This Too Shall Pass....Ignore the stock market, it's not the economy
Welcome to the Skeptical Investor post on Bigger Pockets, A frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.
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What a wild ride!
Today, we’re talkin’ stock market chaos, trade, tariffs, lower prices and what real estate investors should be doing to come out ahead. I go deep here, you don’t want to skip this week’s newsletter!
Let’s get into it.
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Today’s Interest Rate: 6.75%
(flat % from this time last week, 30-yr mortgage)--------
The Weekly 3 in News:
- - Markets now predicting 4 interest rate cuts in 2025 ().
- - Nashville News - Nashville unemployment is 3.1%, 1.3% lower than the national average. Nashville is cookin’! (BLS).
- - Housing Input prices are plummeting. First interest rates, now lumber.
Investor Pep Talk
I’m not happy with what is happening in the market. If you own stocks, this is not fun.
I do. It doesn’t feel great.
But let’s be honest. Most folks in the market are wealthy, relative to others.
Sorry, it’s true.
An anecdote: in the summer of 2024 “[a record number of Americans both vacationed in Europe and were forced to get meals at food banks] (Bessant).”
Remember, the top 10% of Americans own 88% of stocks, the next 40% owns just 12% of the stock market. The bottom 50% does not own much if any stocks, or any other asset for that matter. They have debt: car loans, student loans, credit card loans.
Fellow investors, these are your tenants.
So while the stock market is down, so are interest rates, which is more impactful for most Americans who are unfortunate debtors.
It’s also particularly impactful for real estate investors.
For the wealthy, it’s not actually about money. It’s the mood. The wealth effect for them is quite pronounced. They will pull back aggressively with their spending/buying/ investing.
When the stock market plummets it makes them feel poor.
So for you fellow investors, real estate owners, and landlords I say to you:
This too shall pass.
(It might be like passing a kidney stone, but it will pass).
You only lose money when you sell. Remind yourself of this.
I’m not changing my investment thesis. Real estate is the survivor asset, when times get tough, it gets better.
And guess what else is way down? Prices.
Eggs, gas/energy, bacon, milk….all down.
This is great for your tenants.
Ok, had to get that out of my head. Now buckle up, I have a TON of great information for you today.
Let’s Get Some Perspective
We (the news, people online, nervous investors…) are talking mainly about the stock market reaction over the last 7 days.
Again, remember stockholders, you only lose money when you panic and sell.
The truth is, this is not a historic moment.
There have been 6 bear markets (down 20%) in my lifetime. This is likely the 7th.
A-Political Politics
I try not to get political here, and I’m not starting now.
But because the market reaction is fomenting so many of my readers and investors, I’m going to draw on my time on Capitol Hill to address what is happening with tariffs, trade, negotiations, and how all this affects the housing market, ie us real estate investors. Importantly, I am going to pass judgment. I’m sticking to the facts I see from the data while providing predictions on the results.
My first thought is: nobody, including should be surprised that the President (POTUS) followed through with implementing tariffs on imported goods, even if they were more robust than a bunch of pencil pushers on Wall Street were expecting.
He talked about it constantly. Hell, here he is decades ago talking about it on Oprah:
What is Happening Anyway???
A brief summary of the week: “[POTUS announced sweeping new import tariffs, including a baseline 10% duty on virtually all imports with higher rates for certain countries. In response, China immediately implemented 34% tariffs on all U.S. goods while tightening export controls on critical minerals, the EU announced counter-tariffs up to 25% on select U.S. products, and Canada imposed 25% tariffs on select U.S. products. In addition to China, the EU, and Canada, numerous other countries, including U.S. trading partners across Asia and Latin America, have signaled readiness to impose retaliatory tariffs or trade restrictions. These measures triggered a severe market response, with the S&P 500 declining 10.5% over two days, erasing around $5 trillion of market value (chamath).]”
Why is this Happening?
First and foremost, I still view tariffs not as an end state, but as a means. A high ceiling has been set. This is where negotiations start.
And, dare I say, this POTUS very much enjoys a good negotiation.
What the Administration is doing is turning their world upside down, rewriting the financially-stimulated global economy. Case in point: We spent $10 trillion to try to avoid a recession during COVID, only to cause extreme inflation and indebtedness to the tune of $36 trillion that we must now refinance. As a result, we now spend $1.1 trillion / year just on the national debt’s interest payments. Again, not passing judgment, that is what happened.
The aim of these actions is “less financialization, less Wall Street and more “Main Street,” boost manufacturing in America and reduce global integration, with a focus on China and its subsidized economy and, yes, slave labor.
It’s a big gamble.
And we will eventually have to figure out how we trade and interact with the global economy. America First maybe, but it can’t be America Only.
The Administration has implemented a Dual Mandate.
Their North Star is: reduce interest rates so that:
- 1 - The non-wealthy / “main-street” / “tenant-class” must pay less for consumer goods & energy (Bessant) and get out from under their tremendous debt load, and
- 2 - The country’s $36 trillion debt can be refinanced at lower rates without bankrupting the country.
And I do have to say the method to this madness has been a bit, shall we say, brash. The execution is reckless. Perhaps that is the intent? Will they be right? I don’t know. But so far…
It’s working…
Oil prices:
10-Yr Treasury:
30-yr Mortgage:
Prices are cratering and the 10-yr treasury / 30-yr mortgage is cooking.
