High Interest Rates vs Gov Spending. Who will win the inflation fight?

[Andreas Mueller]

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: A bold dark roast coffee from Bulletproof and some protein from Pilgrims Jerky. Looks like a marbled pancetta. Amaze-ballz.

Today We’re Talkin:

• - The Weekly 3 - News and Data.
• - New Mortgage Program will Exacerbate Inflation.
• - Hot Tip to Save BIG on your Next Renovation.
• - The Skeptics Take.

The Weekly 3: News and Data to Keep You Informed

1. - Apartment renters are signing longer leases than ever - incentivized by high supply in multifamily apartments coming online. (JayParsons).
2. - The cost of two kids in child care exceeds rent payments, by at least 25% nationwide and is more than double that in 9 states (CCAA).
3. - Book Recommendation: Long Distance Real Estate Investing. Highly recommend, a must for new investors looking to develop systems and invest long distance.

Today’s Interest Rate: 7.28%

(☝️ .21%, from this time last week, 30-yr mortgage)

Mortgage rates are up significantly this week, following a move in the spread between 10-yr Treasury and 30-yr mortgage rates. Nearly 1/4%. We need inflation to trend down, but so far signals are “mixed. ”

Counterintuitively, it seems wage growth has begun to outpace inflation growth, for much of the last 12 months (or has inflation merely seeped into wages?). Although if you ask anyone they certainly do NOT believe this to be the case. The last 2 years of hot inflation is still burned into all our minds.

Count on mortgage and bond markets to remain volatile, yet range-bound, circling the 6.7-7.5% range. Hot tip: If you are an active homebuyer and have locked in a mortgage rate, don’t hesitate to ask your lender if you can re-lock that rate. Ask them to monitor rates for you (they should be but don’t always). Take advantage of this volatility to minimize your future monthly mortgage payment. There can be a small fee for this so have them run numbers for you.

Fresh inflation numbers come out Friday, we will see what they portend for next week.

New Gov. Mortgage Program will Exacerbate Inflation

U.S. federal government spending "is the biggest threat to disinflation and lower interest rates" (Piper Sandler). I agree, at least in most part, and especially when the Gov spends money it doesn’t have (deficit spending). It’s a short term juicing that can be helpful to stave off an economic slowdown but is not and should not be used long term. Without wading into politics, that is unfortunately, what our government leaders continue to do. For years. The result? Inflation continues.

Deficit spending is a snake eating its tail.

I don’t need to tell you this, but one may only look at housing prices. News flash, they are higher. In fact, for the first time in 2 years, there’s no major American metro where home prices are falling (RedFin). Home prices are up up 4.8%, and monthly housing payments are up 15%, YoY.

Now, the Feds are proposing another program that will directly inject billions into the economy.

Why?

And this is on top of the Government’s announced plans earlier this year to boost spending and demand for homes.

Why?

Problematic Housing Plan #2 for 2024

In short, the Government is proposing to incentivize folks to take out second mortgages on their home, access that equity, so they can spend it. While it is true this would help folks “unlock” some of the equity in their home since home prices/values have appreciated greatly in the last 3-4 years, it also means they will spend it somewhere into the economy and that means more pressure on inflation. Not to mention the second mortgage payment / higher debt they now have (ie higher risk for homeowners).

Why?

Some more detail: How will the government do this? Freddie Mac, which is still under government conservatorship since the Great Financial Crisis, is proposing to buy these second mortgages on the secondary mortgage debt markets as a mortgage-backed security. Makes my spine shiver a la 2008. Importantly, some in Congress have signaled their opposition. Although unfortunately it has now become a partisan issue.

The proposal will simply amount to a stimulus program, inciting inflation growth.

Again, I do not dismiss that folks are feeling inflation so getting access to $ may seem like a good idea. I can understand the inclination, albeit misguided.

Case in point, home repair and reno costs are up since 2019. Way Up. Nationally, costs for home repair and remodeling rose +39.9% between April 2019 and April 2024. That outpaced overall inflation, which rose +22.7% during the same period.

But the solution cannot always be to throw more money at a problem.

Again, the government is focusing on the easy-button solution when it comes to higher housing related costs.

We need more Houses.

We need more houses. That’s it. Bottom line.

And the government does have a role here. We don’t need housing programs that give folks $, incentivizes spending or stokes demand (there is plenty of that). That is counterproductive. Must we forget the other federal agency, the Federal Reserve, is in a highly restricting posture right now, holding interest rates at historic levels to slow inflation. Boosting consumer spending is literally rowing in the opposite direction.

