It's Good News Week! Why we may be in a 10-year growth cycle, circa 2009-2018.
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: Cucumber Botanical soda water, zest of lemon, and a dash of Guaranaplant extract. WoW. It’s like a Celsius but better and no crap in it (be careful, this stuff is powerful). Workout today is going to be intense! Like camping. 😊
Today We’re Talkin:
- - The Weekly 3 - News, Data and Education.
- - Good News to Report!
- - Woo-Girl Inflation?
- - The Skeptics Take.
- - Elon Musk's AI company @xai is planning to build the most advanced supercomputer in the United States, in Memphis. It's expected to be the largest investment, by dollar amount, in Memphis history (MBJ).
- - Dolly Parton’s business empire is expanding yet again, this time with Dolly Wines. The singer’s collection of wines comes to stores next month with a peaches/cream chardonnay (food dive).
- Bonus - A Nashville native broke the 100M butterfly world record at the U.S. Olympic Swimming trials Saturday. Hell ya! (News5).
- - Book Recommendation: Man’s Search for Meaning. Not for the faint of hear, but if you think you have it bad or are searching for meaning in an otherwise good life, this will put you in your place. A classic, and something all adults should read, IMO (Frankl).
Today’s Interest Rate: 7.02%
(☝️ .04%, from this time last week, 30-yr mortgage)Good News Day!
Enough already all you doomers! Begone you negative Nancies and fragile Freds. I’m in a good mood so let’s talk about some good news for once. eh? (well, mostly, I promise).
American’s Net Worth is UP
Total net worth for the bottom 50% of folks is UP big time, and has been since the Great Financial Crisis, but it took 13 years, until ~2019, to get back above 2006 levels. Thats a long time, and just goes to show that the GFC was a big deal (a BFD!).
Still, good news.
But then something happened, government COVID intervention, where we printed $10 Trillion and injected that intravenously into the economy’s carotid artery. BOOM. Net worth for the bottom 50’s was supercharged. Up more than 200% in 4 years.
This was a doubled edged sword for the bottom 50, however. Those folks now are wealthier but we had wild inflation in the price of, well, everything (more on this later). And this matters more if you are in the bottom 50, of course.
Yet, something great happened. Folks actually saved a lot of that wealth in their bank account. Total checkable deposits for the bottom 50 remains high. Way high. Also up more than 200% since 2019.
Now the rich are still getting richer, a lot richer, to be sure. The top 1% gained about $15 Trillion in net worth in the same time. But that was from a high baseline, so their gain was (only) ~150% higher.
So the rate of wealth increase was far more pronounced for the bottom 50% of folks than for rich folks.
All things being equal, that’s pretty cool.
Let’s also look at income, not just total wealth, since many folks, especially hourly workers, in the bottom 50 unfortunately, really can’t/don’t save much money or own income producing assets.
Wages > Inflation
Wages for hourly workers are actually growing faster than inflation.
It’s true.
And, moreover, except for 2021 - early 2023, that has been the norm for the last 10 years. Wages > inflation.
The problem is, it really doesn’t feel like it. Inflation is a son of a b$t$&, and we had a bad case of it. Still do. We went from $9 beer night to straight woo-girl summer cocktaillevels of inflation, and fast.
And the speed of that inflation has been psychologically painful. Cars, Eggs, and of course Houses,,,all UP. Inflation is still high, to be sure. But we really are in the hangover phase from all those inflated cocktails (myself included, damn being 40 isn’t the same as 24 kids).
BUT, all this being said, wages for hourly folks are up more, and have been since early 2023.
Good News.
And the most updated numbers from last week show the trend continues. Inflation (CPI) came in at 3.3%, and hourly wage growth was 4.1%, YoY, making real average hourly earnings .8%.
Better news.
CPI vs Wage Growth
All while folks are still saving and have more $ in the bank.
That’s the best news.
