“A snarky but accurate description of monetary policy over the past five years is that the Federal Reserve successfully replaced the technology bubble with a housing bubble.” – Paul Krugman
Is real estate in a bubble? Are we headed for a crash?
Should you keep your house? Buy more houses? Should you sell?
Woah, slow down there!
Now, these are all very important questions, but let’s take them one at a time, shall we?
We’ll go over each of these questions and give you a strategy to take advantage of what’s going on in the real estate market right now.
1. Is Single Family Real Estate in a Bubble?
Are we in a place where we’re getting prices so high nobody can afford houses anymore?
We’ve been asking the same question for the last 20 years.
In 2001, the average price of a house in the U S was $169,000.
Now, 20 years later, it’s $347,000.
That’s an increase of 205%!
Don’t believe me? Here’s a chart to prove it!
After seeing that jump in numbers, the question soon becomes: ‘Why has this happened?’
Also, how do you know that this is a bubble?
What can we do to take advantage of it?
Well, it comes down to this…
There is a relationship between interest rates and asset prices.
When interest rates are low, asset prices are high.
What that means is when interest rates are high, people can get a great return just for putting their money in a bank.
I recently opened a bank account and they sent me a letter that said, basically: Your interest returns in this account are 0.0% per month.
That doesn’t make any sense.
When this happens, a lot of people will put money into other assets.
Sometimes, they will put them in the stock market.
But other times, they’ll put them into real estate.
They’ll get investment properties, second homes, summer houses.
When they do that, both the demand and the price of real estate skyrocket.
You might be thinking to yourself: Well, yeah! That’s common sense!
But we have to think beyond that.
Interest rates are low right now, so asset prices are higher.
But how long can that really go on?
Can’t it just go on forever?
The answer is, unfortunately, no.
It’s only a matter of time before we run face-first into a pretty big problem.
2. Interest Rates and Inflation
We’ve dipped our toes into interest rates already and how they affect things.
Remember? Say it with me, now!
When interest rates are high, asset prices are low.
When interest rates are low, asset prices are high.
But why does it work like this?
The reason comes down to affordability.
If I have $3,000 a month to spend on a house payment and interest rates are low, I can afford a much higher asset price.
I can do this because we’re seeing historically low interest rates.
Seriously, we really can’t get much lower than we’re getting right now.
Don’t believe me? Check out this chart!
People are even talking about negative interest rates.
That is a crazy concept!
Crazy, but not impossible.
Everything comes down to the issue of affordability I mentioned before.
If interest rates become higher all of a sudden, people can afford less of a house or less cost.
That is what is known as deflationary pressure, which brings the price of housing down.
So now you might be thinking: Why can’t we just keep the rates low forever?
While it’s a nice thought, there are some real reasons as to why we can’t keep rates at this historically low point.
When asset prices go up, they drive the cost of other goods up with them.
So if the stock market and real estate are up, that means things like energy costs and gas prices are also up.
Everyday staples such as toothpaste, toilet paper, groceries – all those things cost more.
Because of these economic effects, this is something the Federal Reserve really keeps an eye on.
Do you have any guesses as to why?
If you guessed inflation, you would be right!
Let’s take a minute to talk about that.
Inflation can be a scary word, but really, it’s about two things.
It’s the quantity of money, times the velocity of money.
Let’s break down the quantity of money first:
In the last 20 years, we’ve basically had a 400% increase in the supply of physical currency out there.
That’s a lot of money!
Look at this chart to see some more in-depth numbers.
Just like Scrooge McDuck in DuckTales, you’re going to see money, money, money, everywhere.
And that’s exactly what happened here.
Remember when I talked about the housing prices doubling in the last 20 years?
Well, the money supply has grown even faster.
It’s grown four times over the last 20 years.
This brings us to the second part of inflation: the velocity of money.
While you might be picturing a stack of cash cruising down Route 66, the velocity of money actually has to do with how much people spend versus saving and how quickly they spend that money.
How exactly are those numbers calculated?
