"negative rates distort everything" warren buffet. how about RE?

[George Gammon]

The gravitational pull of interest rates according to Warren Buffett.  How does this affect housing prices?  must watch video for real estate investors.  

click here for video of Buffett discussing interest rates 

[George Gammon]

Originally posted by @Nick L.:

@George GammonGreat link!

My guess is that long term negative rates will not have a huge effect on residential OO real estate. The whole reason for the negative rates is a weak middle class with diminished earning/spending power, with no more Fed firepower to help out. That same middle class is not going to be rushing out and splurging on McMansions any time soon.

On the investment side, I believe long term negative rates will boost prices at first but settle over time. The initial boost will come as people watch their stocks and bonds decline from negative rates and a weak middle class economy, and look to take charge of their nest eggs. Investment real estate is a natural fit and low interest rates will boost lending. As millennials are weighed down by student debt, auto loans and fewer/worse jobs, they will increasingly turn to renting as they did in the last recession.

But over time all the new real estate capital will have been deployed. Plus commercial non-residential will slowly decline for the same reasons as the rest of the economy, and residential investment properties can't get too far out of whack from residential OO. So the boost will not last forever.

Of course all of this is total speculation, but as WB himself said, this has never happened before and all anyone can do is to speculate. Do you have any quant data to provide insights, like you provide on local housing markets?

On the subject of WB, I just read his new annual letter to shareholders and he made the point that America's GDP growth is not in question. What people are arguing over, and will continue to argue over, is how that GDP pie will be divided.

This is a great point but I feel he is missing the permanent structural changes in the economy due to automation and increased globalization which are permanently benefiting the capital owning class at the expense of the economy as a whole. As a real estate owner I feel this is a good thing but as a member of society I know it is not.

 Nick, thanks for the response.  I totally agree with most of what you're saying but I see it from a little different angle.

1.  The reason the fed lowers interest rates is to pull more spending into the present from the future.  They're all Keynesian economists, therefore believe spending is the cure for all economic issues.  How much more spending could they possibly pull forward?  How many people have been saying "as soon as interest rates go negative I'll start a new business, hire more employees and buy a new house!"?  I'm guessing zero.  Essentially we're saying the same things.  

2.  Yes.  If I had to make a bullish argument for inflation adjusted home prices rising it would be due to capital flows rotating out of cash to avoid paying interest on deposits or just chasing yield because negative interest rates pulling down returns even lower.  My big concern there is that would incentivize people to go further and further out the risk curve.  Generally that ends badly.  The millennial situation is certainly bullish for rents.  Although if the negative interest rates don't keep the economy from deleveraging employment rates might go up substantially even with these crazy labor force participation numbers.  You're main deflationary risk with rentals is always population decline in the city or nieghborhood where you have rentals though.  

3.  Seems very probable.  I submit Japan

4.  My favorite chart is always the historic inflation adjusted home prices.

Here are some observations I made on another post...

First, notice that every RE decline has needed less of an interest rate hike as a catalyst (1980/8%, 1990/2%, 2008/1%). This makes sense because the amount of credit in the system has been exponentially higher at each point in time. This provides a very bearish case for US RE prices if interest rates on the 10 year go up modestly. Second, envision an approximate historic average. Looks like it would be around 135. Notice where RE prices fell when the market finally bottomed in 2012...just about 135. I don't think this is coincidental. It's obvious the rising prices of 2002-2006 were a result of expanding credit not increasing real incomes. Naturally when there's a deleveraging you'll have a reversion to the mean (where home prices should be based on real incomes). So then the question becomes where are we now? Definitely not to the 2006 highs but far above the mean. If you look at real wage growth, or lack thereof, it becomes obvious that this recent rising of real estate prices is a result of something other than real wage growth, which implies prices are artificially high again. Housing prices haven't "recovered" they've "reflated". The great news is it gives us a good proxy on where to start buying if/when prices come back down.

5.  Personally I don't put much weight into that.  I think he really has to watch what he says about the american economy for political reasons and since his views are so scrutinized by the public/media.  Our economy is so reliant upon the expansion of debt, confidence is paramount.  I think he knows that, and realizes his influence over that public confidence.  

6.  Totally agree about the real issue being structural...I see different structural issues being more problematic though.  I believe the biggest issue is overall debt.  See chart below of overall debt to GDP.  The capital owning class always is the biggest beneficiary of asset inflation caused by the fed.  

Real estate is tough to beat ;)

Thanks again for the response,

George