Solano Real Estate Scene: Flight to quality

Volatility, instability and uncertainty are all words that create fear. When investors in the stock market get scared, some don’t hang around and fight, they run. It’s a natural response to danger and risk to become defensive and protective. In a recent column, I wrote about the benchmark 10-year U.S.-backed treasury bond and how watching this is a great way to follow mortgage rates because as the 10-year yield falls, mortgage rates follow and as it rises, mortgage rates rise quickly. Many people who trade bonds and mortgage-backed securities are experts on predicting what interest rates are probably going to do in the next week to a month and maybe even the next quarter. Most of these bond traders would have predicted a flight to quality this past week with the Iran terrorist threat. A flight to quality is an exit from the higher-risk stock market and an entry into the “no-risk 10-year bond market” guaranteed by the full force of the United States of America at a yield for the first couple weeks of January 2020 at around 1.85 percent. The stock market S&P 500 returned more than 27 percent in 2019. The fear of loss is a much more powerful emotion than the glee of gain. When huge portfolio managers who represent retirement funds and mom-and-pop investors think the Iranian terrorists are going to cause a huge war, they fear it will damage our economy and they sell their Fortune 500 stocks and buy bonds, creating more buyers than sellers and pushing yields down on bonds and low-risk mortgage-backed securities. As a person hoping to semi-retire in five years, I don’t need a huge flight to quality. I need the investors of the world to believe in the U.S. and increase their investments and not be afraid of investing in the greatest country in history. Do this for my sake because I am very exposed to losing 20 to 30 percent of my IRA and 401(k), or at least this is how it feels after this past incredible 10-year bull market. Buying gold and buying real estate is often considered a flight to quality, too. If a retired person has $1.5 million in their IRA, they could use $500,000 of this and purchase a single-family dwelling and rent the home at $2,700 per month to make a net profit each month after taxes, insurance, property management, vacancy, repairs and maintenance of $1,700 per month or an annual yield of 4.1 percent plus the benefits of real estate appreciation and inflation. “Buy land, they aren’t making it anymore.” – Mark Twain