Posted about 2 months ago

Government has taken a permanent intellectual vacation.

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 little English Breakfast aged tea, full fat cream, and, my favorite, raw unadulterated organic honey. Delish. I’m having another.

Today We’re Talkin:

- The Weekly 3 - News, Data and Education.
- Quick CPI Report
- Government has taken a permanent intellectual vacation
- The Skeptics Take.

The Weekly 3: News, Data and Education to Keep You Informed

- Barry Sternlicht warns about troubles in Commercial real estate: “We have a problem in real estate. In every sector of [commercial] real estate, not just office, because of the 500 basis point increase in rates that was vertical.” (Sternlicht)
- * Bonus: his take on interest rates and when they will come down.
- The largest and most powerful rocket just went into space. And its booster recovered. What an amazing feat of science. (SpaceX)
- Book Recommendation: The Millionaire Real Estate Investor. Ignore the cringy title. This is a classic and a fantastic detail of how to succeed in real estate investing (Keller). A must for your library.

Today’s Interest Rate: 6.98%

(👇 .09%, from this time last week, 30-yr mortgage)

Inflation? What Inflation?

Everyone’s talking about the inflation report today, so I’m not.

Ok, I’ll give a cursory summary:

-We had more consumer price inflation in May (3.3%)…..
-which was the exact same number as we had in April…..
-but it was less than the “experts” and economists expected (3.4%)….
-and it is still much higher than the Fed can stomach (2%)…
-markets are roaring upward on the news (1.1%)…
-Why? Wall Street thinks there may be, possibly, potentially, feasibly, conceivably… a slightly higher chance for an interest rate cut this year.
-When? Nobody knows.

Got it? Good.

You can read the Bureau of Labor Statistics CPI release here, if you really want to waste your Wednesday. I say go for a walk instead and listen to some long form interview, aka a podcast, like this one on real estate deals gone south.

These are the inflation report Cliff Notes (Oh man! I just realized Chat GPT has, if not soon, probably killed Cliff Notes. You got me through English class (obviously). RIP, I’m going to pour out some moderately priced wine in your honor tonight).

Ok on to a new topic…

Government has Taken a Permanent Intellectual Vacation

This week, the Federal Government announced rules to block medical debt from credit reports, ie being used to evaluate a borrower’s financial fitness for mortgages, car loans, aka, easier to get more debt.

All things being equal, not a good idea.

Let’s ignore, for now, whether or not this is right or wrong and try to exclude all political thoughts. Let’s just look at the facts.

It bears mention that exorbitant medical expenses happen all too often in this country. I, for one, needed heart surgery when I was born. Twice. And let me tell you that was not fun for my folks. I would go so far as to say it sucks. So when you get a large expense like this, and because our health care system is….to put it politely, buggy, you need a loan, and these expenses become debt. And debt in one thing means you can’t pay as much for other things. Like a mortgage. Or car loan. Or new shoes (ok, that may be a good thing for someone with whom I share a closet 😬). So creditors have included debt, all debt, as a strike against one’s credit, limiting one’s ability to dig themselves into a debt grave, and yes to obtain another large loan, like a mortgage.

Speaking on the announcement, VP Harris said, “Medical debt makes it more difficult for millions of Americans to apply for a car loan, a home loan or a small-business loan, all of which makes it more difficult to just get by, much less get ahead,” Vice President Harris said on a call with reporters. “No one should be denied access to opportunity simply because they have experienced a medical emergency.”

This statement is unfortunately laden with poor assumptions.

First, we really should fix the health insurance system (we don’t really have health care system its an insurance system). Intervening in financial risk management is dangerous. Why? I’ll tell you.

At the individual level, again, having one loan you are paying makes it harder not to just apply for another loan but to pay that loan back. Obtaining more debt is what makes it harder to “just get by,” it’s not an “opportunity to get ahead” as she put it. It’s a liability that will hold you back. Literally.

At the market/economic level, this policy is highly problematic in 2 major ways, both of which are inflationary.

