How the acceleration of inflation will super charge the PRIME Real Estate

[AJ Wong]

Dollars are doomed. Well maybe the fears of de-dollarization are a bit inflated (like everything else!) but more out of a lack of options than the strength of the currency. 

The harsh reality is that the United States is now $33 TRILLION is debt, at least $1T more than we were 90 or so days ago. 

Money supply is uppitty up up and that means that value of savings and buying power is going downitty down down. 

The numbers are so ridiculous I have to explain it with a bit of satire or I'll just be depressed, because it is depressing. 

I mean, if the US were a business, it would not be a very well run, I think we are seeing that on al societal & political levels. 

There is a lack of comprehensive & cohesive fiscal or monetary policy. The economic system has been bailed out so many times it is difficult to keep track of where the last crisis ended and the latest one begins. 

Most likely, when the next crash or depression occurs, it will be too late to protect your assets and financial future. 

The crash of 2008 happened as a flash flood, but the excesses were bottle necked over a long period of fiscal irresponsibility. 

By the time investors were aware of the risk, it was too late. These forums weren't around then, but I'm sure there are many of persistent investors that can share some very challenging stories about that period in US real estate investing. 

There were indications in 2007 that the market was heading for trouble, you couldn't really place the problem, but you could feel it. I felt it strongly enough that I sold my first home, for essentially break even, months before the 'crash.' It was a tough lesson, at 23 years old, on investments not working out as expected, but one that ultimately saved me a lot of frustration and cash. 

Of the 8 or so properties I've personally owned during the past few decades, not all have been 'winner's' but they've all lead to the next step in my portfolio and real estate business growth and maturation. 

I am not old enough to have experienced very high mortgage rates and inflation, but I am enough experienced in asset management to know that there is going to be a correction. Not a correction in housing prices, so much as an equilibrium to the excessive quality of life Americans and the capitalist society has enjoyed during the past century or so.

I have been fortunate enough to travel this world far and wide, to almost every continent (except Antarctica) and one thing is for sure: We enjoy a privileged life as Americans. Much of that quality has been supported by having, controlling and abusing the reserve currency that is the once almighty US Dollar. 

We export our debt. That is America's primary gross (literally) domestic product. It's 'worked' unless you count the few times the system has been failed, to be bailed out by...uh...the system? 

I'm still confused on who actually controls the money supply and who the interest is owed to? Keep in mind it's with the advent of the internet that the history of the Federal Reserve and how the current fiat system is sustained is even familiar. I remember when it was taboo or 'conspiracy' to discuss how money was magically created. It is any wonder that as the veil has been pierced, the value of those dollars has declined? 

The truth is not always pleasing. The recent downgrades on US debt are telling. They are subtly implying that the US will never pay down it's debt and that default is inevitable. It's not hyperbole. The true purchasing power of your savings is declining exponentially and the accelerator has a ways to go before it reaches the floor. 

As above, so below. There are no free lunches and the rate of decline could outpace the rate of improvement..

Rewatch any documentary on the Lehman Brother's collapse and just how closely society was to ATM's not working and you'll have a clearer understanding on just how safe, secure and accessible your cash, equities and paper 'assets' are. 

Think of it this way: In 2008 the entire financial system would have collapsed if not artificially supported. Since the intervention of the American Recovery & Reinvestment Act (Actually a brilliant Stimulus package) economic growth globally has been driven by...debt. Debt in China RE, Speculative Technology, Crypto and real estate. All borrowed at 0% and enabling all sorts of 'investments' and unprofitable companies to exist. 

The source of the majority of this capital is government backed securities, and low rate debt. This capital is 500% more expensive now and since interest rates are a tax on business(es) is essentially a tax that will be passed on to the cost of products and services. 

If you have been fortunate enough to amass a fortune during what is likely the greatest financial boom in the history of the world* then you have considerable assets under management. The majority of these assets are likely on paper, in the demonization of USD. 

As deflation of those assets become more apparent and evident, those with the most will have the most to lose. There are a few hard, tangible assets that are likely to preserve their value. Gold, silver, diamonds, art, spirits, antique vehicles and...Real Estate. Particularly premium real estate. 

This is how the affluent and royalty have preserved their wealth through the millennium, regardless of what currencies have come and gone. 

My fearless forecast: Luxury and prime investment real estate is about to boom. 

Real Estate is one of the few asset classes that large quantities of capital can be allocated aggressively, legally. There are other investments, but many have a scaling limitation or take a considerably more due diligence or discovery. Time is not a luxury that those with major assets will have as inflation intensifies. 

Imagine having $5M in liquid assets in the bank. Imagine inflation is 8% per year. Imagine a decline in the value of your cash portfolio of $1M+ in the next three years..Imagine what you could have bought with that $1M+.. Imagine this: An ocean front vacation rental in Oregon that generates $120K per year..

As the 'lower' end of the market stalls due to affordability restraints, those with the resources to acquire property, will. Luxury buyers and investors are in strong positions, as there will be less market activity to distract lenders, and bankers will have incentive to offer capital to well qualified borrowers. 

Already we are seeing Private Banking division such as Morgan Stanley offer attractive terms to client(s) to keep their capital on the books. I had a client prequalified with one of my go to lenders for a conventional purchase with 20% down. When the client contacted the asset manager for the down payment they offered a loan against his portfolio at 5+%. Instead of the banking allowing the $200K+ deposit to leave the books, they wrote him a check for $800k+ at a 5% return. Not great for my lender friend, but great for my client! 

I also recently receive a jumbo pre qual for a $2M+ purchase with 20% down at 6.875% with no points on a 5/1 ARM. That's absurd. At least 1%+ less than even the most attractive conventional purchase. There are supposedly some hoops to jump to get that program but still, it shows that the more you have, the more banks will be willing to work with you and offer terms that are attractive.

Other areas of the market that will see an upswing in demand and premium are strong cash flowing properties. Properties with proven deposits, income and consistency will be essential assets as equities decline and investors look to shift from intangible to tangible assets. 

I could be wrong, and things could go back to 'normal.' Lower interest rates, and the economy takes off, but what happens to the luxury market and the RE market then? 

What are you seeing in your luxury and multi family markets?