investors if you’re willing to stay focused on the opportunities and not let the negative news scare you away.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

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What Lies Ahead for Real Estate and the Lending Market in the Coming Months

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By Edward Brown

Many fear a recession looming in the coming months that will negatively affect real estate prices. In a typical recession, house prices usually drop. According to the Joint Center for Housing Studies at Harvard University, housing prices dropped in four out of five recessions that have occurred since 1980. During those recessions, house prices dipped on average about 5% for each year the economy remained down; However, in the Great Recession in 2008, the average price dropped by nearly 13%.

During the recession of 1980, inflation started to skyrocket, much like we have been experiencing in this past 12 months. However, there are vast differences between the recession of 1980 and the possible one to come. First, the population in the United States in 1980 was just over 226.5 million people. Today, there are over 333 million people according to the US Census Bureau. Everybody needs a place to live, and supply has not kept up with demand. Many cities have dissuaded builders by imposing large fees as well as taking too long to issue permits. This could be due to downsizing of government staff, but another phenomenon that was not as prevalent in 1980 as compared to today is that neighbors have a lot more say in what goes in their neighborhood. When there are too many roadblocks, many builders shift to fix and flip.

In addition, there is still a large supply chain issue left over from Covid. Also, costs of materials and labor has substantially increased. Lastly, finding qualified trade workers has been quite a challenge for builders.

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One of the major differences in the early 1980s as compared to today is the interest rate on mortgages. By 1981, mortgage rates were as high as 19%. Although current rates at 6% seem incredibly high [since they bottomed out in the 2+% range during Covid], they are still less than a third of what they were in 1981. It is true that house prices have substantially increased since 1981, but so have wages.

Some factors that affect the demand side of home purchases are that millennials are coming into the market in droves. These same millennials
witnessed their parents’ difficulties during the Great Recession, but enough time has passed, and millennials are now in positions of starting families as well as becoming a strong impact in the workforce.

Probably one of the most overlooked area of why demand should at least come close to supply [to keep residential real estate prices relatively stable] is that there were millions of homeowners who refinanced when rates were very low. These homeowners will not be able to replace their current mortgage rate for the foreseeable future.

Thus, there has to be a compelling reason for these people to sell their house. Currently, the Fed is trying to tame inflation by raising interest rates. This has started to work, albeit slow and not strong enough. Anyone buying groceries will say that true inflation is closer to 15% rather than the 6% the government is touting.

Raising the interest rates usually causes a recession, as costs of production are impacted. If a recession then causes interest rates to decline [due to lack of demand and falling inflation], we may see the refinance market pick up again and more mobility of home buyers driving up demand again. So far, there has been a slowdown in sales volume. This, in combination with slower refinances, has caused many mortgage companies to lay off workers. For the private lending industry, this should cause volume to move in their direction.

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Private lending use to be the last resort for many borrowers, as the costs were higher for these borrowers; however, with the smaller pool of lenders due to the layoffs as well as mainstream banks making it harder for borrowers to qualify due to the uncertainty of the economy, private lenders have moved up the chain with regard to the choice of lenders for those needing to borrow. In addition, we may likely see more bank regulations due to the downfall of Silicon Valley Bank and Signature Bank.

The Fed wants to exude stability in the market, so they will probably clamp down on what banks are allowed to lend on as we saw the Great Recession produce new regulations via Dodd-Frank.

There may be a drop in real estate prices over the coming months, but it most likely will not be what we saw in the Great Recession, as that was a credit issue, where the banks were too lax in giving loans to borrowers who may not have had the income to repay. Current regulations make lending much stricter, so borrowers have to show the ability to repay the loan. Thus, even a coming recession should not see a tremendous drop in real estate prices.

ABOUT EDWARD BROWN

Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company.

Additionally, Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.

Edward Brown, Host
The Best of Investing on KTRB 860AM
The Answer on Saturdays at 8pm
and Sports Econ 101 on Saturdays
at 1pm on SiriusXM channel 217
21 Pepper Way
San Rafael, CA 94901
[email protected]

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Why 2022 is Still a Good Time to Invest in Real Estate

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Despite Inflation, Despite Interest Rates, Despite a Recession

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
—Warren Buffett

By Jeff Roth

Why to Not Worry About Inflation

Let’s take a look at inflation historically.

Yes the Consumer Price Index (CPI) is over 8%, and some say higher because they changed the way CPI is calculated over the years and does not include all items that may show inflation that consumers frequently need to buy.

However, real estate is one of the few assets that is performing well in this inflationary environment.

Values of properties have continued to go up higher than inflation. Buying investment real estate is using the power of inflation to your advantage because prices go higher with inflation because, sadly, the value of the dollar has gone down, and it takes more of those devalued dollars to buy the same house.

Even in 2022, prices are forecasted to go higher.

Rents have also increased greater than the rate of inflation in many places.

So, investing in real estate uses the power of inflation to your advantage.

What about high interest rates?

Why to Not Worry About Interest Rates

Yes, like inflation, interest rates are higher than we have seen in some time, and many would argue the rates were kept artificially low by the Federal Reserve.

So, historically speaking, how bad are interest rates?

Interest rates are elevated, but they still are not as high as they have been at some points in the nation’s history.

Also, if interest rates are lower than the rate of inflation (which they still are in many cases), then the effects of inflation mean you are paying back a long-term debt with dollars that are “worth less” over time because the value of the dollars you are paying the debt back with have been devalued.

Essentially, long-term debt, like mortgages, are an asset themselves in an inflationary environment.

Yet another reason to invest in 2022.

But what about a recession? Won’t that affect the housing market and real estate investments?

Why to Not Worry About a Recession

Home prices have gone up four of the last six recessions.
Part of the reason for this is the lack of housing supply to meet demand.

In fact, a recent study by Freddie Mac states there is a 3.8 million shortage of housing units to meet demand that would need to be built in the coming years in the U.S. https://www.yahoo.com/news/more-housing-coming-national-shortage-035900543.html

This new supply of housing units will need to be built while there is a shortage of skilled trade workers and lingering supply chain issues making material availability and costs unpredictable.

A good exercise, as an investor, is to ask where else can you invest your resources besides real estate and what returns you can expect.

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What Are The Investment Alternatives?

There are many alternatives to investing in real estate. Let’s see how they are performing.

