Due to the fact that landlords can raise rents and property values typically increase along with other costs, real estate is sometimes promoted as a reliable hedge against inflation.
In September 2022, Jeff Fine and Nora Creedon, two of Goldman Sachs’ industry specialists, discussed why this is rare on the podcast Exchanges at Goldman Sachs.
They explained how the real estate market is changing due to inflation, rising interest rates, and a possible recession, as well as where they believe there are investment opportunities.
Fine and Creedon Real Estate Ideals
Real estate typically has a lower correlation with your other investments. Compared to many other assets, it typically has lower volatility. It frequently has financial aspects. So, in her opinion, it must be included in everyone’s portfolio.
Concentrate on real estate with pricing power. Assets that are in extremely high demand from buyers willing to pay for them. They can afford the rent to live in the apartment complex, hotel, or fantastic office building at Main & Main.
Since recorded history began, there has never been a time when such severe inflation has occurred without also experiencing much tighter financial circumstances, whether those conditions take the shape of higher rates or reduced capital available. That usually could be more helpful to real estate.
She also mentioned “offsetting costs” associated with charging higher prices, such as needing to pay greater wages to the hotel personnel, and said that lengthy leasing agreements might prevent immediate price increases.
Mortgage rates for purchasing a home have significantly increased during the past several months. And as a result, the housing market is experiencing a severe affordability crisis.
Furthermore, she pointed out that since the alternative choice of home ownership has grown less desirable or even unaffordable for certain people, increasing monthly mortgage expenses has assisted residential landlords in raising rents.
There are definitely areas in the residential sector that have a great deal of potential for rent increases over the long term, including specialized sectors like student housing, age-restricted housing, and senior housing. And those locations we’ll want to be in over the following five and ten years.
We have yet to observe a substantial reset in asset pricing since there is so much money chasing investments. However, we believe it will happen eventually.
He was addressing Creedon’s claim that the Federal Reserve’s interest rate increases would make credit less accessible, which would hurt market liquidity and property values.
People, in our opinion, are returning to their jobs. The work schedules might change in specific ways. There might be more adaptability included.
There might be some industries that care less about in-person, in-office interactions. But generally speaking, we continue to have faith in the office tenant market.
We’re about to enter a tremendously fascinating time. But, given the damage they can occasionally wreak to the larger market, we don’t love them.
We discussed the recession. We discussed rate increases. However, as an investor, these are the times you look forward to. At this point, inefficiency offers a chance.
What 2023 Foretells
Over the coming year, we’ll see exactly how much of the housing market’s change is rewriting history and how much is forging new ground.
Our information comes from several reliable sources, including the U.S. Housing Market News Index. An interactive platform offering a data-driven perspective of the national housing market is the U.S. News Housing Market Index.
Luckily, the majority of economists and experts are not overly concerned about a repetition of the protracted national decline in property prices that followed the financial crisis of 2008–2009.
However, there is undoubtedly cause for concern in those markets where rents, prices, and housing demand all increased to levels that were growingly out of proportion to local earnings.
In addition, there is the persistent problem of affordability restrictions that prevent younger buyers, potentially turning many of them into lifelong renters in more expensive cities.
Many will eventually relocate to Midwest, South, and Sunbelt states with cheaper housing markets, especially if they can continue working from home for far-off firms.
A Potential Crash?
Economic forecasts are risky even in the best of times since there are many potential variables.
Since it is unclear how soon or how far the Federal Reserve can reduce inflation and borrowing prices without negatively impacting consumers’ needs for items ranging from homes to cars, it isn’t easy to make concrete forecasts for the real estate market for 2023.
Whatever the Fed decides, it’s critical to remember that home prices are famously tenacious even when housing demand reverses.
This results from sellers preferring to hold on to their projected paper gains for as long as possible and buyers not wanting to “catch a falling knife,” which restricts transactions.
This stickiness will prove even more difficult to overcome until salaries have an opportunity to catch up with the rise in property values because so many households with mortgages are benefiting from record-low rates.
Notably, 12 months after, home values on the S&P Case Shiller index started to plummet year-over-year at the start of the financial crisis in March 2007. They had decreased by less than 8%.
Given the lack of available homes, it is doubtful they would decline even more sharply than in 2023.