Get Your Mindset Fit This Winter

Welcome to my Skeptical Investor Blog on BP. A frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

Today’s Read Time: 11 minutes.

Today We’re Talkin:

• - The Weekly 3 - News, Data and Education
• - Inflation Update
• - Interest Rate Update
• - Feature: To Pay off or Not Pay off a Mortgage: A Lesson on Debt and Risk
• - My Skeptical Take

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

1. - Small business optimism has skyrocketed to a six-year high. Small business owners feel more certain and hopeful about the economic agenda of the new administration. Ex: the percentage of owners expecting higher real sales volumes rose eight points to 22%, the highest reading since January 2020 (NFIB).

2. 
   
3. - What are all those closing costs for? A simple breakdown (@mortgagetruth).
4. 
   
5. - FDA bans Red No. 3, artificial dye used in beverages, candy and other foods. What may be next? (NBC News).

Today’s Interest Rate: 7.25%

(☝️.08%, from this time last week, 30-yr mortgage)

Today we’re talkin’ important news, we get a big update on inflation, interest rate predictions, and I have a story of a family and their 2% mortgage. With a twist.

And make sure to tune in next week, I’m going to tackle insurance. And why it will outpace other services costs in 2025. Keep a lookout.

Ok, let’s get into it.

Important Inflation Update

Hot off the presses, we got inflation numbers for December and they were positive. The Producer Price Index (aka the input costs for businesses that make things and do stuff) was up just .2%, half the .4% expected.

And the closely watched Consumer Price Index also came in below expectations. Excluding volatile food and energy prices, the core CPI annual rate was 3.2%, vs 3.3% expected.

Both were a pleasant surprise after a few weeks of worry of reigniting inflation. Of course, we aren’t out of the woods yet. But this is positive, which is why stocks are up and bond yields are down today.

Price increases were mostly seen in energy, 40% of price increases were from energy, which was up 2.6% for the month, mainly from a 4.4% surge in gasoline. Food and shelter prices also rose, but only 0.3% for the month (BLS).

We will find out more inflation and labor data for December in the coming days. All eyes will be on Personal Consumption (PCE) numbers (the Fed’s preferred inflation measure), to be released on Jan 31st. We will also have a Fed rate cut decision on January 29th. Markets are pricing in a 97.3% chance of NO rate cut.

My Thoughts: I agree with the bond and futures markets, the Fed does not need to cut and they already did their signaling of a monetary posture change from tightening to easing, with 3 rate cuts last year. The 10-year Treasury yield hit a new 14-month high of 4.8% yesterday (although it is down slightly today).

Why?

Markets are still concerned inflation may move higher and the Fed may not cut rates 2x this year, as they said they would. They are also a little spooked about macro-uncertainty and new policy changes. Don’t forget we will have a new President on Monday!

What has all this done for real estate?

The mortgage market is a ghost of its former self, still passing through a prolonged and severe recession. It's one of the worst downturns in real estate sales and mortgage activity in history. Lower activity levels than the Great Financial Crisis.

Refinances are also still in the dustbin. I consider the following index number of 400 to be essentially zero. Only folks who absolutely have to are refinancing, likely folks with hard money, bridge loans or other private financing, such as house flippers who don’t/can’t sell their flip and convert it to a rental. I myself am waiting to refinance more than 4 properties I’ve renovated, which is why I don’t do hard money.

What has this done to real estate industry professionals?

There has been a storm of mortgage broker layoffs, mergers and a culling of the real estate agent herd. Thousands of folks.

Here are just a few examples, all after the Fed started cutting rates (Resiclub and @mortgagetruth).

• -Zillow starts layoffs (1/10/25)
• -Redfin to cut 46 jobs at Seattle headquarters (1/9/25)
• -Ally Financial quits mortgage lending, layoffs (1/8/25)
• -Central Mortgage Funding halts mortgage lending in state of Connecticut (1/2/25)
• -EasyKnock shuts down, layoffs (12/7/24)
• -Fiserv to lay off between 1,000 and 1,500 employees (12/7/24)
• -Wells Fargo to cut 721 jobs in Oregon (12/5/24)
• -Opendoor to reduce its workforce by 17%, roughly 300 positions (11/8/24)
• -Fortress Bank to acquire Compass Mortgage (11/5/24)
• -Flagstar Bank to cut 1,900 jobs as part of strategic transformation plan (10/17/24)
• -Check out the full list here.

Silver Lining. High interest rates make it tough. But cream rises to the top. The best real estate professionals will emerge stronger. Case in point, this is one of our busiest times ever and excellent mortgage brokers I know are gaining business from those who have failed.

It’s time to exercise your

Let’s go!

To Pay off or Not Pay off a Mortgage: A Lesson on Debt

Speaking of mortgages and interest rates, I read an article today that I had to share.

