A Skeptical Dude's Market Analysis - February 28th, 2024

[Andreas Mueller]

Welcome to my weekly take, A Skeptical Real Estate Dude, coming at you live from Nashville, TN. Every week I write a brief, hopefully insightful, dive into real estate and financial markets, for all you tubular dudes and dudettes out there.

What am I listening to? - Classical. More specifically Franz Schubert’s Trout Quintet. It’s a jam.

Where am I? - My home office (yes @IRS I do use it and will be deductin’ it).

Today We’re Talkin:

• - The Weekly 3 - News and Data to Keep you Informed
• - Inflation Back Again?!
• - Tangent! - Bring Back Home EC!
• - City Skylines - Check out Nashville!
• - The Bottom Line

The Weekly 3: News and Data to Keep You Informed

1. -Apple halts rumored car production. Redirecting resources to AI (WSJ).
2. -AI Chatbot Klarna replacing customer service reps with ease. Already has had 2.3 million conversations.()
3. -Bitcoin nears its all time highs. The “hype” hasn't even started yet (Kobeissi).

Today’s Interest Rate: 7.16%

(☝️ .02% from this time last week, 30-yr mortgage) Mortgage Rate Update

Mortgage rates are slightly higher again this week, to 7.16%. We are now back to Nov. 30th levels, making this a 3 month…. dare I say … Trend!

Inflation UP?

Oh the humanity! It appears that market folks (bond, stock, real estate, really all market participants) just keep receiving spooky inflationary signals, which are in turn propping up bond yields and mortgage interest rates. For example, Personal Consumption Expenditures (PCE), a leading indicator of inflation preferred by the Fed, was up .7% YoY in December - exceeding estimates of 2.8%. This is after a reading of +.4% in November and a +0% reading in October. We will get January numbers tomorrow. It’s going one higher or… higher.

Inflation is staying stubborn, much like my girlfriend likes to remind me about yours truly (fair point). So much so, folks may even be warming up to bitcoin as an inflation hedge. It’s over $60,000 today, up 20% in the last week. I must admit, I have a few speculative shekels in it myself.

Shelter is one big inflationary data point, driven by yes, lack of supply, and by input costs continuing to rise (contractor labor, HVAC systems etc…)

Mortgage rates are likely to stay high as well. Market participants are waiting to see what inflation will portend for the month of March, including bond traders who are staying away from the 2 and 10 yr. Add to this a Federal Reserve meeting in a few weeks, where the Fed may lower rates (they won’t), and folks are still seeing the proverbial starter waive the yellow caution flag. And I don’t see a green flag coming until inflation diminishes significantly. It’s just too being hard headed. My call: June for rate cut 1 of 3 at .25%. Home prices, up 6% this year.

Food Prices

For consumers, food has received much focus. After all, we all gotta eat. And as a % of total income it’s historically high. Or, as the WSJ put it “The last time Americans spent this much of their money on food, George H.W. Bush was in office, “Terminator 2: Judgment Day” was in theaters and was rocking the Billboard charts.” We can’t go without food so having to eat these higher and higher prices is painful. But what can we do?…

I would argue there is something we can do.

Cook.

TANGENT: If you are struggling with these wild high prices, there is a very doable way to cut your food costs to pennies on the dollar, and eat well. How?

First, don’t fall for the “cheap” packaged foods or “cheap” meals at fast food places. They are expensive (don’t be fooled by the sticker price, on a per/lb basis all packaged and prepared foods are expensive) and are well…full of crap. Ramen and even cereal “diets” (how is that a thing?) just put empty calories / more crap through your body holes, and literally into the toilet. And again, it's actually more expensive per/lb, and it’s not really food fit for human consumption. I put my broke-self through college cooking - and I may or may not have been able to reallocate additional $ to the beer fund 😁. A few cases of chicken thighs (or even better buy 2 whole birds and break em down yourself, here is a video of Gordon Ramsay showing 8 year olds how to do it), a 20 lb bag of decent rice, and a 20 lb bag of beans (change it up every so often) and you are good to go for 1 month for chicken and 3+ months for beans and rice. See below. And this is free range chicken, the cheap stuff is half the price. Less than $45 a month for food.