Wage Growth- Surely, with all the job shortages reported, there has to be strong wage growth. Actually, according to the U.S. Bureau of Labor Statistics from Sept.13, 2022, real average hourly earnings are down 2.8%, seasonally-adjusted, from August 2021 to August 2022. Did you get a 9% pay increase this year to stay ahead of inflation? If so, you are doing better than most. https://www.bls.gov/news.release/realer.nr0.htm

Stock Market Performance- Year-to-date total returns for the S&P Index is down 17.12% according to MarketWatch. https://www.marketwatch.com/investing/index/spx

Bitcoin- Digital gold is down 57.76% year-to-date according to MarketWatch. https://www.marketwatch.com/investing/cryptocurrency/btcusd

Gold- The original safe haven investment is down 6.82% year-to-date according to MarketWatch. https://www.marketwatch.com/investing/future/gold

Small Business Performance- According to an article from April 2022 entitled “41 Small Business Statistics: Everyone Should Know,” only 40% of small businesses are profitable. https://www.smallbizgenius.net/by-the-numbers/small-business-statistics/#gref

So, if there really are no great alternatives to real estate investing in 2022 for the average investor, what is the cost for waiting and giving in to the media’s negative drumbeat about inflation, interest rates and a recession?

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What Are The Opportunity Costs For Waiting To Invest in Real Estate?

There are always costs for not making a decision or making a different decision with your resources.

Let’s take a look at the lost wealth over the next 5 years in lost equity if you wait or fail to invest in 2022.

According to Keeping Current Matters and the Home Price Expectation Survey, you would lose out on $102,787 from appreciation alone.

Additionally, you have three more opportunity costs for not investing in real estate in 2022:

1. Interest rates may very well continue to increase.

2. The money you have to invest will lose purchasing power from inflation.

3. The tax benefits from owning real estate will not be realized.

So, the question is, why wait?

Why Wait to Buy Real Estate?

Real estate appreciation and rent increases are greater than the rate of inflation.

Interest rates are still below the rate of inflation and below historical highs.

Home prices have gone up during four of the last six recessions.

All other investment alternatives are losing value in 2022 on average.

Waiting to invest will cost you future projected appreciation, interest rates may continue to increase, the money you have to invest will continue to lose purchasing power, and the tax benefits from owning real estate will not be realized.

Why wait to buy real estate?

To your success!

Jeff Roth
Contributor

Jeff is the founder of Arbor Advising. Arbor Advising is a consultancy based in Ann Arbor, Michigan that is passionate about helping people reach their financial goals with real estate and real estate investing in Michigan with an established record of success in various market conditions. Jeff believes in the value of education and is a contributor to many local and national real estate publications and organizations. Reach out for a confidential consultation to review your specific goals and objectives and join the many satisfied clients that work with Arbor Advising.

You can connect with him at:
www.arboradvising.com
[email protected]
https://twitter.com/ArborAdvising
https://www.facebook.com/profile.php?id=100083113851229
https://www.linkedin.com/company/arbor-advising/?viewAsMember=true
https://www.instagram.com/arboradvising/

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.

4 Questions Every Real Estate Investor Should be Asking About Inflation

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By Strategic Passive Investments

Since the start of 2022, there have been a number of historic “mile markers” in the U.S. economy. For example:

  • Used cars rose in price by 22.7 percent year-over-year as of May 2022.
  • Gas prices jumped from $3.38/gallon (average) during the first week of January 2022 to $5.10/gallon (average) as of mid-June.
  • Interest rates rose from just over 3 percent for a 30-year fixed-rate mortgage in January 2022 to nearly 6 percent at the end of June 2022.
  • Perhaps most troubling of all was the issue of rising inflation, which had already been heading skyward toward the end of 2021. By May 2022, the annual inflation rate in the United States hit 8.6 percent, the highest since December 1981 and higher than even most pessimistic forecasts.
  • To make matters worse, the Federal Reserve warned that in order to get inflation “under control,” it would probably continue to raise interest rates over the course of the remainder of the year.

Traditionally, most buy-and-hold real estate investors have not worried too much about inflation. After all, real estate is probably the most time-honored hedge against this issue because it performs more reliably than precious metals, the other traditional hedge, and tends to appreciate faster and on a more predictable trajectory.

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However, with inflation rates causing huge leaps in prices and affecting the country’s already troubled supply chain, investors need to ask themselves four important questions before they sit back and feel smug about their portfolio. Fail to consider and allow for the answers to these questions (and some of them may surprise you), and you could end up paying far more than you expected for your complacence in the face of what many economists are beginning to dub the “national emergency” of inflation.

Question 1: Am I adequately insured?

Properties have gained quite a bit of value since the pandemic began, and that is generally considered to be good news for real estate investors. If your insurance company operates like most, you probably will see the effects of this appreciation when you get your annual update about your insurance policy. In short, your rates are probably going to rise. However, there is a good chance that even your trusty insurance agent may not have factored in everything they should have when it comes to keeping your properties adequately insured.

Take a careful look at the replacement-cost estimates in your policy. You will need to consider the costs of waiting on materials as well as transporting and replacing materials in the event of damage. If you have rentals, then this is an even bigger deal because you will have to help your tenants deal with this as well. That will also cost money.

Talk to your agent and make sure your policy fully reflects the elevated costs of materials and labor and the potentially new costs of waiting an extended period of time for both.

Question 2: What is the real inflation rate?

Depending on whether an analyst is trying to play up inflation or play it down, you may hear numbers ranging from nearly 9 percent to as low as 0.3 percent. This is because when an analyst says “inflation,” they can mean several different things. For most investors and, indeed, most of the general population, the higher numbers seem far more relevant to daily life than the lower ones. However, for a Fed official trying to make it home while dodging pitchforks, the desire to insist that that April’s inflation rate was 0.6 percent is incredibly tempting.

To get lower inflation numbers in today’s economy, analysts look at core inflation rate. Core inflation rate measures exclude oil and food prices, which some analysts argue are “too volatile” to factor in. Of course, since we all eat food and use oil directly and indirectly, that volatility is highly relevant to us.

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Question 3: Is some inflation really “healthy,” as we are being told?

If you have been monitoring the economy for the past decade, you probably have already realized that inflation has been held to an artificially low and unrealistic level for many, many years by policymakers desperate to keep a recession away from their terms in office. This is one reason that interest rates have been so low for so long, and now the time has come to pay the piper. Most economists agree that about 2 percent inflation is good for economic growth because it spurs demand without putting too much pressure on the consumer pocketbook.

However, because inflation has been kept near zero for so long and because consumers have largely forgotten how to handle it, today’s inflation is not just rising too fast, but it is also causing a national freak-out that is actually driving other markets awry.

