Mass Deportation and Real Estate Prices
We all know a correction is needed in the Real Estate market. Prices are not affordable and we have seen Real Estate prices far out pace inflation, which we’ve experienced at record paces over the past four years. Could Real Estate prices ever return to affordable levels for the average American? Let’s take a look at a few factors involving Real Estate.
The ability to borrow money to increase the Federal debt ceiling is rather complicated and for the most part, a series of events behind the scenes we are not supposed to ask questions about. The first detail to look at is, how does the U.S. Government borrow money?
Here’s where the Government is different from individual people and businesses. When the Government borrows money, it doesn’t go to the bank and apply for a loan. It “issues debt.” This means the Government sells Treasury marketable securities such as Treasury bills, notes, bonds and Treasury inflation-protected securities (TIPS) to other federal government agencies, individuals, businesses, state and local governments, as well as people, businesses and governments from other countries. Savings bonds are sold to individuals, corporations, associations, public and private organizations, fiduciaries, and other entities.
https://www.treasurydirect.gov/kids/what/what_borrow.htm
We all know loans are backed by something of value. What is referred to as collateral on a loan. Most people are familiar with using their homes as collateral on a home loan and cars for car loans. The government uses something a little different called Gross Domestic Product (GDP).
What Is Gross Domestic Product (GDP)?
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.
https://www.investopedia.com/terms/g/gdp.asp
Since we want to look at how housing prices and rent prices effect the GDP, we need to look at the roll they play in the ability of government to borrow money.
Housing’s Contribution to Gross Domestic Product
Housing’s combined contribution to GDP generally averages 15-18%, and occurs in two basic ways:
Residential investment (averaging roughly 3-5% of GDP), which includes construction of new single-family and multifamily structures, residential remodeling, production of manufactured homes, and brokers’ fees.
Consumption spending on housing services (averaging roughly 12-13% of GDP), which includes gross rents and utilities paid by renters, as well as owners’ imputed rents and utility payments.
Including owners’ imputed rent (an estimate of how much it would cost to rent owner-occupied units) in GDP has long been a standard practice in national income accounting. Were owners’ imputed rent not included, an increase in the homeownership rate would cause GDP to decline.
The entire system is difficult for the average person to understand. The government hires tens of thousands of people to track, calculate, and write rules for the GDP and how it applies to National Debt. To put the National Debt into terms we can understand, let’s place National Debt in the same terms of a home or auto loan. With the government and the system used to calculate GDP, your home, car, along with all the other products produced and consumed in the US are more or less used as collateral by the government to borrow money. We know houses are registered by Deeds. We know cars are registered by Title. When we look deeper into the issue, every computer and phone is registered by IP Address. Every item that can be registered and accounted for is available as collateral for the government to borrow money. That may not be completely true, but we may never know without reading the tens of thousands of pages written to make the GDP system and government borrowing work.
All we need is a basic understanding of the GDP system and how it links to government borrowing to examine a theoretical decline of housing prices along with a set of factors known to control Real Estate prices. The main contribution to Real Estate prices, like all products is the law of supply and demand. Before the border swung wide open, Real Estate prices saw modest, expected gains. With the influx of millions of illegal immigrants, all housing prices skyrocketed overnight. What caused those increases in prices? It all began with the problem of where to put those illegal immigrants. Each municipality is responsible for infrastructure planning the master plan to grow a community over a given time span.
Communities must plan for the future thoughtfully, understanding risk and tapping into opportunities. Generally, communities have a 30-year land use plan, which drives the development of comprehensive infrastructure plans to accommodate the growth. A complete plan also includes a capital improvement plan including a financing plan. These plans are updated on average every five to 10 years—especially if a community needs to pivot or adjust due to faster than expected population growth.
For significant improvements, such as water and sewage treatment facilities and significant transportation projects, the approval processes can be time consuming, so it is important to manage risk and find a balance that meets the community’s needs for delivering infrastructure at the right time.
https://www.wsbeng.com/how-communities-can-effectively-manage-population-growth/
Those plans normally accommodate a 1% to 4% increase in population over a given time period matching that with the need for shopping centers, service industries, roads, and as mentioned, water, sewer, and other services. Without a plan a city is doomed.
If people followed the basic rules of infrastructure planning, adjustments can be made limiting growing pains, such as increased taxes and inflation. But when the federal government is run by people with no infrastructure experience, with their mistakes being forced on local governments and people in the community the burden of dealing with unexpected growth falls on taxpayers. The first to suffer is housing. When faced with a housing shortage, rents increase. Followed by the cost of housing across every price range contributing to inflation and record tax increases to deal with the problem.
The price of single family homes is governed by rent prices. We can call it greed or whatever you wish. When the population out paces housing, investors naturally raise rents, which also increases the cost of single family homes based on the fact, rental property prices are calculated on what is referred to as a CAP rate.
