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Stagflation Investment Idea Part I: Multi-family residential real estate

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  • Stagflation Investment Idea Part I: Multi-family residential real estate


    Stagflation Investment Idea – Part I: Multi-family residential real estate

    Inflation discussions typically focus on the price side of the inflation equation, but the income and expenditure side shows how households are responding to changing prices, especially wages and other income relative to goods and services prices. As part of our ongoing quest to look for ways to move out of our Treasury bond position that we have been in since the year 2000, today we look at the residential rental real estate market

    The latest BEA report on personal consumption expenditures (PCE) comparing September to August 2010 begins:
    "Personal income decreased $16.8 billion, or 0.1 percent, and disposable personal income (DPI) decreased $20.3 billion, or 0.2 percent, in September. Personal consumption expenditures (PCE) increased $17.3 billion, or 0.2 percent."
    Rising expenses and falling incomes is the definition of stagflation.


    This is not a one-month phenomenon. The trend for 2010 is personal income, disposable personal income falling faster than PCE. It’s the relative rates of change that is creating economic pain for millions of Americans now living through the Transitional Economy, as explained in The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble.


    What can we, as investors, do to manage through this period? Is there a way to mitigate its impact on our savings?

    Taking a closer look at the income data, we see clear trends in rental, interest, and dividend income. Income from interest is falling – big surprise with rates near zero. But rental income is rising steadily.


    Independent tracking of national residential rent trends aligns with our July 2008 forecast (see Housing Bubble Correction Update: Here comes the jobs crash (Part I)) Competition for rentals is stronger in regions of the country where the job market attracts migrants from states where jobs growth remains weak, while reducing rental competition and prices in the regions the migrants left behind. In that mid-2008 analysis we identified Energy Price Inflation States (e.g., Texas) as good potential markets for housing rent and price appreciation, and Ground Zero States “where housing speculation itself was a major driver of incomes and employment during the bubble, such as in Florida, Arizona, and California” as areas to expect falling rents and prices.

    The data from the site http://rentbits.com corroborates the forecast.

    Rents advance in Atlanta...


    ...heighten in Houston...

    ...boom in Boston...
    ...and trend up in Tampa.


    But they are flat in Phoenix...

    ...and are dipping in Detroit
    .


    In addition to the migration “pull” effects of high energy prices and “push” effects of the collapsed housing bubble, the trend away from home buying and toward renting is becoming cemented in the minds of both sufferers of negative equity and those who have seen the prices of their home collapse since 2006.

    A May 2010 Real Estate Channel article “Will Growing Rental Trends Undermine U.S. Home Sales?” states:
    There is a far-reaching change occurring now which threatens housing markets around the country. A survey conducted by Harris Interactive for the National Apartment Association in May 2010 found that 76% of those surveyed now believe that renting is a better option than buying in the current real estate market, up from 71% in 2008. Especially sobering was the fact that 78% of those surveyed were homeowners.

    David Neithercut, CEO of Equity Residential, the nation's largest multi-family landlord, believes that there is a "psychology change" in the mind of consumers. In a June address to an industry conference, he declared that there is "a change in one's thought process about the benefits or wisdom of owning a single-family home.
    But the article also notes that the “End of the Housing Bubble Led to a Surge in Houses Available to Rent,” causing rents to fall. That may still be true for the home rental market but not for the multi-family apartment rental market.

    An August 2010 National Apartment Association report begins:
    “Over the past 12 months the apartment industry has faced some of its greatest operating challenges in decades. It did not matter whether the owner or operator was a public or private company, a large or small organization, or based in any particular region of the country; the impact of the economic downturn, historically high level of unemployment, lack of meaningful job creation, declining rents, and significant declines in both transaction volume and asset values placed a greater emphasis on operation performance and bottom line metrics. However, the challenges over the past year appear to be “bottoming out” for the multifamily sector, and there are signs that over the next 12 to 36 months, there will be significant improvement in operating performance. Rents are beginning to rise, concessions are slowly declining, investor interest has increased and a renewed emphasis on managing the bottom line at the property and portfolio level is underway.”
    If a trend toward higher multi-family apartment rents in Energy Price Inflation states, and those that benefit from dollar depreciation will be with us through the Transitional Economy, might there be a way to invest in this trend without the aggravation of becoming a landlord?

