Today we're going to talk about what is real estate do during
inflationary and stagflation times
and how does it affect your portfolio if you're a real estate investor?
So what is stagflation?
There are three major economic components necessary for stagflation to occur.
And how do we know this because it occurred in 1970 and 1980.
So what are the three major components that make up stagflation for it to occur?
The first one is rising inflation.
And I know a lot of you understand what's happening right now.
We know that at least what's being reported is somewhere
between seven and 8%.
The second one is rising unemployment and this is a tricky one because some of
you are going to say employment is rising, unemployment is declining.
Well, more on that later.
The third is the declining demand for goods and services.
And we're starting to see this especially during the pandemic and after.
And now with rising interest rates we're starting to see it again.
So now let's rip the Band-Aid off on the first one.
Rising inflation.
We all know inflation's going up.
Everything's going up.
Food is going up.
Oil and gas is going up, rents going up,
housing is going up and interest rates are going up.
Everything's going up.
So price increases are here for sure.
And I don't see any ending in sight, especially with all these supply shock
issues that we have coming at us right now.
And this does not include anything that has to do with the war at the moment.
Except for the economic sanctions.
Go back and look at the video that I did on unemployment,
and you will see that we're actually in pretty bad shape.
We're actually close to 8% Now, how do I get to 8% when the media saying
it's for you?
Three is what the media is reporting and you six is the real unemployment
because you six actually includes all the discouraged workers,
all the workers that haven't been able to find jobs for some time.
So whenever you're looking at unemployment,
you have to be looking at you.
63 demand for goods and services are going down.
There's a couple reasons for this.
One is prices are going up so people can afford less.
Secondly, supply chain issues are causing inventory to be lower.
And I don't see any relief on this in the near future.
As I like to say, smart money goes where it's treated well.
And if people are going to pay for things,
they're going to think about it before they pay too much.
So we know that stagflation is declining economic growth or lower GDP.
Secondly, high inflation and high unemployment or unemployment
increases, as we are seeing in this great resignation.
But a couple of the things that are not talked about a lot.
One is supply shocks, which we all know we're having.
And the other is monetary policies.
We're not going to get too deep into this.
But basically what they're talking about is money printing.
And, of course, we need to print money right now to take care of the things
like social services and the pandemic losses.
But this does create inflation once you create stagflation.
So for those of you who think I'm crazy, maybe you're just not paying attention
to the multiple articles that are all over the Internet
from the Washington Post, The New York Times, Barron's, Forbes, the first of all,
the threat of stagflation is haunting investors.
And if you guys are investing, you know what I'm saying?
Cycle one.
What is stagflation?
Fears are rising that the US economy is headed toward a 1970 style death spiral.
We're going to talk about this in a minute.
I'm going to show you, as I said a word about how stagflation
will impact real estate.
Another one is the Washington Post.
The Fed is charting a course to stagflation and recession,
which we already know.
And here's one from Forbes.
Most Wall Street experts now predict stagflation.
Here's what it means for the investors and the US economy.
So, guys, this is all within the last month.
You need to be paying attention to this.
But first,
let's take a look at the Fed's choices, because they don't have very many.
So obviously, the Fed should hike interest rates
immediately, cut stagflation risks, says this particular economist.
And of course, they did, which slowed down consumption, which made it worse.
The second thing that happened when the Fed increased interest rates
to help stagflation is that the housing market has now hit a wall.
And if you haven't been paying attention, you need to.
The point is the Fed's choices here, guys are limited.
They have to increase these interest rates or slow the economy down,
which hurts stagflation even more because
one of the big components of it is consumption So now let's take a look
what real estate did in 1970 during stagflation.
So as you can see here, here's how much the housing prices
have skyrocketed over the last 50 years and I stopped at 2000.
The second chart is medium sale prices of houses sold in the United States
from 1970 all the way to about 2020.
I left the pandemic out because that's just an aberration.
What I really want you to pay attention to are these two things.
Take a look at 1970 as you can see the average price of a home
at the beginning of 1970 was 11,700.
And guess what rent was $108.
That was the price of rent in the beginning of 1970.
Now let's jump to 1980.
This is during and after the period of stagflation.
Housing prices jumped from 47,200
and the average price of rent went to $243.
So 108 to $243
and 17,000 to $47,200.
Now why is this important?
If you take a look at this period of time, housing generally doubled
about every ten years.
But during the period from 1970 to 1980 you could see it almost tripled.
So it accelerated at a faster rate because the component prices
of real estate itself went up a lot during this period of time
and therefore so did the price of houses.
What's most interesting from this chart down here
is that you can see from this period to about this period, it doesn't look like
much compared to the rest, but you can see it was pretty flat prior to 1970.
The other interesting thing that happened during this period of time,
Nixon also took the dollar off of the gold standard,
which means that this time the dollar started floating freely,
which is called a fiat currency, which means that the Federal Reserve
can print for things that they need during this period of time.
Some would say that during this period of time prices have gone up on assets
largely because we printed money along the way to take care of the economy.
So lastly, I want to show you guys what I would be doing if I were you.
As we get into these inflationary and stagflation times.
Now, I went back to 1970 and said, what would I do
if was 1970 and what asset classes did really well.
No surprise that there was a bunch of stuff around stocks
because the internet was riddled with stuff around the stock market.
But I did find some very good stuff.
The best areas are investor
periods of inflation, including technology and consumer goods, precious metals such
as gold, silver, have traditionally been viewed as good hedges against inflation.
We talk a lot about this.
Obviously real estate, land and property fixed rate debt
like commodities tend to rise in value during periods of inflation
or in stagflation.
So then I went back and took a look at the asset classes.
So equities, treasuries, U.S.
T-bills, commodities gold and reeds, or real estate investment trusts.
How did they do these were inflation adjusted since 1973.
And this was from Schroders Gold as you can see.
Gold was clearly the winner here
during stagflation during this period of time at higher than 22%
as measured by all these other things not including real estate in this chart.
Of course I love real estate.
I'm heavy in real estate
and if you're a debtor you're going to do very well if you have fixed rate
debt heading into these headwinds they are coming.
Guys I give you enough information.
Please take action.
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