Macro Economic Conditions

Expanding payrolls, solid consumption growth and housing market momentum support economic landscape. Against this backdrop, the Federal Reserve anticipates lifting its benchmark rate for the first time in more than nine years during 2015, though a move may not occur until next year. The imminent increase in the Fed Funds rate has raised questions among commercial real estate owners and investors regarding its potential effect on borrowing costs, spreads and asset valuations. However, the relationship between rising interest rates, a strong economy and continued vitality in commercial real estate seems quite compatible.
Read more here.  

In this context, where are investors finding the best real estate investment strategies? I've been told that commercial real estate follows a ten year cycle: For six years it is all about apartments and multifamily, for two years it is all about condos, and for two years, it is all about playing golf. 

I think we may be in the playing golf phase right now....What do you think, dear blog readers? Leave your thoughts and comments here at this post.

Happy Investing! 

Market Commentary

08.07.2015

Mortgages declined this week on comments from Atlanta Fed Chairman Dennis Lockhart, although weak earnings reports, and trades’ confidence that the Fed rate hikes will be slow, mitigated some of the sell-off in mortgages.

The bond market got a bit of a wake-up call on Tuesday when Atlanta Fed Chairman Dennis Lockhart said regarding Fed rate hikes that there was a “high bar right now to not act, speaking for myself.” Although he clearly qualified that he was just speaking of his viewpoint, not other members of the FOMC, the bond and mortgage markets quickly turned downward raising yields. Chairman Lockhart is widely regarded as a centrist so his comments were taken by investors and traders as a signal that there is a significant chance of the Fed tightening in September. As the week progressed there were several economic releases, but none of them were particularly out of line with expectations. Thursday’s weak earnings reports for companies led to downturn in the equities markets with bond and mortgages benefiting as investors moved to a bit more security. Currently based on the effective fed funds rate, traders are pricing a 56 percent probability of a September rate hike.

Economic Indicators that beat expectations included: Personal Income at 0.4% vs estimates of 0.3%, Personal Spending at 0.2% vs estimates of 0.2%, Markit US manufacturing PMI at 53.8 vs estimates of 53.8, Factory Orders at 1.8% vs estimates of 1.8%, Initial Jobless Claims at 270K vs estimates of 272K, Manufacturing Payrolls at 15K vs estimates of 5K, Unemployment Rate at 5.3% vs estimates of 5.3%, Average Hourly Earnings (MOM) at 3.4% vs estimates of 3.2%, and Underemployment Rate at 10.4% vs estimates of 10.5%. Economic Indicators that missed expectations included: Construction Spending at 0.1% vs estimates of 0.6%, ISM Price Paid at 44.0 vs estimates of 49.0, ADP Employment Change at 185K vs estimates of 215K, Trade Balance at -$43.84B vs estimates of -$44.00B, Continuing Claims at 2255 vs estimates of 2249, Nonfarm Payrolls at 215K vs estimates of 225K, and Average Hourly Earnings (YOY) at 2.1% vs estimates of 2.3%.

Happy Investing!

Thanks to Sarah Riley, Caliber Home Loans for this blog post.

Where to Invest Now?

Successful investors need to be able to make an educated prediction about which way markets and economies are moving.

Champion hockey player Wayne Gretzky explained the secret to his success like this:  “I skate to where the puck is going, not where it is.”  The same advice applies well to real estate investing.  If you are willing to make a prediction where the economy is going and you are willing to take action on what you know, you can make a lot of money.

The economy and the real estate market have trends.   There are times to buy real estate,  times to sell, and times to just hold on.  Real estate prices move up slowly and come down quickly.   Fortunately, real estate trends are easy to spot and make a prediction on if you know what to look for.  Unfortunately, by the time most people recognize the trend, it is too late for them to get into the game.

The real estate market is trending and I am going to spell things out for you in the simplest terms I can.  

Here is my best prediction and action steps to making money in real estate over the next ten years:

PREDICTION 1: Inflation will cause prices to rise substantially as the dollar devalues. This issue has finally made its way into the mainstream media as retailers are raising the cost of food, fuel, and finished goods.

