Where’s the Bubble?

[Canesha Edwards]

Hello everyone-

Please keep in mind- that this post is of my opinion only, based on my knowledge of the US economy and real estate markets.

Now, this discussion about a bubble and a crash in the real estate market has been going on for a few years. Let’s say since around 2016 but prices have only continued to rise. However, now we find ourselves in a very unique environment.

First, let me say that the next crisis will not be with the homeowner like ‘07-‘08. Why? Because that crisis was based off terrible lending practices. Anyone with a heart beat could a get a loan and a lot of these loans were variable interest rate loans. Most homeowner loans today are low Interest fixed rate loans. Therefore, even when rates do rise- payments are staying the same. Not a major problem there.

So, where is the problem? I think we are going to see major problems in the commercial arena. I’ve seen too many syndicators and personally talked to a few who are underwriting deals at a 3% cap. This is unheard of and quite frankly bad risk management in my opinion. Why you ask?

All of these deals are based on rents rising and syndicators being able to refinance or sell on a 3-7 year period. The problem is no one is considering the chance of rising rates, but I think this is a real viable option. Jerome Powell has finally admitted that Inflation is not transitory. If inflation gets too out of hand- the FED will have to deal with it. How do you tame inflation? The gov’t could spend their way out of it or they could shrink the money supply. I personally feel the government has been spending way too much and I vote for contraction of the money supply. Meaning the FED would have to raise rates. Well as a syndicator if you have to refinance at a higher rate….well the deal goes from good to suspect real quick.

Cheap credit has its pros and cons but I think this period of low interest rates has served it’s purpose. To me, this era has more in common with the late 1970s than many would like to admit. The question is, will we have a Fed Chairman like Paul Volcker to do what needs to be done?

I’d love to hear others opinion on the matter.

Just my 2 cents.

Happy Investing.

Canesha

[Canesha Edwards]

@Aaron Gordy

Inflation reached 14% during that time. Interest rates were increased to 20%. The current U.S inflation rate is 6.2% percent, with the next inflation report being tomorrow, let’s see if it’s lower or higher.

I have never been a fan of QE. I think it was the wrong move in ‘08 and I think it was the wrong move now.

Now, personally I’m not concerned because I own my investment properties outright and plan on holding for 30 years. So, I’m good regardless if prices or interest rates go up or down. I know many investors like this or who at least have long term fixed rates.

However, like I stated in my original post, all these syndicator’s who’s business model is solely based on rising rents and refinancing are going to be in for a rude awakening when interest rates start rising. Rates have been too low for too long and cheap money makes people risky and irresponsible.