“Los Angeles, California” A significant downturn occurred in the stock market for the first time since the beginning of 2016 last month. Long-term interest rates reached multi-year highs and are projected to continue to rise this year. In addition, the United States Congress reached a consensus on an expansionary spending plan for the 2018–2019 fiscal year. In the context of the real estate market, how will this take place? Concerns about inflation have been the primary reason for the precipitous drop in stock market values, despite the fact that it seems that technical issues were the primary cause of the correction in the stock market. We have provided an example of such a situation about inflation and the effect it has on investments in real estate. In point of fact, the gap between the present and trend economic growth is becoming closer and closer to zero. The growing demand for labor is exerting upward pressure on wages and salaries, but it is still a long way from a significant increase in inflation rates. The recommendation made by the United States Department of Commerce in its investigation to restrict imports of aluminum and steel on the grounds of national security serves as a reminder that the possibility of trade tensions becoming more severe has a significant impact on investments in real estate. In light of these occurrences, we are not providing any evidence to support the notion that the likelihood of dangers has significantly increased. On the other hand, we contend that a higher level of volatility, in conjunction with the unpredictability of the future and the uncertain outlook for our trade policy, is not an environment in which we should risk everything on a single endeavor. Instead, we should seek returns by pursuing opportunities in the real estate market. Price increases that are not warranted will, in all likelihood, be adjusted over the course of time. This is a natural process. Some analysts are of the opinion that the recent decline in the stock market may have been mostly influenced by the fact that inflation has been on the rise. Higher inflation, on the other hand, is indicative of an economy that is overheating, and increasing wages may result in decreased profit margins. There is little doubt that neither scenario is applicable at the present moment; but, there is data from the past that indicates that periods of time when inflation starts to increase often cause instability in real estate markets, and that returns on average are rather low. The last point to consider is that increased interest rates might have a negative impact on real estate values if they indicate an increase in risk. In the event that stronger growth is the cause of higher interest rates, then such rates should be less significant. The repercussions of increasing interest rates on the real estate outlook are expected to be limited for the time being, according to our expectations. It is possible, however, that a more persistent and considerable decrease in real estate values might be linked with slightly slower growth. This could be the case either because the economy is anticipating a slowdown or because the economic downturn itself is dampening growth. When it comes to growth, the effect of increasing interest rates is also contingent on the causes that contributed to the increase in interest rates. It is possible that the increase in interest rates is the result of higher growth momentum; if this is the case, then the economic repercussions will be relatively limited. Nevertheless, if, for example, increased interest rates are a reflection of growing risks, then growth may very well suffer greater and more substantial consequences. Conditions in the banking sector continue to be very lax, and interest rates are quite low. Because of this, economic development should continue to be supported. Consequently, we are maintaining our forecast of prolonged economic development, which includes the following: (1) an increase in global economic activity; (2) an increase in the creation of fixed capital; and (3) a very gradual adjustment of monetary policy in the United States. We are aware of the potential dangers that might arise from increased protectionism, since recent pronouncements serve as a warning that disputes over trade could become substantially more intense. At this juncture, it is not yet clear what course of action the United States of America will pursue, nor is it known how other nations could react. Since the onset of the Great Recession in 2008, the majority of countries have successfully avoided the possibility of deflation by using conventional and, more crucially, unorthodox means of monetary policy. In the United States, inflation was roughly 1.5 percent on average, with a range that went from -2 percent in the middle of 2009 to approximately 3.8 percent in the latter half of 2011. The current rate of inflation for consumer prices in the United States is 2.1 percent. It is possible that further trade tariffs and trade friction may cause inflation to rise in the United States, where the government is now beginning on a path of fiscal stimulus. Nevertheless, the underlying inflationary pressure is being kept under control for the time being by a number of reasons. These factors include consumers’ continued cautious wage negotiation behavior, companies’ pricing fixing, and changes in the structure of the labor market. Furthermore, it is quite probable that the most recent measurements have exaggerated the present price trends ( the surprising weakness in inflation in 2017). Over the last several months, salary and price patterns have not altered much outside of the United States. In light of this, we do not anticipate any unexpected events to take place during the course of 2018. After considering the tightness of the labor market in the United States, the evidence of accelerating wage dynamics, and the potential impact of higher financial market volatility on economic growth, it is anticipated that the Federal Reserve will gradually raise interest rates while exercising caution. Additionally, a tax policy that encourages the competitiveness of corporations in the United States and provides incentives for direct investments from outside should be supportive of the greenback. This policy should also serve to enhance the potential growth rate of the United States. At the same time, there are a great number of elements that indicate that the real estate markets are going to have a prosperous future. The likelihood of a recession occurring in the United States economy is now estimated to be at four percent, and it is expected to increase to roughly ten percent by the end of 2018. This information comes from the Federal Reserve Bank of New York. We believe that real interest rates will remain relatively low as a result of the gradual tightening of monetary policy, limited expectations of inflation, and cautious investment demand. It is for this reason that we favor investing in real estate in 2018. in regard to the author: The center for real estate studies is a research organization that focuses on real estate, and Eugene E. Vollucci serves as the director of the Institute. He has written a number of articles and four books that have become bestsellers, all of them are on real estate rental income investment and taxes. Please visit our website at http://www.calstatecompanies.com should you be interested in purchasing a membership to market cycles or gaining other information on the Center for Real Estate Studies.
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