Invest For Society > IFS > Why the US market ?

,Real-estate versus equity market?

Our experiences and partnerships being specialized in the US market, this is where part of the proceeds raised at the ICO will be invested, here is why:

At the global level of the United-States, real-estate home prices are currently about 12% higher than before the big financial crisis in 2007-2008. Despite an extended economic cycle, that leaves some potential of increase comparing to others asset classes.

Home Price Index historical data (HPI) in United-States

 

When we compare with the US stocks market, for instance the S&P500, we can see that it is currently 90% higher than before the 2008 crisis (cf. below chart). Moreover, we know that the real-estate market tends to be considered as a safe haven. Indeed, when stocks markets are collapsing, real-estate is considered as a safer asset (when it is not the root of the crisis though). Therefore, having a long position in that asset class does make sense to us in the actual economic configuration.

S&P 500 histo 2003 - 2018
Main US stocks market index S&P500 historical data

 

It is important to underline that we are not betting on the next crisis to come. We are actually betting on an asset class which generates yield and cash-flows (rents) with the time going. We call these investments as « carry positive » as they generate cash with the time going.

Others investments in gold or bitcoin for example, are « negative carry » assets as they do no generate anything with time.

 

IFS token is a « positive carry» asset.

Macroeconomics of the US ?

Growth and inflation:
  • Strong US economic growth + contained inflation around 2 %: Indeed US have that double advantage to be part of the « developed » economies, with a stable government and fiscal policies, while having strong growth and inflation levels. As a comparison, 2018 US growth is expected at 2.9% against respectively 2.1% and 1.0% in Europe and Japan.
Interest rates level:
  • Historically low level of interest rate and it should last One of the factors the most impacting the real-estate prices is indeed the level of interest rates in the market. Low-interest rates level means an ability for buyers to borrow higher amounts and then push the homes price higher. However, interest rates too high will lower the amount that a buyer could afford to borrow, which will get the homes price decreased (as a reminder, in 2006 interest rates were extremely high and then fed among other factors the 2007-2008 real-estate crisis).

Hence, the actual interest rates environment should roughly stay on these historically low levels (+/-1%). Even if the trend is slightly hawkish on the short term (which underline a good health of the domestic economy by the way), especially on the long term of the curve (20y or 30y maturities which influence mortgage loans). The main reasons behind that situation are a global liquidity surplus in a context of international monetary policy easing (cf. Europe / Japan).  As we underlined earlier, only a growth and inflation boom would justify significant higher rates and this is not our main scenario.

 

Historique des taux 10y US
10y interest rate swap in the US, historical data
USD currency:
  • The USD is a safe haven and therefore a structural appeal for foreign investors. Keeping the focus on the macroeconomic side, as the domestic economy was appealing for investors, we also have a positive bias on the USD as a currency. Indeed, without being dramatic in warning against the next crisis, it is a scenario everybody needs to have in mind still when we think about investing. If global context remains positive there are not many problems to think about, however issues come when crisis arise. Hence, if a crisis or turmoil were to come in the markets or global economy, we assume that USD should benefit from a risk-averse environment as a safe-heaven.
Real-estate rental yields are attractive:
  • Attractive rental yield in stable and growing areas. Finally, experience from our team members can prove of opportunities in multi-family rental activity in Florida for instance. That market is still 5.7% lower than in 2007 (cf. below chart). Those real-estate markets could generate 15% yearly gross return. As a comparison with other geographic « developed » areas such as Europe where it is much more complicated to find that kind of high yielding opportunities assuming a mitigated risk.

 

History HPI Florida.
Home Price Index in Florida (HPI), historical data

 

We are considering at IFS that with a stable low-level of interest rate, a well oriented domestic economy, the real-estate market should keep increasing while still giving a strong return in the property rental activity.

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2 Responses
  1. Matthew

    Interesting piece as this article came just before the end of year equity sell-off. Nice call! But what about the recession risk in US and the impact on real-estate market then?

    1. Jonathan Galbrun

      Hi Matthew, you are right. Recession risk still exists, and it could impact the real-estate market as it would impact the whole economy. However, with buy & hold strategy you can keep your position and wait for brighter days before selling the houses. Hence you avoid a potential loss due to a bear market, you will still get your rent and your return. This is where Invest For Society’s model makes sense: as liquidity is provided for a long term due to the ability to exchange the IFS tokens on a secondary market, it should allow us to go through such period.
      Finally, I personally do think that real-estate market should not drop as sharply as it did back in 2008 or as others asset class could. 2 reasons: 1- current valuations are not “overvalued” in many locations, 2- Long term interest rates should stay low or at current level for a while, especially in case of recession.

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