Posted 3 months ago

When your latte has a 7 handle, it starts to become a Problem...

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.

Today’s fuel is a strong columbian blend coffee. Made with extra beans for a little jolt, much like I’ve enjoyed on a Navy ship in years past. And a little Pink Panther theme to start things off. RIP Peter Sellers. Genius.

Today We’re Talkin:

- The Weekly 3 - News and Data.
- The Fed Took Meaningful Action this Week! (But you may have missed it).
- Are We Really a “Renter Nation?”
- * Tangent Alert - Car Embarrassment!
- Build Baby Build: Lumber Prices have settled down.
- The Skeptics Take.

The Weekly 3: News and Data to Keep You Informed

-The vast majority of the country is still below pre-pandemic housing inventory levels The Midwest, Northeast, and Southern California, in particular, remain tight (NewsLambert).
-Nashville news: New Jefferson St. Development. 8 stories, 132 residential units, 108 room hotel, 4,650 sq. ft. of retail (UrbanPlanetNashville).
-Book Recommendation: The Book on Rental Property Investing. Highly recommend, and software has gotten much much better since 2015 (Turner).

Today’s Interest Rate: 7.20%

(👇 .31%!, from this time last week, 30-yr mortgage)

A Progressively More Dovish Fed

Well, I thought the Fed would come out swinging like a hawk last week, given all the negative inflation data; but instead they sounded more of a dovish tone, while keeping interest rates unchanged.

Very odd.

Inflation is not yet waining, we all know this. Been to Starbucks lately? It’s rough. Their stock tanked this week because their CEO said their “occasional customer,” i.e. high-priced coffee w/ morning glory muffin dude, is coming less often.

When your latte has a 7 handle, it starts to become a problem.

Instead, the Fed actually took a real low-key, dovish action. And Powell buried the lead, as did much of the media. I haven’t see this anywhere. What did they do? They curtailed quantitative tightening (QT). Yes, that’s a double negative I know. So they did what?…. They eased monetary policy, and not insignificantly (yes I love those double negs), from $60 B / mo → $25 B / mo, or 60%. This will meaningfully slow the amount of liquidity the was being drained from the banking sector each month.

The result? A little stock market juicing, up 2.5% since he spoke last week, and - more importantly for us real estate investors, - IMO mortgage interest rates should come down slightly against the 10yr treasury spread. We may be seeing some of that already (see above on % rates).

Again, I find it perplexing for an organization that is trying to crush inflation to be less restrictive in QT and relatively dovish in their posture/tone, but Powell was likely getting nervous about adding fuel to any potential banking/liquidity crisis in the overnight Repo lending market. As has happened under his watch. That is way above my pay-grade so if it is happening or could happen then this action could be warranted, even in an inflationary environment.

Anyway, more detail than one may care about. What’s the point?

The Fed is realizing they have been restrictive (both interest rates and QT) for a long time and mat be getting concerned about overdoing it. They may also be absorbing some political pressure (although I still am of the opinion Powell won’t take drastic political action). The Fed is likely looking over the horizon. They want to cut interest rates, but are holding their ground (rightfully so, IMO) until inflation ebbs.

Further translation: I am still of the opinion that the Fed will cut rates in 2024, most likely twice, by .25% each. Perhaps starting in July. Inflation is not yet trending down to the Fed’s 2% target, this is true. But this too shall pass and I see a few signals the clouds are forming (see below).

* Tangent Alert *

Just destroyed my oil filter trying to get it off my car (I change my own oil to save a quick $100). Used a heat gun and 2 types of oil filter wrenches/straps. No luck, had to call a mobile mechanic for $250, super embarrassing.

Any fellow handy-skeptics out there have any advice for a sticky oil filter? He used a pneumatic hammer to knock it loose.

But I digress….