    We continue our exploration of alternatives to our Treasury bond allocation by reviewing a fund aimed at the multi-family apartment market.

    Stagflation Investment Idea – Part II: Here come the funds

    I recently reconnected with my friend Eric Silverman, partner in Eastham Capital, based in Needham, Mass. Turns out he is in the later stages of raising a fund that may fit the iTulip investment thesis. Asked if he thinks his multi-family residential real estate fund might make a good inflation hedge he replied, "Inflation? Rents are inflation. They’re 40% of consumer expenditure!" Reviewing the most recent Bureau of Economic Analysis (BEA) data, I’d say he’s got a point. more... ($ubscription)


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    Last edited by BDAdmin; 11-22-10, 12:42 AM.

  • #2
    Re: Stagflation Investment Idea Part I: Multi-family residential real estate

    I love it! "Rents go up." So here is how the inflation feeds-back and starts the inflation ball going: rents go up. The landlords can't keep paying rising utility costs forever--- to protect bird-habitat and salmon habitat and make Greenpeace happy--- so they raise the rents. Everyone has to live somewhere, so lest they go back home to mommy and daddy, they fork-over the higher rent.

    If the renters can't pay, throw them out, and get some new faces in. I love it! And if no-one here can pay, then the immigrants from Mexico will. Excellent! The immigrants would be glad to live two-families per apartment.

    Already in Central California, McMansions are being sub-divided into apartments, sometimes legally and sometimes not. The rent-flow is what counts! Money makes things happen; a good lawyer might make your McMansion apartments legal.

    So as the rent comes flowing-in, the real estate values go back up. Lovely!

    And as the rent flows in, the velocity of money begins to increase. MV becomes a positive number, and the money supply does begin to force prices up, for everything.

    So the process was: habitat protection >>> utility increases >>> rent increases >>> general inflation >>> work longer hours.

    And for this brilliance, we need Ben Bernanke and the Federal Reserve Bank System?

    Comment


    • #3
      Re: Stagflation Investment Idea Part I: Multi-family residential real estate

      There is much more to this than the idea that rent can always be expected to rise. Surely that is the very same mistake that was made with house prices? With a mortgage, you can be bankrupted, but with a rental.... especially if the renter gets the underlying message and always ensures they have an "OUT" without bankruptcy, then as their income declines, they move. They move out to a lower rent. Moreover, by setting out to so do, they will drive the process down, not up. The reverse of the trick made with moving credit card accounts.

      Then there is another much more important aspect to this debate; where are investors going for the long term view? By going, I mean; what is there long term aiming point? If it is to repeat the same mistakes that have virtually destroyed the economy, particularly the industrial economy; then right on, keep this up. A great ploy to just keep the wheel of misfortune for your respective nations turning.

      If the long term view is the re-invigoration of the underlying economy, then of all things, the long term view of the cost of housing those next generation of industrial employees must be to reduce them..... all the way back to competitiveness with what they were when you were last a successful industrial economy. PERIOD.

      And in which case, the aiming point for the leadership of the new economy for the Western nations MUST be towards reduced housing costs and increased investment into new manufacturing employment. And the consequence of that is an inevitable slow reduction in rental income. I well remember that one of the primary causes of the inflation during the early 1970's here in the UK was the discovery that employees living in London could no longer afford to live there as rents and values rose, inexorably. That whole process has to be reversed. Yes, it will take decades, but it has to be reversed.

      The leadership of the new age of investment must have the whit to be able to see this is their prime responsibility.

      Comment


      • #4
        Re: Stagflation Investment Idea Part I: Multi-family residential real estate

        What does "multi-family apartment" mean?

