September 29, 2009
One of our recent posts discussed housing tax credits and the potential for them to cause deflation. Bill Gross of PIMCO, one of the most well known bond investors is now increasing his position in longer-term government debt, namely 5 and 10 year treasuries, as a hedge against deflation. The loser in his fund are mortgages, which the government is scaling back its purchases of.
Officials at Pimco have forecast a “new normal” in the global economy that will include heightened government regulation, lower consumption and slower growth. The economy will likely expand at a 2 percent to 3 percent rate going forward, Gross said.
Deflation presents a big risk for property investors and banks. The issue is that in a deflationary environment, appraisals based upon comparable sales or income valuing approaches tend to be fickle. The uncertainty which deflation injects into the system leads banks and lenders to keep a tight rein on debt, which will continue to keep the pressure on values. On the investment side, one of the asset classes to get hit hardest during deflationary periods tends to be multifamily/apartments. There is a lot of equity right now chasing multi-family deals, in large part because investors still have the ability to lever up the assets thanks to Fannie Mae and Freddie Mac programs. This can be highlighted by looking at recent offerings by Avalon in the South Bay where more than two dozen offers surfaced. Whether these deals end up making sense in a few years remains to be seen.
- Bill Gross’s Investment Outlook
- Equities, Real Estate, and Deflation
- DDR Issue Signals Slow Return of CMBS Market
- Richard LeFrak on CNBC With a Wait and See Attitude
- Apartment Investors Out In Full Force