ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

US Buy to Rent Property is the Perfect Stagflation Hedge Until the Fed Decides It's Not

Updated on January 9, 2013
It is now cheaper to rent than to own US housing.
It is now cheaper to rent than to own US housing.

Rising Rents are a Cause and a Symptom of Stagflation

Uncertainty, created by economic weakness, is driving rents higher. This uncertainty is causing Americans to be better renters than buyers of homes. Economic weakness has also caused the Federal Reserve to lower interest rates; and maintain them at these low levels for an extended period of time, which many think will continue into 2015. Mortgage lenders have tightened lending standards, so that many would-be buyers are forced to rent because they don't qualify for a mortgage.The combination of uncertainty and the Federal Reserve has created a situation in which mortgage payments are lower than rental payments on the comparable property.

In addition to the economic fundamentals, a powerful speculative driver has entered the property market; to capitalize upon the tighter lending conditions, low interest rates and high rental demand. This speculative driver, once again, comes from Wall Street. Well capitalized private investment companies are chasing the offer side of the housing market; to create portfolios of rental properties. Ironically, it is the policy makers who called for the infusion of private capital into housing, to take away the moral hazard for the taxpayers in relation to the GSE's (Fannie and Freddie), that have created this second speculative bubble. The profit motive can be understood as the spread between rising rents and falling mortgage interest costs. The situation is made more risky by the fact that since these private sector funds are well capitalized, the banks are willing to extend them greater leverage than they would to an individual. The banks also have an interest to move their underwater property assets off balance sheet; so in effect they simply transfer the assets to the private sector fund and also lend it the money to buy the assets. The banks have just performed the neat trick of improving their perceived credit risk, by reassigning the assets from individuals to large asset managers and hedge funds. The banks have then totally undermined this improved credit strategy by providing leverage to the private sector funds that buy the property assets. The only good news is that the underlying asset is being transferred at a lower price, so therefore the total financial risk is lower than it was back in 2005 to 2007. When the banks start securitizing the loans that they have made to the private sector buyers, we will be back into familiar bubble territory.

Home prices are now being priced off their rental capitalization rates, rather than the normal supply and demand factors that have traditionally driven the market. Since the weak economy increases rental demand this means that, based on rental capitalization rates, home prices can rise even when the economy and unemployment are weak. A negative feedback loop has been created, in which weaker economic activity actually drives up home prices, because rental demand is rising. Rents and house prices rise, so that inflation is rising at a time when economic activity is falling. This is the classic symptom of Stagflation. The higher rents rise the less money will be available in the economy for consumption. The rise in rents and home prices is therefore a symptom of a speculative form of Stagflation, that is as unsustainable as the property bubble of 2005 -2007.

So far, as rents have risen and consumption has fallen, the Federal Reserve has chosen to ignore the fact that it is creating this unsustainable situation. It seems more concerned with providing the monetary conditions that will allow the banks it protects to move their property inventories onto the private sector. At the point at which this transfer of ownership has been completed, the Fed will then be in a position to think rationally. It will then have to accept that, by providing cheap liquidity, it has actually caused an economic recession by allowing rents to rise and consumption to fall. Far from stimulating employment, Quantitative Easing has killed employment for all except those who are involved in the Buy to Rent sector of the economy.

If the Federal Reserve ever owns up to this unintended consequence, it will then have to normalize interest rates and kill the Buy to Rent speculators. It seems likely that the banks who have moved their assets into the private sector, did so by lending the private sector the money to buy them. We will then have the next property crash. No doubt the banks that kept the loans they made to the private sector buyers of their property assets will then demand another bailout; and no doubt the private sector will raise rents to cover its losses. Holders of the securitized loans of the private sector buyers will have a worthless asset. If rating agencies are involved, it will all look very familiar.

Chairman Bernanke may have managed to retire , as Alan Greenspan did, before the consequences of his policy choices fall due on the Federal Reserve to react to in the same predictable fashion.


    0 of 8192 characters used
    Post Comment

    No comments yet.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)