Rent vs Income
Now, we have to tie this back to real estate, of course. So finally, let’s look at rent vs income of apartments.
Rent costs are nearing 2019 levels. “Operators are pricing to move units…National year-over-year rent change has fluttered around 0% for 11 straight months. We’re likely closing in on 19 straight months where wage growth has topped new lease rent growth – which means rent-to-income ratios are retreating again (Parsons).” Rent-to-income ratios (among new lease signers) are nearing the pre-pandemic norms of 21-22% (Whitaker).
More good news.
* *Side note, overall shelter costs (not just apartments) is trending higher than both: overall inflation and wage growth, at 5.4% YoY. But is steadily decreasing and this government number is lagging/not terribly precise. Good news on the trend. Remember, shelter costs have normally averaged higher than overall inflation. See chart.
*** Tangent Alert! - Honest Question, Why do Car Fuel Standards Matter Anymore?
The National Highway Traffic Safety Administration, just announced new rules requiring the average efficiency of new vehicles 50+ miles per gallon by 2031. Sounds like a fine thing for carmakers to do, on average. We literally had cars in the 80s that got 50 MPG so should be pretty easy for car companies to do. No?
The fuel savings, according to the NHTSA, should translate into about “$600 less in gas costs over the life of a new vehicle.” Nice, I like saving…. what what??? Only $600? Over the car’s life??? Am I missing something??? So, over what, 20 years I save $600 bucks? $30 bucks a year?
Shut up.
How about an EV? How much will you save (avg) on car-life gas costs?
$1000/yr or $20,000! (not counting lower maintenance costs like no more oil changes etc…).
Tell me NHTSA, why are you spending time on meaningless fuel efficiency for gas cars? Seriously. Start working on something important, like approving autonomous taxis will cost 1/4 the price of an Uber? Get on that will ya? We have the tech now.
Whew… ok…I digress…..
The Skeptics Take:
We know, even though we choose not to believe it, we are never going back to 2019 price levels.
Ice cream was once 10 cents too. Never again.
For the last 15 years we have really been living in a prolonged recovery period, IMO. This period, from the GFC to let’s call it 2009-2018, was pretty sweet. Inflation was low, cost to borrow/capital was low, and Gen Z’s taste in music was still bad…
Interest rates were low because inflation remained low, so the Fed really didnt have to do much, and only started pulling levers again at the end of 2018. Then a pause, then they started up again briefly in 2019 as the economy was slowing and WHAM, COVID ZIRP policies. Combined, the Fed and Congress (with 2 Presidents) busted out the printing press and went HAM.
$10 Trillion later, inflation took off like starship.
(And Congress wanted to keep spending more, thankfully those bills didn’t pass.)
That all was a lot for the economy to take it, and in real estate, it broke parts of the economy, especially housing. We had the largest housing recession since the GFC.
I believe we are again in a protracted recovery period, which could last 10+ years, much like 2009-2018. Sure there will be volatility, as is the human experience and the markets we love to screw with.
But, hear me out:
- - AI and robotics are leveling up every day it seems. They will significantly boost labor productivity;
- - Inflation is trending down;
- - the Fed is itching to lower interest rates and bond markets are starting to sniff out a shift in the winds;
- - there is a ~$70 trillion wealth transfer from the Baby Boomers to their kidsbeginning (including their homes and real estate assets);
- - home prices are increasing steadily, not chaotically;
- - overall rents are up, but steading thanks to apartment rents / supply;
- - wage growth, for more than a year, is back to above inflation levels;
- - and the bottom 50% have more $ in their checking accounts than ever before as a % of wealth.
We Skeptics MUST remain vigilant of all these data points, nobody knows where Mr. Market may take us. But so far, in the roulette game of life, good news comes in streaks. And right now, the trend is our friend….
…until the end, when it bends.
Until next time. Stay curious. Stay skeptical.
Herzliche Grüße,
-Andreas
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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.
* 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.