Real Estate Fortunes to Rise or Fall in Balance Between Heaven & Earth

The earthly success of Real Estate operations is heavily dependent on micro characteristics of a market such as geography, supply, population and job growth; however, the future outlook of Real Estate valuations depend on the macro flow of capital from the credit heavens above.

So, who controls the realties on earth for local real estate markets and who makes it possible for money to pour down from the heavens?

This is a question of balance between Micro & Macro Yin & Yang.Micro Yin is driven by local governments, big businesses and Investors who put incentives and equity to work across US cities. These relationships create the conditions that determine how market fundamentals work over time, and whether those LOCAL market characteristics, which typically include public and private partnerships, business friendly environments, communities anchored with amenities and an educated workforce, will foster conditions of housing demand by expanding a city’s population and employment.

Remember, a National real estate market DOES NOT exist since every city has a market DNA, which creates a unique real estate cycle.This LOCAL, and micro set of circumstances that creates real estate cycles is very different from the Macro Yang dictating money supply, also known as the credit cycle, which can fuel or fumigate real estate valuations regardless of the stage of the cycle any LOCAL real estate market is in.

For example, after the 2008 financial meltdown the Dallas Fort-Worth (DFW) Metroplex experienced a year over year jobs loss of 3.7% in 2009, broke even in 2010 and then employment increased 2.5% in 2011, holding steady ever since.Population growth in DFW grew well above the national average, even as the nation was in financial crisis.Solid population growth and a fast rebounding jobs market coupled with a central geography and a business friendly environment gave the DFW Metroplex the right micro characteristics to pull itself out of the depths of a national financial meltdown faster than any other Metroplex in the US.DFW’s real estate market cycle was already in a growth stage pre-2008.The financial crisis was a Macro event that sucked money out of the system deflating property prices in DFW, but was a minor disruption in its already emerging status and today stands as one of the hottest real estate markets in the country. In fact, DFW home prices have recovered almost 65% above its 2006 peak.

It was the big central bank and government with loose regulations that caused such a big run on cheap and easy money, inflating housing prices from early 2000 to its peak in 2006. As real estate indices reached record highs, our central bank decided to tighten the money supply with higher interest rates causing a lot of that money that was pushing housing prices up, to go look somewhere else for a safer return or simply just park that money on the sidelines. And then, there were those people that had already accumulated debt, specifically with poor credit or low income, or both even. This group of sub-prime borrowers would have to service their debt at higher adjustable interest rates and would eventually be the first domino to fall pushing their problems from main street to wall street culminating in the banking and financial crisis of 2008. These two categories of people would make money evaporate from the financial system and make housing valuations drastically drop across all markets.

So you see, any LOCAL market could have good or bad conditions that will make its future rise or fall faster or slower relative to its past. But, it is the money supply and credit creation that can cause the value of those markets to rise or fall fast and hard when money stops flowing to them. Even though it is true that certain markets are more liquid than others, the big picture of greedy money looking for returns followed by scared money looking for protection doesn’t care whether properties are in good or bad real estate markets.....everything falls in value if there is a major disruption to the money supply.

I remember buying 2 single family rental properties in DFW in 2006 and 2008, when real estate values began to crash. I didn’t even notice we were even in the midst of a financial meltdown because I never had a problem renting those houses out. In fact, because there were so many foreclosures at that time, the demand for rentals boomed and my rents never decreased, but they did increase! I remember the values of my DFW rental properties dropping when money dried up, but I eventually sold both properties doubling my money, through a combination of cash flow and appreciation, faster than if I had bought those 2 properties in most any other market.

For example, If I had bought those 2 same houses in 2006 in Los Angeles my equity would just barely be breaking even today. If those same two houses were in Phoenix I would still be 19% down. Location and timing are probably the 2 most important factors in real estate investing. In order to invest wisely you MUST analyze two things: The micro real estate market cycle and the macro money supply cycle! Understanding these two environments and those institutions that dictate their terms, which I call the balance between Heaven and Earth, will help you maximize an income property’s Cash Flow and Appreciation potential. My DFW properties produced cash flow even as my properties value had dropped. Money was scared off in light of all the mortgage defaults and higher interest rates but what saved me was choosing a market with strong supply-demand fundamentals.

