The Fed FINALLY admits it…

Could the Fed’s decision NOT to raise rates be basically an admission this “recovery” is a farce?

Janet Yellen swears to tell the whole truth and nothing but the truthIf the economy can’t absorb even a token rate increase, it must be FAR from robust.

As we’ve discussed, there’s simply not enough income (productivity) to service all the debt.

It’s like a sub-prime borrower using a teaser rate to squeeze into a home they can’t afford.  When rates re-set, their income’s not enough to cover the new payment.

In other words, we have a sub-prime economy hooked on teaser rates.  An interest rate increase could push it over the edge.

Of course, the flip side of every problem is opportunity.

Right now, Janet Yellen has a BIG problem.  And she thinks housing can help her get out of it.

Check out this headline from Bloomberg…

Janet Yellen Sees a ‘Very Depressed’ Housing MarketJanet Yellen has a big problem

 “The Fed chief noted… housing ‘plays a supporting role’ to bigger drivers such as consumer and business spending.”

“The central bankers ‘recognize that the housing market is sensitive to mortgage rates’ and that an increase…will eventually impact consumer borrowing costs.”

In other words, Yellen didn’t raise rates so she could prop up housing.

Great!

But…proceed carefully.

First, we’re not sure Janet Yellen will succeed at goosing housing.  And that’s okay.

Encouraging consumers to go into debt based on home equity isn’t a smart path to long term economic “recovery”.Encouraging homeowners to go into consumer debt based on home equity is a bad idea

Isn’t that how we got here in the first place?

And with interest rates already so low, there’s no room to push up debt based solely on lowering interest rates.

So incomes need to rise.

But competition from low overseas wages and technology put a drag on American wages.

So Yellen might be tempted to revert back to money printing…or more “quantitative easing”.

Long term that’s bad for the dollar.

So mortgages and real estate could be very good things to have in the years to come.

Because, as we discuss in our Real Asset Investing report, mortgages are a way to short the dollar.  And in spite of it’s recent “strength”, the dollar has a one hundred year history of loosing value over time.  This makes sense because the Fed has a stated goal to create long term inflation.Real Asset Investing explains how to protect yourself from a falling dollar

Real estate is a great way to hedge against long term inflation.

Just be mindful of the fundamentals of value.

REAL value comes from income.  The more income, the more value.  The less income, the less real value.

But after nearly seven years of artificially low interest rates, trillions of dollars in “stimulus”, and zero meaningful reform of highly leveraged derivative speculation…asset values for stocks and bonds have risen without corresponding increases in income.

So this CNBC article says Wall Streeters turned to Main Street for more real returns…

Investors Snapping Up New Homes for Rentals

Hedge funds and foreign investors are buying U.S. houses…large-scale investors buying thousands of discounted foreclosed properties…turning them into single-family rentals….The housing market is recovering…but these investors are not selling. They are buying more, and now they are buying new.”

This perplexes mainstream pundits who only understand “buy low, sell high”.  But the article explains…

 “‘…institutional capital is still looking at … a long-term hold…there’s yield and…appreciation to be had.’” 

Exactly.  Welcome to real estate investing.

Of course, Bloomberg reports that all that big-money bids up prices and takes inventory off the market…

Previously Owned U.S. Home Sales Retreat on Limited Availability

No wonder Wall Streeters are buying new…which of course, makes home builders happy.

As John Burns reported, home builders are beginning to cater to investors instead of only home owners.

But if real value is based on income, how are incomes doing?

Not so good…according to a Bloomberg article:

Americans paychecks are shrinking “Wages and salaries in the U.S. rose… at the slowest pace on record, dashing projections that an improving labor market would boost pay.”

“Private wages were little changed…, the worst performance since those records began in 1980.”

Is this headline from Market Realist provides a little glimmer of hope?

Wage Growth Could Possibly Be Ticking Up

Could…possibly…maybe…kinda sorta…

But then we dig deeper and find:

“Despite falling unemployment, one of the conundrums of the current labor market is flat real, or inflation-adjusted, wages.

And right in the same article we find out why it matters…

“Historically, real estate prices have correlated closely with wage growth…Recently, home prices have been increasing again, but that’s due to low inventory….the ratio of median home price to median income is again approaching bubble-type highs. As the Fed removes accommodation, further home price appreciation will be dependent on wage growth.

Of course, rents also come from wages, and this Associated Press article says…

US rental prices up 3.8 pct. in past 12 months; pace slows but still faster than wage growthRents are becoming unaffordable for many Americans

“…rental housing costs have been rising nationwide at roughly double wage growth…The result is an affordability crunch for renters.”

This means long term resistance to rental increases…and even pressure to lower rents as people look to move to more affordable housing.

Here’s the bottom line…

The Fed’s decision tells us the economy is weaker than advertised.

Wages are soft.  People can’t afford higher debt paymentsor higher rents.

But they NEED housing.

So housing and rents are rising.  But without wage growth it may not be sustainable.

You shouldn’t count on rising rents or lower interest rates to improve your cash flow.

