We Have a Date, Rate Cuts Coming by September.
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.
I am inking a big red line in the sand today. Today’s piece will not disappoint. Keep reading…
Fuel for the day: America. I think we all got a jolt of national pride and the feeling of banding together over the weekend, no matter your political persuasion. I hope everyone is feeling it, and that it lasts. We need less division in our American democracy.
That’s all I’ll say on the subject.
On to real estate! Where we can grow wealth to care for our families. And that’s what matters most.
Today We’re Talkin:
- - The Weekly 3 - News, Data and Education.
- - Deep Dive: Interest Rate Cuts ARE HAPPENING SOON
- - Prediction for 2024 and Next 12 Months
- - The Skeptics Take.
The Weekly 3: News, Data and Education to Keep You Informed
- - A “difficult” real estate market is having an effect on Realtors. NAR membership fell from 1.58 million to 1.55 million (2022-2023). But is it the market, or are real estate agents just leaving the Realtors association? (National Association of Realtors).
- - Americans' pandemic savings are gone. (Bloomberg)
- - Fun Fact re: Government Debt - America’s $34 Trillion debt is out of the control and tax increases are not the answer. There are 741 billionaires in the US, with a collective net worth of $5.2 trillion. Even if the government took all their homes, savings and other every penny of their net worth through a wealth tax, it would still be $29.7 trillion in debt. We are spending a new $1 Trillion every 90 days.
A note to the next US President: Deficit spending must stop.
But I digress…
Today’s Interest Rate: 6.83%
(👇 .16%, from this time last week, 30-yr mortgage)I think we just hit an inflection point with interest rates…
We are likely, today, close to the Fed’s target rate of 2% inflation. This will translate into 2 interest rate cuts this year, likely .25% each, starting in September. I also believe spreads between the 10yr and 30yr mortgage will come down, resulting in additional reductions in mortgage rates beyond this .50% prediction.
The Bottom Line: in the next 6 months the 30-yr mortgage will likely come down by a full 1%.
This is a big f&*k&#g deal.
Why do I think this? Read on…
Inflation, Shelter and Labor are Normalizing
On the job market, the unemployment rate is starting to run higher. Employment is slowing. Initial and continuous unemployment claims are rising. This is true. But I would offer this: the labor market is not softening, its It’s normalizing, regressing to the mean from a crazy level we had as a result of COVID policies. For instance, if you look at unemployment vs. avg duration of unemployment you see that they have been relatively low here.
I expect the rate of unemployment claims curve of to bend down in the fall, slowing and becoming less pronounced as we approach a more normal level of unemployment consistent with full employment (5% or below). We still do have a labor shortage, despite heightened immigration levels. AI and robotics will help with this long term. Job openings have come down, yet from wildly elevated levels, so again, it’s not slowing per say, it’s normalizing.
On housing inflation, shelter is finally normalizing as well, hopefully this is the start to a trend. Shelter was at .2% in June, the smallest MoM number since August 2021.
In fact, X-shelter, we are already at the Fed’s 2% target inflation rate. Looking YoY, shelter accounted for nearly 70% of the total 12-month increase in the all items less food and energy index. Shelter does still sit at 5.2% YoY; but from elevated comps.
Shelter coming down is a big deal, and if the trend stays our friend (I’m looking at you fellow roulette gamblers), Shelter will be down dramatically by the end of the year. Remember too that the government’s shelter data lags reality.
Again, IMO, it is likely that total inflation is near the Fed’s 2% target already. Inflation could now “fall like a rock.”
If this is true, the Fed must cut rates asap.
Why?
Monetary policy is a lot like pot edibles. You do a little, a little more, a little more and BOOM recession or BOOM inflation, the inverse. Slowly and then all at once. You did too much. And both are REALLY hard to get rid of. There is nothing worse than being violently too high. Holy hell it’s debilitating. Take it from 21 year old me.
How is the Fed doing in its job in quelling inflation and ensuring full employment? So far, I must admit, the Fed, after being late to the party, has actually done a fantastic job keeping us out of the danger zone. Nobody is laying on the floor, immobilized, unable to get up because they took another browny. Monetary Policy is sufficiently restrictive and is slowly doing its job.
Well done Mr. Powell.
The bond market agrees. The implied probability of a rate cut is way up this month, and spreads between the 10yr and 30-yr mortgage are coming down.
As of July 14th, the probability of a September Fed Funds interest rate cut is now 98.1%!
The spread is 261 basis points (~2.61%), which is lagging. I believe this will likely decrease more soon.
Tangent: Title Insurance is a Scam.
Title insurance is an outright scam, and far more expensive than the risk associated for the price. Guess how often it’s even used?
3%
Unlike property or car insurance, we don’t really ever use it (unlike auto insurance (70% and property insurance 55%).
For my $1000-$6000+ dollars it really grinds my gears. Most people don’t bat an eye because they are too busy buying a home, and this is just a .2% fee we assume we have to pay. But why? And why is it so expensive?
But it gets better. It doesn’t even protect you, it's for the lender. It protects them and their loan on the asset’s title. Why don’t they have their own umbrella insurance plan that covers this risk, like business liability insurance would?? Instead we buy a new policy one at a time for the bank every time someone buys a home? Title companies too could buy these plans in bulk or buy an umbrella plan.
This is at best negligently inefficient, and at worse, a price-gouging pyramid scheme.
But I digress…
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The Skeptics Take:
We are on the precipitous, edge, cliff, brink… of a new bull market, as I said 2 weeks ago, before this inflation data. Today, I’m doubling down. There is too much pent-up demand in real estate. For a home. Not an apartment, not a flat. This isn’t Europe or Japan. Folks here want a home, they want soil. I don’t know why, I just know it’s true. And demand for homes is like a coiled cobra, ready to spring once rates tick down.
Demand will be volatile, with lags in-between hitting 6.5%, 5.9%, 5.5% and 5% interest rates, where we may bottom. I vehemently disagree with the National Association of Realtors who claims rates will NOT reach 5%.
Boloney.
Demand is going to pop and inventory for homes (not condos or apartments, again) are going to be sucked up like a shop-vac stuck in a fish tank.
I’ll quote the great Barbara Corcoran here:
"If you wait for interest rates to come down by another point, I don't think you'll gain. I think you'll wind up paying more because I wouldn't be surprised if real estate went up by another 8 or 10% if interest rates come down."
But, don’t try to time the market. That’s a fools errand. It could be a year before we get to the 5% range. Just get involved, now. Just keep buying real estate.
And One last thing…
Ok I lied, one last thing on this past weekend and what’s important in life.
Newsflash, it’s family, (of which I include friends).
So get out, turn off, stop reading this, and have some damn fun.
You never know when the party may end.
Until next time. Stay curious. Stay skeptical.
Herzliche Grüße,
-Andreas
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* 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.
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