Palos Verdes, CA. The Center for Real Estate Studies (CRES) has just released their third quarter 2016 issue of “Market Cycles". It gives a forward look at more than 150 income rental markets with “buy and sell” recommendations. This publication gives the real estate investor a two-year head start on where and when to invest in income rental properties. The current number of markets in the “Sell Phase” is forty-five, according to Eugene E. Vollucci, Director of CRES. The number of markets in the “Buy Phase” is eleven. Mr. Vollucci states, “This quarter the three top buy recommendations are Akron, OH, Madison, WI, and Youngstown, PA. The three top sell recommendations are Bellingham, WA, Newhaven, CT and Charlotte, SC. according to Mr. Vollucci. In this quarter’s edition of our "Market Cycles," we outline our thoughts about various economic outcomes over a horizon of six to 12 months and their impact on the real estate market. We have created a frame of four different scenarios, including our base-case scenario and three different risk scenarios. Our base-case scenario, labeled "Slow growth, low inflation," assumes that the current recovery will continue despite heightened uncertainty about the presidential election in November, which validates our current real estate allocation, a balanced combination of risky assets and assets that may deliver less correlated returns. The first risk scenario presumes that US wages may accelerate soon because current unemployment has fallen below the level of unemployment that is consistent with stable inflation, which might force the US central bank to hike rates faster and more sharply than currently expected. Real estate prices historically decline under this scenario. A sudden jump in inflation and a forced renunciation by the Fed of its current gradual tightening stance will create an environment of risk-off with a sell-off of real estate. Finally, government debt will also experi¬ence significant losses. In such a scenario, we would strongly underweight real estate, with the highest underweight in euro areas and the lowest underweight in US, as the US economy may benefit from safe haven flows In the second risk scenario, we evaluate the implications of a positive demand shock – which may result from sharply rising fiscal spending, as intensively discussed by many policy-makers and desired by many investors – to the economy and financial markets. More spending is usually favorable to real estate markets. As economic growth accelerates earnings growth, we strongly overweight real estate with a preference for the US markets, as they offer more upside potential because of their underperformance over the last few years. In such a scenario, we would increase the allo¬cation in real estate investments based on the view that earnings growth is increasingly improving In the third risk scenario, we investigate the impact on the economy and the expected performance of real estate markets if there is a negative interest rate policy. If the banking sector introduces negative rates on deposits, causing a sharp decline in bank money, a recession due to credit scarcity could emerge. This would warrant a very conservative real estate allocation. |
We recommend underweighting real estate, as a potential recession threatens earnings growth among all other investments, we still favor US real estate, although a potential recession would deteriorate the earnings profile of real estate assets.
Given the deceleration of economic activity due to declin¬ing credit availability and further monetary rescue packag¬es, we would underweight investments in real estate, as defaults would be expected to rise.
ABOUT THE AUTHOR: Eugene E. Vollucci, is the Director of The Center for Real Estate Studies, a real estate research center He is author of four best selling books and many articles on rental income investing, apartment investing, real estate and taxation. To purchase a subscription to Market Cycles and to learn more about the Center for Real Estate Studies, please visit us at http://www.calstatecompanies.com
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