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Back to the basics

In today's economic climate we are reassessing risk on nearly every asset type.

One of the key reasons we are facing the current economic crisis is because as a society we have forgotten the basics of personal finance and investing. Currently the U.S. Government’s credit rating is being questioned. Even the U.S. government has let go of many sound financial principals in favor of short term gains. Because of this our government’s credit rating is at risk of being downgraded. Going back to the basics is necessary to extricate ourselves from the mess we are in as a nation, and will also allow those with foresight to capitalize on one of the greatest transfers of wealth in recent history.

Simplicity

The last few years we have seen a glut of complicated transactions in the form of credit default swaps. These transactions were understood by very few but because so many thought that they could effectively eliminate risk they created liabilities over 50 trillion dollars and threatened to destabilize our entire financial system. For the 35 years that Westland has been in business we have focused on one thing, local apartment investments. They are not elaborate and the operation can get messy, but they are simple, insurable, easy to understand and they are real assets that our clients take title to through an escrow company.

Supply VS demand

It’s not that tough a concept but one that is not given enough attention. The real estate bubble was caused by legislation, speculation and relaxed regulation. Initially there was more demand than supply caused by low interest rates and relaxed lending restrictions. After the initial bump human nature stepped in, people bought houses because they saw the appreciation and wanted in on the action. Investors bought houses in neighborhoods that were empty with the thought that they would cash in on high returns. Some did. Then reality (supply and demand) caught up with speculation. Values in some areas have come down 50% off their highs in 2006. Now we face the reverse situation where people are afraid to purchase real estate when not all areas are projected to be in decline. The following graph was taken from the Spring 2009 edition of the RCA Report (Realtors Commercial Alliance).

In the RCA report, Dr. Yun, Chief Economist for the National Association of Realtors, indicates one of the reasons that apartments have remained stable.

 “The sector that is holding up decently is the multi-family sector. With home sales at 12-year lows and foreclosure rates rising, the demand for rental units has held it’s ground. The apartment vacancy rate is expected to stay close to 6 percent with rent growth to rise by 2 percent in 2009.”

Back to the basics

In today’s economy more and more products and services are being outsourced. Apartments fill a basic human need and cannot be outsourced. The fundamental driver behind apartment demand is population growth and home affordability. It is thought that home ownership rates have peaked and that more and more people will rent their housing. This helps to maintain apartment demand today, and builds a bright future for the long term demand of affordable housing.

Portland's affordable housing is the high ground for local investors

The supply of affordable housing is highly constrained in Portland while the demand continues to build. Our population is growing but there is very little new construction because rents are not high enough to justify the cost to build. This creates a rental vacuum that will force rents higher when the economy turns around and will maintain low vacancy and current rents in most areas.

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