So it’s REALLY important to BUY RIGHT.
  • Choose affordable markets with a good local economy, low taxes and living expenses, and an attractive quality of life for people leaving expensive areas in search of affordable housing.
  • Avoid paying too much. Be disciplined. Don’t chase the market.
  • Lock in low fixed rate long term financing. The difference in adjustable and fixed rates probably isn’t worth the risk right now.
  • If you want an equity pop, force it by adding value.  Ditto for rents.  Maybe the market will push prices higher, but don’t count on it.  The equity tide can rise…and it can recede.
  • If you can get available equity out at today’s cheap interest rates, it’s probably a good idea…as long as you have someplace to conservatively invest the proceeds for more than it costs to borrow.  Right now, that’s pretty easy.

When we look at the investment landscape, we agree with the contingent of defectors from Wall Street…stocks, bonds and bank accounts look very scary right now.

But investors have to store their wealth somewhere.

Real estate provides income, long term equity growth, tax breaks and the most affordable form of conservative leverage.

In today’s climate, it’s hard not to like properly structured real estate in the right markets.

So if you have wealth you want to protect and grow…consider real estate.

If you know how to invest in real estate, but are already fully invested…think about starting a business to help other people get into real estate while the getting is still good.

Until next time, good investing!

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The Missing Piece to the Puzzle

We’re living in a world of great financial uncertainty. But inside all of that uncertainty are amazing opportunities.

People are worried about the finances todayThat’s really good news, because in an economy that isn’t creating many high paying jobs, with all kinds of queasy money distorting asset values and suppressing interest rates; plus rising costs of healthcare and other essential products and services, a lot of people could really use a great opportunity.

Maybe you’re one of them.

Coming out of The Great Recession (we know, we’re not really out yet…), the distribution system of money to Main Street was broken.

Because when the stewards of the economy, from the Eccles building (The Fed) to Wall Street to Washington DC, screwed it all up for Joe Citizen, the trust that holds all the machinery together was severely damaged.

So even though financial institutions are having a field day with cheap money in the Wall Street casinos, Mom & Pop investors are understandably nervous trying to navigate the resulting asset bubbles. (For insight into how scary paper assets are right now, click here)

GREAT!

Because now the near stranglehold that institutions had on Main Street assets has weakened.  So street level entrepreneurs have an opportunity to step in and serve the needs of savers in a way the institutions can’t.

YOU can be a part of it.  In fact, we’d argue that you NEED to be a part of it.

Big money just can’t do real estate the way small-time operators can.  Real estate doesn’t lend itself to mass production.  Every property, personality and deal is different.  And that inherent uniqueness creates huge inefficiencies that mega-money players can’t navigate.  And they shouldn’t.

Yet, bread and butter real estate…the kind that houses people and small businesses…is foundational to a civilized and productive society.  Otherwise, we go back to a world of nomadic hunter / gatherers.  Candidly, there’s a few super-models we wouldn’t mind seeing in a loin cloth, but for the most part a modern society is to be preferred. 😉

But if the institutions can’t really do basic real estate very well, that creates a real challenge for the good people who work hard, live within their means, and save money that they want to put to work.  Because if they can’t sit in their crib with their smartphone app and “invest”, they aren’t sure what to do.

Their problem is YOUR opportunity.

You’re doing all the stuff they don’t want to do (or if you’re not, you can be).

You’re already building a network and getting into the deal flow.  You’re out there looking at properties and finding the pockets of opportunity… right down to the street level.

You’re practicing and developing the fine art of creative deal making.  You’re willing to organize and oversee a re-hab project.

You’ve got property managers (or maybe you’re one of those crazy folks who actually manage your own properties) and you’re willing to deal with all the drama of tenants, toilets and termites.

In short, SAVERS NEED YOU.  And it’s more true now than ever before.

Think about it.  Savers can’t get any yield on bank savings.  Ditto on bonds.  And with no place for interest rates to go other than up, the principal value of bonds is fragile.  Meanwhile, stocks are arguably near a bubble.  Smart money is getting out before the bottom falls out again.  It’s a VERY SCARY time to be a paper asset investor.

But YOU can be the knight in shining armor.  You can show up with a REAL ASSET investing strategy.  You can help savers put their money to work in investments that have intrinsic value, produce income, benefit from (or at least hedge) a falling dollar and low interest rates.

It’s a PERFECT STORM of opportunity for you to become a syndicator.

Simply stated, a syndicator is someone who raises private money from investors and goes out and puts it to work.  It’s a serious business and a big responsibility.  But it isn’t overly complicated with the right education and professional advisors.

It’s something we think any real estate loving entrepreneur should be giving serious consideration to RIGHT NOW.  And of course, we have some resources to help you.

Here’s a couple of broadcasts we’ve done on the topic (look for the Listen Now button at the bottom of each post or search for episode title on iTunes):

Speaking of crowdfunding, attorney Mauricio Rauld has something on the topic in our Special Reports collection:

Here’s THE handbook on the subject, available in The Real Estate GuysRecommended Reading Bookstore:

And if you’re REALLY serious, we’d love to have you attend our Secrets of Successful Syndication seminar.  Click here for more info.

The great thing about syndication is you don’t have to have a ton of money.  You need to have time, intelligence, high integrity, and a strong work ethic.  With those, you can raise the funds, find the advisors, and make all the money you need by helping solve savers’ problems.

Right now, the market needs more good people to put money to work on Main Street, without funneling it through the institutional machinery.  That’s good for the the investors, it’s good for the community, and it can be very, very good to you.