Where is the best place to invest in the US during inflation?

The declining markets are also creating opportunity, but the US is a large country saturated with real estate traps.

So where should you invest?

Ran Harel and Matan Partman, guest column

15/06/2022

Wednesday, 15 June 2022, 09:14

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The investment world has been gaining momentum in recent years.

More and more people are realizing that especially in an era of inflation, when the prices of goods and services are rising and our ability to buy is eroding, it is desirable and right to rely on sources of income other than the workplace.

In terms of alternatives, and despite the recent rise in interest rates in Israel, interest rates available at banks are still nil and investors are constantly looking for alternative investments, such as real estate in Israel and abroad, cryptocurrencies, loans and more.

And as the stock markets are declining, and real estate prices in Israel continue to rise and recede - real estate investments abroad have become the domain of a few an investment alternative that is talked about in almost every home.

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A safe but expensive destination.

New York (Photo: ShutterStock)

At the top of the investment targets is the USA. Why is the application made there? This is a market with an infinite number of options that is considered a large and diverse market. The conduct of the English language provides security, along with an investment target that is considered to have the strongest economy in the world that dictates the global tone. The Fed had options such as lowering interest rates and printing money in favor of injecting aid, which led to continued growth in the US and a drop to 3.5% unemployment - a move that helped overcome the crisis.

And showed that a strong market is more resilient to crises and recovers from them faster.

A shortage of millions of homes that is expected to continue for the next decade

Despite the expected interest rate increases all over the world, which may make conditions a little more difficult for homebuyers, it should be remembered that in the US there is a shortage of about 5-6 million homes in the US.

The shortage was created due to the subprime crisis and the subsequent drop in construction starts (in the decade of 2010-2019, only 6.8 million homes were built, about 20,000 homes per million people, compared to the previous decade in which about 12 million homes were built, which is about 40,000 homes per million people).

The above shortage is estimated to be able to close within 9-11 years if they manage to meet the quantity at the desired construction starts. It should be remembered that residential real estate is a basic consumer product, so real estate prices are expected to be directly affected by limited supply. A dramatic change in the supply axis, it will be difficult to bet on a change in the trend of real estate prices in the US.

How to choose the desired market and investment sector?

This period is challenging and very interesting - we are experiencing remnants of the corona crisis, high inflation, rising interest rates, entering the bear market as leading indices in the US (and worldwide) complete a decline of about 30% from the beginning of the year as of this writing and geopolitical challenges following Russia's invasion of Ukraine In such a period it is very important to hedge risks on the one hand and on the other to seize opportunities that cannot be found in more routine periods.

In choosing the market, it is first important to consider the position when it comes to a long-term investment strategy.

The US is made up of 50 countries with dozens of different markets. There are cities in the US where real estate prices have soared in recent years, alongside cities where real estate prices have fallen over the same period of time.

So in order to understand the demand versus the supply in a specific city, one must first examine the increase in the population in the city - alongside the expected construction starts in the area.

For example, the city of Phoenix in Arizona is an example of a city that has many construction beginnings.

About 70,000 apartments are expected to enter the market by 2026, providing housing for about 40,000 new residents each year.

On the other hand, in the years 2019-2020, an average of 90,000 people immigrated to the city a year - and thus it is possible to understand why real estate prices in this city are expected to continue to rise.

Although this type of data can be found online, it is not very complicated to understand the reasons for the prosperity of those cities.

These are large metropolitan areas, where there are anchors of employment, centers of education and culture, along with a shortage of land available in city centers.

A notable example is New York, which while suffering from a crisis in 2020 due to the corona, but recovered impressively in 2021. Other examples - Houston Texas, Austin Texas, Denver Colorado.

Recovered from the crisis.

Houston, Texas (Photo: ShutterStock)

In terms of the investment sector, many investors will prefer to focus on the residential real estate sector, due to it being a basic consumer product. In these areas, it would make sense to choose areas with strong populations, as rising interest rates hurt most weak populations. A larger population chooses to move into rent.

Therefore, it is recommended to consider focusing on rental projects, where one of the trends in recent years in the world of real estate and finance is BFR (built for rent) - construction of a complex with several tens / hundreds of single-family properties, all of which are for rent.

On the other hand, quite a few investors choose to take advantage of the current situation and the upheavals in the real estate markets in the last two years, and enjoy opportunistic investments that are mostly situation-adjusted. York, a leading tourist and economic hub, which has been significantly hit in Corona, with a drop of tens of per cent in hotel and office prices.

Risks are an integral part of the deal - so what do you do?

Ran Harel and Matan Partman (Photo: Or Golan)

The risks cannot be ignored.

The problem in the supply chains causes many delays at times, inflation leads to an increase in construction prices, interest rates, which are rising, increase financing costs, and so on.

It is necessary to take them into account already in the planning and fence them.

This can be done through: Stress tests - check what happens if the investment is delayed, if the construction costs increase and if the prices go down.

These are things that are always done but in such a period it is right to "press" more.

In a time of uncertainty, it is right to take more solid leverage and examine interest rate hedging - there are instruments that hedge interest rates, of course each case must be examined on its own merits because it is a tool that costs quite a bit of money but certainly gives peace in times of rising interest rates.

In the end, the future is unpredictable and anyone looking for 100% certainty will not find them in the investment world.

But given this, the right choice of an American city in growth, along with choosing an investment sector that fits your risk profile and while hedging the possible risks in the investment (and disqualifying investments that can not be well hedged) - you can take advantage of the market situation and make investments.

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