To The Moon

My investing muse - real estate & crashing up

Real Estate is an area of concern, namely Commercial Real Estate (CRE).

• The commercial real estate CRE remains an area of concern. The value of office properties may continue this downtrend with default hurting various stakeholders. Once the banks are affected, the subsequent waves could hit rapidly.

• The high mortgage rate can affect employment when people are forced to stay in their current geography. People are limited in their ability to relocate by the high mortgage offering and the low mortgage they are servicing.

• With the housing situation, it can be difficult for people to relocate to take up new jobs - unless the mortgage can be adequately covered. The states can only look internally for manpower to take up the job openings.

Graph from Financial Times

With the interest rate, the work-from-home hybrid is causing a drop in office vacancy. This will also affect neighbouring businesses and the various public services like public transport. With a drop in the demand for public services, the local government can “incur losses” and may re-deploy these “excess” resources. On top of these, the crime rates are a concern for business and tourism.

Crash up

When the interest rate starts to drop, asset inflation is likely to follow, causing a “crash up”. With a lowered interest rate, property can get “more affordable”. Thus, it is possible that the price of assets like property increase from the current due to a surge in demand. This is known as “crash up”. When the price of assets like real estate increases, this should render houses more unaffordable despite the drop in interest rate - causing the market to crash upwards, making assets surge in value and thus enlarging the income gap between asset and non-asset owners.

Conclusion

We are seeing more debt being taken on by households, some businesses and the federal government. The government has a deficit of $1.6 trillion - financed by issuing treasury assets. This does not seem to be sustainable with another $1.5 trillion deficit expected in the coming 6 months. The Federal government will need to “liquidate” a company with a scale of Alphabet (market cap of about $1.67 trillion) in 6 months, a company that took about 19 years to build. What the US government needs to borrow in 6 months is similar to the 13th biggest economy in the World - South Korea with a (2022) GDP of $1.665 trillion.

CNBC news article dated 10 Nov 2023

When the biggest superpower needs to borrow money every few months to fund its deficit, it is a major red flag for me. Moody’s cut the US outlook to a negative last Friday. We can expect this to spill over into the market.

Let us exercise caution.

@TigerStars

$S&P 500(.SPX)$