STOP deficit spending. The young / less well off populations are shouldering this inflation and we now see the consequences. The Congress and Administration need to get our fiscal house in order. It’s been too long since ideological opposites Bill Clinton and Newt Gingrich were able to strike a budget deal.

Why can’t we do that again?

This really grinds my gears!

Ok, whew, let’s focus on something positive. How about a hot tip!

Hot tip alert! Buy your Own Materials

The hot tip for the week is: Buy your materials / supplies, especially for high-priced /large / single items.

Case in point, I recently had a water heater go out, one of these pricier tankless systems that was on its last leg after about 10 years.

I called Plumber #1. I saw them at the neighbors house and I always like trying new subcontractors that seem busy.

The quote I got was $5500 (which is insane). But it got me curious, so I asked them what make/model they were going to install, and how many man-hours it would take?

Answer: State Proline XE 199k BTU and 6 hours (although they were very fuzzy on the latter).

I looked it up and saw I could get it for $1500. Taking into account some necessary supplies for installing the new unit (let’s say generously $800), that means their / hr rate was $533. And they probably are tacking on some margin for the unit too.

Yuck.

So I searched around for a deal and bought the next model up online for $1600.

I called Plumber #2, who I have used in the past, but who I also found by calling a random van doing work at a neighbors.

I told him I need a water heater replaced, and that I already had the new unit.

Quote to install it: $1500.

A savings of $2500.

Boom.

I take this tact on many high priced or specialty or design items, like countertops, light fixtures, appliances, large glass or window replacements, mechanical anything, etc….Contractors have their preferred suppliers who they know and are reliable, but are not always the best deal. They won’t normally look, or look as hard as you will, for a deal / sale since they will just pass on that cost to you. They are busy folks so I don’t (usually) blame them, I get it. So if you can take a little of the workload off them and buy the supplies/materials, do it. Hot tip #2, if you get a wildly high quote, it’s probably because they don’t really want to do the job or are too busy. Don’t take offense, just get a few more quotes.

In other words, they just aren’t that into your job.

Also, I’m never using Plumber #1 ever again. That neighbor of mine got hosed.

The Skeptics Take:

Government needs to get their you know what together. People need homes. This issue is not going away. It’s not acute, housing supply is now a chronic issue. We need fewer regulations (or at least the correct ones) to incentivize housing construction and more up-zoning in appropriate areas to add density to existing lots. This should focus on supply of new homes, adding density to existing lots/homes and bringing down inflation costs.

We can do this, let’s F&%ing Go!

Bonus hot tip!

Homes getting too expensive where you live? Invest remotely, I did before I moved to Nashville. Where should you invest?

My advice: skate to where the puck is moving, which cities are growing and where the young folks are going.

Where are young folks moving? Let’s see:

• Booming: Provo, Austin, San Antonio, Charlotte, Nashville, Orlando, Dallas/Fort Worth, Denver, Greenville, Raleigh, Tampa, Phoenix, Seattle, Houston, Atlanta
• Strong Growth: Indianapolis, Las Vegas, Riverside, Detroit (!!), Boston.
• Contraction: San Francisco, New Orleans, Los Angeles, Chicago, New York.

Focus on growth and young demographics. My 2 cents.

Until next time. Stay curious. Stay skeptical.

* 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.

[Jacopo Iasiello]

Thank you for sharing! 

[Jonathan Klemm]

Great share @Andreas Mueller!

I am from Chicago and I am more frustrated here with the exorbitant amount of vacant and run down homes in our city.  I have a huge passion for fixing up properties in distressed neighborhoods to help the exact problem you are preaching about.

In my opinion, we need more incentives to fix up these properties rather than build new ones.

[Andreas Mueller]

Jonathan, I couldn't agree more. We absolutely do. Repairing the blight in many cities is actually just as important. 


Quote from @Jonathan Klemm:

Great share @Andreas Mueller!

I am from Chicago and I am more frustrated here with the exorbitant amount of vacant and run down homes in our city.  I have a huge passion for fixing up properties in distressed neighborhoods to help the exact problem you are preaching about.

In my opinion, we need more incentives to fix up these properties rather than build new ones.

[Stephen Keighery]

Interesting post. thanks for sharing. 

[Andreas Mueller]

Quote from @Stephen Keighery:

Interesting post. thanks for sharing. 

 Stephen, you got it!

[Wyatt Wolff]

Good read, thank you!