Macro money supply is beyond the control of local governments, big businesses and investors. In fact, the little people on earth are at the mercy of the big banks that control credit. These Gods of Money creation have artificially kept interest rates low following the Great Financial Collapse of 2008 by printing $4.5 trillion. Low interest rates and an increased money supply gives incentive to take money out of savings accounts and find equity positions in investment vehicles like stocks, bonds and real estate, pushing the value of those investments higher and higher. This is the foundation of bubblenomics.

Fast forward to December 2018 economy and the façade of steady job creation, record corporate earnings, record high residential and commercial price indices, low inflation, record high stock market valuations and a strengthening dollar indicate a strong US economy. Now take a look behind the façade at the financial systems used to engineer this Goldilocks economy and it starts to look a little more like the portrait of Dorian Gray.

Today, there are more jobs than people. As job supply continues to surpass demand we could expect job creation to slow and prompt stock & real estate sell-offs just as it did in January, 2008.Corporate earnings have not yet declined but stocks have been extremely volatile and trending downward, which means that smart money is betting on falling future earnings and stock prices. Record high residential and commercial valuations are slowing as income growth cannot keep up with rents and as interest rates rise. Because of globalization Americans have bought cheap goods from countries that pay much lower wages and have benefited by low inflation; however, today global trade wars and protectionist policies could kick inflation up along with interest rates, making life more expensive for Americans. With our current environment of rising interest rates, stocks become less attractive and corporate debt that is scheduled to roll over becomes more expensive, which lowers corporate earnings and in turn, like a tide rolling back into the sea, lowers stock prices and the wealth affect.A strengthening dollar means that foreign investors see the US as a safe haven relative to other countries like the UK, Europe and Japan. This is good for US consumers as imported goods are cheaper but, at the same time, if those US dollars being bought from foreign investors are being used to look for returns in US assets, like real estate, then those investments tend to become more expensive. Remember, more money=more competition=higher real estate prices=potential for higher interest rates.

So why go on a rant about the National US economy when all real estate is local? The fact is that all these things are what the gods of debt consider when deciding to open or close the heavenly funnels through which money flows to earthly markets. Too many jobs and not enough people, new record high stock market and real estate valuations and a strong dollar have created a lot of wealth and optimism in the US economy. But the US central bank and government want to keep growth in check by avoiding an overheated economy so they make money more expensive by raising interest rates causing credit creation to slow.This can spook people and institutions to stop spending money, inventory to grow and prices to fall.

This is exactly what happened in 2008.Money got expensive, then money got scared and it ran away to hide in other places other than real estate. We went from inflated real estate prices to deflated prices because money stopped flowing to real estate. The US central bank printed more than $4.5 trillion to flood the US markets from 2008 to 2014 and kept interest rates low, inflating asset prices, like real estate. In 2015 the US central bank began to slowly raise interests rates and beginning in 2018, slowly take back the $4.5 trillion it had printed off US streets. Today, $50 billion is being taken off US streets every month. With money becoming more expensive and less of it circulating what will happen to the value of assets like real estate in 2019 and beyond?

The bad news......we cannot control the Gods of debt who influence the money supply and ultimately the valuations of our assets. Today, there are so many potential triggers of a credit cycle downturn such as global trade wars, rising interest rates, record high corporate debt, slowing housing market, slowing auto market, an inverted yield curve and weaker global growth. The good news.....as investors, we can evaluate local real estate cycles and control the flow of our money to properties that are well located in markets showing pro-growth characteristics that produce cash flow and are structured with good debt. These investors and properties will be able to survive any national credit crunch. Speculators that choose poor markets & properties levered with short-term debt should pray to the gods to keep cheap money flowing from the credit heavens above.

Stevan Garcia