Last month saw the first huge correction in the stock market since early 2016. US Congress agreed on an expansionary spending path for 2018-19 and long-term interest rates increased to multi-year highs and are expected to increase this year. How will this play out in the real estate market? Although it appears to have been mainly technical factors that triggered the correction in the stock market, inflation concerns have been the major cause for plummeting stock market prices. We have outlined such a scenario of inflation and its impact on real estate investments. Indeed, the difference between current and trend economic growth is moving close to zero, rising labor demand is putting upward pressure on wages and salaries, but it is still far from a strong acceleration in inflation rates. Meanwhile, the recommendation by the US Department of Commerce in its investigation to restrict aluminum and steel imports on national security grounds is a reminder that the risk of escalating trade tension has a significant impact on real estate investments. We are not suggesting that the probabilities of risks have risen substantially in light of these events.

However, we argue that higher volatility combined with uncertainties about the future uncertain outlook for US trade policy is not an environment where we should risk everything on one endeavor, but rather seek returns by pursuing opportunities in the real estate market. It would be more than natural that unjustified price appreciations will be corrected over time. Some observers believe that rising inflation may have played a prominent role in the recent stock market sell-off. However, higher inflation points to an overheating economy and rising wages could lower profit margins. Neither case obviously applies at the current time. However, historical evidence shows that periods when inflation begins to rise often create volatility in real estate markets and, on average, returns are meager. Finally yet importantly, higher interest rates could hit real estate prices if they reflect rising risk. Higher interest rates should be less relevant if they result from higher growth. For now, we expect the implications of rising interest rates on the real estate outlook to be limited. A more persistent significant decline in real estate prices could, however, be associated with somewhat slower growth, either because the economy anticipates a slowdown, or because economic decline itself dampens growth. The impact of rising interest rates on growth also depends on the factors that pushed up interest rates. The rise in interest rates could be the consequence of stronger growth momentum, in which case the economic fallout is understandably limited.

However, if higher interest rates reflect rising risks, for instance, then growth may well suffer more significantly. Financial conditions remain very loose and interest rates relatively low. This should continue to support economic growth. Therefore, we are keeping our scenario of sustained economic growth: (1) higher world economic activity, (2) rising fixed capital formation, (3) a very gradual adjustment of monetary policy in the US. We acknowledge the risks from higher protectionism, as recent announcements are a reminder that trade frictions could escalate significantly. At this point, it remains to be seen what action the US will take and how other countries may respond. Since the beginning of the Great Recession in 2008, most have averted the specter of deflation by deploying conventional and – even more importantly – unconventional measures of monetary policy. Inflation in the US averaged around 1.5%, with a dispersion of -2% in mid 2009 to approximately 3.8% in late 2011. Currently, US consumer price inflation stands at 2.1%. In the US, the government is embarking on a path of fiscal stimulus, and more trade tariffs and trade friction may push inflation higher.

However, several factors are keeping underlying inflationary pressure contained for now, including still-cautious wage bargaining behavior by households, price setting by firms and compositional changes in the labor market. In addition, the recent readings have likely overstated current price trends,( the surprising weakness in inflation in 2017). Outside the US, wage and price trends have not changed much in recent months. Against this backdrop, we do not foresee any surprises over the course of 2018. The Fed is expected to gradually lift rates with caution depending on the tightness of the US labor market, the evidence of accelerating wage dynamics and the potential impact of higher financial market volatility on economic growth. In addition, a tax policy that fosters the competiveness of Corporate America and attracts direct foreign investments, helping to raise the potential growth rate of US, should also be supportive for the greenback. At the same time, there are as many factors pointing to a glorious future for real estate markets According to the Federal Reserve Bank of New York, the current probability of recession for the US economy stands at around 4%, moving to approximately 10% at the end of 2018. In our view, the gradual tightening of monetary policy, limited inflation expectations and cautious investment demand, will keep real interest rates relatively low. Therefore, we prefer real estate investments in 2018. ABOUT THE AUTHOR: Eugene E. Vollucci is the Director of The Center for Real Estate Studies, a real estate research institute. He is author of four best selling books and many articles on real estate rental income investing and taxation.