What Is the Capitalization Rate?
The capitalization rate (also known as cap rate) is used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property.
This measure is computed based on the net income that the property is expected to generate and is calculated by dividing net operating income by property asset value and is expressed as a percentage. It is used to estimate the investor’s potential return on their investment in the real estate market. The figure also helps to determine the exit rate or terminal capitalization rate for a property when it is sold at the end of the projected holding period.
https://www.investopedia.com/terms/c/capitalizationrate.asp
In short terms investors look at the income the property is expected to produce. Normally known as rent paid on the property by tenants on an annual basis. Loan payments, taxes, maintenance, and other expenses are subtracted which leaves a net profit. In normal circumstances the CAP rate, or expected net profit is calculated over a 5 to 15 year period, give or take based on the market, which determines the market or sale value of the property.
Increased rent naturally increases the value of the property. As an example using a 10 unit apartment collecting rent at $1000 per unit per month. $10,000 a month equals $120,000 annual gross income. Subtract the expenses such as taxes, interest on a loan, and other expenses of $40,000 annually and the property promises an annual net profit of $80,000. To determine market value the Seller decides the basic pay back or break even point on the property in years. Which is an easier way to explain CAP Rate. A ten year break even point on investment property can be attractive. The Seller would set the market price at $800,000.
When we see what happens when rent prices increase we begin to understand how a sudden increase in population effects all Real Estate pricing.
When tenants out number available units, rent prices increase. If rents were raised from $1000 a month to $1500 a month on the 10 unit example above, that of course raised the listing price. $1500 a month rents raise the annual gross income to $180,000. If expenses increased to $50,000, annual net income would be $130,000. Based on the same 10 year break even point, the market value would increase to $1,300,000.
When the sale value of investment property rises, that trickles down to single family homes based on the fact there is a relationship between rent costs and home payments on the loan and taxes. That is just how the market works. You could say it is fueled by greed but all the complaining in the world is not going to change a thing.
Now for the inevitable question. What happens if the US exports millions of illegal aliens?
Many investors are drawn to the lure of housing illegal immigrants based on the fact, rents are paid by the county. Checks are rather secure guaranteeing no late or missing payments. If millions of illegal immigrants are deported, that would leave thousands of rental units vacant. Investors would need to compete for available tenants by lowering rents. Lower rental income would lower annual income for rental properties thus reducing market prices. If rental prices decreased, single family home sellers would need to lower sale prices to compete with lower rent costs. In essence, deporting illegal immigrants could have an overall effect on every area of the Real Estate industry.
Another side effect of deporting illegal immigrants is of course lower taxes. Billions of tax dollars will no longer be spent to house illegal immigrants, in addition to other costs such as medical, police protection, the court system, and numerous other areas.
The only downside to exporting illegal aliens is the effect lower rents has on property values. As seen from the data collected, the ability for the government to borrow money is directly related to GDP, which includes rents as well as property values. What does that mean?
In a normal Real Estate market prices constantly increase. When people go to buy a new home, refinance, or take out home equity loans, when property values increase, the availability of funds also increases. A basic law of economics. What happens when property prices decrease? Since that is a factor largely unknown in the industry, how do we gauge the possible scenarios? What are the possibilities? Are there banks and countries holding large amounts of national debt who will call in that debt expecting immediate payment? Let’s look at the closest example.
A home is entering foreclosure. In most instances the loan on the property has been paid for years. Interest paid on that loan equates to income and profit for the lender. Since the loan is secured by the deed on the property the foreclosure process allows the lender to secure possession of the property and sell it to recover the debt and payoff the loan. In most cases the value of the property increased over time allowing the lender to quickly sell the property above the original purchase price. In most cases, that allows the lender to secure a tidy profit with little to no risk.
How does that work with a government who suddenly experienced a drop in GDP? Common sense would tell us, it would be much wiser for lenders to patiently sit, wait, collect interest payments promised on the loans, and allow the scenario to play itself out. In short, the US would be entering uncharted waters where exercising caution along with common sense will be key factors. We would expect to see alarmists to raise one red flag after another predicting the worst outcomes. We have to realize, those self proclaimed experts are not speaking from experience and are in fact the experts who created the problems.
Reducing government spending opens a host of scenarios to use to our advantage. When an individual secures additional income and uses that additional income wisely, they follow a plan to pay down credit card debt. The quicker that debt is paid, more money pays off the principle and less is paid on interest. This is basic economics. Eliminating billions spent on illegal immigrants leaves more money to pay off national debt meaning less spent on interest payments. In the long run even the government can reach a point where the entire debt is paid off and reach a balanced spending level. If nothing is done, the problem will worsen.
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