By Mike Colpitts
Real estate investments have taken a financial beating the past five years, but could evolve into a more stable investment, despite poor macroeconomic conditions in the U.S., according to a private real estate investment equity firm.
Investors with access to large amounts of cash, who are able to avoid debt, are likely to position themselves to benefit from what could be a major shift in portfolio investment allocations into real estate, Northpoint Asset Management says. The company has produced some of the best results for clients in the industry carefully selecting low leverage investments.
U.S. pension funds are flush with cash, currently sitting on $5 trillion in unused capital searching for investments to allocate. But after the financial crisis, volatility on Wall Street and Ponzi scheme swindler Bernie Madoff, among other financial market criminals, professional investors and amateurs are cautious of many investment routes.
Tight lending in mortgage financing and commercial markets restrains economic growth as federal regulators work over final regulatory reforms to present to Congress. Despite near record low mortgage rates, obtaining a mortgage for most people is next to impossible.
However, lending rates have remained at low levels for an extended period of time with few exceptions from 1950 to 1970, mostly following World War II. But inflation increased to as much as 13.5% from 1973 to 1982 averaging 9% during the period. The Federal funds rate exploded to as high as 16.40%, but with current Federal Reserve policy rates are expected to remain low for a long period of time in efforts to aid the U.S. economy and eventually propel growth.
“Although interest rates are at an all-time low and even if debt became easier to obtain, anything other than fixed rate mortgages could be dangerous in an inflationary environment,” said a statement from Northpointe. “Historically, a period of low interest rates has been followed by high rates and monetary inflation.”
A variety of factors influence monetary policy and the way rates are set by banks and mortgage companies prior to lending. But for the 20 years prior to the real estate collapse from 1990, inflation remained tame, generally less than 3.5% annually.
Rental rates are projected to grow over the next five years as former homeowners who have been foreclosed from their homes seek rentals to house themselves and their families. Multi-family residential unit growth is driving a rise in residential first time home building starts.
“If inflation takes hold of the American economy, real estate assets are a great investment as long as they are not tied to revolving or high interest bearing debt,” Northpoint advisors contend. “Rent may increase in sync with interest rate hikes.”