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Sunday, October 2, 2016

Trump: “We Are in a Big Fat Ugly Bubble”


“There seems to be some perverse human characteristic that likes to make easy things difficult.”  Warren Buffett


In the first presidential debate, Mr. Trump stated, “We Are in a Big Fat Ugly Bubble.” His reasoning is the Fed’s irresponsibly in holding down interest rates that are creating real estate and other asset bubbles. 


Mr. Trump knows real estate bubbles can occur in some property types and locations due to supply and demand imbalances and/or misappropriations of one or more of the following economic balances:

  • The annual all cash risk rate’s (property yield) present value was accurately applied to the anticipated benefits expected by the buyers during their ownership. 
  • The market rent or market rent benefit (if owner occupied) was in the right proportion with the users demographic household annual income for residential properties, and also in the right proportion with the users demographic business annual income for commercial properties.  
  • The property’s market rent expectation increases kept up with actual users expected annual income increases.  
  • No irrational speculative expectation of the property’s future selling price appreciation was factored into the property’s beginning market value sale price. 

What Mr. Trump was referring to was the first bullet point. This economic balance states the property’s all cash risk rate (annual expected property yield) must be in sync with the actual risks being taken. This annual yield includes the expected ending sale price expectation. 

Investors and valuation experts base this all cash risk rate on alternative investments with similar risks. Due to artificially low Fed interest rates, many property’s current market values are being inflated due to lower going-in and going-out capitalization rates that are use to calculate a property’s current market value.  

These cap rates are being lowered leading to higher property values because buyers are leveraging (financing) the sale prices with artificially low interest rate loans. The resulting buyers annual equity yield appears to be competitive with alternative investments with similar risks. 

Without comparing a property’s current market value to its current fundamental value, the market will be unaware the property possibly has entered a dangerous bubble. 

If property values are in an ugly bubble, then Mr. Trump is correct that any interest rate increases by the Fed will have an adverse effect on property values. 

To see if your specific commercial or residential property is in an ugly bubble, there is a simple solution. 
  • First, have your property professionally appraised with an opinion of the property’s current market value. The traditional appraisal process uses comparable sales and data in deriving a property’s current market value. 
  • Second, have the property appraised based on its current fundamental value. This type of analysis uses the above four economic balances to appraise your property. A trusted real estate advisor can easily accomplish this for you using a new software (valuexpose.com). You can even use this software yourself with minimal training and cost. 
This software automatically inputs your property’s current market value and compares it to the property’s current fundamental value. If your property’s current market value is significantly above your property’s current fundamental value, your property is in an “ugly” bubble.  

This means you are buying or holding the property at the top of a bubble cycle. The property’s current market value, in all probability, is not sustainable during the current economic wave cycle (approximately a seven year cycle). 

Conversely, you will have a great buying or holding opportunity if your property’s current market value is approximately equal or below its current fundamental value. 

In our bubble infested markets, it is now more important than ever to know your property’s current fundamental value as it relates to its current market value. This type of new analysis advises you when to buy, when to sell, and flushes out hidden risks that until recently were undetectable until the bubble burst.   

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