So I am going out on a limb here with some forecasts for the New Year. I say forecasts rather than predictions because it is impossible to predict the future, but I can speculate a little based upon current conditions and a little base knowledge. Forecasting 2012 is much like forecasting the weather. I know for example that here in Memphis in the spring cold and warm air masses will begin to interact with each other on a more frequent basis. Sometimes this interaction will produce tornadoes. I cannot say however where those tornadoes will touch down or how strong they will be. There are just too many variables.
The same goes for 2012. I know based upon what is happening now, such as Federal Reserve money printing or government market manipulations that certain things are very likely to happen. I just can’t say exactly when or how significant the impact will be. For that we will just have to wait and see.
OK here goes:
1. Commodities such as oil, copper, gold, building materials, etc will continue to increase in price. These increases are the result of money printing by the Federal Reserve and soon also to be by the European Central Bank and Bank of China. Newly printed money always hits the capital sectors of the economy first before it makes its way down to consumer goods. This is why commodities like copper have gotten so expensive that people will now take grave risks to steal it. I do not see any sign of the money printing slowing so expect commodities to continue to increase in price.
Why should you care? Higher oil prices are like a hidden tax, especially on lower income folks. They will either have to buy gasoline to get to work or pay you rent, but will not be able to do both. Higher prices also make new home construction much more expensive, slowing it down in all but the priciest parts of town. Eventually the new money will make it to the consumer sector and food prices will begin to rise. That’s when things will get fun.
2. Interest rates will begin to creep up. The United States borrows $20,000 every second! Well guess what, with loose spending like that no one wants to buy our debt anymore. In fact some like the Chinese have been selling it off. So as demand drops we have to offer higher and higher interest rates to unload our debt. Unless of course the Federal Reserve steps in to buy the debt no one else wants by printing money. Then rates may stay low but see Number 1 above.
Why should you care? Interest rates affect real estate prices. Higher interest rates will put more downward pressure on prices.
3. The Chinese economy is in trouble. I expect to see some real turmoil in the Chinese economy in the coming year. China has made remarkable strides in the past few decades, but it is still a communist, centrally planned economy in many ways. Thus the number of malinvestments in China is staggering. This malinvestment of capital and resources is going to have to be corrected and that correction is going to be painful.
Why should you care? China makes all our stuff now, where will we get it all? If China takes a dive, who will buy all that debt? See number 2 above.
4. Real estate prices will not recover much. There are still a lot of malinvestments (bad loans, useless condos) on the books and in the foreclosure pipeline in this country. We have not even begun to reach the bottom of the foreclosure crisis yet as there are thousands of people underwater and not even paying their notes.
Why should you care? These foreclosures and low prices translate into numerous deals for us investors. It looks like the deals will keep on coming. I hope you can get some sooner rather than later though (see number 2 above). And be sure not to bet on price appreciation, unless you are a farmer. Bet on positive cash flow to stay strong.
5. Lending to real estate investors will remain flat. Banks made a lot of bad decisions (malinvestments) in the past decade and a lot of that junk is still on their books. They are either so backed up with foreclosures, or do not want to take the write downs, or simply no one wants to buy their bad loans and inventory. In fact, I bet we will see bank closures and forced fire sales to other banks in the coming months. Bottom line, the bankers are scared of real estate, especially investment real estate and will be for some time.
Why should you care? One of the best things about real estate is leverage or using other people’s money (OPM). Traditionally banks were the place to go to get OPM. Those days are over for now. Does that mean you quit as an investor? No! This is the best time to be buying real estate (you read number 4 above right?) You must adjust. Find private lenders and offer then a nice interest rate (especially now while rates are low! See number 2 above). Or find a wholesaler who has private financing in place. They are out there.
So there you have it (wow that was a longer post than I thought it would be). My five forecasts for 2012. It is not all doom and gloom. In fact it is a great time to be a real estate investor. But one must watch the trends, study the data, make the forecasts and adjust accordingly.
Till next time, work smarter not harder and Happy New Year!