        Surely it doesn't mean an apartment in which many families live at one time.
        raja
        Boycott Big Banks Vote Out Incumbents

        Comment


        • #5
          Re: Stagflation Investment Idea Part I: Multi-family residential real estate

          Originally posted by raja View Post
          What does "multi-family apartment" mean?

          Surely it doesn't mean an apartment in which many families live at one time.
          a larger building with several to many apartments within it.

          Comment


          • #6
            Re: Stagflation Investment Idea Part I: Multi-family residential real estate

            Originally posted by Chris Coles View Post
            If the long term view is the re-invigoration of the underlying economy, then of all things, the long term view of the cost of housing those next generation of industrial employees must be to reduce them..... all the way back to competitiveness with what they were when you were last a successful industrial economy. PERIOD.

            And in which case, the aiming point for the leadership of the new economy for the Western nations MUST be towards reduced housing costs and increased investment into new manufacturing employment. And the consequence of that is an inevitable slow reduction in rental income.
            Thats too much common sense for this forum, let alone the world we live in. Keep these thoughts to yourself. /s

            Comment


            • #7
              Re: Stagflation Investment Idea Part I: Multi-family residential real estate

              Originally posted by chr5648 View Post
              Thats too much common sense for this forum, let alone the world we live in. Keep these thoughts to yourself. /s
              read this book. that's his argument... neo-industrial development 'should' replace the fire economy. but the csm review starts... 'Despite the disparity between where the US economy is heading and where the author would prefer to see it go...'

              you're new here & welcome... here's the deal. itulip invests in the world 'as is' not as we wish or hope it was... or will be in the future. gold & bonds since 2001. 'should' stocks have done beat gold & bonds? yeh. did they? nah.

              from here... 'should' rents fall? yep. will they? not so long as the fire econ boyz run the show. you wanna bet they plan to leave quietly any time soon?

              Comment


              • #8
                Re: Stagflation Investment Idea Part I: Multi-family residential real estate

                rents can fall in real terms while rising nominally. whether you profit depends on the other side of the balance sheet and the rest of what's happening on the ledger.

                Comment


                • #9
                  Re: Stagflation Investment Idea Part I: Multi-family residential real estate

                  I have been struggling with this for some time... Rents have been going up bc of the amount of people getting foreclosed on and then renting vs buying, but what happens when incomes dont keep up with inflation? How do these apartments deal with a situation of utilities going up but incomes declining? Wont the amount of people able to afford high(er) rents decline? Will folks just suck up and pay? If that happens we really will turn into a fuedal society, land owners and renters....

                  EJ, how do you see these investments doing in a high interest rate environment? That is something i have been questioning/trying to understand as well..... Why not buy these in a high rate environment? In your later pieces you mention rates of 18-24%, how do you foresee these investments doing in that environment? Wouldn't prices go down if rates go up? I ask this knowing that as with any investment you make money when you buy so rent increases are icing on the cake when at current rates you can probably get 15% cap rates.

                  I am assuming that with multi-family units weren't as distorted as SFH due to more investors instead of retail buyers, but as you mention in AZ rents have gone down due to lack of rental demand due to folks leaving the state.

                  Comment


                  • #10
                    Re: Stagflation Investment Idea Part I: Multi-family residential real estate

                    There are also a number of other factors to consider with multi-family rentals:

                    1) Rent control. Many places have it - and many more will get it
                    2) Taxes. Only going to go up
                    3) Maintenance costs. Only going to go up
                    4) Deadbeats. Only going to go up

                    A large enough local operation can offset 3) via full time maintenance staff, and can even out the effects of rising deadbeats, but provide an even more attractive target for 1) and 2).

                    Comment


                    • #11
                      Re: Stagflation Investment Idea Part I: Multi-family residential real estate

                      Landlords, developers, and rightwing city-planners have an approach to deal with rent-affordability issues: they increase the density of the development. It's called, "slicing the pie thinner".

