Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
Dear Mr. Bernanke, Ms. Yellen, and the entire FOMC,
I am writing this belated letter to thank you for the $4,000,000,000,000 (Trillion) in monetary base, countless billions in MBS purchases, and aggressive and extended cuts in the target fed funds rate. It has slathered real estate investors with low-cost financing to boost cash flows and returns, added appreciation to our properties, and pushed more people to invest with us in this low-yield environment. I even got one 30-yr fixed rate loan on a 4plex for 3.25%! I'm sure there will be no longer-term consequences to this unprecedented expansion of money supply and extended low-rate period, while asset prices reach new highs in many areas of the economy.
On behalf of myself, and the investors below,
THANK YOU!!!!!!!
I think we have to be a little cautious of mistaking our political viewpoints as justification for valid economic arguments. The facts are we have printed and borrowed an extraordinary amount of money recently they has to be accounted for at some point. We may have a Japanese style or Carter style stagflation or we may have a good amount of inflation that would be tied to a more robust recovery. In either case lets not pretend we can print and borrow money for free then have a full recovery with no deleterious effects.
No matter how many Pual Krugman and J. Stiglitz editorials you read in the WaPo and NYT it still isn't going to up-end the laws of basic macroeconomics. A logical argument is that we needed to print and borrow this money for a "soft landing" and to "prevent the next great depression", recapitalizing banks, etc; i.e a necessary evil. However when you start pretending there aren't negative consequences because "your guy is in office" and the Fed did something brave, wonderful, admirable, or even particularly clever by injecting tons of easy money into the economy I think you need to leave your political hat at the door and deal with reality. When I borrow money on my credit cards to the limit I hardly ever get the same kudos.
At some point we are going to have higher inflation tied to any strong recovery, or stagflation tied to continued high unemployment in a weak recovery. The known unknowns regarding inflation are simply when and how much. In any case Real Estate is a fairly hard asset, and if you look at historical inflation vs. home price charts you will see that. I don't really think there is a great way to hedge your Real estate positions given the reality of the situation.
Yeah, she use to be the President of the SF Fed and is now Chair of the Board of Governors. I'm looking forward to inflation so that rents go up and my debt service stays the same!
If you really think inflation is a good trade off to keep your rents ahead of your decreasing purchasing power from depreciated money then you should be buying property in Greece and Argentina. I also doubt you are going to serendipitously time the duration of your cheap money loans to encompass your future home purchases. Arguing the benefits of inflation is a fools errand.
I think by almost any measure the FED has operated masterfully considering the challenges posed in the last couple years. This was in spiteof any assistance from congress regardless of the requests and analysis provided. The money supply in its broadest measure has not been expanded. The FED took actions to maintain liquidity not ad new financial assets to the economy but rather perform assets swaps. I also see no reason for high inflation in the coming years and most certainly no hyperinflation that so many predicted. I believe that interest rates will remain historically low for the foreseeable future as well.
@Kyle Hipp , I agree rates will be historically low for quite a while. Same with inflation. However, over the longer-term (8-15+ years) I think the uncertainty regarding inflation and rate movements increases dramatically. The long-term history just makes it look like we are in a low-rate bubble the last almost 2 decades now. Either way, I'm not envious of having that position during the crisis. Must have been stressful..
Look back a few more decades.. Who knows? Maybe history will not repeat itself. Maybe there will not be any crazy global disturbances that increase US rates. No supply-side shocks. No uncontrollable increases in core commodity prices, oil.. No "stagflation." No never-ending increase to total US debt and debt/GDP. Maybe none of these things. But sometimes, some facet of history does repeat itself... Either way, I think RE is a great asset. And either way, I give extra thanks to the FOMC for putting extra coin in our pocket with low rates!
The Fed shoots for 2% inflation, so I expect at least that much over the longer-term, if there are no surprises.. As I've said, history doesn't always repeat itself. Maybe we're in a new era of lower inflation and rates, where central bankers are smarter, there is less geopolitical risk, and supply-side shocks were the problems of my father's generation.. But every financial disaster story starts with "it's different this time.." Just throwing both sides of the coin out there..
No never-ending increase to total US debt and debt/GDP. <snip> Either way, I think RE is a great asset. And either way, I give extra thanks to the FOMC for putting extra coin in our pocket with low rates!
J thanks for the article and I couldn't agree more. You've probably seen www.usdebtclock.org so theres no chance of US debt to continue forever ;) Also I agree RE is a great asset. As prices rise so does the value of our assets and the rent :)
History does always repeat itself. Every super power and every fiat currency fails. It's a cycle that has never been broken. When you start seeing countries making deals outside of the dollar, it's a bit concerning. I believe the dollar has lost 96% of its purchase power in the last 100 or so years. 2% inflation? Haha...really?
George, I hear that a lot how the US Dollar has lost 98% of its purchasing power since 1913 (federal reserve instituted). However two things get lost in that single metric. The standard of living increase has far outweighed the loss of purchasing power. I would much rather have a median income in today's world than be worth $10 million in 1913. I like to be able to refridgerate my food, pick up groceries at a variety of different stops on my way around town on paved roads in a vehicle with climate control, radio, and GPS. I like to be able to talk or see someone on the otherside of the globe instantly. I like to be able to get there safely with a day on an airplane. I like the medical advances that have cured many diseases since then and can treat even more. I lile to be able to go to the bathroom in my house and any house, and have light on (and maybe an exhaust fan) on while I do it. I like that I have a bigger concern with the question of whether I will have enough money in retirement compared to will I live to retirement age.
