At the beginning of the year, growth was well above expectations. The labor market remains strong, with solid wage growth supporting consumer spending. Our economy has been driven by an obliging fiscal policy; its impact should increasingly erode this year, which may have an adverse effect on values of real estate investments.
In the first quarter of 2019 growth was 3.2% . This was the third quarter our economy has grown at a rate above 3% in the last five quarters. Looking at the makeup of quarterly economic growth, domestic demand slowed sharply. Economic growth is expected to decelerate to 2020, but at a very gradual pace.
A recession is highly unlikely in 2019 and in 2020 (as household consumption should continue to benefit from higher disposable income). However, doubts may arise in the coming quarters from fiscal policy, domestic demand under pressure and mixed signals from hard data. We must always keep in mind that lackluster growth could trigger a recession.
Since the beginning of the year, we have observed a calm period in the interest rates, with volatility very subdued. The USD index only rose by 1.35%. The USD currently still has a lot going for it, does better on most growth, inflation, and yields than most other indexes. Its Achilles’ heel remains a squeamish Fed, which has the ability to adjust rates.
A strong outlook on earnings growth, along with manageable wage inflation, would suggest that real estate investment values should remain intact, especially as our monetary policy maintains favorable financial conditions. However, with the renewed trade tensions, the real estate rental investment market could change. Although valuations of the real estate industry appear attractive, we feel that investing in “pockets of opportunity” locations as pointed out in our quarterly newsletter Market Cycles represents a well-balanced risk positioning. Should a proper trade deal between the US and China materializes in the weeks ahead, the prospects of adding potential value should increase.
Another factor that has an impact on the real state investment industry is the price of oil. The rollercoaster has continued after OPEC cut production by 3 million barrels a day, the most significant cut since the Great Financial Crisis. The surprise announcement by the US administration that the US is ending waivers allowing several countries to keep importing Iranian crude has pushed up oil prices to $75 per barrel.
At the end of the day, with low inflation and subdued growth, the central bank has turned more wishy-washy and remains so. Monetary policy is likely to respond to enable economic growth to recover in the quarters ahead. We think the Federal Reserve could cut interest rates if the economy slows materially. Interest rates have a profound an effect on the value of real estate investments. Because their influence on investor’s ability to purchase real estate investment properties (by increasing or decreasing the cost of mortgage capital) is so profound, many investors know that this is one of the most important factors in real estate valuation.
ABOUT THE AUTHOR: Eugene E. Vollucci, is considered to be one of the foremost authorities on real estate taxation and real estate investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for Real Estate Studies, a real estate research organization. To learn more about the Center for Real Estate Studies, please visit our web site at http://www.calstatecompanies.com