A Skeptical Dude's Take on Real Estate
Market Insights for Real Estate Investors and Finance Nerds.
Welcome to A Skeptical Dude’s Take on Real Estate: a frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.
Coming at you live from Nashville, TN.
Fuel for the day: The late great Charlie Munger’s wise words. An important reminder when sh*t gets wild.
Let’s dig in!
“The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.”— CHARLIE MUNGER
Today We’re Talkin:
The Weekly 3 - News, Data and Education.
Economic numbers = Interest Rates 👇.
Opportunity is a Knockin’
Key Look: Housing Inventory Rising
A Skeptic’s Take.
The Weekly 3: News, Data and Education to Keep You Informed
A lot more people will need homes over the next few decades. Even accounting for falling birth rates and the aging population, the Census expects the 18+ population will grow by TENS OF MILLIONS by 2050 (EricFinnigan).
Job openings nudged down in November, down to lowest in more than two years. The Job Openings and Labor Turnover Survey (JOLTS) showed employment listings nudged lower to 8.79 million, about in line with estimates for 8.8 million and the lowest level since March 2021 (CNBC).
Book Recommendation: The Book on Rental Property Investing. An oldie but goodie. Real estate rookie? Pro? This book is the bedrock.
Today’s Interest Rate: 6.34%
(👇.28%, from this time last week, 30-yr mortgage)
It. Is. Happening.
Monday’s stock market tantrum showed us, at the very least, that markets are concerned the economy is slowing and the Fed may wait too long to lower interest rates to compensate, Monday’s Japaneses currency carry trade issue be damned. The widely-predicted assumption that we will have a “Soft Landing” (aka no recession after raising rates to quell out of control inflation) is now being questioned. We even had CNBC analysts calling for an emergency Fed meeting and a .5%-.75% rate cut immediately during the tumult on Monday. An overreaction but telling of the sentiment on Wall Street.
The stock market volatility index spiked up 150%, the most in one day since March 2020 (beginning of COVID), indicating tremendous anxiety in the market of a potential recession, or economic / corporate earnings slowdown.
We predicted this would happen.
What the Bond Market Tells Us About the Future of Interest Rates
Investors should focus on the bond market. It’s the big gorilla - about 3x the size of the stock market - and mortgage rates follow it. Since May, the bond market has been telling us there exists rising risk to the downside. Labor, inflation and corporate earnings are softening / normalizing.
One need look no further than the 10-yr Treasury bond, to which mortgage rates are highly correlated.
If you are watching for what future mortgage rates will do, this is the chart you should be paying attention to. We finally saw a 3 handle last week after almost exactly one year above 4%.
Look out Lower Mortgage Rates - Is sub 5.5% Possible? YES.
Economists know this and are watching the 10-yr treasury yield. 30-yr mortgage rates track the 10-year and the spread between the two is still historically high. The current difference (“spread”) between the two is 246 basis points (or 2.46%). The historic average “normal” spread is ~175 bps. So if mortgage spreads “normalized,” regressing to the historic mean, and the Fed did nothing from today to lower interest rates, the 30-yr mortgage could settle down at 5.63%. In other words, if the bond market calms down and the economy doesn’t enter recession or slow significantly, rates should be close to 5.63%, even without the Fed cutting. The Fed plans to start cutting rates soon.
Today’s rates: 10-yr Treasury Yield - 3.90%, 30-yr Mortgage Rate - 6.77%.
Today’s rates: 10-yr Treasury Yield - 3.88%, 30-yr Mortgage Rate - 6.34% = 2.46% *(as of this writing).
*** An important disclaimer. ***
The panic in the market this week is overblown, especially for those looking to jump on their next real estate deal. What this is, is an opportunity to buy (keep reading).
So When will the Fed Cut Rates then?
What’s next for interest rates? The 40,000+ employees at the Federal Reserve (that’s right, 40,000 and 400 Ph.D. economists) are probably watching labor markets most closely for signs of cooling. Not the stock market. Fortunately, we did see this week some Jack Frost, which should keep the Fed on its course to stepping down rates in 2024.
According to the bond market, there is priced in a 100% chance of a .25% cut in September. And 83.5% of a lager .5% cut. This is a stark contrast to where we were just a few weeks ago.
However, I am not surprised given the last 5 trading days and what the bond market has been telling us since May. Mr. Market is sending a strong signal to the Fed they are concerned about the overall state of the economy. And since the Fed takes August off, we and the Fed will simply be watching what the multiple labor and inflation data tell us over the next 45 days. There will be no emergency meetings, as some are prematurely calling for.
But then again, back in January, the bond market was pricing in a 97.4% chance of a rate cut in March 2024 - and a mind-bogglingly high 6-8 rate cuts in 2024. This obviously never happened. Not even one. At the time, we disagreed, saying it was more likely they would start much later in the year. So far, we are on track to that prediction.
Will the Fed be ‘forced’ into cutting rates? Only if the economy starts to slide in the next 45 days, which Bank of America CEO Brian Moynihan thought may happen, predicting 4 rate cuts this year and in 2025 to “avoid tipping the economy over.” Turns out he may be correct, albeit quite a bit early. And Goldman Sachs just raised their recession risk to 25%. Again, markets are signaling their concern.
Counter point: Economists are touting a strong labor market that is “normalizing,”as Fed Chair Powell put it last week. Wage growth is still outpacing inflation and initial and continuous unemployment claims are rising. Both are true. But is the labor market softening? I would argue not, and agree with Powell that it is regressing to the mean, from inflated levels we had as a result of COVID spending policies. For instance, if you look at unemployment vs. avg duration of unemployment you see that they have been relatively low here.
