Never before have world central banks raised interest rates by these amounts at the same time.
Mainstream media keeps reporting that it’s a bad time to buy a house amidst spiked interest rates. It’s a message for, well, the mainstream. It’s directed toward primary residence buyers.
It’s a different story for income property buyers. The tenant pays your interest for you and rents are spiking.
A looming recession and liquidity crisis is a big threat to stocks and other major markets. Let’s compare the investment environment among major asset classes today.
The dollar. It’s seen hegemonic strength compared to other world currencies. But with 8%+ inflation, it’s the worst time to invest in dollars (save money) in 40 years. Even if your CD or money market fund yields 3%, this guarantees a 5%+ loss in your prosperity.
Gold. It’s the classic inflation hedge with an impressive track record of possessing value for millennia. But it hasn’t done anything in high inflation. I own some gold. It’s about as exciting as eating celery sticks. Silver, platinum, and palladium prices have tailed off too.
Oil. Its rally lasted about as long as your house plant. In a recession, energy consumption wanes.
Cryptocurrency. Many have suffered brutal value downdrains as the crypto winter drags on. Cascading margin calls exposed unsustainable leverage in the system.
Store crypto on a “cold wallet”, which means offline.
Bitcoin is down 70% from its all-time high last November. I still believe that bitcoin has long-term potential due to its brand recognition and fixed supply. It could be time to “buy low”. Ethereum has migrated from “proof of work” to “proof of stake”, which promises to cut energy consumption.
The trend that’s become disappointing to many crypto enthusiasts (and me) is that its price movement is now closely correlated with stocks.
Bonds. Yields will remain well below inflation.
Stocks. In a recession, some sectors do alright historically, namely those in food, housing, consumer staples and health care. Humans demand these necessities in good times and bad, like Walmart, Procter & Gamble, Pfizer and McDonald’s. But don’t expect these to be Aaron Judge home runs.
Historically, recessions are bad for the stock market overall. The S&P 500 is now down 21% year-to-date, on pace for its worst year since 2008.
Many believe stocks are still overvalued and don’t expect major stock indices to rise again until there’s a “Fed pivot”. This means the time when the Fed signals that rate hikes are tapering or that rate cuts are imminent.
Primary residence. Prices have rocketed higher since the beginning of last year. Mortgage rates were 2.7% then and 6.7% today. They could exceed 8% by year-end.
The saving grace is that there’s less competition and buyer contingencies have returned in 2022. But they don’t offset higher rates.
Income property. When you buy one, your tenant pays all of the higher interest rate expense for you. That’s what offsets it. Higher mortgage rates lead to higher rents too.
A 5/1 ARM rather than a fixed-rate mortgage can lower your interest rate by 1.5% or more.
In five years, you might be able to refinance an ARM to a lower rate.
Worst case? Rates rise further—your payment will be less now and more later. In high inflation, you would rather have preserved a dollar today than a dollar tomorrow.
Of course, with your loan, you benefit from inflation-profiting. Say that you make a $50k down payment + $10k closing costs on a $250k property. With 8% inflation on your $200k loan, your ROI is 26.7% from this effect alone. ($16k / $60k invested)
With housing supply this tight, if a tenant loses their job, expect an incoming tenant to occupy it quickly. At times, the latter downgrades from a more expensive unit that they had occupied.
Whether we have a recession or not, you’re going to want another income stream.
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