DSTs and the Housing Bust

America’s housing market had a lot going for it before ‘Bidenomics’ and the onset of inflation.  Interest rates were low and pent up demand was strong coming out of the pandemic inspired lockdown.  This, of course, says nothing about all the spare cash in consumer’s pockets from trillions in stimulus spending.

However, all this is now history.  In hindsight, it is truly remarkable how much damage the misinformed can do to the economy in a very short period of time.

By shifting the Fed’s focus away from its twin mandates of low inflation and full employment to the chimera of social and economic equity along with climate change, the shibboleth of inflation has returned with a vengeance.

In its wake has come a doubling of mortgage rates and concomitant increase in the cost of housing.

According to NAR (National Association of Realtors) as of April, existing homes were at their least affordable since July 2007.  They are even less affordable now.

Freddie Mac recently reported the average rate on a 30-year fixed mortgage was 5.78%.  This is a big change from January when the average was 3.34%.  Nice while it lasted huh?

2007 wasn’t that long ago.  Even in a culture with a collective attention span of a Twitter Direct Message, may be able to take something constructive from it.  When housing peaked in 2006-2007, it began a steady decline until it reached new lows in 2011.

“Those who do not learn history are doomed to repeat it,” comes to mind.  The quote is most likely due to the great Spanish writer and philosopher, George Santayana; In its original form it read, “Those who cannot remember the past are condemned to repeat it.”

Either way, there isn’t another group out there more cavalier in its attitude and treatment of historical precedent than today’s progressive elites. 

They are the ones that brought us the twin toxins of social equity and modern monetary theory (MMT).  The latter is a heterodox macroeconomic framework that contends sovereign governments can borrow and spend any amount of fiat currency with no negative ramifications.  How’s that working out?

Thanks to their best efforts, we now find ourselves back in much the same place as 2007.  Only this time it is compounded by persistent inflation that shows no signs of abating.

If you think George Santayana knew more about the human condition than Joe Biden, AOC, Nancy Pelosi, et al, you might want to prepare for the housing market bust that may follow on the heels of our pandemic inspired boom.

What does this mean for income property investors?  First and foremost, it may mean that the millennial generation which seemed primed to become homeowners as little as a year ago, will put this off for the foreseeable future.  This dream may still come true sometime but the numbers as they are, just don’t work anymore.

Therefore, they are likely to remain renters longer.  This has the potential to be good for the multi-family sector.  As previously mentioned in our March 3, 2022, blog, “Skyrocketing Rents and DSTs,” this may push even more people into the rental pool at a time when supply is constrained in terms of both materials and labor.  This could have the knock-on effect of driving rents even higher.

Near term, this should be good for multi-tenant landlords.  Apartment properties generally trade on rental income levels.  Increasing rents, may translate into increasing valuations.

It may also be good for self-storage.  Apartment living has little in the way of storage to begin with.  New construction footprints keep getting smaller due to increased construction costs and space limitations.  This translates into even less storage and all that ‘stuff’ has to go somewhere.

Additionally, the demand drivers for storage; dislocation, downsizing, divorce and death all tend to go up when bad things happen and the economy goes down.  Therefore, any prolonged period of economic dislocation brought about by a housing market bust, may increase demand.

Senior living may also prove an asset worth considering if history repeats itself and the housing market tanks.  In most cases, residents are lessees not owners.  As such, they may be less impacted by a downturn in housing prices.

It is also often overlooked that these folks are no longer part of the work force.  This means they are not dependent on a job and incumbent paycheck to pay the rent.

If a housing market bust helps catalyze a recession as in 2007, this status may provide them more protection.

This may be particularly true of those senior living communities which are 100% private pay.  They usually require significant private means to gain entry.

These are just a few of the options we believe income property investors should consider in light of current economic uncertainties and the striking parallels regarding single family homes current un-affordability and the 2007 bubble.


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