ACTION STEP 1: Acquire income producing real estate with as much fixed interest rate debt as possible.  Do not skim over this statement too quickly.  Having both debt AND income to service the debt are vitally important.  The income will inflate with the currency and the debt will devalue with the currency.   As an investor, you need to prepare to win from inflation by having both of these financial tools in your arsenal (fixed rate debt and rental income).

PREDICTION 2: Invest in cities and markets that will dominate job growth and population growth in the United States. Texas is certainly a popular state in which to invest. Personally, I am bullish on Seattle (see previous post in my blog).

ACTION STEP 2: Acquire income producing real estate near major metros within a short drive of major job centers.  The scarcity of land in the major metros is an emerging trend for you to capitalize on.  People need jobs and houses.   You should own houses near major job centers so there is a constant demand for your housing.  A major job center will have at least 1,000 employees and will create a good or service that imports revenue from as far away as possible (e.g. a business with a local and world wide customer is more economically stable than a business who only has a local customer).   

PREDICTION 3:  Hispanics will dominate population growth throughout the US and especially in Texas.  The Hispanic market is the fastest growing segment of the middle class. 

ACTION STEP 3: Invest in real estate and businesses that would appeal to a middle class Hispanic market.  Make sure your property managers speak Spanish and advertise in Hispanic media.  Hispanic families often have more children, have multiple generations and families that occupy a single home.  Buy properties with several bedrooms, but modest square footage to be price competitive. Real estate prices go up when more people compete for a limited supply of inventory.  Own the types of property that the maximum number of people would like to live in – single family houses with 3 or 4 bedrooms and 2 bathrooms.   A master bedroom is essential.  Game rooms, lofts, and media rooms are a non-recoupable expenditure to a cashflow investor.

PREDICTION 4: Domestic military spending will contract.  As the US becomes further entrenched in foreign wars, the US will spend less money keeping troops inside its borders.

ACTION STEP 4: Do not invest in military towns.   If a military base represents more than 10% of a local economy, put your dollars somewhere else.  It isn’t worth the economic risk if the military downsizes or eliminates the military base that is the lifeblood of your town.

PREDICTION 5: Fewer people will be attending college and more people will return to manufacturing.  The US economy is globalizing and many white collar jobs are headed overseas.  As the dollar devalues, it will be more competitive for the United States to manufacture things and export them to emerging markets in Asia and South America.

ACTION STEP 5: Invest in areas of the country where there is a tremendous amount of manufacturing infrastructure already in place. Large manufacturing centers need transportation logistics such as heavy rail, trucking centers, highways, and cargo airports. Manufacturing centers also need a very cost effective workforce and real estate prices. 

PREDICTION 6: States with a favorable business climate and a low income tax burden will enjoy the most prosperous economies.  Formerly prosperous and business unfriendly states such as California will raise taxes, lower wages, and default on government pensions to cover their economic shortfall.  In areas where big business feels constrained by taxation, labor relations, and environmental regulations, expect declines in government services, poor quality public education, and weak transportation services as a result of unparalleled shortfalls in revenue and a declining business environment.

ACTION STEP 6: Examine the financial well being of any state, county, and city in which you decide to invest.   Live where you want to live, but invest in areas where local and state governments embrace responsible business growth.

PREDICTION 7: Interest rates will rise as the US government receives foreign political pressure to stop buying its own bonds and mortgage backed securities.  The stock market will see unexplained and radical fluctuations in value as the government manipulates stock prices through covert buying and selling of public traded stocks.

ACTION STEP 7: Do not invest your IRA in the publicly traded stock market.  Cash investors can get in and out of the stock market when times are turbulent while IRA funds are often “stuck” in the market with no place to go.  Evaluate options for investing your IRA in private placement investments, businesses, notes, or the indirect ownership of real estate.  I do not recommend buying real estate directly inside your IRA, but there are great strategies for getting your IRA funds into the indirect ownership of real estate. There is no one size fits all investment / financial strategy. 

To your success! Happy Investing!

With thanks for his contributions to this blog to :

David Campbell
Professional Investor, Developer, and Financial Mentor

David@HasslefreeCashflowInvesting.com