After my last post on triage, which was a bit dark, I have decided to spend some time doing something that will shock many of you: optimism and positivity. Fact is, I’m actually a pretty optimistic and positive guy — it’s just that I form opinions based on facts, and the facts are often rather negative in our industry.
At the same time, right now is not the time to focus on storm clouds, except to the extent that you need to for survival. Now is the time to think about change and look at the positives that will come out of this. As the Chinese saying goes, within crisis, there is opportunity. So this is just one post, potentially out of many, where I’m going to think about silver linings, about the positives we may see come out of this.
At the top of my list, as of this morning, is the high likelihood that housing will absolutely explode once we get out of the quarantines.
Let me caveat this right at the start. I look like an economist, but I am not one. I am neither an investment advisor nor a REALTOR. I am simply a man who, like Tyrion Lannister, drinks and knows things.
The Steven Mnuchin Interview
I came to this conclusion because of the interview that Steven Mnuchin, Treasury Secretary, gave to Fox News this morning. I can’t find a video to embed that isn’t completely trying to do politics, but here’s a link to the relevant clip on C-SPAN.
One of the most important takeaways for me is that the economic rescue package is $1.8 trillion. Furthermore, Mnuchin talked about 2 weeks of cash flow to small businesses (forgivable loans), $3,000 direct deposits to (each? every? qualifying?) American family of 4, enhanced unemployment insurance, and $4 trillion in “liquidity” to support the economy. Plus, bailouts galore.
He is actually asked by the news anchor “Can you keep going back to the well? How much debt can you take on to address this?” Mnuchin gives a politician’s answer about the fundamental strength of the US economy and blah blah blah.
My takeaway is that inflation is inevitable. Hyperinflation is possible.
Inflation, Stagflation, Hyperinflation — All Share One Common Theme
This article on CNBC by Victor Li, Professor of Economics at Villanova, was published a few days ago prior to the ginormous economic stimulus packages just announced today. His opinion is that we could see stagflation:
While the benefits of cutting a federal funds rate already close to zero is limited, there will be risks associated with the Fed’s policy in the aftermath of the coronavirus crisis. In particular, when containment is achieved, production will still be restrained by those infected and unable to work and by those displaced by unemployment and struggling to find other jobs that may not fit their qualifications. However, there will be a surge in demand as fear abates, customers return to shopping centers and restaurants, and businesses and consumers look to borrow at historically low interest rates. Ultimately, the imbalance will create a lopsided recovery with slow output growth with accelerating prices and inflation; in other words, stagflation.
Others think we might see hyperinflation. Some think this type of fiscal and monetary policy is an acceptable risk given the unique circumstances we’re facing.
It really doesn’t matter what your political leanings or your preferences are though, because all of the possible outcomes share one common theme: money will be worth less in the future than it is today.
There is no scenario where the world governments inject trillions into their economies without affecting the value of money. Money is not immune to the law of supply and demand.
Which brings us to housing….
Housing is Both Tangible and Fundamental
During inflationary times, tangible assets increase in value because the currency loses value. Real estate, gold, commodities, etc. all become more valuable simply because the money isn’t worth what it once was.
Thing is, gold might be great as a hedge against inflation, but no one needs gold to survive. Commodities are great as a hedge against inflation, but many of the commodities are not fundamental — we all could get by without pork bellies. (Although… life without bacon might not be worth living… but that’s a different discussion.) We all need to live somewhere. Housing is pretty unique from that perspective.
Real estate, particularly residential real estate, is both a tangible asset as well as a fundamental need. The fact that we all are getting so used to remote work and social distancing means very bad things for commercial real estate, but you still need an actual roof over your head when you go to sleep at night.
Once this health crisis is dealt with, one way or another, housing is going to be incredibly in demand. The short term drop in prices from the drop in demand represents a buying opportunity for anyone who can get into a house. Investors are going to flood back into residential real estate (if they haven’t already begun). Even if (God forbid) we were to lose 2 million people to the virus, the longterm inflationary pressure from the trillions being injected into the economy is bound to make residential real estate more valuable in the future.
Don’t Overdo It, But…
Right now, in the midst of lockdowns and panic, is NOT the time to be calling your clients and telling them how it’s a wonderful time to buy. Seriously, I worry about dumbass real estate agents putting out cringey marketing materials at the wrong fucking time. We have already seen this happen during this crisis. Stop it! Act like a goddamn professional.
But maybe once the health crisis has been contained, or maybe privately to a trusted client who you know will not misinterpret what you tell him, it would be smart to start advising people that there are few better investments for their money than residential real estate for the foreseeable future.
With low interest rates (although that can change and quickly), and reasonable expectations of inflationary pressure from fiscal and monetary policies, I can’t think of a better asset to purchase than a house today.
So if you’re a broker or an agent, here’s the silver lining: if you survive the next few months (and I say this because I can’t see the nation survive if it goes much longer than that) and make it through, the demand for residential real estate is going to be silly. If you have strong buyers with good credit and money for a down payment, the next few months represent a potential once-in-a-lifetime opportunity to buy a house even if they overpay, as long as they pay cash or get a fixed rate loan.
Because money is going to be worth less in the years ahead.
Silver lining playbook, y’all.