Inflationary Fears Ultimately Lift the US Property Market

The theory of a ‘flight to quality’ has been haunting the pages of economic text books since before Warren Buffet was a toddler, and it is now a well accepted routine reaction that markets display toward less than titillating news. Despite the US recessionary fears of 2008 that were said to lead the global recession, the Global Financial Crisis caused a major appreciation of the US dollar as the refuge within which to ride out the storm. As the dust settled, the merits of other economies were taken into consideration and US dollar positions were unwound.

In the same vein, property and gold have also proven to be objects of a flight to quality throughout history, and while the former in many jurisdictions is bordering on the oxymoronic, foreign investment in short sales and other distressed US real estate is a burgeoning phenomenon.

With the collapse of the UK property market in 2007, and the sheer devastation that the sub-prime mortgage fiasco has inflicted on the US property market, investment capital has sought alternative nooks to occupy. As equity markets flailed in response to lower economic growth, debt instruments appeared to be the only recourse to be had. Still, the yield curve being shaped by bond rates that act as a barometer of economic health, have recently ceased to be the favored haven for capital. This may well have to do with the potential for inflationary pressure envisaged in the medium term, and the possible inability of central banks, regulators and governments to contain this arch enemy of the capitalist economic model.

In any event, the target wooed by funds under management is distressed property in the United States. As was certainly entertained, the rumblings of the US economy with 300 million American consumers spending every day, is the veritable engine room for the world’s economic growth. This has resulted in increased output and economic activity returning to the US economy in a surprisingly short period of time.

With the carcasses of numerous REO properties, and mortgagors scrambling to avoid foreclosure lining the avenues that were once paved with gold, the US property market is still in recovery. This provides a small window of opportunity however; the sheer volume of property on offer in the US is slowly being absorbed by foreign investors who see greater returns in US property than underperforming bonds. Just as surprisingly as economic growth returned to the Land of the Brave, so too will a robust US property market reappear, blaring its horn like a freight train through a tunnel.

The attraction of US distressed property is patent considering the fact that the Federal Reserve is bound to maintain low interest rates to avoid double-dip recession. Bond yields will also remain relatively connected to the lower end of the spectrum, but currently the yield curve may steepen as investors openly reveal their inflationary concerns, and bail out of bonds for want of a higher return. If the low cash rates of today are going to take inflation to 12 % where it was in the mid-1980’s, investors want to be compensated for a commitment to long bonds. This need is far from being met in the US; nor is it being met in the UK or Europe due to the after effects of a global recession. Consequently, the capital markets the world over are turning to distressed property in the US as a profitable alternative. They are the only cheap items left on the shelf.

Posted by Arnold Balthazaar on Jun 23 2010. Filed under Economic Updates. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry