12/16/12: The Return of Equity – The Fed Strikes Back

When the evil Debt Star blew up the mortgage and real estate markets, it was a major blow to the balance sheets of many investors and institutions.

The shroud of the dark side of leverage fell.  The foreclosure wars began.  Suck, it did.  And for many, suck it still does.

In response, Supreme Chancellor Bernanke was granted emergency powers.  The old republic of independent mortgage banks was wiped out and reformed into the Great Galactic Government Sponsored Enterprise.

Before long, the Fed’s balance sheet was bigger than Jabba’s fat Hutt.  And, through QE4ever,  it continues its epic growth to unprecedented proportions.  And while some are into that kind of thing, to us it isn’t a pretty sight.  But (get it?), we digress….

So what does all this mean to the real estate market and real estate investors?  To find out, we assembled three storied members of the Equity Council:

  • Your host and pilot of the Millennium Microphone, Robert “Helms Solo”
  • Your “not a Jedi yet” co-host, Russell “Luke Skytalker” Gray
  • The ancient and lovable Equity Master and Godfather of Real Estate, Bob “Yoda Man” Helms

For 800 years (or so it seems), Bob has invested for equity.  Yet there are things happening in this market that even he’s never seen…like 30 year fixed interest rates BELOW 4%.  Powerful, Bernanke is.

Now that Emperor Bernanke has announced to the world that he’s planning to print a TRILLION dollars in the next year (we didn’t make that up, we got it from quotes in the Wall Street Journal), and hold interest rates at essentially ZERO until unemployment is below 6.5% (which the Fed estimates will be in 2015), the question is….

So what?

To find out, we dusted off a VHS cassette and watched a prequel.  And we noticed the last time the Fed flooded the market with currency and credit (under former Fed Emperor Greenspan), it created an explosion of equity.

Apparently, the market is starting to buy it.  Home builder confidence is up.  New construction is starting in some markets.  And even though there are still tons of foreclosures and anemic economic growth, people are starting to spend money and buy properties.  In short, equity is happening again!  (Hopefully, that will be good for book sales.  There are still a few shopping days left before Christmas.  😉 )

Of course, having seen this movie before, we know there’s a ton of money to be made on the front end of a wave of equity growth.  We also know (school of hard knocks) that if that big wave of equity your riding crashes on top of you, you can quickly find yourself underwater and in danger of drowning in debt.

The main point of all this is that while you may or may not agree with all this “inside the beltway” market manipulation, when you’re living on Main Street or in the Outer Rim, all you can do is watch and do your best to go with the flow.  After all, the forces at work are a lot more powerful than you are, so (to borrow from a different sci-fi series) resistance is futile.

The good news is that even though many people (like savers, workers, small businesses…you know, “the middle class”) get hurt by all this “easing”, YOU don’t have to.  You can borrow essentially free money to purchase assets and income streams that grow with inflation plus throw off tax breaks that are even more sacred than the perhaps soon to be extinct homeowner’s mortgage interest deduction.

With so much distress remaining in the resale market (foreclosures are still holding down prices), you don’t have to settle for passive equity.  You can buy stuff in bad shape, pretty it up, and “force” the equity.  And if you get some appreciation, cash flow, tax breaks on top of that…well, more power to you!

So listen to Yoda Man, and “force the equity” young padawan.  Twenty years from now, you’ll be happy you did.

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