The Dire Warning From a CEO - What it Means for US Real Estate Investors
Investors have relied on real estate investment trusts (REITs) for years, yet now some experts are raising red flags over these firms.
Jamie Dimon of JPMorgan Chase recently warned investors that the commercial property market may be heading for another crash similar to what occurred 15 years ago. Investors should heed his warning.
The US Debt Ceiling
Though discussions surrounding the US debt ceiling may appear political in nature, they actually carry serious financial ramifications. If Congress were to allow the debt limit to reach zero again, interest rates would rise sharply and have far reaching effects for mortgages and other forms of lending.
Treasury has used extraordinary measures in previous debt ceiling impasses to prevent default. These include suspending government employee workplace retirement account reinvestment and delaying auctions of securities to temporarily postpone when federal spending exceeds the statutory limit. Unfortunately, however, current short-term measures will likely run out by June and Congress must then decide how best to increase or increase debt ceiling or face a US default on its obligations.
An unexpected national debt default would have devastating repercussions for financial markets, global economies, and American households alike. A study by Moody's Analytics suggested that protracted default would lead to a 4 percent decline in GDP and loss of approximately 6 million jobs similar to what occurred during the Great Recession.
Risk of default drives the debate surrounding the debt ceiling and should prompt investors to be wary about making any speculative investments in the US. At the same time, it must be remembered that policies which create debt must also be addressed in order to avert future crises; using debt ceiling debates as bargaining chips won't do.
Permanent solutions to the debt ceiling problem involve cutting spending or increasing tax revenues sufficiently to offset an increase in debt limit; this is no simple task and so the issue will likely resurface in subsequent years. Indeed, Congress and President Obama reportedly clashed over spending cuts, leading to an unexpected stock market selloff and credit downgrade in 2011.
The US Economy
Real estate is one of the biggest drivers of US economic activity, both residential and commercial real estate alike. It provides housing for families, jobs in construction industries and wealth and savings opportunities for millions of Americans; yet when an economic cycle turns, so too do real estate prices decline.
Investors should pay careful attention to economic indicators, including GDP growth and employment data, interest rate cycle changes, and real estate prices in general. Investors must keep tabs on all these economic data points in order to make informed investment decisions.
Demographics is another key consideration, along with its ability to weather short-term economic cycles. An investor should think carefully about factors like average age in an area and its possible fluctuations, which may impact demand for properties significantly.
Investors must also be cognizant of how government policies and legislation impact the real estate market. Tax credits, deductions and subsidies can increase or decrease demand for real estate; so investors must remain up-to-date on trends and policy changes to remain informed.
Good news is that the current economy appears to be stronger than during the previous recession. GDP growth slowed to a moderate pace in Q1, consumer spending increased and personal savings went up while unemployment rates remain stable and inflation remains minimal.
However, there remain some concerns. One is that recent banking stress has put a damper on loan growth; particularly commercial loans which account for a significant proportion of all commercial real estate loans. As a result, property values have fallen and short-sellers are increasing their bets against these assets. Before the Bell spoke with Xander Snyder from First American who explained how health of commercial real estate market has an immense influence over banking system health as a whole and therefore on economic health overall.
The US Housing Market
As the US economy continues to expand and interest rates remain relatively low, the housing market has remained robust. However, rising mortgage rates and an absence of affordable homes for sale is beginning to put strain on this segment of the market; buyers are taking longer than before to close on homes while distressed property sales have dropped considerably.
While experts expect the housing market to remain strong than normal in 2022, many expect it to shift away from being an overheated seller's market and towards becoming more stable in coming years. This shift could be furthered by recent policy shifts from the Federal Reserve that have resulted in higher interest rates that increase borrowing costs for prospective homeowners.
Due to rising interest rates, developers have found it increasingly challenging to build new properties as demand and prices continue to decrease. Builders have responded by shifting focus towards multi-family construction projects to meet rental market requirements; this shift, however, has further limited home growth while adding to inventory shortages.
As investors are actively buying existing homes, the average sales price of an existing single-family home has increased nearly 33% year over year since last year. Redfin reports that homeowner equity levels have hit their highest point ever seen over the last decade; meaning many homeowners now enjoy significant equity gains that enable them to sell their properties for significantly more than they ever could before.
Consider these factors when investing in real estate. Doing research can help prospective real estate investors identify areas with strong growth that offer good opportunities for short or long term rental investments; Mashvisor provides real estate heatmap and neighborhood analysis tools to identify top performing locations. By conducting your own investigation before investing, potential real estate investors can avoid costly missteps that could scuttle their plans.
The US Real Estate Market
The United States real estate market consists of hundreds of local markets that operate independently from each other. There are, however, certain general factors which can have an effect on real estate prices nationally; such as income levels in an area having an effect on demand for homes or apartments and thus drive home prices higher or decrease when there is an economic slowdown or recession causing less people to need housing; on the other hand, as demand decreases so do prices of homes sold on those markets.
Real estate investment offers investors a great return on their money. Property values tend to appreciate over time, while rental income is taxed less than other forms of income such as wages or dividends. But investors should take care not to overpay for properties as this could lead to negative cash flow - meaning their investment is losing money! To prevent this happening, always conduct thorough research when researching a potential property before purchasing one and carefully consider all associated costs that go along with owning it.
When investing in US real estate, it is wise to focus on markets with faster-than-average growth rates. This will ensure your investments appreciate over time while giving you better chances of finding good deals. In addition, real estate offers numerous tax benefits including depreciation and lower capital gains taxes - making it a fantastic choice for all investors of different kinds.
The US commercial real estate (CRE) industry is facing numerous challenges. First, changes in office and retail occupancy rates resulting from pandemic-driven outbreaks are depressing asset valuations; rising interest rates have increased costs associated with capital, thus slowing deal flows; while thirdly the threat of global financial crises adds further uncertainty as to asset values.
Even in spite of these obstacles, CRE is expected to grow over the long-term and is an integral component of America's employment sector. Yet if current trends continue, US economy could face significant hurdles by 2023.
As the future of US real estate remains unclear, investors must focus on finding good opportunities within this market and carefully considering its strengths and weaknesses. Furthermore, it is imperative that they work with an advisor they trust who can advise them on suitable investments.