The Cal State Companies: Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership
Real Estate Investment Outlook August 2020
It looks like the corona virus has spiked. When we will see a decline again depends on various factors: 1) the effectiveness of the fiscal support measures 2) how fast jobs will return and short-working schemes can be reverted to normal working time employment, 3) how fast supply chains can be fully repaired, 4) how resilient private consumption will be in the light of elevated unemployment and rising debt burdens, and 5) the impact of possible second waves.
According to its World Economic Outlook, the world economy, especially the advanced countries, is expected to contract in a coordinated fashion. Most countries have embraced various support measures such as tax deferrals, loans, equity injections, and guarantees. These policies will only have an indirect impact on growth this year because they provide financing rather than directly increasing spending.
The Fed has already stretched its balance sheet at a frantic pace. Its total assets have grown from 4.2 trillion USD in December 2019 (representing about 19.2% of GDP) to 7.2 trillion USD by early June 2020 (±31.5% of GDP). Most of the expansion thus far can be explained by its “traditional” asset purchase program targeting Treasury and government sponsored enterprise (GSE) securities. The holdings of those increased from 3.7 trillion USD in December 2019 (17.2% of GDP) to 5.6 trillion USD by the end of May 2020 (25.8% of GDP), surpassing their previous record in both nominal terms and relative to GDP (over 24% of GDP in 2014). In addition to these programs, which are already reflected in the bank’s balance sheet and which as yet do not have an official upper limit, the Fed has pioneered new measures to provide up to 2.3 trillion USD in loans to support the economy, only a portion of which is currently disbursed. This latter figure includes up to 750 billion USD allocated to purchase corporate bonds from issuers which are either investment or noninvestment grade.
One argument in favor of a potential boost to inflation is the massive fiscal spending that is being used to fight the worst consequences of the current slump in economic activity. But arguing that fiscal stimulus is a game-changer is putting the cart before the horse. It is not the current stimulus that matters but whether huge deficits will continue long into the future. It must be noted first of all that a big amount of the fiscal measures announced are loan guarantees rather than fresh new money. There is nothing simulating about adding more debt to balance sheets. Even a direct form of stimulus is designed to be temporary and self-calibrating. The bulk of the fiscal stimulus is also temporary – households have received a one-off paycheck, more likely to be saved rather than spent, as happened in 2008. As things stand, the fiscal stance is set to be massively contractionary next year, not expansionary.
These policies will have a devastating effect on real estate values in the coming years. To keep on top of the real estate markets and avoid the rocky road ahead, we recommend using calstatecompanies “Market Cycle” which gives you a two-year head start on when to buy, sell or hold.
ABOUT THE AUTHOR: Eugene E. Vollucci, is considered to be one of the foremost authorities on real estate taxation and investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for RE Studies, a real estate research organization. To learn more about the Center, please visit our web site at http://www.calstatecompanies.com