This Time it (Might Be) Different for Real Estate?May 10, 2022
When the stock market goes down, we assume people ‘lost’ money. And sometimes that is true, of course – if you bought high and sold low -- but if you take a step back, if a stock falls, it means that someone bought and someone sold, albeit at a lower price. A result is that when the market gyrates wildly – up or down – someone (the seller) ends up with a pile of cash from whatever was sold.
Only a few months ago – which seems like another lifetime – the name of the game was trying to figure out what a Snoop Dog Avatar was – yes, I know that doesn’t quite make sense – and idly muse whether the NFT you just bought would double, triple or quadruple in value in the next month.
Suddenly, greed isn’t quite as good as it was – to semi-quote Gordon Gekko in the Wall Street movie -- as greed has turned to fear in many markets, as the Fed frantically tries to prove that inflation is transitory by raising rates.
And this spells the end of 20 years of falling interest rates – during which time many people made zillions of dollars on their investments and were convinced of their investing talent.
So now – like many -- I wonder about where people should be putting their dollars. And real estate comes up as a really solid alternative.
Ten-ish years ago – during the Global Financing Crisis – real estate was possibly the worst of all asset classes. Most recently, some real estate asset classes – retail and hotels being most prominent, with office close behind – got hit hard during COVID. But this time around, real estate may come out the winner.
Consider the alternatives…
Stocks are scaring people right now. The easy money was made, and investors are now quite afraid of losing significant money. There is certainly a rotation from growth stocks to value stocks, which often pay a dividend.
Bonds are normally the safe investment, aren’t they? But when interest rates are blasting upwards, it turns that view on its head. Bonds are getting creamed right now, which may go on for some time. Of course, there is a moment when bonds are perfectly priced – i.e., when the interest rate rise has peaked – and when one should buy bonds again, but who knows when that will be.
An aside here, if you think you know when the end of the bond market route is, I ask you how many super-duper incredibly smart people predicted that interest rates would surely go up next year over the past ten years? They were all 100% wrong, weren’t they? So anyone telling you they know when interest rates are going to peak has, in my view, the exact same ability to be right. To be clear, no one has a clue when the interest rate rise will peak.
Crypto, NFTs, and all of that stuff is wonderful (is it an investment?) when the government throws out two – or is it now three – trillion dollars and sprinkles it over the country like confetti. Still, the reality of it being a pure gamble becomes more pronounced when the monetary spigot has been turned off.
And then you have cash? Cash is king is an adage we have heard before, but going to cash really means you are timing the market, and as I, and others, have written before, that is a fool’s errand in the long run.
So what is left?
Dare I say real estate?
Real estate – with a boring five to ten percent annual return – has a nice margin of safety. Over recent years, it looked paltry and pathetic next to tripling your money on crypto, but it seems kind of good, doesn’t it when compared to losing perhaps ninety percent of your investment on that Snoop Dog Avatar.
Now, of course, real estate isn’t an investment in and of itself. As all of us know, there are many different ways to invest in real estate. Still, there are some good places to be, with the most obvious being to invest in asset classes where rents can rise quickly as a nice inflation hedge – think multifamily and hotels, where the rents reset often. Also, borrowing long-term is in the borrower’s interest if inflation increases as it leads to a heads-the-borrower-wins/tails-the-lender-loses result. Other real estate investment ideas also abound that I am not mentioning here, as I would consider them proprietary to our law firm and/or our clients.
So I think that this time around, as the markets gyrate, real estate may be the place to be. I urge you to tell your crypto buddies – your tech buddies – your bitcoin friends – and all those guys and gals who were cleaning up as the markets went up and now have piles of cash to put to work – assuming they sold as the markets sold off – that now is the time to put that cash to work in real estate.
You could tell them something like:
Real estate might not make you rich – but it will keep you rich!
Bruce Stachenfeld, aka The Real Estate Philosopher™
*This email is provided by Duval & Stachenfeld LLP for educational and informational purposes only and is not intended and should not be construed or relied upon as legal or investment advice