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 Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.

08/16/15: Clues in the News – Is a Squeeze on Rising Rents in the Future?

There’s been lots of talk in the news lately about how and why rents are rising.rents are rising and rents are too high

Of course, if you’re already a landlord, that’s not bad news.  And those who invested in residential rental property a few years back hit the trifecta of low purchase price, falling interest rates and rising rents.

But that was then and this is now.

Is the party over?  Did you miss the boat?  What’s happening today…and where are things headed?

All great questions!

Squeezing their way into The Real Estate Guys™ studio to look for answers in this edition of Clues in the News™:

  • Your plum of a pontificator and host Robert Helms
  • His orange-you-glad-he’s-not-the-host co-host Russell Gray

We like to look at the news for a lot of reasons.

The Real Estate Guys look for Clues in the News to help listeners be more successful at real estate investingFirst, the news helps us see the big picture events which affect our real estate investing.  And we’re especially interested in anything that affects our rental income, our interest expense, or the supply and demand of properties.

Real estate investors tend to live in their own little world…finding deals, servicing tenants, managing cash flow and dealing with vendors.

It’s EASY to get lost in the weeds and miss a macro-trend that could have a HUGE impact on your business.

For syndicators, the news provides insights into the concerns and competing opportunities your investors have.  When you are well-informed, it makes a positive impression on the people who are…or are considering…investing in you.

For this episode we hone in on reports of things that have the potential to put the squeeze on the rising rents so many landlords have been enjoying.

U.S. Health Spending – $3.1 Trillion a Year and Growing

One thing we like about real estate…especially residential real estate…is keeping a roof over their head is a HIGH priority to tenants.  That means with all the things competing for their available income, landlords are high on the list.Healthcare spending is on the rise which could put the squeeze on rising rents

However, healthcare is pretty high on the list too.  And with the new Obamacare mandate forcing everyone to buy insurance or pay a penalty, more of a tenant’s available money is going to healthcare.

This article also says out-of-pocket expenses are on the rise too.  Which, again, means more competition for available cash flow…and a potential restriction on the rising rents trend.

The GOOD news is that if you own property in an area with a strong healthcare industry, your local employment and wages might be above average.  So there’s always a silver lining.

Social Security Disability Fund to Run Dry Next Year

With nearly 100 million people deriving some form of income from the U.S. government, the odds are high that some of your rental income comes from government sources.  So it’s smart to pay attention to any potential cuts.

Social Security it running out of moneyAnd with the substantial increase in people on disability provided through the Social Security Administration, it’s pretty big news when the trustees are reporting there will be NO cost of living adjustments in 2015…and the Social Security Disability Fund will be BROKE by the end of 2016.

Will Congress allow the fund to go broke?  Probably not.

But if they don’t handle it soon, an AUTOMATIC 19% cut kicks in…the same way the mandatory “sequestration” cut in the general budget kicked in when the government couldn’t pass a budget.

If you have tenants who rely upon Social Security disability payments to help with rent, the next year or so could mean a squeeze for your tenants, and therefore for you too.

From Rents to Haircuts, Americans Start to Feel Price Hikes

For some reason, The Fed has been trying to get inflation up to at least 2 percent.  Looks like it might be working.As the cost of living rises, it's harder for people to make ends meet

And while it’s been nice to see the upward pressure on rents, when it hits our tenants’ pocketbooks in other “essential” areas…like haircuts, healthcare and coffee…it means the tenant gets squeezed.

You can only squeeze so much before something’s gotta give.  And that something might be your ability to raise rents…or even maintain the rents you’ve raised already.

Of course, all of this presumes your tenant’s have a paycheck to divvy up.  So this next headline also caught our attention…

Layoffs Surge As Oil Price Outlook Remains Sober

Falling oil prices were supposed to be a big boon to consumers.

falling oil prices has lead to widespread layoffs in the oil industryBut with reports of inflation kicking in and gasoline prices not falling as far or as fast as oil prices, it doesn’t seem like cheaper oil has meant lower living costs for everyday people…like your tenants.

On the other hand, the oil industry had arguably been the brightest star of employment over the last several years.  But with oil prices depressed, not only has the job growth stopped…it’s going backwards.

And as we emphasize on The Real Estate Guys™ market field trips, certain industries are employment magnifiers because they funnel money into a region from outside.

So not only does the primary industry create jobs, but the revenue it generates purchases supplies and services from secondary or support industries.  These are sub-contractors, parts and materials suppliers, and vendors of all kinds.

But it’s even bigger than that…because the employees of BOTH the primary and secondary industries ALL consume local retail services, such as restaurants, dry-cleaners, automotive sales and service, healthcare and yes…residential real estate.  These tertiary industries also provide local jobs.

So if it employment is MAGNIFIED by the growth of a PRIMARY industry like oil…what happens when layoffs occur at the primary level?

That’s right.  The LAYOFFS ARE MAGNIFIED too.

So as strategic real estate investors, it’s important to consider where your rental income REALLY comes from.  And how these news headlines could trickle down to YOUR bottom line.

But lest you think it’s all gloom and doom, it’s important to remember that there’s always opportunity.

And while not really a headline, a recent newsletter we subscribe to from a new contributor to The Real Estate Guys™ blog brought us this news:

A New Opportunity to Build New Detached Homes for Rent

John Burns Consulting provides intelligence to the real estate development industry.  They point out that 10 percent of homes are purchased by real estate investors…like you.

But until recently, new home builders ignored this segment of buyers in favor of selling to owner occupants.

Well, a funny thing happened on the way to the bank…residential home ownership has fallen to a nearly 40 year low.

So builders had realized they might want to serve the growing segment of the market…landlords.

And there are a LOT of reasons to be excited about a better opportunity to buy brand new homes designed with the landlord in mind.

First, tenants prefer…and will pay more for… a brand new home.  That improves your gross income.

Also, brand new homes have NO deferred maintenance.  This keeps your capital expenditures low at acquisition and for the first several years of ownership.  So you add lower expenses to your higher income.

So far so good.

Add to this that the smart builders will value engineer their products to provide a lower cost without a corresponding loss of rent-ability.  That is, the amenities which a home BUYER requires…at extra expense…are less important to renters.

This means you pay less for the same rental income.  Nice!

So even though there are headlines which point out some of the challenges, we know that the flip side of every problem is an opportunity.

This could explain…

Why Most Americans Are Investing in Real Estate, Not Stocks

According to this article from CheatSheet.com, a recent Bankrate.com survey says Americans’ first choice for investment is…real estate.

Makes sense to us.

So listen in as we discuss these and other topics as we search for Clues in the News™!

Listen Now:

  • Want more? Sign up for The Real Estate Guysfree newsletter and visit our Special Reports library.
  • Don’t miss an episode of The Real Estate Guys™ radio show.  Subscribe to the free podcast!
  • Stay connected with The Real Estate Guys™ on Facebook!

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.