Going from Hero to Zero in America what the FED Rate foreshadows in Real Estate
Delayed recession, new monetary policies, and a corona scape goat. The markets experienced over valuation and inflation from fiscal policies designed to appreciate nominal values while depreciating tangible currency values.
Corona is the plausible excuse to reason market corrections. The effects will be increased by monetary inflation.
We won’t dive right into real estate. If you bear with me it will all tie together. Don’t skip the words in a sentence. Arriving at the period first means you get the context last.
INFLATION HOW IT ACTUALLY WORKS
Inflation works two ways.
The first way Inflation applies is by creating money into direct circulation. More money in circulation naturally devalues the currency. Having more of one thing than last year means it takes more of last year’s supply to buy the same thing.
I’ll explain with a simple bartering analogy.
Bartering with 10 coins when total coinage is 100 means you have ten percent (10%) of all available coins. If an agreement is reached to give 10% of all available coins to a person in exchange for goods a deal is struck. When the time comes to exchange, where the total coinage has increased to 200, you need 20 coins not 10 coins to complete your deal. If you only have 10 coins you don’t have enough to do the deal you agreed upon last year.
The coin bartering analogy is how FIAT currency works.
The second way Inflation applies is by acquiring debt instruments. These debt instruments are supported by new coins issued. These debt instruments will be paid with future coins that do not exist at time of acquisition. The coins used to pay the original debt instruments are again borrowed through new debt instruments. These new debt instruments will be paid with new future coins that also do not exist.
Hence the cycle never stops. In a perpetual cycle the coin base increases. All the while the coin in your pocket devalues every day.
THE WAY THE US DOLLAR & US COIN WORK
The coin is the US Dollar. To keep the analogy, think of the actual US Dollar Coin (Yes there are those just think Morgan Silver Dollar). Normally interest rates compound on US Debt instruments. There is an actual cost the US Government must pay. The actual cost is interest. Interest cost to acquire debt instruments from the US Federal Reserve means the US Government doesn’t just ask for coins and receive them for free. The Federal Reserve purchases US Treasury Bonds by acquiring these debt instruments with coins (or money) the US Federal Reserve just manufactured. In exchange for US Government Debt the US Government gets more coins to pay third parties. These third parties are usually obligated to repay the US Government.
This explanation is where the phrase “They just print money” comes from.
The US Government has unique ability to create money whenever they want by going into debt.
This ability creates irresponsible policies with limited accountability. There is no limit to debt the US Government can go into. In politics you sometimes hear this as the “Creating a Debt Ceiling”.
Despite alleged controls and theories about economy expansion the bottom line is, “The US Government can print money to pay for something if it doesn’t have the money to pay for the thing it needs.”
People are people. The US government is run by people. It’s easier to make the coin instead of earning the coin. That’s why the US Debt has risen to 22 trillion since 2000. Therefore, the US Debt never went below 1 trillion when we started the century. The US Debt always goes “up” with our current policy. Since Andrew Jackson it has never went “down”.
The last person to pay off the national debt was Andrew Jackson in 1836. He responded by disclaiming he “Killed the Private US Central Bank”.
THE EFFECTS OF A ZERO PERCENT POLICY
In time of crisis the US Government issues an obligation to the US Federal Reserve to manufacture coins. These coins come to the US Government via US Treasury Bond purchases.
The issues with this policy are many but one is central to the problem. The US Federal Reserve purchases “US Treasury Bonds” or “Debt Instruments” with the coins requested by the US Government. The US Government must pay back the US Federal Reserve.
These coins are then distributed to the masses for “free” in the form of stimulus or grants.
What does the US Government use to repay their US Treasury Bond purchase if the coins they just acquired from the US Federal Reserve are sent out are not obligated to return?
The answer is…more “Debt Instruments”.
In times of a zero percent policy the government tends to accelerate this activity. To date there is little activity for creating coins. The activity consists of:
·$3 billion for research and development of vaccines, test kits, and other treatments
·$2.2 billion for the Centers for Disease Control and Prevention to contain the outbreak
·$1.2 billion for the State Department to assist in battling the spread of the virus overseas
·$1 billion for medical supplies, healthcare preparedness, and community centers
·$1 billion authorized for the SBA to make subsidized SME loans
·$500 million for Medicare providers to provide telemedical services
·$300 million to ensure vaccines are delivered to individuals at little or no cost
The total affect of new coins is low but what happens if it becomes another 2008 bank bail out? How much more could come to devalue our US Dollars?
