In a complex financial eco-system, there are MANY components, dependencies, and inter-dependencies …
… any of which can be the catalyst for a seismic economic earthquake.
The flip side and basis of real estate’s stability is real estate’s relative lack of liquidity as compared to publicly traded securities.
After all, you can’t hit a buy or sell button and execute a real estate transaction in seconds like you can with stocks, bonds, currencies and options.
Real estate moves slowly.
That’s why real estate prices and rents don’t bounce around on a daily basis after a Presidential tweet, an executive faux pas, a jobs report, or even a Federal Reserve interest rate pronouncement.
It’s also why so many Mom and Pop investors come home to real estate when the Wall Street roller coaster ride becomes a little too nauseating.
But because most minor economic waves tend to break harmlessly against the breakwater of real estate’s stability…
… real estate investors can get bored of watching the horizon for the occasional financial tsunami.
And boredom’s not the only problem.
There’s also the issue of overwhelm. In today’s complex world, there’s not only a lot more to watch, there’s a lot more chatter.
While lots of information is generally good, some stories get lost in the noise. And entering an election year, there’s a LOT of noise out there.
But it’s a mistake to tune out and assume all is well. Or to put blind faith in the “smart” people whose hands are on the controls.
Sometimes, those in control are the very people creating and downplaying the problems.
Remember, it was then Fed chair Ben Bernanke who assured the world in 2007 that the sub-prime crisis was contained and didn’t pose a threat to the economy.
We all know how that ended.
Current Fed Chair Jerome Powell recently assured the world that the U.S. economic expansion is sustainable.
Perhaps.
But there’s a long list of alarm bells going off … in bond markets, in oil, in trade, the dollar, geo-politics, and the resumption of easy money (just don’t call it QE).
Okay. Take a breath. Yes, Halloween is coming up, but we’re not trying to scare you … much.
It’s unwise to unplug a blaring smoke alarm because it’s interrupting your sleep.
If you’re trapped in the wrong slow-moving real estate and you wake up late to a developing problem …
… you may not be able to rearrange your portfolio fast enough to avoid losses and capture opportunities.
Remember … a bend in the road isn’t the end of the road unless you fail to make the turn … and problems and opportunities exist concurrently in any transition.
Events are often only as good or bad as your personal awareness and preparation make them.
So back to our threat assessment …
You’re going to be hearing more about problems with pensions.
But before you check out because you think pensions don’t have anything to do with you … think again.
You may not have a pension. But lots of people do.
More importantly, pensions control a HUGE chunk of assets in the economy, including stocks, bonds, and real estate.
While there may be many reasons for any particular pension fund’s failure, there are a couple of undeniable macro-factors common to all …
… artificially low-interest rates and an aging population.
This one-two punch has many pension plans on the ropes.
Recently, General Electric (GE), an iconic company once revered for its great management, announced it’s freezing workers’ pensions.
GE is FAR from alone.
Both public and private pension programs, not to mention Social Security, have been on a slow motion collision course with insolvency for many years.
There are many potential ramifications for real estate investors. Some good. Some not so much.
Starting with the not so good …
Loss of purchasing power creates a ripple effect in any economy … affecting which states, cities, neighborhood, product types, and price points people can afford for housing.
Jobs and wages are important. But neither have a direct impact on retired people living on fixed income.
When costs tenants can’t control rise for essential items such as energy, healthcare, food … they’re forced to cut back on big things they can control, like rent.
Think about that when you jump on the senior housing bandwagon. Not all senior housing communities or investments are created equal.
Also, for investors with properties in retirement markets … even if YOUR tenants aren’t depending on pensions and social security directly …
… those retirement checks still provide the economic fuel for the local economy.
After all, your tenants might work at the restaurant, gas station, grocery store, dry-cleaner, auto shop, or landscaping service providing services to retirees.
When retirees cut back, it affects those tertiary businesses and their employees (your tenants). Pay attention to these dependencies.
Bigger picture, failing pension plans mean potential bailouts.
While the Federal government can (for now) still print unlimited amounts of dollars, local municipalities cannot.
So failing local government pensions create a huge temptation for local officials to increase property taxes and the costs of municipal services.
Landlords are easy targets for pandering politicians in cash-strapped towns.
And while you might not pay directly for all municipal services, it doesn’t matter. If the tenant’s costs go up, it puts downward pressure on their ability to pay you rent.
It’s a complex eco-system and we’re all inter-connected.
Bailouts also could mean big federal tax increases, or perhaps even worse … loss of faith in the dollar, rising interest rates (pressure on both you and the tenants), and a general decline in the economy, jobs, and wages.
Robert Kiyosaki tells us failing pensions are one of his biggest concerns right now.
There’s more to watch out for, but before you go into a full-fetal coma, let’s end on a high note …
The flip-side of any crisis is opportunity.
When asset prices collapse, those who are liquid, educated, well-connected, and emotionally prepared can acquire quality assets at bargain prices.
So note to self: Now is the time to get liquid, educated, well-connected, and emotionally prepared.
Sadly, many retirees will sell homes to raise cash, then enter the ranks of renters. So just like 2008, demand for rentals in the right areas could actually increase.
Therefore, it’s important to really understand your markets, their drivers and demographics, and to be mindful of the product types and price points favored by an increasingly large retirement population.
For example, multi-story homes can be less desirable to seniors. Warm weather is a plus … who wants to shovel snow in their 70s?
Great local medical services are also really important to seniors.
And if retirees have moved away from friends and family in search of affordability, great transportation infrastructure is another valuable market “amenity”.
And of course, areas with an overall lower tax burden help those fixed incomes stretch further.
It’s not rocket science, but you do have to think.
That’s why we attend conferences and listen to smart people talk about all these things from different perspectives.
It’s also why we host the Investor Summit at Sea™ each year, where we get together with big-picture thinkers together and street-level niche experts to find ways to think big but invest small and smart.
Whether you join us at these events or find your own tribe, we encourage you to take your nose off the grindstone a few times a year and confer with the smartest investors you can find.
Because even though you can’t possibly watch it all and see every threat or opportunity forming, your tribe can. And you can all learn faster together.
Until next time … good investing!
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