Let's talk recession
Recession. The dreaded "R" word. We are already entering it. And by the time the Fed calls it, we will be a quarter or two into it. The Fed is always a "day late and a dollar short." By the time they pick up the clue phone, it has quit ringing.
The fundamentals of our economy require that we are entering a recession. Skyrocketing fuel prices, inflation hitting 8 percent after March (the highest since 1981), and an inverted yield curve: Yesterday, April 7, the yield on the 10-year Treasury fell to 2.331%, while the yield on the 2-year Treasury was at 2.337% at one point in late trading Thursday. After a brief inversion, both yields were basically trading at the 2.34% level in the latest trading.
In a healthy market, a longer term debt obligation (bond or note) should always demand a higher yield. In a "scared" market, that flips, and the "inverted yield curve" usually predicts recession.
But what does that have to do with real estate? And specifically Gatlinburg real estate? Three things are going to happen to soften demand for Gatlinburg real estate, causing prices to decline:
1. Gatlinburg real estate has been attractive because of the high yield (CAP rate). As interest rates rise, investors move their dollars into bonds and CDs that yield respectable amounts for very little effort.
2. The cost of borrowing is rising significantly, due to rising mortgage rates. If rates rise from 4% to 6%, that isn't a 2 percent increase. It's a 50 percent increase. That means that a cabin that was profitable yesterday, suddenly isn't profitable today.
3. Higher vacancy rates due to less traveler demand, meaning declining yields, and prices of real estate adjusting commensurate with those declines.
If you bought in Gatlinburg last month, your property may be worth less in a year than it is today. Perhaps significantly so. If you bought a year ago it is iffy, if you bought two years ago, you're probably fine.
But if you are a long term investor, you are fine regardless. That is, if your property doesn't require perfection to cash flow, as we are entering a period of imperfection.
I have attached several charts of Gatlinburg real estate (excluding condominiums) that show what I believe to be nearing peak, and the worm is turning. Of course, I could be way off target. But each month, I will be posting updates of these charts to see where we stand.
Happy Investing!
source: Rate.com
Comments (7)
It is definitely a seller’s market but the question here is how long it is going to be. I was looking to invest in this market but everything which Collin said makes absolute sense. Now there is a chance we have a soft landing but this cannot continue for long, numbers on these cabins don’t make sense to me. They barely look manageable with self manage but any change in perfect conditions can make it negative cash flow. I am going to sit this one out.
Ashraf, over 2 years ago
Hi Colin
First, thanks for taking the time to pull the data together. I am an agent here in the smokies, I represent only short term rental investors. I am seeing some softening in the market both in terms of the number of days properties are staying on the market and the number of offers properties are getting. Properties that are priced within the 2nd home loan range are still getting multiple offers and going over asking, but they are getting less offers. Properties over the $1M mark are sitting on the market longer, but they are still moving. People are still buying here.
There is a significant backlog in demand and while the returns are not what they were if you bought a cabin two or three years ago, the returns are still far better than bonds and more stable than stocks. These two factors continue to make the smokies an attractive choice for investors looking for a higher return.
I own three short term rentals in the smokies. I have not seen my occupancy decrease, quite to the contrary it is up over last year at slightly higher rates. The smokies are 8 hours away from half the population of the United Sates. In an economic downturn, this makes them an attractive choice for families who cannot afford to hop on a plane. Local businesses continue to invest heavily in the area, with several major venues opening up in the first half of 2022. There is also a theme park planned rivaling the size of Dollywood. If the Smokies were in a decline, major businesses would be investing their dollars elsewhere. The affordability of a smokies vacation combined with the continued investment in family entertainment venues will continue to attract tourists in large numbers.
I am looking forward to future data updates!
Thanks for starting the thread…
Karen Chenaille, almost 3 years ago
Hi Karen. Thank you for your insightful comments. With you being a local real estate professional focusing on short term rentals, your insight is very valuable.
As interest rates rise, real estate will be increasingly be competing against investment income from safe havens such as bonds. As an example, 30 Year US Treasury bonds today traded near 2.8% annual yield. That is still well below the historical average 4.2 percent yield.
I have been seeing cabins trading for up to 13X gross rents. Even without a dime of expenses, this only represents a 7.69 percent annual yield, assuming a cash purchase. Once you factor in expenses - rent, insurance, repairs, etc. - I would guess that the yield would fall to under 5 percent.
As interest rates rise, there will be many fixed instruments offering this yield with very little risk and no work.
This will serve to push investment property prices down, as buyers will demand a higher yield to take on the risk.
I wholeheartedly agree that the Smokies are a wonderful area to invest in for the long term real estate investor, as traveler demand stays strong for the reasons you mentioned.
I look forward to hearing more from you!
Collin Hays, almost 3 years ago
edit: The historical average yield for a 30 year US Treasury Bond is 4.8 percent, not 4.2 percent.
Collin Hays, almost 3 years ago
It will be interesting to see if this is the peak or not. A reversion back to 2020 prices doesn’t seem that far fetched, but even that will cause a lot of pain.
John Carbone, almost 3 years ago
Your graphs show
1] prices continue to climb
2] nothing is for sale
3] list price keeps climbing
4] the few properties available are snapped up almost immediately
Looks like a seller's market to me.
Steven Joseph Fogarty, almost 3 years ago