By Larry R. Anweiler, ABD, Full-Time Faculty
Published March 2016
This may be the year to buy commercial real estate for your portfolio or a new home for your family. Financing rates for both commercial real estate and residential real estate continue to remain low, despite the Federal Reserve’s move to increase interest rates by 25 basis points in December. Although the Federal Reserve’s Chairman, Janet Yellen, has indicated that she wants to continue to increase rates, this appears an unlikely prospect with recent financial news within the United States, China’s equity market meltdown, and recent developments within the Middle East.
The year 2016, started out on a shaky note, with U.S. stock dropping to a three-month low and emerging-market shares at their cheapest since 2009. Additionally, U.S oil fell below $34 a barrel as supplies out of the Middle East were increased. China also added to the world’s weaker economy, as their equity markets plunged in early January with the fear that China would again devalue its currency.
However, as the Asian markets decline, along with the European Markets, and as the Middle East turmoil grows in its severity; the United States market may face both brighter prospects and increased challenges over the next few years. Investors fleeing declining world economies may reinvest their capital in U.S companies with a more stable economic basis. This in turn will lower excess human capital (in the form of higher employment rates) and could trigger the type of hyperinflation not seen since the early 1980s.
Through its expanded borrowing and money printing, which has more than doubled U.S. Government debt since 2008, the Federal Reserve has saturated the market with additional cash in its attempt to fend off the economic meltdown caused by the mortgage bond market. This money has essentially stayed in the hands of big business that used the capital to expand and modernize operations. However, as economic recovery takes hold, and idle capital (in the form of unused labor) decreases, consumer spending could increase to the point where hyperinflation may occur. This may be the reason the Federal Reserve is pushing so hard to increase interest rates in an attempt to head off economic conditions that would set off spiraling inflation.
For investors, few asset holdings maintain their values during times of hyperinflation. As a group, fixed assets perform very well during inflationary periods. Assets within this category include precious metals, such as gold and silver, and real estate also falls within this category. For those who buy real estate early with fixed financing, investors could see asset prices double within a very short period of time. Evidence of this phenomenon in fixed asset values can be found by looking at historical trends within the fixed asset category during the early 1980s.
For individual investors looking for a new home or institutional investors repositioning portfolio allocations, 2016 may be the time to increase real estate holdings. In the substantial number of economic forecasts reviewed for this article, including forecasts by CBRE, Bloomberg, The Urban Land Institute, Wall Street Journal, National Association of Realtors, and Goldman Sachs, all predict real estate values increasing during 2016 by modest amounts. However, if hyperinflation does take hold over the next few years, those who buy real estate today could find substantial wealth in their future
Larry R. Anweiler is a professor at Purdue Global. The views expressed in this article are solely those of the author and do not represent the view of Purdue Global.