At the recent Thrive Event, OTA founder and president, Eyal Shahar, shared his, what I like to refer to as my Poseidon Adventure, with the attendees. Like his, mine too was a “life changing event”. I would like to share my experience as it directly impacted my real estate investing strategy.
In 1986, then President Regan signed into law the 1986 Tax Reform Act. Overnight the investor emphasis of the 4 benefits of owning real estate went from tax shelter and appreciation to being replaced with cash flow and mortgage reduction. For the next four years I struggled to keep my head above water because my portfolio of properties was highly leveraged. A number of colleagues, like me, never saw the Tax Reform Act coming, and a good number did not survive the experience financially. It happened again in 2008, and we all know how that impacted millions of Americans.
Those who are awake, should learn from these experiences. I learned to pay close attention to events, cycles and trends that could impact the way and what I invest in. Here are some of the things that are on my “watch list”.
In looking at the 2 charts below, one can quickly see that the annual inflation rate can get to double digits and that since 2008, the “beast” has been lower than the 50 year historical average of 3.22%. At this rate, everything will double about every 20 years. This is good for owners of real estate, bad for longer living retirees on a fixed income. Note the trend since the beginning of this year, but still 100% greater than August of last year. (0.8 vs 1.6); this directly affects the Fed’s policies as discussed later in this article.
When you google Historical Unemployment Rate you get the following sub categories:
- rate, rate by state
- rate by county
- rate chart
Click on one of those categories and you get even more categories. There is certainly no shortage of data to analyze. Start from the top down. Look at the historical trend on a national, state and county level and identify the trend. Then compare your county or the county you are interested in investing in and determine if the data weighs in your favor. Here, in my home state of North Carolina, small communities are particularly hard hit when a large firm cuts back, relocates or closes completely. The impact on real estate values and rent is immediate.
Events such as terrorism, War or Brexit, for example, have the potential to create substantial volatility in the equity and real estate markets. I, personally, have had proposed real estate projects abandoned both times the World Trade Center was attacked. Totally unpredictable.
As it relates to Brexit, stay tuned. The terms and conditions of the negotiated departure from the EU will certainly impact individuals and countries globally in a variety of ways. Unless extended, the exit will occur in March of 2019. Brexit has the potential to be a major Poseidon Adventure event, creating both havoc and opportunity. And suppose other countries besides the UK decide to exit the EU? Keep yourself informed so that you can identify opportunities and avoid potential trouble spots.
As an opportunity example, suppose a major corporation decides to move its manufacturing operation back to the U.S. in your community because of tariffs, volatile exchange rates, higher foreign tax rates or delays and uncertainty in manufacturing because of customs. The expectation would be that real estate in that area would increase in value, making it a potentially good investment right now.
It is beneficial to stay informed about the various political initiatives being proposed that may directly or indirectly impact the real estate market. For example:
- BAT – For those paying attention, the proposed Border Adjustment Tax has been removed from consideration in the Tax Reform proposals being discussed, as of July 2017. Voters sent a strong message to members of Congress that they wanted nothing to do with this proposal. Congress listened, leaving the question of where tax revenue is going to come from for the proposed tax reduction.
- Tariffs expanded – Trump and certain members of his cabinet are in favor of implementing tariffs to offset the balance of trade deficit and currency manipulation. Historically these type tariffs have not produced the intended results, with loss of jobs and higher prices often following. As you can imagine, this is not good for the real estate industry.
- Tax Reform Proposals – No one that I have spoken to wants to stick their head out and predict what the proposed tax reform will include. Without question, if enacted these proposals could harm or benefit segments of the real estate industry. There is conversation about making them retroactive to the beginning of this year. Such a prospect certainly makes tax and estate planning challenging.
- Less Regulation – Eliminating or watering down the Dodd-Frank Act, or cutting back on EPA and other agency regulations could be a stimulus for the real estate industry.
- Budget Deficit – The U.S. now has the dubious distinction of being number three in the list of G-20 nations as it relates to the ratio of Federal Deficit to GDP (Gross Domestic Product). We are one of three nations in the G-20 that exceed 100%. You only have to look at Greece to see what the future could bring.
- Immigration – Enforcement of the immigration policy appears to be in full force creating problems in some states for certain industries. For instance, construction workers are returning to their country of birth, causing a shortage of skilled labor which in turn causes new construction and renovation costs to go up. This results in higher home and rental payments.
The Federal Reserve does not directly set mortgage rates, but as shown above, it does set the Federal Funds Rate (FFR) in an effort to control inflation and stimulate the economy. If inflation were to increase above the Fed’s current target of 2% then you could expect to see another increase in the Federal Funds Rate. Mortgage rates are influenced or set by the pricing of mortgage backed securities (MBS) on Wall Street. Higher inflation causes a lower MBS value, and to compensate for that reduction in value mortgage rates will increase. NOTE: The Fed did not increase the FFR July 26, 2017 because of the decline in the inflation rate mentioned earlier in the article.
If you truly want to understand demographic shifts and be able to identify market opportunities as they are developing, then Big Shifts Ahead by John Burns & Chris Porter is must reading. My rating for this book is a 10 out of 10. Absolutely filled with “golden nuggets” of information, and that equates to opportunity.
According to this website: nationwide, 1 in every 1,789 homes is in foreclosure as of June 2017. The five States with the highest foreclosure rate are New Jersey (1:607) Delaware (1:757) Maryland (1:833) Connecticut (1:1,111) Florida (1:1,175) For comparison, South Dakota has only 1 in every 24,380 homes in foreclosure Visit realtytrac.com and click on your State on the map and get the current figures.
The conclusion for me in reviewing these charts is that this explains some of the frustration many OTA students are currently feeling due to intense competition and difficulty in finding good deals. The number of available properties to consider is continuing to decline. Patience and Persistence are the two key words here.
I have shared some of the influencers that stay on my radar to help me avoid another Poseidon Adventure. My perspective on identifying cycles and trends is that it can give you an enormous advantage over those ignorant of the coming changes and enhance your confidence in your decision making abilities. You may have some considerations you would suggest adding. If so, please email and put my name in the subject line as they might be a good topic of discussion in a future RECC.