For example, when real estate prices become outrageous, the market usually would react by cooling. However, in today’s market, the higher the prices, the more people rush in to buy before interest rates rise or inflation prices them out. Today’s inflation is not just too much and too fast, it is also a massive market disruptor in and of itself.

Inflation has always been driven, in large part, by the expectation that things will get more expensive. Now, spending is being driven by the expectation that things will never be affordable again. That’s a big difference, and one that will affect what both renters and buyers do when it comes to obtaining housing.

Question 4: At what point will inflation spiral out of control?

In theory, a free market will eventually right itself, however painful the process, when things get too far out of hand. In today’s market, however, things are not really free. They are managed by Fed policy, local policies, government protections, IRS interference, and a vast array of other factors. As a result, it might be tempting to believe that our market will eventually slow inflation and things will calm down, but realistic investors must accept the potential outcome that inflation will spiral out of control for a very extended period of time that actually seems permanent.

Will the market eventually correct? Probably. But you do not want to be unprepared for the weirdness and potential disaster that could occur in the interim.

One of the weirdest things inflation is doing right now in terms of affecting the consumer mindset is that renters are starting to bid on their rents. While this has long been part of the equation in extremely attractive locations like Manhattan, now it is happening in many metro areas and even suburban locales including southeastern locations like Atlanta, Georgia. Essentially, when renters submit an application, they also include an offer to pay more than the going rent rate. As a result, their application is more attractive than others and they get their desired rental.

This is an example of self-fulfilling inflation because as more renters encounter this practice, more renters are finding it necessary to enact it. As an investor, you may wish to notify potential applicants that this is an option (if you choose to make it an option) and, in the worlds of one New York-area broker, “politely recommend it.”

Inflation Does Not Have to be the End of the World

For real estate investors, inflation does not have to be the end of the world even if you have not yet built up a massive portfolio to hedge against it. Just be certain that you understand what is going on with inflation and exactly how it will affect both your properties and your acquisition processes. It might be the time to change your strategy, or it might be time to ramp up operations. This can be a good time to be in real estate, but you must be willing to ask questions and then act decisively once you have answers.

Why the Public is Not Happy with Inflation! (Part 2)

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Image from Pixabay

By Dan Harkey

Business & Private Money Finance Consultant

Cell 949 533 8315 email [email protected]

Consider the largest debt-bomb globally, the unfunded portion of social security, Medicare, Medicaid, Military, and public employee pension shortfall. This $150 to$200 trillion estimate does not show up on the government accounting books as a liability. Like a boiling pot of water, the debt simmers, soaking the working-class public through increased taxation, regulation, inflation, and reduced purchasing power (debasement). The retired public may or may not be aware that no trust funds exist because they have always received their checks.

These are loans to the government borrowed from the public that will never be paid back, except by a massive erosion of purchasing power of the dollar (debasement). The government understands that the nasty bogey called inflation will reduce the value of the debt.

The government leaders also encourage a massive influx of new legal and illegal foreigners, who are expected to pay taxes eventually. This is not an immediate solution since 63% to 70% of newly arrived illegal immigrants go on welfare or subsistence government transfer payments. Different articles and statistics differentiate between undocumented non-citizens, illegal immigrants, and non-citizens.

https://cis.org/Report/63-NonCitizen-Households-Access-Welfare-Programs

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In 2019 Social Security and Medicare programs cost an estimated 8.8% of gross domestic product (GDP). GDP is approximately 22 trillion. 22 trillion times 8.8%= $1.936 trillion annual expenses. If you use $1.936 trillion divided by the number of retired of 70 million, then each retired person cost $27,657 each year. Social Security is about .6% to administrate and Medicare about 2%. Private insurers may spend between 12% to 18% on administration costs. End-of-life medical expenses may exceed $150,000 per retiree. About 2% of retirees, about 1.4 million die per year.

There are currently 10,000 people retiring each day, or 3,600,000 per year. If 3.6 million arrive on Social Security rolls and 1.4 million dies, then the net increase is 2.2 million added to the rolls. Each retiree will cost the public an estimated $28,000 per year, or an additional $61 billion per year on top of the $1.9 trillion current

In 2019 there were approximately 64 million retirees (pre-COVID). Adding 3.5 million per year over the next 10-15 years will result in 100 million retires who will expect financial support for retirement income and medical care. But that statistic is in a pre-Covid timeframe. With Covid, the propensity for retirement drastically changed.

COVID brought about a massive spike in retirement and social security application. The number of Social Security recipients skyrocketed. In 2019 there were about 64 million receiving Social Security benefits. In 2021 this number rose to 69.8 million or 70 million. — 70-64=6 million additional retirees in a matter of 2 years. The increased number, including 2022 retirees, will reflect close to a dramatic increase in retirees who apply and receive social security in just three years.

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We are facing turbulent financial trade winds this year and next. Interest rates should rise to combat inflation. Wall Street, big banks, and large corporations will be beating the drums no to raise rates. Borrowing cheap money and leveraging investments is their mantra. With artificially low-interest rates projects, become profitable because borrowing is cheap. Valuations rise accordingly, even to irrational and exuberant levels. But the minute rates begin to rise, profits and irrationally high valuations evaporate and fall back to earth. Boom and bust cycles are not an inherent trait of capitalism but caused by central bank intervention.

Regardless of the conclusion, the Federal Reserve will be there with their trusty computers to readily inject many additional dollar digits (trillions) to continue the U.S. financial Ponzi scheme (spend now and expect someone in the future to repay).

Our economic entire system of governance requires a never-ending Ponzi strategy. Future taxpayers will always be necessary to pay for today’s government expenses. If future spenders have no money because of high taxes, excessive regulations, or refuse to buy stuff, the system will collapse.

Image from Pixabay

The government and mainstream media propaganda machine will have public observers thinking that everything is rosy. The propaganda objective is to keep the population preoccupied with revolving crises designed to frighten them into compliance and submission.

All new fiat currency created by the government is designed to keep the population happy, the government in power, and the voting block reliable. The Ponzi system’s pursuit is conning the public into submission of a perpetual-motion downward economic quagmire. It’s truly a wonderful day in the neighborhood when the government-backed borrowed money flows freely, knowing that it will never be paid back. Of course, most beneficiaries of free-flowing borrowed funds are directed to (FOGS-friends of government.)

The U.S. tax base is not increasing much. Our GDP is about $21-22 trillion. Federal taxes collected appx $3.5 trillion. If we add all state and other forms of taxation, the total is about $5 trillion. The federal government spends close to twice as much as they take in, meaning a $2 to 3.5 trillion shortfall that must be borrowed.