It detailed a lovely family who was being interviewed about their decision to pay off their mortgage early.

Now this is an age-old debate in real estate, mainly with homeowners (or anyone who follows Dave Ramsay’s advice. And while he may be a nice guy, I’m not a fan of much of his zero-debt finance philosophy).

Now, it should be said that paying off a mortgage early is usually not a financial decision, it’s more personal. Some folks prefer to lower their risk by getting rid of the mortgage. Some like keeping their property leveraged. After all, with the same amount of cash, you can own 4 or 5 homes (putting down 20 or 25%) instead of owning it outright. And mortgage debt (aka borrowing to buy real estate) is usually the cheapest debt you can get. Paying the mortgage is usually a top priority, it means keeping your house.

So, should one pay the mortgage off early?

The family detailed 4 reasons why they wanted to pay it off early.

1. -“Debt freedom makes early retirement easier.”
2. -“We're hedging our bets.”
3. -“We'll save money on interest.”
4. -“We're getting peace of mind.”

Now normally, these would be fine reasons to pay off your home loan and I wouldn’t balk at this. Again, it’s more of a personal decision really.

But… there is a problem.

Their mortgage rate was 1.99%.

And a rate this low, in today’s interest/inflation environment, really matters. In fact, it makes each of their 4 reasons fallacious.

Why?

Today’s 10 and 20-yr Treasury bonds are more than, 1.99%, actually they are double that. Today’s 10-yr Treasury is 4.7%.

And owning a US Treasury is . Owning your home outright and putting (aka storing) all your cash in it is not risk free, as a home value can decrease. Just ask the homeowners out there in CA near those fires.

What does this mean?

Paying off this mortgage is actually MORE risky than keeping it, in this example. It’s both a higher risk and a lower return.

When you choose to repay your loan early, you are essentially converting your debt % into your rate of return. So there is an opportunity cost to this decision. In this case, it will be 2x more costly for this family to pay off the mortgage.

Instead, the family should:

- redirect the money they are using to pay off the mortgage, and,

- buy 10-yr or 20-yr Treasuries, which today are paying 4.8% and 5.073%, respectively. More than doubling the investment return for this family.

Risk Free.

And because their rate was so low, this was likely a once-in-a-lifetime mistake.

Now, will the family either go broke or get filthy rich because of this decision?

No.

But it’s a great example of why we need to be on our game in real estate. I wish the Business Insider journalist would have asked them a few questions.

If it were me, I would keep the loan, and reinvest that money in more real estate or at the very least buy the S&P 500, which averages ~8% historically. These are not risk free but I choose to take slightly more risk with my investments.

Want to learn more and get even more free real estate education? You can:

1. Keep reading my newsletters :)
2. Pick up a book on running numbers and analyzing deals. Real Estate By the Numbers is a great choice. I can’t recommend it high enough. Yes, yes it’s not free, but it’s a book. (And if you send me a message with some feedback on this article, maybe I’ll send you a copy :).

My Skeptical Take:

Despite continued higher interest rates, real estate prices continue to hold up, with most financial institutions predicting 3% appreciation in 2025.

I think we run hotter, closer to 5% nationally, on average.

So what’s next?

On interest rates: CME Fed Watch has the chance of a Fed Rate cut in January at 2.7%. My intuition agrees, and tells me they pause (no cut), in the face of strong inflation and strong labor market numbers, which we will get more of in a fortnight. The 10-yr treasury is at 4.67% today, the market still sees a risk of re-inflation.

On Inflation: We are likely amidst the last mile problem. Inflation could be kicked already (heck we were above 9%!), but getting below 2.5% PCE could just be a very slow/structural process downward, with some minor adjustments along the way. After all, ex-shelter, inflation is right about at the Fed’s 2% target….Shelter inflation was flat in the last reading.

On the Fed: Should the Fed have cut 3 times, by a full 1%? Probably not, in hindsight. The economy is still hot with GDP at 3.1%, but they also likely wanted to signal their shift in the cycle from tightening to loosening. We get newGDP numbers on January 30th.

My message for the week:

This Winter, get fit. Hit the gym. Educate yourself with books and podcasts (here are some great ones). Start some hot Yoga classes, maybe BJJ. Build your wife a sauna (I’m trying)…Whatever it is, use this time wisely before the Spring demand hits. 40% of annual real estate sales are transacted March-May.

That said, the environment for investors today is extremely positive. I’m buying now while demand is low, and I’ll also be buying in the Spring. High rates have scared off all the HGTV posers, which means less competition for deals. Especially for the ugly properties.

So, what are you doing to get fit this Winter?

Until next time. Stay Curious. Stay Skeptical.

Herzliche Grüße,

Andreas Mueller