With the new year upon us, we are all starting to realize it is a very different atmosphere than where we were in 2022. While 2022 felt very prosperous and moving towards growth, 2023 feels stagnant and uncertain. Below, I am going to address the top issues facing the economy in 2023, and what we at MC Companies are doing to handle the challenges.
As we all have heard and seen, the FED is focused right now on lowering inflation, and they are currently doing that by increasing the cost of borrowing money. We have had six rate increases since March and we believe there are more on the way as inflation still isn’t even close to the FED’s target of two percent. Inflation on fuel, groceries, and utilities is a supply and demand issue and won’t be affected by these rate increases. However, increased rates do affect financed purchases, which include real estate.
Keep in mind as some of you are very secure financially, that as the cost of money goes up, the pain for your average household goes up. Your average household is very tight on cash, and groceries, gas and utilities are three things that are very hard to cut back on significantly. Also, many families have non-fixed debt in the form of credit cards, and those payments have increased since these rate increases started.
These price increases caused by inflation will hurt the average household. Discretionary spending will be limited, which will slow down the economy even more than we have seen from the rate increases.
2. Price of Money
Money has a cost to borrow, and that cost has increased six times since March. This is why fixed debt is important, but so many people are borrowing in variable debt in the form of car loans, credit cards, personal loans, private college loans, etc. When the price of money goes up, they get squeezed. This makes purchasing a home very difficult and renting a more optimal solution.
You don’t just see this with families, but you also see this with a lot of syndicators, as well. The price of money has increased, and they are in hard money loans where the debt cost goes up every few months when the loan renews. If you are trying to exit a deal in this time frame, like many syndicators who buy solely to sell, then this is problematic.
The value of the property is inversely related to rate increases. As the interest rate goes up, the price of the property goes down. – Ken McElroy
This is because real estate investors make offers based on the monthly payment and cash flow and if the monthly payment increases, we have to offer less for the property. Since MC Companies doesn’t map out exit strategies and are holders, this does not affect us nearly to the extent it affects those whose business plan was built around forced equity and a planned exit on a deal.
Unemployment and inflation go hand and hand. As the FED increases borrowing rates, inflation will decrease because the economy slows down, but as the economy slows down, more people will lose their jobs, which slows down the economy even further. That is why the fact that the FED is in charge of both inflation and employment makes it a very difficult balance between the two.
Personally, I think they needed to slow down the economy, but the lag in unemployment will be significant. What do I mean by this? I mean there is always a delay between the cause and the effect, so these raised rates are just now starting to show in the decreasing employment numbers, and I fear these numbers will get worse in the months ahead.
2023 is going to be a very different year, but it needs to be. We couldn’t sustain the growth we had for the past two years. Bubbles need to pop, and everything needs to go back down to reasonable price points. This includes inflated real estate, cars and other assets that were propped up by stimulus money. This really is a positive situation over time and there will be great buying opportunities when the dust settles. For now, just sit back, relax, and look for some cash-flowing deals. If you can’t find any, then wait a few months and it will surely be a lot easier.