Image from Pixabay

The only viable solution that the U.S. Federal Reserve has is to keep creating fiat money to plug the financial drain dike. What used to be directly on the book’s debt under President Ronald Regan (1/20/1981 to 1/10/1989) of 2 trillion, which is now $30 trillion and will become $100 trillion in our lifetimes. Since that time, the U.S. has gone from the world’s largest international creditor to the world’s largest debtor nation.

The speed of issuing new currency into the system and the subsequent debasement of the dollar is accelerating into uncharted territory, more than any time in our adult life. There will be massive upward price pressure on all goods and services the public will be subjected to. Since inflation is caused by an increase in money supply relative to goods and services, the government’s propensity to print fiat currency is currently experiencing a more than a significant increase in the money supply. Never mind that there is a corresponding increase in national debt!

Government actions are always the root cause of inflation. There was no inflation in the American colonies because there was no mechanism to print fiat currency. Between 1775 and 1779, Congress issued $225 million in fiat Continentals (currency), a massive sum for the time. Subsequent inflation caused prices to rise years 1776=12.99%, 1777=21.84%, 1778=30.19%, 1779= -11.59%(minus). Any rational mind would think that our elite governing leaders would recognize that deficit spending feeds the inflation spiral and needs to be limited.

Image from Pixabay

There has been ceaseless financialization and globalization over the past 50 years of the Federal Reserve, Wall Street, and mega-banks. By manipulating interest rates to near zero and investing in derivatives contracts, the insiders boosted their wealth upward to an unimaginable level, at least $50 trillion. Greed by beneficiaries of inflation, including the Central bank, Wall Street firms, megabanks, and large corporations, will work hard to keep the illusion going in their favor. Their savvy public relations people might object to the above statement.

Wall Street, megabanks, and large corporations’ benefit from high inflation by operating with exceptionally highly leveraged investments. Financial leveraging means investing very little capital, borrowing cheap money, and using derivatives to leverage-up at a much higher level. One percent capital and ninety-nine percentage leveraged borrowing are not abnormal until things go wrong. Leveraged investments with super cheap borrowing costs are why Wall Street, megabanks, and large corporations won’t raise interest rates.

The disparity is frightening. The wealthiest 10% has increased to at least 70% of all U.S. wealth applied to their asset ledgers. The bottom 50% held 2% of U.S. Wealth. They have now created the largest financial bubble since the 1680 tulip bubble.

https://www.statista.com/chart/19635/wealth-distribution-percentiles-in-the-us/#:~:text=As%20of%20Q1%20of%202021,another%20half%20at%2037.7%20p ercent.

Artificially low-interest rates harm savers who rely on bank interest for income, U.S Securities holders, corporate bondholders, and other interest income-related investment strategies.

Image from Pixabay

Distortion of economic reality created by artificially low-interest rates is hard to comprehend because Wall Street and megabanks have such tight control on government actions. They might object to that statement for public posturing. Butwait, if the market crashes, the elites will merely ask the government to bail them again. Elite leaders in the executive branch of the U.S. government are handpicked from Wall Street firms, particularly Goldman Sachs, BlackRock, The Vanguard Group, and JPMorgan Chase & Co. BlackRock has $10 Trillion assets under management. Vanguard has $8.5 Trillion assets under management. The magnitude of these figures is staggering, considering the U.S. has a total GDP of $22 trillion. You can rest assured that the oligarchs in the U.S. have control over almost all actions of government. Money begets power. Money and power beget influence.

U.S. direct on the book’s debt will balloon to $50 to $100 trillion in the next meltdown. Some Wall Street firms, megabanks, and large corporations will become insolvent from derivatives losses. They will be bailed out, just like they were in 2007-8. Once the next bailout is complete, they will high-five each other and issue big payout bonuses for their hard work creating a colossal financial mess. Just as they did in the 2007-8 bailout, they will take a vacation for all their hard work driving their companies into insolvency. The public is provided little or no information on these bailouts. Only the governing elites have full knowledge.

The ongoing strategy will eventually crash. No one knows when the cows will come home, and the entire system collapses. But the Ponzi strategy has been systematically successful, with a few bumps for over 225 years. Ponzi is an investment swindle strategy. Current participants rely on existing occupants/taxpayers to pay the government the costs now with borrowed funds and expect future generations of occupants/taxpayers to repay the debt. Those new taxpayers can only be paid back by collecting additional funds from subsequent new occupants/ investors. This strategy is the same for Social Security.

Image from Pixabay

The success of the future of your U.S. Ponzi assumes that the dollar will maintain the status of world reserve currency holder. If our leaders keep piss—g off world leaders en masse sooner or later, they will devise a mechanism to circumvent the dollar-based monetary system. Many of the strategies being followed by the current administration will cause the loss of world reserve currency holders. No one would be willing to buy our worthless treasury securities. Seventy-five years of dollar dominance would come to a suicidal end, and deficit spending financed by the other sovereign nations would stop.

Middle-class income earners and those who rely on retirement benefits may have limited ability to keep up with inflation. Living standards could collapse to those of third-world countries with visions of impoverished masses struggling to meet the most basic human needs (access to food, water, and shelter). With inflation, each year arrives with the reality that everything costs more, or dramatically more, to the point where most of the population will struggle to keep up or become stressed out debt-surfs.

Dan Harkey

Dan Harkey is a contributing author to Weekly Real Estate News and is a Business & Financial Consultant. He can be contacted at 949-533-8315 or [email protected].

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.

Why the Public is Not Happy with Inflation! (Part 1)

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Image from Pixabay

By Dan Harkey

Business & Private Money Finance Consultant

Cell 949 533 8315 email [email protected]

In 1913 folks could buy a five-course meal and iced tea for 10 cents.

That was about the time when the Federal Reserve system (central bank) was established. Since that time, approximately 109 years later, as of 2022, inflation increased by 2,740%. Many folks will argue that this is not true.

Inflation Calculator:

https://www.in2013dollars.com/us/inflation/1913?amount=1

Image from Pixabay

The Federal Reserve System is not our friend. A secret meeting was arranged by 6 of the wealthiest bankers at a remote location on Jekyll Island, off the coast of Georgia. This group of wealthy bankers-controlled appx 45% of the banking in the United States. They designed a cartel whereby members (privately owned banks) would lend between members to avoid bank runs. Participants laid the foundation around 1910 as a response to the financial crisis of 1907.