Mortgage Costs UP - There will now be folks with a higher risk obtaining more debt, a lot more debt. Lenders will need to offset this risk with fees/interest rates so they recoup losses when those riskier borrowers default. while / because lenders can’t use medical costs to judge the credit worthiness of a borrower well, all loan costs will have to go up, to spread the risk peanut butter. Arg! Also, why should the borrowers pay off the loan at all if it won’t affect thier credit? And if they don’t, well then all our medical expenses will also go up! Hospitals will have to change more for procedures to makeup for the $ they lose for the folks who don’t pay their debts. Unfortunately, not everyone is a Lannister.
Housing Prices UP - This is just simple economics. More folks will be able to obtain debt to buy a home. How many more individuals will realize this “opportunity” to pile more debt on their plate? An estimated 22,000, which at a median home price of $420k is $9 billion in inflationary spending added to the economy. This increased demand and consumer spending during a time of extreme low supply, means prices go up.

Remember, this is the third inflationary housing policy in as many months proposed by the federal government, all during an extended 3-year time period of high inflation, which is still near double the Federal Reserve’s target rate. Back in March, the Administration announced a:

Highly inflationary. (click the above links to see my write up on these proposals).

Remember further that shelter costs made up much of current inflation. (blah, now you got me talking about the damn inflation report!)

Returning to our Cliff Notes, we just found out today that shelter costs increased .4% for the fourth consecutive month, and was the largest factor in the monthly inflation numbers. Shelter increased 5.4% over the last year, accounting for over two thirds of the total 12-month inflation increase (BLS).

Yuck.

And if you overlay shelter on top of inflation in the graph, you can see just how much higher we are than pre-2019. Shelter is still rising, each and every month, faster than ever before. Overall inflation is at 2011 levels, interestingly, the same time housing prices bottomed, following the Great Financial / Housing Crisis.

Total Inflation vs Shelter Inflation

And one more thing on the stupid inflation report…

Think shelter was bad in May? Medical care costs rose even more this month (.5%), meaning this policy of easing access to more debt on top of medical debt, will be even more inflationary and risky for lenders.

This is why passing policies that are inflationary to the housing market are so problematic. It’s just so pervasive in our everyday lives.

The Skeptics Take:

As was said many years ago by some old French dude, “the road to hell is paved with good intentions.”

True. IMO.

And this is what happens when you have well-intentioned policymakers (ostensibly) intervening in a marketplace. I can guarantee you Fed Chair Jerome Powell took a deep sigh when he heard about this proposal from the Administration. It’s not helpful. Without a significant drop in inflation he can’t cut interest rates, because doing so it also inflationary.

Ah the humanity!

It is important to note that this announcement is still in the rule making stage so it will 1) take time to become policy, ie after the November election, and 2) the Congress or courts may block it. But they did put out a press release showing they are serious about implementing it. And unlike the other 2 policies, they likely don’t need Congress’ approval to implement them.

Also, the irony is not lost on me. And I can’t help but laugh. The Federal Government is doing the opposite as what it is intending. They are proposing to use $7 billion in American Rescue plan Funds, which it borrowed, to pay medical expenses, which people borrowed, so that people can borrow more and lenders can make it more expensive to borrow. A lot more. Mortgages are the largest debt line-item for households. All during a horribly inflationary economic environment.

Inflation is here to say. Today’s report is being received positively in the press and equity markets because it wasn’t worse. Not because it was good.

And the cycle continues.

Just check out this article from 1979, sound familiar?

But I digress…

I can only assume this announcement is just political. The Washington Post calls this announcement “poised to be part of President Biden’s closing argument that he is addressing pocketbook issues.” So I get it. That actually makes rational sense at least, with the election 5 months away. But if it’s not, and they seriously believe this is helping? Well then….

….Its official, government has taken a permanent intellectual vacation.

Until next time. Stay curious. Stay skeptical.

Herzliche Grüße,

-Andreas

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* 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.