With interest rates headed upward yet again with the latest round of belt tightening by the Federal Reserve, and the stock market falling with no bottom in sight, many people are crying doom and gloom. There are talks of watching for a rise in foreclosures due to stock market losses. Builder are convinced they are about to be ruined. But this is no time to rush for the exits. The fundamentals of real estate investments are sound.
During the period of 1980-82, when there was a single-family homebuilder. Now that was tight money. With prime in the high teens, very few deals made any financial sense for lender or borrower. Then came the 5 years of favorable tax treatment that made dumb and dumber deals look good, until Congress pulled the plug on passive losses. Then we had to re-learn an old lesson, if it doesn't cash flow, it's not a deal. The recession of 1990-91 was a cakewalk for those who weren't over-leveraged. Fast forward to 1998, builders were riding what has now become the longest economic expansion in history. Asia went ape, the Russian ruble turns to rubble, and the markets gave a physics lesson, what goes up, does come down. The Fed cut rates, everything settled down, and for the most part it was business as usual on Main Street. But for the first time we got an up close and personal look at how interconnected this global economy has become. Now it’s the year 2000. Y2K turned out to be a non-event, though it took the blame for a general slowdown in activity in fourth quarter 1999. Gas prices are at record levels, yet spending remains strong. Why? Are we heading for recession? Does it matter? How do we plan for the next five or ten years? One fact remains constant for the real estate industry. Our health and well-being has always been tied to the availability and the cost of debt capital. That is to say that as long as we as investors have access to reasonably priced financing for our properties; we can survive in any market. In 1991 that it wasn’t enough to have equity,
India Property has to cash flow as well. Builders also learned that when I can present my company as a stable enterprise, insulated from the uncertainty of highly speculative investments, lenders will roll out the red carpet for my deals.