Inventory returning to 2019 Levels
For investors, lower rates + higher inventory = tremendous opportunity.
In recent months, four states have achieved a milestone by restoring their housing inventory to pre-pandemic levels: Texas, Florida, Idaho, and now Tennessee.
Other states, such as Colorado, Washington, Utah, and Arizona, are close behind in regaining their footing.
What's driving the swift recovery in these markets, outpacing their Midwest, and Western counterparts?
For one, there existed a disproportionate surge in home prices during the pandemic, which stretched affordability in areas like Boise and Austin (down 15%). As migration slowed and interest rates rose, these markets became vulnerable to correction.
In contrast, many Northeast and Midwest markets have limited new construction, making existing homes the primary option. Meanwhile, Southwest and Southeast markets are experiencing a surge in new supply, with builders employing strategies like buydowns to stimulate sales. This influx of new inventory is cooling the resale market, a phenomenon not seen in the Northeast and Midwest.
The broader trend suggests a housing market slowdown, as affordability concerns temper the frenzied pace set during the pandemic. Although home prices are dipping in some Gulf Coast areas, most regional markets continue to see moderate growth. The looming question is whether rising inventory and months of supply will trigger more widespread price declines?
YoY Inventory Numbers:
July 2019: 1,239,534
COVID
July 2023: 647,135
July 2024: 884,273
Still not there yet, but by mid-2025 we should pass 2019 levels, all things being equal.
A Brief Aside: Is there Wage Deflation in the Construction Industry?
Construction wages fell in 2Q24, according to the employment cost index. First significantly negative ECI print in history for construction. This tracks with a -8% decline in residential units under construction vs. a year ago.
A notable shift occurred in the second quarter of 2024: construction wages experienced a decline, marking a historic first according to the Employment Cost Index (ECI). This unprecedented downturn in construction wages coincides with a significant 8% drop in residential construction projects compared to the same period last year, indicating a substantial slowdown in building activity.
A Skeptics Take:
To review briefly, let’s look at a few concerning facts that we saw Monday:
Japan's stock market experienced a dramatic swing, plummeting into correction territory on Monday. Meanwhile, cryptocurrencies Bitcoin and Ethereum were facing significant losses, down 11% and 20% respectively. The Nasdaq 100 has also entered correction territory, signaling a downturn in the tech-heavy index. Interest rates have shifted, with the 10-Year Note Yield dropping 60 basis points in just one week. The labor market is showing signs of weakness, with the unemployment rate reaching a three-year peak of 4.3%. Market volatility has surged, with the volatility index skyrocketing over 100% in the past month. Furthermore, the combined market capitalization of the top 7 US stocks has shed a staggering $3 trillion from its recent high, indicating a severe market downturn that's eerily reminiscent of a recession.
Just one day later, most of these had reversed or started significant recovery.
The lesson? Markets are on edge and we are likely to see volatility like this until the narrative surrounding economic data starts to turn from “softening” to “normal.”
Its too early to tell in hindsight, so let’s give a few predictions:
This stock market tantrum will be a correction down 10-20%, not a full bear market (down 20%+), and will not last for an extended period of time. I expect the bond market to take the lead, and treasuries to continue to trend higher (ie lower rates).
True, those concerned may be right, the economy may enter a recession, but it’s really hard to know this. I would put it at 33% chance; however, this is pretty much my default posture at all times. Some prominent tech investors think we have been in one for a few months now. Regardless, I always vigilantly aware and constantly ask myself: what could go wrong? (serious I talk myself through this question almost daily, I know…but it has served me well, a la Charlie Munger).
IMO Inflation has likely already reached the Fed’s target of 2%, which we will realize in hindsight. And I see no signal of that changing
When will the Fed cut? September.
Further, in the next 6 months the 30-yr mortgage will likely drop by a full 1%.
Bold call: Rates will hit 6% by year’s end. And 5.25% next year.
Economic indicators are signaling the start of a new real estate bull market, until further notice. For those looking to invest in real estate, the Spector of rate cuts and economic worries, mixed with inventory rising is the perfect storm, of opportunity. And while I don’t at all wish for any sort of market “crash” real estate assets do provide a great hedge against such an event.
Remember the wise words of Mr. Munger. The market is telling us that now is that opportunity.
Until next time. Stay curious. Stay skeptical.
Herzliche Grüße,
-Andreas
Please Share this Article!
It takes several hours to write the Skeptical Dude article, and they will always remain free. All I ask is that you share it with 1 friend. If you do, you will get two gifts: free education for one of your friends and good karma for helping to grow the community. You can share it here:
Contact Us Here in Nashville!
If you are interested in talking real estate investing and digging deeper into any of these ideas don’t hesitate to reach out! I always like a rigorous discussion and helping fellow real estate investors.
Looking for a market to invest in? There is always a bull market somewhere, and one of them is Nashville, where we are seeing record tourism this year. 99 people per day move to Nashville and our city population is still under 700k. 3 professional sports teams, massive health care and entertainment industries, more than a dozen colleges….Look for bullish drivers like this.
Looking for a realtor in the Nashville area? We work with the best here who specialize in helping investors find great properties.
* I write this myself and get it out for you all in the same day. Apologize in advance for any typos / syntax errors. Don’t have a team of editors, yet :).
** The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.