From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for May 2021

Inflation and Real Estate

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First and foremost, I came of age in the 1970’s, a period that gave rise to the term “stag-flation”. Significant inflationary pressure was real not just in the U.S. but across the globe, and for a variety of reasons. The complexity of the 1970’s is well beyond the scope of a single simple article, but suffice it to say, the past 40-ish years of relatively mild year-over-year price inflation has put the problem out of sight and out of mind for most economists.

That said, the Labor Department reported that April’s consumer price index rose by an annual rate of 4.8%. According to a great article in the Wall Street Journal yesterday by Konrad Putzier, most analysts think this is transitory. I tend to agree. None-the-less, savvy investors should properly be asking the question, “what if?”

Real estate has historically been considered a nearly perfect hedge in times of heightened inflation. Even for the past 40 years, real estate prices/values have out performed the CPI year after year. For example, the median price of a single family home in America in 1970 was $17,000. I’ll let that sink in for a minute. Now, let’s compare the 50-year return on that home to the consumer price index (CPI) as well as the S&P 500 (all three at the end of the respective years).

 House PricesCPIS&P 500
Compound Annual Change5.7%3.8%7.7%

Wow. Plus, this doesn’t come close to telling the whole story, If you had invested in that house, you’d either enjoy rents (net, on average, around 5% – 7% per year) or alternatively you would forego having to pay rent to someone else. Further, there have been and continue to be enormous tax advantages to real estate ownership.

Now, here’s the problem, as well described by Mr. Putzier. An inflation hedge, like insurance, is something you want to have BEFORE the wreck happens. Today, we see investors rushing out to bid-up the prices of every piece of property that comes on the market. It’s likely that some of these purchases will be ill-advised and not justified by future rents. Indeed, as I’ve noted on this blog before, wages since 1970 have not kept up with real estate prices, and given the cost of housing today, it would not be surprising if rent increases in the future lag inflation in general.

Nonetheless, existing, well-curated real estate portfolios will undoubtedly be positive compliments to an overall diversified portfolio of investments. Even with the hot-bid market today, we continue to stay active in this market, looking for value opportunities.

If you have any questions about your real estate portfolio, please don’t hesitate to reach out. We look forward to hearing from you.

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

May 26, 2021 at 11:24 am

Posted in Uncategorized

ACCRE Report, April, 2021

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Not a bad month, as all things go, and certain a great month to own the S&P. With that in mind, the real estate sector continues to “figure out” what the post-pandemic world will look like. After two “down” months, ACCRE rebounded nicely in April, although we’re still behind the S&P both on a single-month basis and cumulatively. Nonetheless, some of our metrics (particularly diversification) make us continue to stay the course. So, on with the report…

As shown, a dollar invested in ACCRE at the inception (four years ago) would be worth $1.56 today. For most of the last four years, ACCRE has handily beaten the S&P, but the strong bull market for the past year has really turned that around. Conversely, the S&P Real Estate index languished for most of the last four years, but has performed nicely in the last 12 months.

One of our main goals with ACCRE is to provided positive-return diversification with a fairly low-risk portfolio. Most months, we demonstrate this with a Sharpe Ratio — this is a measure of the average daily excess return (fund return minus the T-Bill return) divided by the standard deviation of those returns. In short, it tells us how much return we are buying proportional to the risk we are taking. A higher Sharpe Ratio means we’re doing well, and if our Sharpe Ratio consistently beats the S&P, it means we’re providing more return than the market as a whole relative to the risk we’re taking.

S&P 500
Average Daily Excess Return0.0498%
Standard Deviation1.2977%
Sharpes Ratio3.8369%
Average Daily Excess Return0.0365%
Standard Deviation1.2010%
Sharpes Ratio3.0393%
Correlation (life of the fund)51.9182%
Correlation (month of April)16.3113%
ACCRE Metrics as of April 30, 2021

The Sharpes Ratios are calculated for the life of the fund, as is the overall correlation. Most months, ACCRE beats the S&P, but as we all know, the S&P has been on a very real bull tear this past year. Certainly, we all hope that continues! The overall correlation (life of the fund) is just where we want it, but the correlation for April, while positive, is surprisingly low. Digging into the data a bit further, we find that the S&P, while doing great, nonetheless had some bounces during the month. ACCRE, on the other hand played the “slow and steady wins the race” game.

We may reconsider some of our positions this month, and of course our subscribers will get immediate notification of any trades. In the meantime, if I can answer any questions about REITs or Real Estate Finance in general, please don’t hesitate to reach out.

John A. Kilpatrick, Ph.D. —

Written by johnkilpatrick

May 5, 2021 at 10:21 am

Posted in Uncategorized

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