of magic dollars out of thin air to stim- ulate the economy. But what happens when the Fed reverses its policies and decides to take that money back and return it to the thin air from whence it came? Make no mistake, that is exactly what the Fed will do with future rate hikes and efforts to reduce its balance sheet (see side- bar). When it does, we may see long term interest rates rise. We know monetary stimulus fuels
economic shrinkage associated with ris- ing interest rates. Furthermore, reduced corporate taxes will likely fuel more business growth, more spending, and more economic stimulus to offset the Fed’s monetary tightening. In all like- lihood, effective tax reform could pro- duce at least another year of economic growth and, by extension, growth in the real estate sector. AWORD OFWARNING However, investors should keep a close eye on supply and demand bal- ances as more businesses take flight. Be very aware that at some point, there will be debt to pay. That debt will be big, and it may be too big to pay back. When that debt comes due, we will most cer- tainly see a massive correction, possibly bigger than the last one. We probably will not pay the piper in 2018 and maybe not even in 2019, but at some point, payment will come due. Make decisions based on this surety and try to stay in short term deals with plenty of liquidity. Beware of short-term balloon notes or high debts that can’t be paid. Another great strategy is investing for cash flow in the affordable housing sector. Affordable housing is in high demand, and will likely continue to be so. I would even go so far as to say it certainly wouldn’t hurt to keep some of your winnings in banks outside the U.S. in countries that have low or no national debt. Investing with an impending reces- sion in mind means taking on smart debt - debt that gives you the flexibility you might need to wait out a down- swing. Be careful out there, and make sure your real estate portfolio can with- stand a boom or bust cycle. •
WHY DO WE HAVE TO SAY GOODBYE TO THE STIMULUS? Y ou might wonder why the Fed would want to take away the stimulus if it’s working. Simple: They have to. Too much money circulat- ing may result in too many borrowers drives prices down. Most people think too much money creates inflation, but the opposite can happen as well. For example, what if it be- comes easy to get a loan to open up a restaurant while the restau- rant industry is booming? Lots of people do it, and soon there are too many restaurants in an area. Some go out of business. We start to see layoffs. Buildings sit empty. This is exactly what hap- pened during the housing crisis. Builders had easy access to capital, so they built more and more homes. This threw off the supply-and-demand balance. Of course, at the time, the end buyers of those homes also had access to easy credit that they were unable to pay back. Over-lending created one of the largest banking crises in history. starting too many busi- nesses, which can suddenly create too much competi- tion, which then
an econ- omy. We
also know monetary tightening shrinks it. It’s important to understand that we are now in the shrinking phase of the cycle, as the Fed
plans to hike rates at least
four times in 2018.
DIFFERENT STIMULUS COULD BE THE ANSWER
Presently, the U.S. is facing a housing shortage. Builders are working hard to bring on new inventory, but the cost to build has risen, as has the cost of labor. As a result, new housing inventory is on the higher end when affordable housing is what’s truly needed. This means we could eventually see a glut of higher-end homes on the market in 2018, especially if the Fed continues its monetary tightening policy and making credit less available. However, tax reform measures could help make up the difference. While it remains to be seen how a tax-reform-re- lated, potentially $1.4-trillion infusion into the money supply might affect our economy, this could certainly alleviate
Kathy Fettke is the co-founder and co-CEO of Real Wealth Network. She may be reached at www.RealWealthNetwork.com.
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