I think that went a little more detailed but made the point. The second point is that the economy is much more stable and increasingly so since 1913 when analysing the data.
yup, with long term buy/hold it's a win-win IMO. Inflation hits and rates go up, you may win BIG with an expansive RE base that goes up with/near inflation. Rates stay low, well you still have a low fixed rate!
I personally believe that several years from now we will get some inflationary blowback. But of course no one knows for sure what the hell will really happen. But I'm just glad to have mortgages that are essentially non issues, because the wrong mortgage at the wrong time can literally sink you.
I think we have to be a little cautious of mistaking our political viewpoints as justification for valid economic arguments. The facts are we have printed and borrowed an extraordinary amount of money recently they has to be accounted for at some point. We may have a Japanese style or Carter style stagflation or we may have a good amount of inflation that would be tied to a more robust recovery. In either case lets not pretend we can print and borrow money for free then have a full recovery with no deleterious effects.
No matter how many Pual Krugman and J. Stiglitz editorials you read in the WaPo and NYT it still isn't going to up-end the laws of basic macroeconomics. A logical argument is that we needed to print and borrow this money for a "soft landing" and to "prevent the next great depression", recapitalizing banks, etc; i.e a necessary evil. However when you start pretending there aren't negative consequences because "your guy is in office" and the Fed did something brave, wonderful, admirable, or even particularly clever by injecting tons of easy money into the economy I think you need to leave your political hat at the door and deal with reality. When I borrow money on my credit cards to the limit I hardly ever get the same kudos.
At some point we are going to have higher inflation tied to any strong recovery, or stagflation tied to continued high unemployment in a weak recovery. The known unknowns regarding inflation are simply when and how much. In any case Real Estate is a fairly hard asset, and if you look at historical inflation vs. home price charts you will see that. I don't really think there is a great way to hedge your Real estate positions given the reality of the situation.
First of all, there is no political hat here. Second, what are you doing to protect yourself and your family from possible high inflation, stagflation or deflation in the future?
I'm with you. In my post mentioning all the same things you did, I was being a little sarcastic when saying none of those things would ever happen again and maybe history won't repeat itself. There are a lot of "tail risks" out their in the world. I do work in bank regulation in SF, and have seen Yellen speak, but I was just joking about her. I have no real connection, political viewpoint, or bias in this matter - except a little sarcasm, and a bit of a distrust of a system that encourages printing crediting money to primary dealer accounts + govt debt & private asset purchases. It's a hard habit to kick..
But like @Amit M. said, if it happens, you have that protection (+blowout bonus points with 30yr fixed). And if it doesn't, you're fine too! Because RE is a good investment under either condition if you're in the right place..
This was originally just sort of a joke post about all the extra cash flow and other benefits we, as investors, got handed in this low-rate environment by the FOMC.
But I did take a little poke at the Fed by sarcastically saying, "I'm sure there will be no longer-term consequences to this unprecedented expansion of money supply and extended low-rate period, while asset prices reach new highs in many areas of the economy." - so I guess I asked for the inflation discussion!
So there will be inflation. The question is when will that be? 1, 5, 10, 20 or 30 years from now? Economists, experts and whoever else called for dooms days, the U.S. losing its world reserve currency status, DOW going to 1,000, etc... since one of the darkest days in our history 2008-2009 mortgage meltdown, what happened? The market turned around and made all time high in just 5 short years. Companies are making record profits. Yes, they're making more money now compared to 2006.
My point is that... no one knows when the inflation days will come. By being a perma-bear, you're missing out an opportunity once in a lifetime to get ahead in life and put your family and possibly future generations on a solid foundation for years to come.
There are certain things in life that you can control, and your destiny is one of them. Inflation is, unfortunately, not one of them.
I agree completely with @Account Closed 's sarcastic poke at the Feds: national and global macro economic decisions get made, and as individuals we are tasked with using them (or not) to our benefit. And on that note, here's a tip of the hat to Ben and Janet :)
"every 30 to 40 years the reigning monetary system fails and has to be retooled. The last time around for the U.S. was in 1971, when Nixon cancelled the convertibility of dollars into gold. Remarkably, the world bought into the unbacked dollar as its reserve currency, but only because that was the path of least resistance. But here we are 40 years later, and it is clear to anyone paying attention that the monetary system is irretrievably broken and will fail."
Minh I answered your question in the last few sentences of my previous post. I'm confused as to what was ambiguous or unclear to you? Thanks for being so concerned for my family btw, worse case scenario is I vote for the same politicians you do and they raise taxes high enough on income earners that this question becomes moot.
I don't know when it will collapse but the fact the govt uses 26% of tax revenue to pay interest on our debt...not a good sign. Also the avg fiat currency lasts 27 years and after 30-40 there is always a reset. Also look at the history of all of the countries that have held the currency reserve. It's eerie how they've all held it for a similar amount of time and the us has held just a bit longer than they have.
We can all get together and strategize on how to make money until then! I'm organizing a MASSIVE RE INVESTOR MEETUP in the SF Bay Area for October of 2014, so everybody please come out!