Historically, the devaluation of our money led to increased stock indices (as the value of the US Dollar / Coin weakened) and housing prices eventually appreciated (see the stock market rally from 2008 to 2019).
The price increases and stock value gains are less about gains and more about “loss in real value”.
The effects of a zero percent policy signals prices should go up with: 1) consumable goods, 2) stock prices, 3) housing, and 4) vehicles. This usually happens after a year or two of painful losses.
THE OPPOSITE EFFECT FOR REAL ESTATE GAINS WITH A ZERO PERCENT MARKET
The fact housing prices should rise is not a good thing. The housing market should rise to “purchase” the “house”; however, the “rent” to “live” will stay the same. We may potentially see long term rentals not cover the cost to hold the property.
On older affordable homes people may stay in their homes. The price increases may simply lend net worth appreciation to those existing homeowners.
In new construction homes what we might see is the opposite.
Data strongly suggests we might see future new construction investors enter foreclosure. Foreclosure would be due to impulsive purchasing to acquire properties and sell at new price point appreciation not supported by end buyers. In this instance we see builders cut home prices by fire selling to get to the next construction phase. These fire sales hurt comparable houses in the area and burn the previous purchasers.
This situation is not theory. I know this cycle firsthand because I lived through it in 2008. I owned numerous residential houses during this cycle. I was the investor burned by this cycle and my partner was the home builder who fed into the builder fire sale cycle.
The rent rate in this scenario does not cover new mortgages on new construction houses. This new circumstance causes strain on private owners of property. These owners then look to off load via short sale. This scenario ushers back the real estate market of post 2008.
FACTORS TO CONSIDER
The real estate market correction is based on the following 1) investors willing to buy a new construction house, 2) investors willing to drive the value by selling it to another investor, 3) builders feeding into the trap to bolster gains, and 4) the end investor not being able to cover their mortgage with the rent from end buyers / tenants.
The likelihood of these factors are probable to me because 1) in a depressed and volatile market builders will want to post earnings to protect stock price, 2) investors always want to flip a house, 3) prices will naturally go up because of currency devaluation, 4) Fed interest rates of zero stimulate US Dollar / Coin Creation to appreciate homes through US Dollar devaluation, and 5) real estate is always seen as a sure bet.
Remember the application to a zero percent market are not just stocks and bonds. Real impact can happen in unconventional ways. The application to a zero percent market is more than mortgages. I hope this article sheds light on how you navigate the real estate market. Don’t get caught up in mortgages. Learn from history and pay attention to leading indicators.
These indicators can save you more than a buck. They might save you from bankruptcy. More importantly follow me on Medium or subscribe to my newsletter to learn more insightful advice on how real life situations influence economies. Wealth is value not money. Money is always attracted to wealth.
To your knowledge success!
About Christopher: Christopher Knight Lopez is a Professional Entrepreneur. Christopher has opened over 7 businesses in his 14-year career. Christopher’s purpose is to take advantage of various market-driven opportunities. Christopher is a certified Master Project Manager (MPM), Master Financial Planner (MFP) and Accredited Financial Analyst (AFA). Christopher previously held his Series 65 securities license. Christopher also has his General Lines — Life, Accident, Health & HMO. Christopher has managed a combined 286mm USD in reported Assets Under Management & Assets Under Advisement. Christopher has work experience in 29 countries, raised over 50mm USD for various businesses, and grossed over 7.5mm in his personal career. Christopher worked in the highly technical industries of: biotechnology, finance, securities, manufacturing, real estate, and residential mortgages. Christopher is a United States Air Force Veteran. Christopher has a passion for family, competitive sports, fishing, martial arts and advocacy for entrepreneurs. Christopher provides self-help classes for up-and-coming entrepreneurs. Christopher’s passion to mentor comes from belief that entrepreneurs need guidance. The world is full of conflicting information about entrepreneur identity. See more at www.christopherklopez.com.