In economic terms, there is nothing more speculative than war. The costs are always guaranteed no matter the outcome, while the benefits are only secured by the victor. Moneyed elites benefit the most regardless of the outcome. While the working class is sacrificed at the altar of the spoils of war.
Military intervention abroad is the inevitable result of domestic financial excesses. Paid for by the misallocation of taxpayers money and the accumulation of government debt. Both are major contributors to inflation which lowers the buying power of the poorer sector of the population.
For the majority of people, buying a home is the biggest investment they will ever make. It’s referred to as an investment because of the long term commitment made to amortize a sizable loan secured by real estate. And once the debt is paid off, the investment will provide the owner with enough equity to secure a good portion of his retirement.
Whereas speculation is defined as making a short term monetary gamble with the expectation that it will pay big. As it happens, close to zero interest rates policy made real estate a speculative asset. And war, is also a short term gamble that a party will win and take over the economic resources of the conquered nation to finance domestic financial mismanagement. It goes without saying that a military conflict is utterly destructive and results in the dissolution of the defeated State.
Central Bankers driving interests rates close to ~0% was meant to be a short term gamble to kick start an economy that was stuck in a deflationary mode in the aftermath of the financial crisis of 2008. The low interest rates resulted in an unsustainable growth of government and consumer debt. As a side effect, the low rates drove the price of single family homes out of reach for an emerging working force.
The ~0% interest rate era is over and so are the speculative excesses it spawned. It will cost more to finance consumer and government debt as a result. Higher rates of debt will unavoidably lead to higher taxes. Measures that will be a deterrent to economic growth.
The U.S. federal government’s on an unsustainable fiscal path. And that just means that the debt is growing faster that the economy. Federal Reserve Chair Jerome Powell
Single family home values reached a peak in 2024 and are currently adjusting to higher interest rates. Until recently, property values were lifted by speculative buying as a result of historically low interest rates. For the most part, this was generated by investors buying homes as rental properties.
Investors who bought homes for rental revenue will evaporate in a rising interest rate environment. Profit seekers now have a choice of investing their money in low-risk short term T-bills at ~5% as opposed to about ~1% a few years ago. Or put their money in a relatively safe money market account that exceeds current returns on a rental property. A declining number of real estate investors will inevitably contribute to a downward pressure on home prices.
The value of real estate investment trusts (REITs) like Equity Residential (EQR) peaked in 2022 at $92 per share. As of this writing, EQR is selling ~30% lower. During a real estate correction, REITs typically come under pressure to sell part of their investment to meet investors’ redemption. The sale puts further stress on the value of the stock and home values.
Commercial real estate (CRE) is having a notable correction in the aftermath the lockdowns. It is exemplified by the recent transfer of a 26 story Manhattan office tower located at 1740 Broadway, New York City. It was purchased by Blackstone in 2014 for $605 million. The company defaulted on its loan in 2022. And it sold recently for ~$200 million. Going forward, distressed sales like these determine the value of comparable commercial properties in the market place.
Big corporate landlords like American Homes 4 Rent (AMH) have been buying whole development known as built-to-rent gated rental projects. The new business model is undertaken to cut the administrative costs of owning homes that are scattered in various locations. To implement built-to-rent properties, these big landlords sold ~3,000 homes in different neighborhoods so far. Companies like AMH will no longer bid prices higher in the market and are adding inventory of homes for sale.
Currently, banks hold a limited number of mortgages on their books. Since the 2008 financial crisis, loans have been sold off to Government-Sponsored Enterprise (GSE), like Fanny Mae, who in turn sell Mortgage Baked Securities (MBS) to investors. As a result, the Fed is no longer overly concerned about banking mortgage defaults triggered by lower property values. It can now concentrate on the domestic economy and the credibility of the US dollar. And keep inflation in check with high interest rates to curb a troubling rise in residential rents that have been a contributing factor to higher cost of living.
What made the USA an economic powerhouse was the mobility of its people. First, by settlers who moved away from economic discrimination and subjugation. Then, by immigrants who fled to a land of freedom, better economic opportunity and easy access to property rights. Similarly, cities marred by government mismanagement, high home prices, high taxes and high crime will push people to move elsewhere, seeking affordable homes and a safer environment. Whereas, counties unsatisfied with State rulers will be secede. Potentially creating a financial implosion in big cities and States burdened with out of control debt.
The exodus will leave mismanaged cities with an oversupply of homes for sale and lower real estate values. The exodus will generate a devolution of power away from big metropolises in favor of smaller community living. The transition will benefit small towns and mid-sized cities ruled by governments that are in touch with their residents.
The real estate market generates a great portion of economic activity throughout the country. If a sizable real estate correction unfolds, it will alter the feel good prospects for the economy. This will modify owners’ tolerance for incompetent governments and their institutions and generate a disintegration of established centers of power.
