Into the last week of January 2022, we are seeing major changes in both the stock market, but also interest rates, and inflation.
Investors are looking for answers, and options, to hedge against market uncertainty and volatility, which is predicted for the next few months at the least. Investing in real estate as an alternative can help protect your investment against inflation and higher interest rates, while also protecting from the ups and downs of the stock market.
Market in January 2022
U.S. stocks staged another resurgence Tuesday but closed lower despite a momentous clawback from losses in midday trading as investors anticipate clues from the Federal Reserve’s policy-setting meeting on how quickly the central bank may move to tighten monetary conditions.
The Dow Jones Industrial Average saw another massive rebound, recovering a drop of more than 800 to end just 0.19% below its flatline at 34,297.67. The S&P 500 ticked up from session lows but also closed in negative territory, down 1.22%, while the Nasdaq remained deep in the red, rounding the day out 2.28% lower.
“The market is exhibiting withdrawal symptoms as it is dealing with the possibility of the removal of the Fed put,” Anu Gaggar, global investment strategist for Commonwealth Financial Network said in a note. “It almost feels like the market is behaving a little incoherently, not knowing which way to go – go down because the Fed is tightening or go up because the Fed is finally acting to rein in inflation and is loading up on ammunitions while economic growth remains strong.
The CBOE volatility index, or VIX, closed Monday at about 29.90 after crossing above 37 in intraday trading, its highest level since November 2020. In their newsletter, Nicholas Colas and Jessica Rabe of DataTrek Research sounded the alarm on recent jumps by the so-called “fear gauge.” The VIX closed last week’s trading at 29 to pass the initial 28 level DataTrek deemed significant, or “the first statistically valid level of market panic.” In Monday’s session, the VIX hovered around 38 before retreating, briefly passing the next level the firm said to watch for: 36.
On Tuesday, the VIX opened at 32.29, hit a high of 35.85, bottomed at 29.13 and a close of 31.16, slightly over 1 point higher than Monday.
Factors affecting the market
Inflation is at a 4 decade high, due to, among other factors, imbalances between supply and demand, strong wage growth, and higher rent prices.
The Federal Reserve, led by Chair Jerome Powell, wants to slow the economy to get inflation down from 40-year highs of roughly 7% year-over-year price growth to a more healthy 2 to 3%.
Fed Rate (Interest Rate)
Although the Fed has signaled it will very likely raise rates multiple times this year, the first post-COVID rate increase is not expected this week. Instead, the policy-setting Federal Open Market Committee will likely tease higher rates coming in its March meeting. However, rumors are that the first hike may occur after the Federal Open Market Committee January meetings that started yesterday.
The Fed Rate rate has been set at near zero since the depths of the pandemic. Raising those rates, referred to as “tightening policy,” could dampen the rapid pace of inflation felt by Americans nationwide. Raising too much too fast is a recipe towards creating a recession- loans and mortgage rates rise, and economic activity slows down.
Investors have become increasingly concerned about the possibility of tensions on the border of Russia and Ukraine leading to military aggression. The North Atlantic Treaty Organization is sending ships and jet fighters to eastern Europe in response to Russia’s military build-up near Ukraine. The European Union also plans to provide loans and grants totaling more than $1 billion to Ukraine.
Why use Real Estate as an alternative against inflation & market volatility
The positive effect of inflation on debt
As a home price rises over time, it lowers the loan-to-value of any mortgage debt, acting as a natural discount. As a result, the equity on the property increases, but the fixed-rate mortgage payments remain the same.
Benefits of earning rental income
If rent can be adjusted up while keeping the mortgage the same, this can create the opportunity for increased money in the bank.
Property values over time outpace inflation
Real estate can be a good hedge against inflation because property values over time tend to stay on a steady upward curve.
Investing in properties with a low rate-fixed mortgage
As inflation rises, mortgage amounts stay the same, yet they are being paid back in lower values when adjusted.
Types of properties that leverage inflation
Short term lease multi-family property, with rental agreements renewed yearly
Apartment complexes are a unique asset class in that they are almost always in demand, but also see a relatively high turnover rate of up to 50%. Plus, due to increases in labor and material costs, there can be a limited supply of buildings or new development projects, which can increase rental rates and property values. These two factors equal a property that will likely not be vacant for long stretches of time plus, re-occurring opportunities to renew or start leases at market-adjusted rates.
Rental policies that incorporate passing on operating expenses to tenants lease
With a triple net lease property, the tenant is responsible for 100% of property-related expenses. As utility and maintenance fees rise with inflation, landlords and owners can be partially insulated from the effects on the property’s cash flow.
*** Stay tuned as we return to this topic in a future email, further outlining the ways real estate can protect your investment against inflation, higher interest rates, and market volatility. ***
Today’s Takeaways on using Real Estate as an Alternative
Develop your ability to manage your holdings with confidence in a market running bullish.
Consider the competitive returns the opportunities in real estate can provide, by investing in supply-constrained Florida locations with developer BAI Capital, with guaranteed fixed annual payouts plus targeted annualized returns.
Learn how to diversify your capital by clicking below for a no-obligation consultation with our investment experts.