There are SO many things happening in the financial news and markets right now, it’s hard to focus on any one thing and say it’s the biggest story.
Obviously, the coronavirus panic is dominating headlines and airwaves everywhere.
And many of the other major stories such as stocks, bonds, interest rates, and oil prices all seem to be considered somehow a derivative of the coronavirus.
Of course, we just keep asking … what does all of this mean to real estate investors?
Two weeks ago, we posited interest rates would fall as investors piled into U.S Treasuries for both safety and speculation.
Of course, we were right … but not because we’re brilliant, but because it was SO obvious. As Treasury yields collapsed, mortgage rates followed.
And because you never know how long these “sales” on cheap money are going to last, it’s a good idea to watch for clues … and then move quickly when opportunity presents itself.
The odds are the coronavirus scare will last months … but your uber-cheap mortgage can last for decades. Nice.
Last week, we dug a little deeper into the WHY behind collapsing rates after the Fed came out with an “emergency” rate cut.
Though billed as a preemptive strike to stop recession, most pundits viewed it as a lightly veiled attempt to calm traders and boost stock prices.
How’s that working out so far?
Of course, WAY before coronavirus, we’ve been pointing out …
… the financial system is fragile,
… the Fed’s intervention in the repo market is a potentially ominous sign,
… and gold could be flashing a “bridge is out” warning even as the U.S. economy is hurtling down the highway at a decent clip.
In other words, the coronavirus might not be a cause, just a catalyst.
Which brings us to the theme of today’s muse …
Insulation matters. And when the climate is extreme, people who don’t have it, want it.
Right now, MANY people are discovering their portfolios are naked and exposed to the extreme hots and colds of publicly traded financial markets.
Equity investors are experiencing nauseating drops and dizzying bounces … all within an overall trend which is flirting with becoming the mother of all bears.
Income investors are watching yields collapse 30-50% from already anemic levels. Savers and income investors were already suffering. Now it’s torturous.
When yields aren’t enough to live on, you have no choice but to consume equity.
And it’s hard to ride the equity roller coaster back up if you to get off at the bottom to eat.
It’s like a starving farmer who eats his seed corn has nothing to plant for food in the future. He eats now but is doomed in the long term. Equity consumption is suicidal.
So while the coronavirus might threaten your physical health, the vast majority of people who catch it will survive and go on to thrive.
But the effects of the panic on fragile financial markets are definitely making paper asset investors’ portfolios sick … and recovery could take a LOT longer.
Of course, most real estate investors are doing what they often do when these things happen … much popcorn, watch the fireworks, and cash rent checks.
Sure, if the storm is bad enough, it can blow your insulated, brick real estate portfolio over too.
But compared to the poor folks living in straw portfolios built only for sunshine, real estate looks pretty darn secure.
So it’s no surprise, that even the mainstream financial media are pointing out the safety features of real estate … at least what they think is real estate …
Don’t Panic – Buy REITs
– Forbes, 3/9/20
REITs And Bonds Rose Last Weeks As Global Stocks Fell
– Seeking Alpha, 3/10/20
Of course, REITs are still publicly traded stocks … essentially a mutual fund collection of individual properties all put into one fund and offered in the Wall Street casinos.
So, while real estate is attractive in times like these, REITs are still subject to Wall Street volatility …
REITs fall in February amid broader market sell-off
– Institutional Real Estate, 3/10/20
Perhaps obviously, the further you are away from Wall Street, the more insulated you are from insane volatility.
Of course, as a real estate investor, YOU already know this. That’s why you read commentaries like this, and probably don’t have much exposure to Wall Street.
But remember there are MANY MILLIONS of people who haven’t discovered real estate investing … yet. Or only think of it as Flip This House.
Of course, true real estate investing is about using low cost, long-term debt to acquire passive income and generous tax breaks …
… and enjoying superior cash-on-cash yields (compared to bonds), while benefiting from long term inflation … insulated from short term deflation.
Real estate is slow, boring, and STABLE. And right now, stable is sexy.
As we’ve said before, you’re not seeing headlines announcing rents have collapsed 50% in the last 90 days because of coronavirus. That’s short-term deflation.
And ten years from now, when this current panic and its ramifications have joined all the other freak-outs of the last 100 years in the dust bin of history … do you think it’s more likely rents and real estate values will be up … or down?
History says “up” in dollar terms … because the dollar has a 100+ year history of losing value against REAL assets.
And most of what’s going on right now … more printing, more debt, more deficits … is BAD for the dollar in the long term.
Sure, most people can’t escape the temptation to gamble. “Buy low, sell high” brainwashing makes it nearly impossible to resist Wall Street volatility.
But SOME people … especially more seasoned folks … will decide the Wall Street roller coaster is more nauseating than intoxicating … and they’ll want off.
So while we’re concerned about the coronavirus panic and its near term effects on the economy and the financial system …
…. we’re SUPER EXCITED about the lessons being learned by Main Street Americans.
Because when more of Main Street gets back to real investing … in real assets and cash flow …
… it could create a big flow of funds out of Wall Street into Main Street … where the real wealth comes from and belongs.
Last time we looked, there’s usually BIG opportunity when money starts moving. The key is to put yourself in a good position to help facilitate it.
So whether you choose to borrow lots of money flowing into bonds and acquire properties in your own account …
… or you decide to start a syndication business to raise private equity to pair with abundant and cheap debt …
… this isn’t a time to be hiding under your sheets with a bottle of hand sanitizer.
Yes, be careful and stay healthy.
But keep your eye on the long-term big picture. It’s easy to get lost in the hype and miss big opportunities that grow out of the chaos.