A new year and a booming stock market. What a great start! We’re just going to keep rolling right through the election!
Read one expert and we’re all in on stocks. Read another and too much irrational exuberance, the market’s crashing.
Getting back to numbers, which is what real estate investors do, we can see that this is one tired bull.
This chart is from the Financial Samurai blog, one of my favorites. It tells us mainly one thing: be wary of the stock market today, very wary.
It also makes a good case for more future investments moving toward real estate. Are interest rates low enough? The Fed sees economic risks on the horizon. Fed Funds Rate dropped from 3.5% to .25% in just 2008 and since then has risen to 2.5% in 2018 but has settled at 1.75% today. LIBOR, the average rate that banks loan to each other, dropped to nearly .5% in 2014, then rose to over 3% in 2018 but has settled at around 2% today. Those are some seriously low rates. Try supporting yourself on the income from CDs. It’s difficult.
Enter real estate, and the reason it is healthy today. It’s not just hot markets like the Carolinas and Texas that drive investments. It is shaky alternatives like the stock market, borrowing costs that may not be this low much longer, and a favorable regulatory climate.
Oh, one more thing. In the most recent down market, 2007-2009, the Dow dropped 54%. Multifamily valuations dropped a lot too in that time period, 40% according to Freddie Mac. But vacancies dropped from an average of about 8% prior to that recession, to 10.3% and rents dropped about 4.5%, according to RCLCO Real Estate Advisors. Take a look at the link to that article below. Can you sustain 10.3% vacancy? Model your break-even point, consider concessions and rent reductions, and think twice before over-borrowing.