                      If you want to see 25 front-foot lots, drive-thru Winnipeg. There are actually some homes on 18 front-foot lots. And then comes the kicker: the city-planners and their contacts in the development industry sub-divide the old homes into apartments, making renters share bathrooms and share kitchens, etc. Stick as many apartments as you can into an old house on a tiny lot, and that is what is considered "progressive" city-planning.

                      I shouldn't pick on Winnipeg. Regina wasn't much better. Or one might visit the Bronx in New York City to see how planners have dealt with rent-affordability issues there. Co-op City in the Bronx provides a visual example of raising density. At least, Co-op City is "progressive" in the sense that it is affordable to most people, but who would want to raise a family in Co-op City in The Bronx of New York City?

                      My idea in city planning was to lower densities of development and to allow cities to grow (sprawl) outward. There was no shortage of land in Canada, so why not allow cities to sprawl, no matter what the textbooks on city-planning might say?

                      What struck me as odd in Winnipeg was the open land, vacant land, almost worthless-land, wheat-fields, literally inches away from the city's development limit. Why leave the land adjacent to the city in agriculture?....... And of course, I was the heretic in the Winnipeg Planning Department.

                      My vision for East Sooke, British Columbia is that someday, maybe apartment towers might be built along the route of the public-transit lines to downtown Victoria and downtown Langford. Someday, people and maybe even people with kids might be afforded the opportunity to live with an unobstructed view of the sea, not to mention a clear view of the rain-forest and the wildlife....... But this is still a dream, and it is still too radical of a dream for city-planners here.
                      Last edited by Starving Steve; 11-21-10, 02:32 PM.

                      Comment


                      • #12
                        Re: Stagflation Investment Idea Part I: Multi-family residential real estate

                        does anyone have an opinion on daniel amerman? http://www.gold-eagle.com/editorials...man110510.html

                        he is on the inflation side and scares me to death. i think his point is to get a large mortgage to combat taxes, but since i didn't pay for the service i don't know for sure. yes, multifamily housing. i find him very convincing.

                        but i thought the money supply is not growing? which is it? is it inflation? or is it a big fake -out?

                        Comment


                        • #13
                          Re: Stagflation Investment Idea Part I: Multi-family residential real estate

                          Originally posted by lalla View Post
                          does anyone have an opinion on daniel amerman? http://www.gold-eagle.com/editorials...man110510.html

                          he is on the inflation side and scares me to death. i think his point is to get a large mortgage to combat taxes, but since i didn't pay for the service i don't know for sure. yes, multifamily housing. i find him very convincing.

                          but i thought the money supply is not growing? which is it? is it inflation? or is it a big fake -out?
                          i spent the money to buy his stuff and i think he's got a worthwhile point: fixed rate debt is a great inflation hedge.

                          Comment


                          • #14
                            Re: Stagflation Investment Idea Part I: Multi-family residential real estate

                            but how can we have inflation if the money supply isn't growing? sorry if this is a dumb question. i just remember the last inflation and it was all about money supply. every day in the paper it was posted. all the m's.

                            fixed rate debt is excellent if there is inflation. not, if not.

                            Comment


                            • #15
                              Re: Stagflation Investment Idea Part I: Multi-family residential real estate

                              Originally posted by lalla View Post
                              but how can we have inflation if the money supply isn't growing? sorry if this is a dumb question. i just remember the last inflation and it was all about money supply. every day in the paper it was posted. all the m's.
                              the m's were volcker's cover to raise rates to kill inflation. hearing anything about the m's for the 25 years or so up until recent focus on the monetary base explosion? i don't care what the m's say, myself. i look at gasoline prices, food prices, movie prices, restaurant prices, and other consumption prices, as well as copper prices, electricity prices, and so on. inflation - for me - is about prices, not m's. the bls and treasury can play lots of games with stats. prices are harder to game.

                              i also remember when the m's were awaited with bated breath each week. they were also announcing the price of gold on the business news every half hour. we've got a way to go.

                              fixed rate debt is excellent if there is inflation. not, if not.
                              yep.

                              Comment

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