Inner-bank lending allowed higher leverage lending for member banks and eventually drove all non-members out of business. Bank runs occurred when large groups of depositors panicked and demanded the withdrawal of their money, either afraid of bank insolvency or creating it by their actions of mass withdrawal. Now the FDIC is subject to the same limitations about raising additional needed cash as the remainder of the government.

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The U.S. government liked and elected to adopt the inner bank lending system, merging the government’s interest with the private banking cartel. Congress created the Federal Reserve System to provide the nation with a safer, more flexible, and stable monetary and financial system. The Federal Reserve System was born on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act. The Federal Reserve System now consists of 12 privately owned banks merged with government ownership and control and a Board of Governors located in Washington DC. While the Board of Governors is an independent agency, the Federal Reserve Banks are set up like private corporations. Member banks hold stock in the Federal Reserve Banks and earn dividends.

Reference-History of the Federal Reserve banking system:

https://www.federalreserveeducation.org/about-the-fed/history

https://www.federalreserve.gov/aboutthefed/structure-federal-reserve system.htm

A fascinating book about how the Federal Reserve System was created is Creature from Jekyll Island. It is a beautiful read that I could not put down once I started. I have a hard-bound copy in my office now.

Here is a summary of The Creature from Jekyll Island.

https://www.eetimes.com/book-review-the-creature-from-jekyll-island/#

Governments have three methods to raise capital for operational expenses. They tax, borrow, and print new fiat currency (money).

The Federal Reserve is responsible for injecting newly created fiat money into the U.S. monetary system by the tens of trillions of dollars when instructed.

https://www.investopedia.com/ask/answers/082515/who-decides-when-print-money-us.asp

In response to bank runs in 1928, the Federal Deposit Insurance Corporation (FDIC) was established in 1933. The FDIC was an independent federal agency whose purpose was to insure bank and thrift deposits in bank failures. The objective was to maintain public confidence and encourage stability in the financial system by promoting sound banking practices. The question today, almost 100 years later, is whether the FDIC has adequate reserves to insure deposits. They don’t without the usual borrowing from the Federal Reserve.

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The Glass-Steagall Act of 1933 required separating investment and commercial banking operations. This separation was a by-product of inner-mixing bank activities that led up to the great depression. Mixing activities of investment with banking operations was considered too risky and speculative.

Gramm-Leach-Bliley Act of 1999 reversed Glass-Steagall direction by removing legal barriers preventing financial institutions from providing banking, investments, and insurance services as combined business services.

Today banks and non-bank financial institutions are some of the most highly leveraged operating companies in the U.S. Banks and non-bank financial institutions regularly invest with minimal limits in extremely high-risk and highly leveraged securities. Little regard is given to safety measures of bank depositors. They ratchet up leverage positions to maximize yields by purchasing positions in casino-style financial bets in the form of derivatives contracts. Even reserve requirements have been eliminated so that banks are no longer required to keep any reserves on hand for protection in case of excess demands for depositor withdrawals.

Image from Pixabay

Inflation is the direct result of the government’s endless injections of new fiat currency into the economic system, which becomes a corresponding future debt of the taxpayers. Our future sovereign debt, of course, is a systemic fraud because the Federal Reserve and the leaders of this country never plan on paying the debt off or even reducing it. As the Federal Reserve pumps more money into the economic system, there is a corresponding reduction of the dollar’s purchasing power (debasement). Goods and services cost incrementally more. With debased dollars paying off the debt assumes that payments would be made severely diminished valued dollars (cheaper dollars).

Taxpayers can only see future debt piled upon future deficits that they view as their responsibility to repay, as a government national credit card for which they are on the hook. The top tier taxpayers of 1% paid 38.8%, the top 10% paid 71%, and the 25% of taxpayers pay 87% of the federal taxes. All these folks should have great concern about runaway government spending. The bottom 50% of taxpayers in the U.S. pay about 3% of federal taxes. Low-income earners and retired folds relying on Social Security for living costs get crucified by the devil called inflation. This lower socioeconomic tier is first and most severely harmed by inflation and reduced purchasing power because of their limited discretionary or nonexistent incomes.

https://taxfoundation.org/publications/latest-federal-income-tax-data/

https://theintercept.com/2019/04/13/tax-day-taxes-statistics/

Image from Pixabay

The U.S.’s financial problems include accumulated disclosed direct debt of about $30.3 trillion and an estimated $150 to 200 trillion of unfunded, underfunded, and not-disclosed future obligations for Social Security, Medicare, Military, and Federal employee pension obligations. These figures are well disguised on purpose. Remember George Bush Jr’s remarks and his debate with Al Gore when Gore’s economic figures were referred to as “Fuzzy Math”? How would the public react if they understood that their future retirement had been stolen or misallocated and not be available when they needed it?

https://www.usdebtclock.org/

Most, if not all, future financial obligations of the U.S. must come from a combination of current general funds based on tax receipts and newly minted fiat currency in the form of U.S. Treasuries as future debt. This future debt is sold to the public, corporations, and other sovereign nations as treasury securities, backed by the full faith of the U.S. Government. Some entities invest in treasuries for safety, and some are out of compulsion (forced for political expediency).

If one inquires of the solvency of the Social Security trust fund from the mainstream media or online web news, they will tell you that Social Security has almost $3 trillion in trust fund assets (so-called-not). But they will fail to tell you that all the Social Security trust funds are invested in U.S. Treasuries. Treasury securities are debt created by the government and must be repaid upon maturity. Social Security is currently a pay-as-you-go system paid by current taxpayers to benefit of retired folks. If financial demands for Social Security and Medicare exceed available current tax receipts from taxation, then the remainder must come from the Social Security trust fund. But there is little or no liquid assets or cash available in the fund?

Image from Pixabay

Any payments demanded from the Social Security trust fund would require that the government free up money by paying off a corresponding amount of U.S. Treasuries (IOU’s) that are held as assets of the trust fund. Where will the money come from for the government to pay off the Treasuries? If the government cannot locate liquid capital, then they must create it by issuing new treasuries for new parties to purchase to replace the old. What a great trick to pull upon the American public! I want to pay my bills and credit cards where someone else is responsible for repayment.

They swapped the accumulated liquid assets sitting on the books of these Trust Funds for debt instruments that are expected to be owed and paid from future taxpayer receipts. Switching debt that you owe and calling it an investment asset is the ultimate form of financial prestidigitation (magic trick). Yes, an asset that is held on your behalf is misappropriated into debt, and you are responsible for repaying in the future.

