Attention income property investors, the great decade long, liquidity induced holiday from economic history has officially ended. With seismic tremors shaking and vibrating the global banking system (Silicon Valley Bank, First Republic Bank, Signature Bank & Credit Suisse), the cost of the grave errors committed in recent years in economic policy is finally being felt. Smart investors should be prepared for a pullback of everything, everywhere all at once.
As previously stated, there is no precedent in the 4000 year history of money for zero interest rates. Therefore, the Federal Reserve’s zero rate policy will rank among the most significant and costly policy errors in nearly half a century.
After more than a decade of negative real interest rates, the Fed doubled down in 2020, declaring that inflation at 1.7% was too low and zero rates with massive Fed asset purchases to goose the economy would be the order of the day. Be careful what you wish for.
Inflation is a choice, and the Fed chose higher inflation. This is exactly what we now have and the Fed’s belated attempt to reverse course, has run the banking system aground.
As such, it should be apparent to all that what we are witnessing is more than one-off management foibles and failures. This is the beginning of a global asset price reckoning for years of policy illusions and financial excess.
Prominent economists and government policy makers around the world acted as if they actually believed Modern Monetary Theory, the quack notion pedaled by the likes of Elizabeth Warren and AOL, that governments can print money and spend their way to prosperity without negative consequences.
Free money then became the rational for more deficit spending by government because rates were so low and unlikely to go back up. Afterall, inflation was a shibboleth only embraced by folks such as ourselves and other “dinosaurs” who had experienced the Great Inflation of 1965 to 1982 first hand.
This monetary gusher has distorted asset valuations all over the world, from Silicon Valley app start ups that should have never seen the light of day, let alone funding to Chinese real estate.
Now the panic is here and the piper must be paid. The law of economic gravity will be obeyed and asset prices, all asset prices, will come back down to earth.
In light of this harsh reckoning, what are income property investors to do? First and foremost, think twice before deviating from core asset types. Everyone, unless you’re homeless in Portland, needs to live somewhere. Everyone needs to eat. Everyone needs a place to keep their “stuff.” And everyone gets a little older every day.
Therefore, multifamily, grocery anchored retail, self-storage and senior living all remain potentially good bets. It is worth noting the last time things got bad for real estate during the 2007 housing market crash all these asset types held up well despite the attendant subprime mortgage meltdown and recession.
Can these properties go down in value? Of course, they can. Higher rates historically shrink the buyer pool for assets and this has been subsequently reflected in lower pricing. This may be exacerbated by the chilling effect on lending the aforementioned bank failures will likely have.
However, habitational and healthcare needs change little year over year. The constancy of this demand may be income property investors best hedge against the current panic and subsequent crash, if one does come.
After nearly 15 years of monetary delusion and grossly distorted asset valuations, it’s back to basics.