Thriving in Wartime Conditions Dr. Mark Dotzour – Ken’s Notes

Author

Ken Wimberly

It is December once again, and that means it is time for the annual presentation to the Society of Commercial Realtors in Fort Worth; this year, Thriving in Wartime Conditions Dr. Mark Dotzour – Real Estate Economist. Always educational AND entertaining (a feat rarely accomplished by 99.95% of economists), today was no exception. Overall, I heard a positive outlook for those of us in the Great State of Texas! Read on for a summary of my notes from the presentation…

Thriving in Wartime Conditions

Dr. Mark Dotzour – Real Estate Economist

Job growth is not on the Washington agenda…..which is why we are only growing at 2-3% per year, rather than 5% per year.

1. Five Fronts of War
2. Hot war in Iraq, Syria, and Afghanistan
3. Cyber war with Russia, North Korea
4. Currency war with China, Japan, and Europe
5. Carbon war with OPEC
6. Mortgage war with Dodd-Frank regulators

Fed Reserve and SEC (the financial group, not the powerhouse football conference) have decided they want more homes BUILT in the US because of the massive economic boost that comes from homebuilding

Dotzour says that 95% LTV loans can be “normal” and healthy, so long as the borrowers have credit and jobs.

The average Economic Expansion (after recession) lasts 58 months; we are now in Month 78 of this expansion cycle….though it doesn’t feel like it
–Dotzour feels like we are in the 7th or 8th Inning of the economic recovery (he thinks we have 2-3 years left…..IF we start building more houses)

INTEREST RATES – Dotzour thinks they will remain “Low”

Japan’s quantitative easing includes printing money and buying stocks……Nikkei is now at 20,700

• JREIT’s – are now funded with printed money from the government and have recently been allowed to purchase overseas real estate assets
• They are buying WITHOUT regard to YIELD……buying simply for capital preservation
• Japan announced in November that it is now officially in Recession again with falling GDP for two consecutive quarters

Biggest threat to our competitive advantage in Texas is that we are not building enough houses……or apartments (really?); Why does he say this? Because rents are still going up over 5% per year.

Europe, Japan, and China are barely hanging on, even with massive printing of money!

Cap rates on CRE continue to compress because people have confidence in well-located RE with good tenants

The only rate the FED moves is the overnight rate…….the rate that one large bank loans money to another large bank for one day only

• The ONLY reason the 10-year treasury rate increases is if there is expected INFLATION
• Dotzour thinks they will raise this overnight rate from around ZERO to get it up to around 2%…….the reason they need to do this is so when we go back into recession (in a couple of years), they have something to lower

The Oil Market: Let’s Play Hardball

• Dotzour says the US can win at $79 per barrel
• The producers in Arabia need $80 to $90 oil
• May 14 – EOG said if crude stabilizes at $65, they are prepared to resume “double-digit growth”
• May 14 – Continental Resources says that $70 is the price that “turns it on for us”
• June – Obama names Iran and the new Ayatollah as new business partners
  Oil then fell below $40
• Chesapeake is finding new oil fields in OK that they can break even at $36 to $37 per barrel
• Possibly $100B in private equity capital waiting to buy distressed energy assets

Automotive business is continuing to carry the economy today
Household net worth is at its highest peak ever
Corporate profits are flat, but there seems to be some pent up demand for hiring

The only thing you have to be careful of in a recession is having too much debt!

• 10-Year US Treasury is 2.21%
• Italian 10-Year is 1.39%
• Japanese 10-Year is .30%
• Swiss 10-Year is (-.41%)

The lack of yield around the country is one thing that is causing a flight to US real estate; and TEXAS is always on the radar for US Real Estate

Will Cap rates rise as the 10-Year treasury rises? NO

• In 2006, the 10-year treasury was at 5% and apartment cap rates were at 6%
• Today, the 10-year treasury is at 2%, and apartment cap rates are at 6%

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