Special Studies by the Historian’s Office of Social Security and Research Notes:

https://www.ssa.gov/history/BudgetTreatment.html

Remember the 1980’s rock group, Queen? Freddy Mercury, the lead singer, was a British singer, songwriter, and record producer, and in my opinion, the most outstanding male singer ever. He was known for his flamboyant stage persona and four-octave vocal range. He could sing classic rock-in-roll as well as serious opera. Ironically, he was born, with the name Farrokh Bulsara, in 1946 in Zanzibar to Parsi-Indian Parents.

“The Show Must Go on. The Show Must Go On. Yeah, inside, my heart is breaking. My make-up may be flaking. But my smile still stays on.”

Your future social security payments are an example of “The Show Must Go on.” Proceeds for social security payments are just a hollow shell of current taxation and debt, which may be paid from current taxpayer receipts or by the government issuing new debt instruments, sold to convert proceeds to cash, and spent now. This strategy has worked so far in our history. Still, the accrued government direct debt obligations and the interest due coupled with the under-funded pension and medical obligations will eventually eat up the entire national budget. It is bookkeeping magic. “But the smile still stays on.”

Dan Harkey

Dan Harkey is a contributing author to Weekly Real Estate News and is a Business & Financial Consultant. He can be contacted at 949-533-8315 or [email protected].

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.

REAL ESTATE: USING INFLATION TO YOUR ADVANTAGE

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By Glenn Mananeng

Inflation is an increase in prices for goods and services. In other words, as time goes by, your buying power becomes less compared to the previous years with the same amount of money. Picture yourself in the 90s and you have around $1 million dollars. Seems like a hefty amount of money especially if you’re thinking of settling in for retirement. Fast forward to the year 2019 and that same amount of money wouldn’t be as lucrative to save you up for the next few years to come. Inflation is something that has proven to be detrimental for most people. If we’re talking about investments though, a good investor can turn the negative face of inflation into something positive – and use it to their advantage. Strategy Properties is here to guide new and seasoned investors on how to deal with inflation and that they should actually welcome it.

Understanding Inflation

statistics-227173_1280A deep dive into inflation shows that it’s more than just an increase in prices. Reduction of interest rates, changes in demographics, and an increase in the rate at which income is generated are several factors that come into play. Like what we’ve mentioned, the oversimplified result of it is an increase in the price of goods and services such as food, rent, real estate prices, and stocks. What doesn’t rise with inflation though is your money. To put it simply, your cash is worth less as time goes by, which is why holding it for long periods of time isn’t a good strategy when it comes to investing and inflation kicks in.

Real estate has been a popular choice for investors because the rising prices increase the value of a property over time. As the price escalates, the rental payment of tenants can also increase which would benefit property owners and landlords. Inflation is inevitable. It can either be at a high rate, a steady rate, or something in between. The best way to win against inflation is by using it to your advantage.

Why real estate is the best investment

key-2114455_1280Properties are more immune when it comes to recession. To put this into detail, let’s take stock market investing as an example. The stock market can offer big returns in a predominantly strong economy but becomes very risky when it dips down to a recession. Your investments, no matter how strong they are, can easily shift on a volatile market. In real estate, you become less prone to a loss when recession hits since properties are generally almost always in demand for housing or other purposes.

Real estate investment trusts (REIT) are companies that own and operate income-producing properties. Publicly traded REITs can give you the upper hand in the long-run. It also helps you broaden your investment choices with less capital involved. Some may argue that they can suffer losses due to inflation but the liquidity of these investments can even things out over time in terms of profits.

If done right, your investments will give you steady cash flow. The rental income from your tenants can go straight to paying down the loan principal, which accounts for most of the value in conventional loans compared to other investments that can’t offer a high enough return during inflation. Aside from that, the appreciation of your property increases in value especially when improvements have been made to it.

money-1428587_1280Choosing the right location for your investment property shouldn’t be underestimated too. Settling on an area that is in a strong and economically resilient market is more likely to achieve inflation offsetting returns rather than one with a non-diverse market with weak demand.

Choosing the right location for your investment property shouldn’t be underestimated too. Settling on an area that is in a strong and economically resilient market is more likely to achieve inflation offsetting returns rather than one with a non-diverse market with weak demand.

Strategy Properties is a team comprised of professionals with extensive experience and knowledge when it comes to real estate investment and all the ways to hedge against inflation. Make the smart choice by partnering with us and contact us through (734)224-5454 or sending an email at [email protected]. Let us take care of everything while you sit back and enjoy the fruits of your hard-earned investment.

Kathy’s 2019 Housing Forecast

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By Kathy Fettke, Co-CEO of the Real Wealth Network

Welcome to my 2019 Housing Forecast! I’ve been doing these predictions for many years starting well before the housing crisis, when loans were easy and home prices only went “up.”

I was a mortgage broker back then, and knew something was very wrong in the lending world. I couldn’t understand how it made sense that I was able to give a loan to just about anyone… and I got my answer in2008 when the housing market crashed.

Since then, it’s become my passion to understand the politics behind economics, so that I’m never caught off guard again. Please note:these thoughts are my opinions only. and not to be construed as financial advice.

My theory on the housing market boils down to these three factors:

Real estate values are tied to jobs.

Jobs are tied to the economy.

The economy is tied to Federal Reserve policy and government regulations.

That’s a very simplified version of the housing market machine, but decisions by the Federal Reserve and the government can have a torpedo-like impact on real estate. So if you take a  close look at what’s happening with the central bank and government policy, you might get a clue as to what is coming.

The Federal Reserve

The Federal Reserve attempts to regulate the economy by controlling the money supply. When there’s more money flowing, prices tend to increase. When there’s less liquidity, less money circulating, prices tend to decline. One of the ways the Fed controls the circulation of money is by raising or lowering the overnight lending rates –basically what it costs banks to borrow money and lend it out.

The Fed lowered these short-term interest rates to near zero levels after the Great Recession, in an attempt to jumpstart a flat-lined economy. It also bought bonds to keep interest rates low, and launched quantitative easing programs that essentially created money “out of thin air” for circulation.

It worked! With trillions of new, freshly minted dollars circulating, the economy came back to life, and a decade later, is booming.

But, a boom can also lead to a bubble, and bubbles burst. So the Fed regulates booms by lowering interest rates. One sign of an overheated economy is runaway inflation, so the Federal Reserve set 2% inflation as a benchmark for raising rates. Inflation hit that 2% mark in 2015, so the Fed began to reverse it’s easy money policies by raising rates.  Since then, the Fed has raised rates nine times, including four rate hikes in 2018 alone.

This attempt to slow things down also worked!

