Understanding How “This Time is Different” to Make Great Investment Decisions – Week 5

What is Different This Time – The Real Estate Market:

In our previous blogs, we have illustrated the fact that rising mortgage rates typically mean a reduction in the value of real estate. There are a number of facts in addition to interest rates that determine the severity of the impact of the increasing interest rates, such as household income growth, rate of inflation, etc.

Just focusing on increasing interest rates and therefore, higher mortgage rates, one would expect the real estate market to suffer severe problems. Once again, the 2017 Tax Law gives reasonable hope that a transition will be bumpy but achieved without too severe a disaster.

The key in the real estate arena are the Section 179 assets, typically equipment. From a seminar I attended, it appears the 2017 Tax Law broadened what qualifies as Section 179 assets. If this is correct, it could create an incentive to invest in commercial real estate because of the increase of the after-tax return on commercial real estate investments.

The effect is similar to the decrease in corporate tax rates working to increase corporate profits to offset the effects of stock values of increased interest rates. Once again, the change in the Section 179 assets may offset some of the effects on real estate values of increasing interest rates.

The group that designed the 2017 Tax Law were Absolutely Brilliant. I am not saying it is perfect, but the 2017 Tax Law provides our economy with a reasonable chance to transition back to normal without a financial catastrophe. Pray it works, because the alternative is total collapse.

It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is land.