What the doomsayers are espousing…
In my article posted here on September 12th, “The FED and you,” I concluded that the end result of all the money printing the FED has been doing of late will create a scenario where the next generation will have to pay the piper. And real estate investors today will end up having their heirs pay for this loose money policy.
There are others who are more doom and gloom than I in their predictions, however. One noted economist, Marc Faber, has recently said that “U.S. monetary policy will destroy the world.” He is referring to the most recent stimulus plan by the FED – also known as “QE3” or “QE Forever.” In an article posted last week in MoneyMorning.com that recapped Faber’s dire warnings (Faber warns everything will collapse. (n.d.) Retrieved from moneymorning.com/ob/Faber-warns-everything-will-collapse/), the case was made by Faber and other renowned economists that the dominos were in place for a worldwide collapse to occur. Besides the FED’s current policy of printing money to keep markets stable in the short term, the other key dominos included the major protagonists in the European financial crisis, including Greece, Italy, and now, Spain.
The article went on to describe how Chris Martenson, a global economic forecaster who’s recognized as an expert on the dangers of quick economic growth, had a theory that the world’s economies would collapse in short order. He was quoted as saying: “we found an identical pattern that guarantees they’re going to fail…This pattern is nearly the same as any pyramid scheme.”
Somewhat less than reassuring, right?
I do not subscribe to this Chicken Little philosophy of a oncoming train wreck that will be create a quick, devastating worldwide economic collapse. It makes for good, sensationalist copy – but hardly sound economic theory. I think the head of the International Monetary Fund, Christine Lagarde, would agree.
While governments in Europe and the U.S. have helped create these economic conditions through a combination of volatile spending with little austerity measures in place, governments also have the ability to right their own country’s economic fortunes (albeit with extremely unpopular political overtones). This righting takes time, certainly won’t occur overnight, and historically runs in cycles of five to seven years. What is new here though, is the interconnectedness between countries. That is at the heart of the aforementioned economists’ doomsday theory.
I still don’t buy it. Will the twenty-five percent unemployment rate in Spain bring the U.S. economy to a grinding halt? Possibly – but doubtful. There are too many other countries, investors, banks and extreme oversight in place to prevent a domino effect from occurring. Meaning: is it all a possibility? Yes. Is it a probable scenario? I think not.
Making sense of it all…
So what does it all mean for real estate investors here in the U.S.? I think doomsday scenarios are quite frankly, irresponsible. They can create a sense of economic panic that can affect markets worldwide…not just in real estate. While it is OK to advise about the possibility of a horrendous economic collapse, saying one is imminent is ludicrous.
That said, we are coming through an economic upheaval not seen since the Great Depression. But the downturn cycle that began in 2007 has already begun changing over the last year. And I think it will continue, slowly, but steadily. If you get into property investing, you do so knowing the inherent risks: it’s illiquid, and in a down market, hard to get your money out quickly. But if you’re in for the longer term, the ups and downs tend to even out. Historical data has proven this – and will keep the doomsday prophets at bay.
While the residential real estate market continues to slowly rebound, average national rents have done quite well – and continue to rise at about a six percent annual clip. It’s possible that short-term financial upheavals overseas may create a ripple effect of tighter credit here in the U.S., but nevertheless, renters are still going to rent. As the rental market remains strong, combined with low interest rates on existing mortgages, it makes for an excellent time for real estate investors to be building a portfolio of rental property.
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