Issue 85 – It’s No Secret That Wall Street Has Been Shaken By Volatility

As the conflict in Ukraine continues to escalate, its far-reaching financial consequences are becoming more apparent. We have now seen the Dow record its fourth consecutive week of losses amid fresh worries about the global economy while oil prices have shot up to nearly $130 per barrel, 57% higher than the start of the year. If oil continues to soar, it will be debilitating for airlines to maintain fares. Sanctions imposed on Russian banks by western powers have pushed the Ruble to zero while the US dollar has jumped to its highest value point in almost 2 years. While a strong dollar is good, it is hard to predict the effect sanctions will have on the US, especially if you consider that they will keep approximately $1 trillion in Russian assets from flowing through US markets.

If all that were not enough, the Federal Reserve is still contending with crippling inflation. To put things into perspective, the Federal Reserve sets a 2% inflation target each year to help businesses plan and maintain prices. Right now industries such as furniture, bedding, and food are experiencing inflation rates over 20%. The Fed’s plan to mitigate this involves raising interest rates in a number of key markets this month, a measure that hasn’t been taken since 2015. Singapore just raised their stamp duty for the first time from 20% to 30% on property sales. It seems to be a “theme”.

Even though the Fed does not “ raise” mortgage rates, they raise the federal funds rate which then can in turn impact mortgage yields and lending from banks. Real estate once again can offer very important protection an “Inflation hedge” – when inflation takes place – property diversification becomes a hedge to inflation. Especially if one is achieving a high rental income.

Hard assets need to go up in order for this hedge to maintain. When there is U.S inflation at times it can outperform the stock market in today’s uncertain world.

In a turn for the better, some 678,000 jobs were added to the US economy in February, and the unemployment rate fell from 4% to 3.8%, a strong signal the economy is gaining steam after a slow start to the year – so know that it’s not all gloom, despite what the headlines say.

What does this confusing picture mean for the US real estate market? There may be one immediate silver lining. If the stock market continues to slide, the Federal Reserve might delay raising interest rates, which would impact mortgage yields. In an already competitive housing market, that would be good news for younger and first-time buyers who would not be saddled with steep rates.

More broadly, with so much uncertainty, property is looking like a more compelling opportunity as it provides the verification from stock markets it has a benefit of being able to be a place where people can actually live in and perform of a time – it can be an income producing property which hedges against inflation and act as a safe harbor. Just as it has for decades, real estate can once again offer very important protection and attractive returns during times like this. New York City’s housing market has already returned to its pre-Covid glory and competition is high. Time and again, this city’s housing market has proven that it is not subject to the same extreme highs and lows of traditional stock investments, making it a flight to safety given the volatility in risk assets.

After all, humans seek safety in shelter. At times of uncertainty, it is our instinct to want to be home with loved ones. During the global pandemic, we saw our homes turn into offices, gyms – essentially, our livelihoods. We rediscovered the value and importance of our humble abode.

While a war continues in Europe and poses a different set of challenges, the diversification into real estate given inflation fears can provide a utility value. Staying in our homes will likely become the new going out as consumers avoid the 25%+ inflation rates seen in the food industry. For investors, this would provide stable cash flow if rented out.

The post-Covid surge of demand combined with recent global turmoil can be off-putting for buyers, but it should not deter from seeking smart investment. Having money allocated into property rather than just in banking institutions or investment portfolios can be one of the best option as we wait to see how else this conflict may further impact the global economy.