It’s not surprising. Higher rates make everything more expensive, which can curb borrowing and spending. This effectively pulls the throttle on the economy and slows down inflation.

Plus, there may be another reason why the Fed has been steadily raising rates. The economy has been booming for a decade now, and many economists believe it’s now near its peak. Some are predicting a recession by 2020. One of the Federal Reserve’s arsenals for turning around a recession is to lower interest rates. But if rates are already low, the Fed has nowhere to go. It has to go up first so it can go down again in the future. Therefore, some say the Fed has been raising rates so that they can lower rates again next year.

Mortgage Rates

Higher short-term interest rates makes it more expensive to buy cars,take out equity loans, and use credit cards. They also make variable-rate mortgages higher, but they do not have a direct influence on long-term mortgage rates. In fact, in December when the Fed raised rates for the 4th time, long-term mortgage rates actually went down. Why?

Long-term rates follow the bond market more closely than the Fed Fund rate. When investors are confident, they invest in the stock market. When they are fearful, they seek the safety of bonds — specifically the 10-year Treasury note. Those same investors tend to flock to the safety of mortgage-backed securities. When more investors are buying, prices decline. So when there’s more fear in the market, long-term interest rates tend to soften.

The Fed’s December rate hike rattled the stock market, sending anxious investors to the safety of bonds. As a result, stocks took a sharp nose dive in December. More purchasers of bonds and mortgage-backed securities effectively lowered long-term mortgage rates. This could help boosts home sales in the Spring.

The Federal Government

When it comes to the federal government, we’ve seen major policy changes that are influencing the housing market. Several are contained in the massive tax reform package that cut taxes and changed the rules for deductions. By lowering the corporate tax rate to 21%, businesses have more money to reinvest and expand their workforce, which puts more people back to work.

One of the biggest benefits for real estate investors is the new pass-through rule that allows people with LLCs and similar business operations to take a 20% deduction. So there are big benefits for all those Mom and Pop landlords who operate as LLCs. The new rules also preserve the highly-prized 1031 exchange, which was at risk of being eliminated. The new Opportunity Zone tax break program is also part of that tax package.

Homeowners didn’t make out as well. They lost deductions for things like vacation homes and large mortgage payments, making homeownership, for some people, more expensive.

Low Unemployment

As I mentioned, those tax cuts were designed to lower the unemployment rate, which is now so low that it’s actually unhealthy for the economy. The data shows that we have more open positions than people looking for jobs. When there’s a shortage of workers, employers have to pay more. That extra expense is then passed on to consumers in the form of higher prices which contribute to inflation. If we start seeing higher prices, the Fed will be inclined to raise those short-term interest rates, which can also trigger other repercussions, like that stock market volatility.

What we need is workforce growth right now — not job growth. And this is a critical element for today’s economy because our workforce is actually shrinking. The U.S. birthrate has dropped to a 30-year low and continues to fall. Baby Boomers will be retiring in massive numbers, leaving more open positions in their wake. And there’s the debate over immigration, and the value of immigrants for jobs like farming and construction.

Economic and Housing Repercussions

So here are some of my predictions for 2019:

The GDP will slow down to around 2% from 3%, as the effects of those tax cuts wear off. High housing prices and interest rates could also help slow growth, along with trade tensions, domestic politics, and the current pullback by China. But, I don’t think we’ll see a recession, this year.

Unemployment will rise slightly due to a changing workforce that includes less corporate dollars for new jobs. An unemployment rate of4 to 6% is considered healthy, so a slightly higher jobless rate could be good for our economy.

Mortgage rates will remain relatively low. The Fed is expected to hold off on rate hikes during the first half of the year as it reassesses the economy. If we see another rate hike or two, it probably won’t take place until later this year.

Consumer debt will increase because it’s now more expensive to borrow money.

Demand for rentals will remain strong because homeownership has gotten more expensive.

Return to Normal Gains

We’ve been so spoiled over the last 10 years by double-digit gains. Investors need to start expecting more normal returns. Syndications will go back to 6% preferred returns, with an equity kicker on the back end that would bring the IRR to just over 10%. Unless you find that home run — like our development in Costa Rica, where we got the land cheap and received entitlements quickly such that we were able to get our glamping resort up and running, effectively lowering holding costs. We are expecting investors to receive an 18% return on that one. But these types of deals will be fewer and further between.

If you’re expecting another 2008 housing meltdown where you can pick up properties for pennies on the dollar, you may be waiting a long time.

There is No “One” Housing Market

We also have to remember that the national housing market isn’t just “one” housing market. Instead, it’s made up of thousands of diverse housing markets. The key to higher returns is finding emerging markets — those with job and population growth, but with real estate values still below their peak. These types of areas give investors both cash flow today and a strong chance of appreciation in the future — a win/win, whether a recession is coming or not.

What happens when we do get hit by another housing recession?

We have to remember, today’s housing scenario is very different than in 2008. Back then, loan underwriting was loose. Today, it’s still very tight. This time, most homeowners have equity in their home. Back then, they did not. Today, homeowners are locked into historically low interest rates. It would be much more expensive to sell or to rent, so they will hold onto their homes. Plus, Airbnb wasn’t prominent in 2008. Today, people can rent out rooms in order to make house payments.  That brings me to my 7th and final prediction:

The housing market will remain on solid ground although price growth will be slower.

The recent slide in mortgage rates is corresponding to more activity from home buyers. That’s an indication that by keeping interest rates about where they are now, the housing market will thrive. We may see some turmoil at the high end of the housing market due to things like the tax law and stock market gyrations, but the housing market as a whole will likely see growth in more affordable markets.

The trick is to find the right markets. Real estate investors want to be in growth markets. And there are several good markets where that makes sense. The Real Wealth Network has identified 15 markets that can provide a good return on your investment. Some are better for appreciation. Others are better for cash flow. We have more information about those markets at our website www.realwealthnetwork.com

 

Kathy Fettke

Kathy Fettke is Co-CEO of Real Wealth Network and best selling author of Retire Rich with Rentals. She is an active real estate investor, licensed real estate agent, and former mortgage broker, specializing in helping people build multi-million dollar real estate portfolios that generate passive monthly cash flow for life.

With a passion for researching real estate market cycles, Kathy is a frequent guest expert on CNN, CNBC, Fox, Bloomberg, NPR, CBS MarketWatch and the Wall Street Journal. She was also named among the “Top 100 Most Intriguing Entrepreneurs” by Goldman Sachs two years in a row.

