Wednesday, December 19, 2018

Commentary: American Real Estate: Are Rents or the Printing Presses More Reliable?

By Aaron ClareyI teach two online classes on finance and investing (I would recommend neither because you can get the same much cheaper here and here).  And one of the common questions I get is "How about real estate for investing?  Can I invest in that?  My buddy says it's the way to make money!"

I try not to get angry because I have to remind myself that this is a beginner's course and most of my students' first introduction to investing.

Yes, you can invest in real estate.
Yes, you can make it rich by doing so.
No, you likely don't have the education, experience, tenacity, or capital to do so.

But another problem I face with real estate as a form of investment is the same problem that plaques nearly every asset class around the globe - nearly everything is overvalued.

This overvaluation comes from countries' central banks doing two things.  One, tripling, quadrupling, or quintupling the money supply. And two, keeping interest rates artificially low.  Since money is fungible, it inevitably finds its way into the larger economy, plus corporations have the incentive to borrow at historically low interest rates and repurchase their own shares.  So this money goes the only place it can - asset prices.  I say asset prices and not consumables (which would traditionally be what we'd expect a la 1970's stagflation) because of three reasons.  One, our consumables are primarily imported keeping consumer prices low.  Two, despite our raping of our own currency, other countries have raped their's even worse.  This allows the US dollar to remain the world's reserve currency and us to export our inflation to naive and more corruption nations' economies.  Three, the genesis or pathology of a lot of this new money is borrowing, so items purchased with debt tend to go up.  Thus why housing, cars, health insurance, stocks, and college tuition are experiencing hyperinflation...but you American sheep think this is a good thing.  In short, asset prices, but specifically stocks and real estate, are no longer driven by fundamentals, but an ever-expanding monetary policy, which presents us with an interesting question when it comes to real estate investing;

Are renters or government printing presses more reliable?

The paradox that one faces with real estate (and other asset classes) is that they are no longer actual investments where underlying cash flows (such as dividends, interest, or earnings) inevitably pay back the original investment and continue to provide an adequate monthly or quarterly ROI.  They are now functioning as hedges against inflation as asset prices are decoupled from the cash flows that traditionally and historically gave them value.  And so now people who wish to invest in real estate or perhaps are just facing the prospects of selling their home face a problem - do you invest in an overpriced asset whose cash flow simply doesn't warrant the price being asked to be paid, or do you buy it anyway because you'll be priced out of the market (a sentiment Millennials might be somewhat familiar with, even though they voted this upon themselves).

Though risky and completely against fundamentals (not to mention my conservative nature), I'm wondering if it isn't necessary to own some kind of housing (or stock) as simply a hedge against inflation.  Additionally, I'm finding it infinitely more reliable that governments are going to keep their printing presses than me finding a reliable tenant who pays on time every time and stays in the place for years to come.  And whereas I'd like to say that there's going to be a crash this time, I'm more and more convinced if a crash is going to come at all, it will be in the form of stagnating prices, not an actual crash.  Overvalued as property prices may be, there isn't the massive oversupply of inventory there was in 2007, and the feds are so far up banks' asses their exposure is not what it was 10 years ago.  We can hope and cheer for a serious recession which I do believe would at least temper (hopefully tank) property prices, giving us commoners opportunities to invest in reasonably priced properties (and other asset classes) that do provide adequate ROI, but we must also face the chance that like "perma-bubble" markets such as Australia and Vancouver, external forces are flooding the markets with so much money, you're almost compelled to own at least some REIT's or indexed funds just to match inflation.

So if you're looking to sell your house, remember you have to buy another one.
If you're thinking the S&P 500 is overvalued, it most certainly is...but how much more money is the fed going to print off this year?
And if you think tuition is too high now, just wait till next year.

Thankfully, at least we know college is an increasingly worthless investment you can avoid. Perhaps you Millennials can use the proceeds you save from not attending to put as a down payment on a mini-house.



Editor's note: This article was originally published at Captain Capitalism and has been rerun with permission.

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