Now that the year 2001 has rolled around… it's time to take a look at our Real Estate Investing Crystal Ball. If you know what to expect out of the coming economy, you can position yourself to take maximum advantage of the opportunities. It's almost like having the winning lottery numbers a few hours before the drawing. With that in mind, let's gaze into the future…
Some Interesting Facts
Consumer spending drives the economy. We as consumers are highly predictable. When large numbers of us earn and spend more, the economy grows.
People spend, save, work and mature in predictable patterns as they age.
Newborns don't spend anything. 18-22 year olds are just moving into the work force and have very little economic impact. Spending for Baby Boomers currently peaks around age 49. Spending demands fall as the maturing work force moves into the power structure of business and industry.
The Baby Boomer generation is the largest in history at 80 million strong.
The Baby Boom generation is defined by those born in the above average birth years between 1946 and 1964.
The most concentrated surge in property buying comes at age 43 when most people buy their largest home. Home buying declines as buyers approach their peak spending age of 49… then drops off dramatically.
Housing is a key factor in the economy. Housing leads the way out of recessions.
The Baby Boom birth wave peaked between 1950 and 1957. This should put the 43 year housing peak from late 1993 through the year 2000.
The above information is powerful. Most of it was compiled by our own government via the U.S. Bureau of Labor Statistics, Consumer Expenditure Survey and the U.S. Census Bureau.
The reason this information is so powerful is that it can be used to predict what will be happening in our economy way into the future. This kind of stuff will turn you psychic. No kiddin'.
Think about it. If you agree spending is what drives our economy… then the shear number of people spending is where the real impact comes into play. This has been going on in commercial real estate for years. If you put a McDonalds on a street with a high traffic count… assuming easy access… it should outperform a McDonalds on a street with a low traffic count. Make sense?
This has been referred to in Real Estate as location, location, location. In McDonalds' case… the hungry crowd is bigger in the high traffic location. Every thing else being equal… which location do you think has the higher probability of success? Which would you rather invest your hard earned dollars?
But you see… this is exactly the same impact we can expect from the Baby Boom generation. More people in their peak spending years. As a matter of fact… the most people in the history of the United States reaching their peak spending years as a group.
The Boom Economy
Right now… we're on the leading edge of a Boom Economy. Because of the tremendous size of this Baby Boom generation… this will be the strongest and healthiest economy we'll see in our lifetimes. In fact, this boom economy should take us well into the 21st century in grand style… lasting until 2010 to 2015.
Get ready! Position yourself to take maximum advantage of this unprecedented opportunity.
Now… Let's Take A Closer Look At Your Tea Leaves…
What can you expect from this economy? Come closer and I'll tell you… First of all, let's talk about inflation. Inflation has made a lot of real estate property owners rich. In fact… there have been times in the not so distant past… when all you had to do was own real estate to become wealthy.
So… what causes inflation? Some say it's the devaluation of our currency by our Government via the printing of more and more money. Let's see if we can't take it a little further. How about this… Inflation occurs when we have a high requirement for investment and low productivity to help finance that investment. In other words… it's the economy's way of financing periods of high investment.
Historically… inflation has accompanied periods of war. High requirement for investment… low productivity to help finance that investment. Inflation also accompanies transitions in technology. Each generation brings with it new ideas and technologies as it enters the work force. The Baby Boomers were far from the exception.
Think of the expense of training this enormous work force (high requirement for investment) compared to their productivity during the training process (low productivity). Add to that the expense of retooling for the new technology they brought with them. This… no doubt… is the formula for inflation. A workable formula we can use to predict inflation.
Pass the Windex
There is no question… barring the possibility of all-out war… this boom economy is going to be one with little… if any… inflation. We will even see many items go down in price. This has already happened to housing prices in some parts of the country like Southern California. It may have even happened in your part of the world.
If you are buying real estate property with the hope you'll be the recipient of a great transfer of wealth because of inflationary times… you may want to re-evaluate your thinking. Real Estate prices… in the next 10-15 years… will be pushed into higher ground only by the laws of supply and demand. Well located… quality real estate property will be the appreciation play.
O.K. Mr. Hotshot… Know-it-all… Psychic Real Estate Man… What About Interest Rates?
Well… let me ask you. What have you noticed as the trend with interest rates in the last couple of years? Been coming down a bit… haven't they? Every time you turn on CNBC they're talking about pressure on the “The Fed” to lower interest rates. “The Fed” is making an effort to protect us from inflation. It is their contention… if you lower interest rates… the economy will heat up… bringing with it inflation.
The reality of the situation is this… every time they have lowered interest rates… the economy has improved without any inflation. In fact… as we have already seen… quite a few items have actually gone down in price.
Interest rates are nothing more than a symptom of inflation. With inflation in check… interest rates will continue to seek a lower level. Look for 30 year real estate mortgage rates to continue to drop… possibly reaching as low as 5-6% by 1998.
“What's It All Mean… Alfie”
It's time for Chicken Little to go back inside. With inflation gone… and with deflation in prices in a broad range of categories… interest rates at the lowest levels in decades… we can expect our purchasing power to increase dramatically.
Think about this: If you could afford to pay $1,000 a month on your primary residence with 100% financing at 10%… you could afford to live in a $114,000 home. With interest rates at 5%… you'd be living in a $186,000 pad. Not too bad… but consider this… with a somewhat deflationary trend in Real Estate Property values… that $186,000 house might actually be the equivalent of yesterdays $200,000 – $225,000 crib. Oooh, Baby! That's goood.
Couple the above with the fact all other consumer items will stabilize in price (or even drop slightly)… savings will increase… spendable income should increase… and you may actually be able to afford $1,500 a month for a house note… moving you into the $280,000 price range. Wow! Can this really be true?
“I Can See Clearly Now… The Haze Is Gone”
What's this all mean to you and me as Real Estate investors? Well… first of all… we can't count on inflation to make us rich for a long, long time. We have to buy property based on it's economic value today. We'll need to re-negotiate interest rates on our existing debt to bring them in line with lower market rates… increasing our cash flow. Lock in on fixed rates where possible. This may also be the best buying opportunity of the century.
Listen friend… take advantage of this boom economy. There will be numerous opportunities to become truly wealthy in the next 15-20 years. It's in your tea leaves. But be warned… it won't last forever. Don't allow yourself to be caught in the trap of linear thinking. Just because it's good now and it's getting better every day… doesn't mean it will always be that way.
Things are cyclical. The shear numbers of Baby Boomers reaching their peak spending years are what fuels this incredible economy. This was put into play some 49 years ago. There's not much that can happen to change this direction. However… behind the Boomers is a serious drop in the birth rate. What will happen in 2015 when the number of people supporting our economy falls off dramatically? Will it be worse than the Great Depression? Probably so!
Your future will look bright if you plan accordingly. Entering into a 30 year mortgage won't have you debt free before the bottom drops out. Consider limiting yourself to 15 year financing or less. The lower interest rates will help. Having large cash reserves will not only help you weather the storm but will also put you in a position to profit from those who don't have their own Real Estate Crystal Ball.