The Billions in "Dry Powder" Won't Support Multifamily Prices

An argument's going around that makes no sense.

It's the argument that Multifamily prices won't fall because of the billions of dry powder on the sidelines waiting for good deals.

As multifamily prices climbed in recent years, more and more capital went to the sidelines to wait until prices became more attractive.Smart money was accumulating cash for bargains following the inevitable market crash.​

Now, the argument goes, because of Coronavirus, those billions will suddenly be invested, keeping prices high.

But, if high prices kept that money on the sidelines, why would it suddenly be deployed in an uncertain market? Especially at nearly the same prices that were too high when the economy seemed so strong a few months ago?​

No, that capital is on the sidelines waiting for "blood in the streets."

Not slight discounts.

It will stay on the sidelines until there is distress and real bargains to buy, not supporting the market at prices that it found too expensive before Coronavirus hit.

​What I see out there now are many investors who are mentally wedded to a picture of multifamily prices rising forever.  If prices every turn downward, they think, it will only be for a fast moment, and then the prices will immediately start rising again.​ So you'd better get in on it now, or you'll miss the upswing.

Oftentimes, the argument is made that loose money from the Fed will, by itself, keep asset prices high. And, yet, this very morning, the Fed warned about asset prices, including real estate, tanking because of Coronavirus.​

Of course, the Fed response will be lower interest rates and quantitative easing. 

But you cannot make people borrow money, no matter the interest rate, if they think the risk of not being able to repay the principal is too high. 

Or, if they think they can get a better deal or make more money by waiting.

The smart money will continue to stay on the sidelines, regardless of interest rates, as long as it cannot spot the market bottom with reasonable certainty.​

So, if you are waiting for Multifamily pricing bargains, have no fear. 

They will arrive.

Your patience will be rewarded.

Those who jump in too fast will have their hands sliced that falling knife they're trying to catch.