Recently, we have seen a cyclone of economic and political news and developments that has affected the real estate industry. Overall, these developments have created somewhat higher downside risks. Growth and inflation data over the last month have not come up to our forecasts. In our view, the mixed data suggests a temporary pause in growth. Lower inflation data could indeed imply slightly higher labor costs and perhaps the continuation of a Pollyanna outcome. The Federal Government is moving ahead with monetary tightening. Several risks are rising, in our view. First, the risk of an escalation in trade tensions, with the investigation into Chinese intellectual property practices. Second, risks in the Middle East are rising again. Third, rising tensions with European countries could hinder an already-difficult reform process. In addition, there is a flattening in the US Treasury yields.

Currently, we do not think that these developments have a major significance for the real estate markets. However, if there is a return to a situation of rising risk in the US dollar, this upset could cause prices to become volatile again. Although Treasury yields have flattened again, they are close to the recent lows. At this point, we think there is no major cause for concern yet. In the US, the downward revision of the first quarter 2018 is partly offset by some upward revision for fourth quarter 2017, and employment remained strong. . Overall, growth in the first quarter still appears to be at a 3% pace, and is expected to pick up later in the year, because of the effects of the US fiscal stimulus. Because of robust growth and subdued inflation, we believe that this has supported valuations of the industry over the last few years. Keep in mind, there are questions during the period of moderate financial market volatility. The most recent data suggest that the Pollyanna effect may persist for a little longer. Therefore, we are staying with our belief of economic growth. However, it is still too early to jump to a conclusion as to the end of the current upswing, despite ongoing trade tensions. The Los Angeles Times recently reported that institutional investors bought more single-family rental homes in 2017 than in previous years, the first increase since 2013, according to data compiled by Amherst Holdings. Wall Street firms such as Blackstone Group and Tom Barrack’s Colony Capital Inc. rushed into the single-family rental business when U.S. housing markets were reeling from the foreclosure crisis and homes were available and cheap. The feeding frenzy was short-lived. By 2014, big landlords were already paring back their purchases as foreclosures dried up and they tackled the challenge of managing widespread homes. Now they’re buying again, at a time when single-family landlords are raising rents faster than apartment owners are. While multifamily landlords face pricing pressure from new supply, very few single-family homes are built specifically for leasing. Demand for rental houses “feels like it’s insatiable,” Gary Berman, chief executive of Tricon Capital Group Inc., said in an interview. Tricon, the third-largest publicly traded owner of U.S. rental houses behind Invitation Homes Inc. and American Homes 4 Rent, bought about 850 homes last year, said Amherst, which analyzed data from CoreLogic Inc. The biggest purchaser was Cerberus Capital Management, with an estimated 5,100 houses. Amherst itself bought almost 4,900 homes through its Main Street Renewal subsidiary. There’s another factor driving Wall Street’s renewed acquisitiveness. Now with their businesses well established, the large landlords are having an easier time financing purchases, said Greg Rand, CEO of OwnAmerica, an online platform for buying and selling rental houses.

Rental properties should remain well ahead of other major property types because they are generally more stable. Three important factors account for this stability: 1.They are less dependent on business cycles for occupancy than any other types of real estate investments. It does not matter if interest rates and home prices are high or low, rental properties are generally more affordable. 2.Rental properties have shorter leases; thereby offering greater protection from inflation than the long-term leases associated with other properties. That is, rents can be negotiated more frequently. 3.The pool of tenants is much greater for rental properties than other types of properties. This ensures a more consistent occupancy than industrial and commercial properties, which usually have only a few tenants from which to choose. ABOUT THE AUTHOR: Eugene E. Vollucci is the Director of The Center for Real Estate Studies, a real estate research institute. He is author of four best selling books and many articles on real estate rental income investing and taxation.