Kathy hosts two podcasts, The Real Wealth Show and Real Estate News for Investors — both top ten podcasts on iTunes with listeners in 27 different countries. Her company, Real Wealth Network, offers free resources and cutting edge education for beginning and experienced real estate investors. Kathy is passionate about teaching others how to create “real wealth,” which she defines as having both the time and the money to live life on your terms.

 

 

The TOP FIVE Reasons to Consider COMMERCIAL REAL ESTATE for Your Portfolio

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By Tom K. Wilson

While many investors see single-family homes as their “bread-and-butter” investment, investing in commercial properties is an option that can also help you achieve your financial goals.

“Commercial” in its broadest lay vernacular includes multifamily apartments, however, the true industry definition separates multifamily properties (over five residential units) from true commercial, such as retail, office space, industrial, self-storage or medical centers.

I’m often asked what kinds of properties I recommend. There is, of course, no one size that fits all investors or markets. While in a normal market multifamily properties are a natural progression from single family homes, this is anything but a normal market and currently there are too many multifamily buyers chasing too few deals, so it currently has lower CAP* rates or returns than pure commercial.

Here are five reasons to consider commercial properties for your portfolio.

#1 HIGHER ROI

Commercial properties often have higher and more predictable return-oninvestment than single-family homes, in part due to the economies of scale from investing in a larger property not usually available to the small investor.

For example, a current commercial retail center that we are acquiring has an 8.2 CAP rate and a four-year internal rate of return* of 12.0%. When you can borrow money at 4.25% and invest it in something yielding 12.0%, that’s worth considering!

#2 FEWER HEADACHES

It’s generally easier to manage one large property through a professional property management firm than to manage scattered single-family homes. Also the business tenants you get in retail or office space are usually of higher quality than most residential tenants. Business tenants have higher credit/risk scores, have pride of ownership in their businesses and want to protect their livelihoods. As a result, they have an interest in taking care of the property.

Many commercial properties are NNN* (triple net), so the tenant pays most of the expenses including taxes, insurance, and maintenance making the owner’s expenses very predictable and consistent.

#3 STABLE CASH FLOW

Commercial leases are typically 5-10 years in length vs. annually for single-family homes. Additionally, commercial leases include annual bumps in rent and options to-renew. As a result of all these factors, cash flows are more predictable.

#4 NO 10-MORTGAGE FANNIE MAE LIMIT

Any loans taken by the owner or syndicate do not count against your 10-mortgage limit because they are in the name of the owning entity and not on your personal credit. This enables you to put more of your capital to work.

#5 APPRECIATION MULTIPLIERS

Unlike single-family homes, which are strictly valued based on market demand, or ‘sales comps’, commercial properties are valued as a multiple of their Net Operating Income (NOI),* which can be driven up by a good property manager’s addition of value. At a Cap Rate* of 8.0,everyone-dollar increase in annual NOI can result in $12.50 of appreciation!

Steps you can take to actively improve NOI include:

  • Upgrading the existing buildings
  • Increasing TI (tenant improvement)
  • Adding leasable square footage
  • Raising rents
  • Reducing operating expenses
  • Adding amenities
  • Adding additional revenue generating resources (ATM kiosk), and many more

Rather than wait for market forces to raise real estate prices organically, you can create appreciation using levers like the ones listed above.

ADDITIONAL BENEFITS

Of course, the five advantages of commercial real estate listed above are in addition to the usual benefits of any real estate investment:

  • Tax Benefits
  • Hedge against inflation
  • A hard asset with intrinsic value

Caveats of Commercial Investing

No discussion of commercial investing would be complete without noting a few issues that investors should be aware of.

Financing can be more challenging

Typically, the investor(s) must put down 25-30% of the sales price and finance the loan amount over a 5-10 year term with a balloon payment at the end of the term. Selling or refinancing options at that time will vary depending on market conditions. And there can be stiff prepayment penalties.

Not as Liquid

If you own 10% of a Commercial building and want to sell your interest, you can sell to your fellow investors (who usually get first right of refusal) but if none are interested, it may be difficult to get out of the investment. That is why long-term funds, like IRA money, are ideal for commercial properties.

Sale of a Commercial Property can take longer

While just about everyone wants a home, only a small percentage of the population is capable of purchasing a retail center or office building. The smaller market of potential buyers coupled with a detailed due diligence process means that the sale of the property can take longer than for a single-family home.

Syndications

Many of the challenges outlined above can be mitigated by investing with an experienced syndicator. Their knowledge, track record, and ability to qualify for the loan and manage the property, allows the small investor to participate in a high quality commercial property or to invest in multiple projects to distribute their risks.

SUMMARY

The benefits, economies of scale, opportunities for forced appreciation and higher returns make commercial properties an attractive addition to most investors’ portfolio, and one worthy of serious consideration.

For your free copy of Wilson Investment Properties article “Are Real Estate Syndications for You?” and a guide to “Commercial Real Estate Terms” please go to our website, www.TomWilsonProperties.com .

Tom K. Wilson has utilized his experience and skills acquired in 30 years of managing some of Silicon Valley’s pioneering high tech companies to buy and sell more than 2,500 units and over $130 million of real estate, including three condo conversion projects, eight syndications, and seven multifamily properties. He founded and owns Wilson Investment Properties, Inc., a company that has provided over 500 high cash flow, high-quality, rehabbed and leased residential properties to investors. Active in real estate associations, Mr. Wilson is a frequent speaker on real estate investing where his expertise and experience makes him an audience favorite. He is the weekly host of the Wed 2pm edition of KDOW’s RE Radio Live in San Francisco, the Wall Street Business Network (1220am).

*A GLOSSARY OF COMMERCIAL TERMS

CAP RATE (Capitalization Rate)

A measure of return calculated by dividing the property’s net operating income by its purchase price.

CONC (Cash on Cash Return)

A measure of return calculated by dividing pre-tax cash flow from a property by the total cash invested (e.g., down payment plus closing costs).

GRM (Gross Rent Multiplier)

The Gross Rent Multiplier is a measure of how expensive a commercial property is relative to the gross rents it brings in, calculated as: GRM = Purchase price of the property / Gross monthly rents.

NOI (Net Operating Income)

The total income from a property minus vacancy, credit losses, and operating expenses.

NNN (Triple Net)

A commercial lease in which the tenant pays three operating expenses (in addition to rent): Property taxes, insurance, and maintenance.

ROI (Return on Investment)

ROI measures the amount of return on an investment relative to the investment’s cost and is calculated as: ROI % = (Gain from the investment – Cost of the investment) / Cost of the investment.