There’s a metric experts use that determines how quickly money is moving.
Normally, money doesn’t move that quickly, as you can see by this chart.
Right now we’re at about a 1.2 velocity, which is almost half of what it was 20 or even 30 years ago.
But don’t lose hope just yet!
While velocity might be down now, it is starting to pick up.
During the peak of the pandemic, it was very difficult to spend money and go do things, hence the lower numbers.
But with that good news comes some bad.
As velocity money picks up, inflation starts to rear its ugly head.
But before I get too much into that, you might be wondering…
What does inflation have to do with single family housing?
What about interest rates?
Why are you talking about stuff that really doesn’t relate to housing?
To that I’ll say: It actually directly relates to how much your house is worth, the houses that you own, and whether you should buy homes.
If things catch on fire, if inflation picks up, we’ll see all of these things affect single family housing.
Shadow stats say we’re close to it.
We’re actually at 14% inflation, although some estimate it at 5.4%.
Now, this could be transitory, but inflation is growing.
Eventually, this fire picks up.
Everything starts costing more assets – things you need to buy.
The Federal Reserve says we need to throw water on this fire and put it out.
They’ve also said that they are not going to raise interest rates until at least 2023.
Unfortunately, I don’t think that that’s feasible.
I think they’re saying this because they don’t want to cause a panic, and rightfully so!
Realistically, interest rates could rise pretty quickly, and do you want to guess as to why they do that?
If you guessed inflation again, you’re absolutely right!
The reason they raise interest rates is to try to tame inflation.
When they do this, it brings asset prices and spending down.
Now, things have changed.
So, again, when the price of a loan or its interest rate goes up, you have less affordability.
And, as we’ve covered, it’s all about affordability.
Remember that $3,000 a month I talked about before to spend on a house payment?
If interest rates remain low, I could afford a much higher price.
But with interest rates increasing and affordability all but disappearing, that same $3,000 couldn’t get someone a nice house in Southern California.
That $3,000 isn’t worth the same it was before.
It has last a major chunk of its buying power.
It’s really important that we keep an eye on this.
The question really comes down to: What should you do today?
Let’s talk about it!
3. Weather the Storm and Buy Long
In the words of my friend, George W. Bush, you have to use your strategery to try to make the best decisions.
I love that word.
It’s not a real world, but I love it.
So, what is it?
What’s the strategy you want to use in order to protect and grow your wealth – especially if you have resources?
Three words: Single family market.
In the next couple of years, I believe we’re going to have a depression in asset prices.
We’re going to have a drop of 20 to 35% because interest rates will rise.
Affordability will go down.
We may even have a recession.
This will not last forever, but it may last for several years – three, four, maybe five.
Depending on who you talk to, inflation is 5.4% and 14% and it’s transitory.
It may completely go away.
Any way you slice it, inflation is continuing to head down there.
The Federal Reserve is going to have to take action sooner than 2023.
Right now, the biggest thing that you can do is take advantage of long-term debt.
If you can get a 30-year fixed mortgage on a house, it’s still not a bad idea to buy when asset prices are considerably high, right?
Interest rates are low.
Asset prices are high.
But if the mortgage is a 30 year mortgage, inflation starts to pick up, and there’s more money printing.
The price may start out depressed, but over the long run, it becomes a valuable investment because of all the money printed.
We may never see interest rates like this again.
One option is single family portfolio investing.
However, we find that most people that do single family investing, myself included, don’t actually get to financial freedom.
Often, we undervalue our time.
If you’re curious about why single family investing doesn’t work, check out this video for a more in-depth look into the reasonings.
But for now, all you have to know is that it all has to do with the amount of time you put into investing and the volatility of the asset.
This is one of the many reasons we do multifamily investing here at Bronson Equity.
But don’t just take my word for it!
Check out a more in-depth look at the benefits of multifamily investing here.
If you want to hear more about multi-family investing and the incredible tax benefits that come along with it – including the effects of inflation – you’ve come to the right place!
Check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.