Economic Signals to Watch

I am seeing a few signals in the economy that bear mention. Nothing earth shattering but it has me now keeping a Skeptical eye out:

Labor market is signaling, ever so slightly, that it may be tightening up a bit. I saw this headline from Moodys that, while a little hyperbolic, make the point well: “The Great Resignation is no more.” Job openings fell from 8.8 million in February to 8.5 million, a trend down from 12 million in early 2022. But instead of firing workers en mass (although many pockets of layoffs exist) companies are merely doing a little QT of their own, hiring less aggressively. And JOLTS, aka the quit my job rate, ticked down from 2.2% to 2.1%, the lowest since early 2018 (aside from a COVID blip). And as we said last week, unemployment ticked up to 3.9%. 😳

Consumer Confidence is now at a 2-year low, falling for a 3rd straight month. Consumers are now glass half-full on job prospects, future business conditions and income. Not overly alarming, but my ears are perked.

Again, not alarming, but awareness is important.

Quick Pivot: “We have become a renter nation.”

False.

Despite economic volatility, home ownership continues to remain steady. And has so since the 40s.

And as a %. Still up, although little lower than when we were giving mortgages to those who couldn’t afford them etc.. which led to the Great Financial Crisis.

Importantly, see the graph’s measurements. Lowest is 63% and highest is 69.5%. We are right in the middle of that range today. Homeownership % has remained steady, as the total # chart above shows as well.

A Skeptical Dude's Take on Markets is written by a real person. So share with a friend! No AI writing here. #OldMillennial

Build Baby Build: Lumber prices have settled down

Inflation is selling down for one important real estate commodity, lumber! Lumber is actually back to 2019 levels.

LFG! Opportunity is-a knockin’, and this is translating to the real world. I am currently looking at building fences for my dog-loving residents, and decks for a couple properties that need a little comfort boost.

New Website Launch!

Fellow real estate investors, we officially launched our new website: Nashville Investor Agent, real estate services focused on helpful investors find, negotiate, purchase/sell, renovate and manage investment properties here in Nashville. Come take a test drive, and please share with your friends!

The Skeptics Take:

So what’s the deal? Where are we at exactly?

The economy is treading water, and we may have a little stagflation in our future (as I’ve said before, count me worried), a few other economic signals are flashing in the labor market… but nothing is alarming at the moment.

So where am I investing? Real Estate, duh, the is a real estate newsletter after all. While I’m playing a little in the Australian Outback, aka the Stock Market, it’s becoming too frothy for me. Which is why I prefer real estate. It’s a relatively stable and reliable market with above average growth and tax advantaged gains, even in troubled times. The stock market on the other hand? Well…Fun fact, over the last 30 years, 50% of all returns in the stock market came in just 10 days of trading. And if you missed on the best 30 days in the market, well… your returns would be an astonishing 83% lower. Totally insane. Last year was a banner year. The S&P was up 25%. What about 2024? Who knows. It’s been highly volatile, up 11% Jan - March, then down 6% to April, now up 4% since, for a total of up ~9%, depending on the day.

But then again we are also only up ~9% from the 2021 peak, or 3% avg / year. Not great.

The other week, JP Morgan called the current stock market similar to the DotCom Bubble. It’s been up up up for a while now, but may be due for one of its cyclical avalanches. But again who knows…

Real estate on the other hand is far more steady an asset class and has outperformed the stock market. In my home state of Nashville, was up 9% last year and is far above (close to double) its 2021 levels. And that is just natural appreciation of the property assets, we also have:

Cash flow + moderate rent increases over time
Principle pay down of mortgage + increases dramatically over time
Forced value appreciation through a renovation
Tax benefits to renting-out a home:
- tax depreciation (you get to deduct 3.6% every year of the value of the home structure, for 27.5 years!)
- Bonus depreciation
- Cost segregation
And a few more too….I’ll share those with you if you reach out to me through our new Site!

People need homes. This issue is not going away. But don’t take my word for it. Think about what makes sense for you and yours. But in the world of real estate, there is plenty of room for positivity.

Until next time. Stay curious. Stay skeptical.

Herzliche Grüße,

-Andreas

Want More?

That’s it for this week. 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.

Looking for a realtor in the Nashville area? Shoot me a note, we work with the best here who specialize in helping investors find great properties.

* 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.