It’s Monday, August 5, 2024, and the Stock Markets worldwide have endured a significant sell-off. Why is this happening and what is driving this? How will this help Real Estate and how will this hurt Real Estate? What are the global ramifications here and how will it affect you and your finances? Those are just some of the questions I will be exploring.
The markets started the correction last week due to bad economic numbers. Those numbers were weak consumer goods orders and higher-than-expected unemployment numbers. These numbers are what the Federal Reserve looks to when they make up their minds on the direction of interest rates. Interest rates drive the flow of money for growth in an economy and they have been high for several years now. Higher interest rates have slowed the real estate market to crawl over the last several years. Fewer people have been able to afford a house with higher interest rates. So with less home ownership people are not spending money on goods and services for homes such as washers and dryers, home improvement items, and major remodeling projects. All the people who work for those support companies have been slowing down and now are laying off people due to a lack of demand for goods and services. The reporting numbers are severely lagged or even manipulated and when the markets finally woke up to the fact that things are not as great as the reporting numbers have said, then you have a correction and that is what we are seeing.
This correction is just beginning, unfortunately, as the stock markets have been held up artificially by certain big investment brokerages or bad government reporting numbers or both. The philosophy of the Stock markets of late has been to simply look to the government’s Bureau of Labor and Statistics that pump out unemployment numbers, Job Growth, GDP, and unemployment to name a few. When you don’t look out the window to see what’s really going on you can be manipulated. People and the markets are now realizing the truth and reacting to the truth. I fear that the monetary system is not far behind.
Traditionally, when the economy has little or no growth the Federal Reserve will lower interest rates to stimulate the economy by getting money flowing again. I firmly believe that the Federal Reserve will have to lower interest rates sooner than later. Although the next Fed meeting isn’t until September 18th I believe the Fed will take an emergency action by lowering interest rates before their next meeting. How much I can only guess l but I would guess by .25%-.50% to get money flowing again. The problem is that as stock markets crash and big companies have less money to work with they will have to start laying off people, which we have already seen in the large-cap companies and small-cap companies. As people lose their jobs, they will have less money to spend in an economy that has already been ravaged by inflation. Things will have to get a whole lot worse before it can get better.
The good news is that interest rates will start to come down again. This will allow people who have good jobs to refinance themselves to a lower payment. It will also allow businesses to borrow at cheaper rates to expand. This will not be immediate as Rates will not go down as rapidly as they probably should. In the meantime, we will all have to endure a correction that could be very painful for those who are retired or close to retirement. It will also affect those in the tech business with the invention of Artificial intelligence (AI) that will be cutting coding jobs for large tech companies. It will also trickle over to the monetary system affecting the dollar.
For now, sit back and enjoy the show, and don’t panic. If you are young, this will be a big deal for a short period of your life but over time everything will come back as history has shown. So, If you have a good job and stay employed through all of this you will have some of the best investment opportunities in Real Estate that we have seen in a long time. You probably will not see these opportunities until early 2025 so if you can save do so now you will need it. We are in for some very interesting times through this correction and the coming election cycle and the events unfolding in the world. Pray that our government doesn’t decide that War is the way out of this problem as that has been what our government has done for the last 100 years.
Wow, the DOW Jones Industrial Average is over 23,000 and to think just 10 years ago it dipped to 8,000. If you are invested in the Stock Market, chances are you have done pretty well. So, when is the right time to take money out of a hot Stock Market and invest in Real Estate? My contention is any time, as Real Estate over time has outperformed the Stock Market in many ways. I know it is tough to give up those double digits gains in your stock investments year after year, but as you know there has not always been those gains and when you take out management fees on mutual funds and 401ks you might only have only had single digit gains or none at all. Not to mention unless you are invested in income producing stocks (stocks that pay a dividend) you generally have just realized equity gains or value increases. Real Estate has also seen double digit gains but the difference with Real Estate Investments are that you also receive rents, so you have appreciation as well rents received.
Every Financial planner will tell you that you need to be diversified with your portfolio, but what exactly does that mean? Well simply put you should have investments in the Stock Market, Real Estate, Gold, Bonds, etc.. When you find yourself too heavily invested in one area you should spread out your wealth. If you can devise a way to sell some of your stocks that may have seen the bulk of their gains and are poised to have a correction and turn around and buy Real Estate, I think when the correction does come to the Stock Markets you will already have the hedge with Real Estate. When the Stock market corrects money tends to move towards Real Estate. If you are prudent and can see ahead, you will profit greatly when the correction does happen.
So what type of Real Estate Investing is for you? Most people know single family homes as they probably own one as the house they live in. But there are many other types of Real Estate Investment. Of course, you can invest in single family homes, but don’t throw out the possibility of investing in multi-family homes, Commercial property or even Notes. Single family homes are pretty straight forward in that you have one home one renter pretty easy to take care of. The only downfall is that when that renter moves out and you have the downtime to find another renter and fix up the damage from the previous renter. With Multi-Family homes you will still have income, however, if one renter moves out you have others still paying so you are still receiving income. In addition, with multi-family properties you generally get more rent per square foot over time. The Percent of appreciation you receive will vary from location to location on any property. With a commercial property you generally have better rents and better lease opportunities such as triple net leases where the renter(s) will pay their portion of taxes and expenses on their space. With a commercial property you get a different kind of use than that of a single or multifamily dwelling. You might have a retail building with shops that are only open during the day, or an office building that the tenants must keep up for their clients, or a warehouse, all of which bring in good rents but are very different in the up keep and maintenance and the ability to have the tenants pay for it.
You have to ask yourself if you are getting all the return on your money that is possible. If the answer is no then you should look towards Real Estate. It is a fact that the wealth of the top wealthiest people in the world have huge Real Estate holdings. Starting your investing in Real Estate can easy, first you have to come up with a budget for purchasing Real Estate. Unlike Socks (generally) you can leverage Real Estate to get the most for your money. As an Investor you don’t have buy property outright you can get a loan against it allowing you to purchase more thus leveraging your investment dollars. Investors should obtain an operating statement from the seller when purchasing commercial properties as you need to know what the income and expenses are of a property before purchasing. Then you can apply your new tax base and your loan expenses and get an accurate income estimate of the property prior to purchasing. This is far easier with a residential Single Family investment home as you will know what the expenses are prior to purchasing as the renter will pay for their own utilities and maintenance, you will have to pay taxes and insurance which you can estimate pretty close prior to purchasing. One more thing you have to ask when placing investment dollars is when will the next correction be in the stock market and can you weather that storm before it comes back. Here at MAE Capital Real Estate and loan we love to help investors obtain investment property as well as helping them finance those ventures.