Want veggies too? Sure, go get em; this is a baseline for eating full meals on the cheap. Want variation? Me too, make different sauces / spice mixes every few days. Invent some fun ones and experiment. And DON’T throw away that chicken carcass. Put that in a pot of water and simmer for an hour (longer if you can). Throw in literally anything you want, plus salt, and boom you have chicken soup, with all the great nutrients from those chicken bones/fat. Simple chicken soup recipes here.

And fun fact, , (again, actual groceries that are whole food, and not processed). More savings.

In my opinion:

Text within this block will maintain its original spacing when published

A cheap meal is one you make yourself. It just takes a bit of effort. - Andreas Mueller

So if you are struggling with these food prices, or just want to save a few extra bones, buy real food and cook. You can eat simply yet fully.

Frankly, it’s a shame we don’t have Home Ec anymore. IMO, minus the sowing classes, teaching personal finance and cooking should be required at every high school, and on the top of lists for parents to pass on to their kids.

So I say, bring back Home EC!

But I digress…. Where was I? Oh ya real estate. 

February numbers will be telling on the inflation front and will signal to the Fed when they may be able to cut interest rates.

I’ll be keeping one skeptical eye open for y’all…

Home Supply is Weak

Home supply is virtually flat, sitting at 3 months supply of homes in January vs 2.9 a year ago. However, total housing supply is what’s most important. And it is historically low. Like, really low. Check out this chart from JBRC.

Yuck.

An Update on 2024 Home Price Predictions

We have a few new price predictions y’all! And it’s actually a little bit of a mixed bag. I’ve summarized below to keep this article short(er):

• Fannie Mae - + 2.4% (down from 2.8%)
• Freddie Mac - + 3.2% (no change)
• Goldman Sachs - +5.5% (up from 5%)

All institutions are seeing prices higher in 2024, as one would predict. Why? Well, its boring but it’s just econ 101: stubbornly low supply and reasonably strong demand for those relatively few homes = price go up. The only question is how much higher. Below is a 5 year chart of best, average and worst outcomes for home prices (depending on who you are of course) from Fannie Mae, our more “conservative” price forecaster. Worst case, up 10%.

Bottom Line

Housing “experts” are constantly making predictions about price and mortgage rates but how often are they right? Eh, not very. Case in point, Fannie Mae now expects mortgage rates to be at 6.5% in Q1 2024….(.01% higher than preciously). Uh, it's almost March…

There are some green shoots - much like those pea shoots in my home garden right now (see obligatory pict below).

It does seem that higher rates are reducing demand for loans, which is driving up home inventory which could - I stress could - suppress home price growth. Mortgage loan applications decreased 5.6% last week, for instance. But so far the market has been just too resilient. Still not enough supply to affect price significantly.

The Skeptics Take: About the only thing going gangbusters are new homes from the large homebuilders, which are coming on the market like hotcakes. But…something may be bubbling below the water, like Will Ferrell and this . Questions have been raised by industry folks on the construction quality and of these new homes, that is, a smaller product at roughly the same price. Further, DR Horton’s earnings over the last few months have been gangbusters. No doubt. But, Warren Buffett recently sold his entire position in the homebuilder after owning the stock for just a few months (very not like him/Berkshire). This was his largest stock position in the homebuilder sector. And there may be other risks on the horizon for the homebuilders as well.

In other words, stay skeptical Y’all.

Sunflower, pea and radish greens! Most Interesting Tweet(s) of the Week

Woah, super wild change too the skyline. in 9 years. And we have 41 cranes in there as of today everyone. Nashville is in growth mode.

That’s it for this week. If you are interested in digging deeper into any of these ideas or just want to talk real estate investing - which I always love doing - don’t hesitate to reach out. 

You can message me directly right here on BP.

Again, stay skeptical, all you dudes and dudettes.

Herzliche Grüße

-Andreas

* 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.