Concern about the Inverted Yield Curve?

Question

Hello BP Community!

I want to start by saying that I am definitely a newbie investor. I have only recently begun looking in to REI. However, I have seen a lot of people that seem concerned about the yield curve flipping, should I be concerned about this? What do you guys think? Is it going to be worth waiting to invest for a while to see what happens? Or should I just be consistent in my investments once I start?

Sorry if this is an off topic question, I just wasn't sure where else to ask this.

Jaysen Medhurst · Answer

@Isaac Pyle, turn off CNBC. Did you even know what the yield curve is before some talking heads started squaking about it? I've been hearing doom-and-gloom from the business press for 3+ years.

No one can time the market and anyone who suggests they can, is full of it. Yes, a down turn is coming. Will it be next month or in 5 years? Who knows?

If you buy right based on fundamentals, really know your numbers, don't over leverage, and plan to hold long term, RE will ride out the ups and downs of the economy.

Rob Jafek · Answer

That's their take, and I agree.  I am sure you learned from your macro classes that there is always a bear in the woods, and a reason not to do a deal. Real estate is intensely local, or in macro-speak: highly inefficient.

Rates DO affect refi, and hence overall transactions, but new home purchases are steady, and even boring.  Ping me if you want charts on that.

Here's a bit more macro, and a last chart:

The red line all over the place is the 2-10 spread, probably the most accepted 'yield curve' indicator.  Yeah, I ran it a couple weeks ago, so it doesn't show the inversion, but you get the point.  Shaded areas are recessions, so you can see the problem with the indicator: size of the inversion doesn't really indicate length of recession, you can't 'time' off of it, etc etc.  And, while this chart doesn't show it, as it was messy enough already, the size of the inversion doesn't portend the size of the recession.  What's important here is the blue line in relation to all this.  It is the Case-Shiller US national house price index, probably the best indicator of house prices.  It's not perfect, but probably best, and I see you're from Colorado, so you may want to look at the Denver only price index (which I find fascinating, by the way).  The point is: the blue line doesn't seem to pay attention to the red line, and quite frequently not the recessions either.  08-09 was an exception with a high degree of correlation, and we could discuss causation for a long time, but neither would disagree it was bad for all camps.

But; even here:  you are not buying the index.  You're very unlikely to ever gather enough data, or learn enough, or analyze enough macro to pull the trigger on investing in real estate.  Stocks....maybe (but I doubt it).  Real estate: no way.  For real estate: study local, learn local, and invest local.

Isaac Pyle · Answer

@JD Gunter I like this way of looking at it. As long as I crunch the numbers properly, and the math checks out, the market is not really going to have a big enough impact to change that. It may rise or drop, but if it is a good deal, it will still be a good deal. Thanks for the post!

JD Gunter · Answer

I agree with these guys. Warren Buffett once said, "Nobody knows where the market is going, but you should know where it is." The way I interpret this is that I should know the intrinsic value of the property I'm purchasing. If I'm buying properties at a good price and adding value through my activities, I'm not as concerned about the broader market fluctuations. In fact, in a down market, residential rents have a tendency of going up.

Sure, sometimes "Mr. Market" (to use another Buffett/Graham term) will say my property is worth more or less than I paid, but I don't loose sleep over it. I've been through hot and cold markets and I've heard "the market is too hot" or "the market is too cold" to invest in just about every market. I can't predict the market and I don't try to. Instead, I focus on the fundamentals of the property itself and try to get a good enough value that I can ride out the inevitable storms.

Isaac Pyle · Answer

@Rob Jafek this is excellent information! I wondered how the actual charts looked. The markets that I am looking at here weren't even hit by the 08-09 recession that much, so I think locally things like the yield curve don't effect near as much. Thanks for explaining all of this! Very helpful.

Isaac Pyle · Answer

@Dave G. That makes sense. I feel like there could be some instability in the next 1-5 years, but if I plan on investing long term (which I do) it might not matter. The market that I am looking at is also incredibly hot and appreciating in value right now. I will definitely look at that podcast later today, thanks for the tip!

Dave G. · Answer

@Isaac Pyle My response to your question is not a No but rather a Maybe or It Depends.

There is nothing wrong with paying attention to a historically accurate, predictive-value metric like the Yield Curve. I do. But it should be part of a basket of key metrics (many of which are local to your market) you should follow to complement the myriad of personal factors that play into when & what YOU should look at investing in.

Example - J. Scott is a very successful investor and he pays attention to the curve (recommend podcast below). And a lot of people pay attention to him as he's an accomplished author and has been a BP podcast guest on 3 shows.

BiggerPockets Podcast 311: 6 Rules for Investing in Real Estate in the Coming Economic Shift with J Scott

But I would also consider that if you're young, with a long-term horizon to weather lengthy market cycles, a pending recession plays a much smaller role in considering investing then if you were nearing a traditional retirement age (50-60 years old?).

Happy Investing,

Dave

Jaysen Medhurst · Answer

@Isaac Pyle, CNBC is a "business" cable network. I suggest avoiding at all costs. Glad to hear your concern is borne from actual education, not just parroting something in the press. Sounds like you've got a good head on your shoulders.

Isaac Pyle · Answer

@Jaysen Medhurst thanks for the reply. Honestly I don’t know what CNBC is. I leaned about the yield curve from my macroeconomics class.

That makes sense that RE would eventually bounce back after any kind of downturn. I hadn’t thought of that.

Concern about the Inverted Yield Curve?

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