The Negotiation to Critical Mass Begins
The negotiations and concessions have begun. The next few weeks will be frantic, with negotiation lines being drawn and redrawn very quickly. In a month or two, we could be looking at an entirely different geopolitical trade order.
Already we are seeing reports from Argentina, Taiwan, Japan, Israel, Vietnam and… just a moment ago, the European Union said it wants to negotiate a zero-for-zero tariff trade deal.
It’s been just a few days…
If this persists, and individual countries (and large corporations) make deals with the US , at some point, we will reach a critical mass. Once perhaps 3, 5, maybe 10 larger-er countries make deals, the political calculus for negotiations will 180, from “screw this impose our own retaliatory tariffs/we don’t have to play this game”
to…
“Oh shit, countries are making new agreements, we need to cut a deal NOW.”
And this just in…
Over the weekend, more than 50 countries reached out to negotiate.
I this true or political posturing?
No idea.
But one fact does remain: you do NOT want to be last to negotiate. It’s a bit of a prisoner’s dilemma.
Once the market (stock/bond) sees Critical Mass on the horizon (I need a better phrase for what is about to happen) the stock market is going to go into launch mode. If you own stocks, you won’t want to miss that.
What am I doing with my stock portfolio? Nothing. Patience, not panic.
This is actually normal. This has happened many times before, it’s just a new kind of surprise.
What am I doing with my real estate portfolio? I’m rasing funds and refinancing (soon) to go bigger than ever before (keep reading).
The economy is fine and real estate investors will win
Last week we saw that breakfast is getting cheaper: eggs, milk, orange juice and bacon.
Inflation is trending down. So far.
Again, energy prices are cratering. I have to look at an energy chart again:
Holy hell!
Tariffs haven’t even taken effect yet
Importantly, tariffs don’t actually take effect until April 10th. So far it’s mostly the stock market that is having a tantrum.
Are we headed to a recession? Let’s look at some future/signal data.
Construction is gaining steam: “Today, residential building construction hit a new cycle high. Residential building construction is usually in contraction well before most traditional recessions start (Lambert).”
Props to @NewsLambert for Chart!So far, we do not have a recession signal from the housing market. In fact…
We also have positive, forward-looking housing data
Even amidst all this trade-war posturing. Here are some fast facts from housing analysis Logan Mohtashami:
- -Purchase applications for homes are positive
- -Weekly pending contracts are positive
- -Total pending contracts are positive
- -New listings data positive
And because of the wild appreciation in home prices, homeowners are in a much better financial position than ever before, adding robustness to the economy.
The average loan-to-value for all outstanding mortgages is only 46.9%, and only 0.3% of borrowers are underwater on their homes. True, the total number of borrowers in delinquency is creeping higher, but still very very low (Simonsen).
The Bond market is not freaking out.
Another positive indicator, the bond market, the big brother of the stock market (1.5x the size), is remaining relatively calm. The all-important 10-yr Treasury is continuing to tick down, passing 4% yield for a moment last Friday but there is no crash to safety. It’s actually acting quite sensible.
Free trade might be ideal, but we don’t live in an ideal world.
Our national debt, and the interest we are paying on it, is an existential risk lurking below the surface of the economy. In a perfect world, we should not be for any tariffs, but we are in a fiscally unsustainable economy. Getting our debt under control is imperative. If tariffs make interest rates crash, and even cause a recession the long-term outcome will be better for the US.
Yes, that is a big IF.
Short term, this will suck for stocks and we must be particularly mindful of job losses, recession or not. So far, the labor market is remaining strong, but then again, tariffs haven’t even hit yet. We are still in the stock market tantrum phase.
On Friday, we got positive labor and unemployment numbers:
Here is famed investor Stanley Druckenmiller to explain what I’m talking about:
Mortgage Relief is In Sight
Home affordability has become wildly difficult in just the last few years.
BUT..
Home prices may be permanent, but your monthly mortgage is not.
Why?
Most of your new mortgage is interest, not principle, and thus as interest rates tick down the monthly cost of home ownership will depreciate. And it will be meaningful.
Interest rates are close to 7%. As rates tick down to say 5.5% (where I think we will land) that could mean a ~25% reduction in interest payments. And if the trade war continues 5% is very much within reach.
So while home prices are stuck where they are, and will continue to appreciate over time, 2025 will likely bring mortgage relief.
And let’s be honest, most folks care about/ budget for their monthly costs more than prices.
A Quick Example - Mortgages are 👇!
January - If you bought a $400,000 home here in Nashville, my home market, at a then 7.26% 30-yr mortgage and 20% down you would have a $2535 mortgage payment.
This week, at 6.75%, that same home would be $2425. (4% less)
If rates keep falling to 5%, as they very well could with this wild trade war, you would have a $2067. mortgage payment.
That’s a 22.6% reduction.
And you probably could negotiate the price down (I am), taking advantage of stock owners’ panic and pull back from making large investments.
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My Skeptical Take:
In my opinion, tariffs....
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Dont be a stranger. :)
Herzliche Grüße,
-The Skeptical Investor
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