Things that Have Never Happened Before, Happen All the Time

Welcome to the Skeptical Investor post right here on BP! A frank, hopefully insightful, weekly dive into real estate and financial markets. From one real estate investor to another.

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Today’s Interest Rate: 7.07%

(☝️.47% from this time last week, 30-yr mortgage)

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What a wild ride!

Today, we’re talkin’ tariff tantrum, rental inflation, apartment demand, what the hell is happening with the bond market, and a full-scale attack on interest rates….we are packed with info today folks.

Let’s get into it.

The Weekly 3 in News:

1. - They tried to sell their homes without a real estate agent. Here’s how it went. If you are not a real estate professional, hire an agent! You may think it went well, but you likely are not getting top dollar. Don’t step over a nickel to pick up a penny. Want to find a top agent anywhere in the US? (Just ask!).
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3. - NVIDIA has announced that, for the first time, the company will produce the most -advanced AI supercomputers entirely in the U.S. (NVIDIA).
4. 
   
5. - A new RAND study shows the difference in multifamily housing construction issues between California, Colorado, and Texas. News flash, it ain’t pretty on the west side (RAND).

Folks are feeling richer again today with the stock market in recovery mode, up ~1% today (but by the time you read this may be down 10%, who knows! @#$%!). Since the tariff tanrum started, stocks are up almost 10%, yet still down ~4.5% from before “Liberation Day” and off the all-time highs by ~12%.

Why is the market up again? Over the weekend the Administration exempted most advanced electronics and semiconductors from China from hefty tariffs.

Big deal. This is saving the MAG7’s (our large tech companies) bacon.

And there was more good economic news in the last few days…

Inflation - Two March Measures 👇

Producer (PPI, wholesale) and Consumer (PPI) prices were both down in March. Producer prices decreased 0.4%, much of which can be traced to an 11.1% drop in gasoline prices. Prices for eggs, beef, and vegetables, as well as air travel, food retailing; apparel, jewelry, shoes, cars, and hotels also moved lower.

But, why am I not surprised….prices for legal services rose 1.5%. They always get their pound of flesh.

A better than expected PPI follows a decrease in consumer prices by 0.1% in March -after rising 0.2% in February - to a YoY 2.4%. Leading the way was energy prices falling, including a 6.3% decline in gasoline (BLS). Plus, Core inflation (without including volatile energy and food prices) fell to 2.8% - the best print since May 2021.

Now normally, all this would be fantastic news for the 10-yr Treasuries, which are skittish about future inflation.

But the bond market has other problems…

What the Hell is Happening in the Bond Market?

I thought interest rates were falling, what gives?!

Well, it’s complicated. The 10-yr Treasury (which mortgage rates closely track), after falling for several every week since January, spiked up violently to 4.5% in just a couple of days last week. 30-yr Treasuries hit 5% briefly, the steepest rise since 1981. These took mortgage rates to 7.07%.

Now, nobody knows exactly what is happening with bonds, but the smart money is on foreign countries selling. In fact, reactions in the Treasury market may likely have been attributed to large leveraged bets made by mainly Japanese hedge funds. In Japan, 30-year government bond yields reached a 21-year high, reflecting the spillover effects.

Why? Well in normal markets they can make an arbitraged return, a complicated set of bets called basis trading. Looks like someone got caught offsides and dumped their position, starting a sell off in 10-yr Treasury bonds. Additionally, the spread between 10-year U.S. Treasury yields and swaps widened to a record 64 basis points, signaling significant distress in the arbitrage space where basis trading operates. This dislocation results when folks sell Treasuries to meet margin calls or cover losses.

Further pressures on Treasuries are coming from the Federal Reserve, which was a buyer of bonds (to print money) a couple of years ago, but is no longer a net buyer. They are also slowly letting $5 billion a month in Treasuries roll off their balance sheet. This is more of a backdrop underlying the environment in the bond market, but is worth noting.

What will Happen with Interest Rates?

The Administration has publically declared their economic North Star is getting interest rates down. This is a Red Line; it’s a higher priority than what happens in the stock market.

The captain of this ship is Treasury Secretary Scott Bessent, who has emphasized this strategy in interviews for 3 months straight. His strategy is that the “[Administration aims to achieve lower rates through fiscal and economic policies like deregulation, tax cuts, spending cuts and increased energy production,]” which he believes will foster non-inflationary growth and naturally bring yields down.” If they are successful, this will benefit consumers by lowering mortgage, credit card, and auto loan rates. Bessent also has tied lower rates to broader goals like affordability, suggesting that reducing regulatory burdens in sectors like housing and insurance would help bring prices down alongside rates (Bessent).

If you don’t know who that is, it’s this guy on the right:

IMO, Bessent is ramping up to go nuclear on interest rates. I don’t know exactly how (hell, I’m just a guy in Tennessee) but Bessent is one of the most knowledgeable bond market practitioners. Fun fact, he was a part of breaking the Bank of England, arguably the greatest trade in history, with his bosses Stanly Druckenmiller and George Soros (yes that Soros, Bessent was a pupil of his, very interesting since most Republicans really really really don’t like him). In short - and this is pertinent to our discussion - in 1992 Bessent was a young analyst at Soros Fund Management, working out of their London office. He played a key role by analyzing the UK housing market and spotted a vulnerability in British floating-rate mortgages and their bond market/banking requirements. This insight helped shape the fund’s strategy to short the pound, betting it was overvalued. The trade netted $1 billion in profit and crashed the British pound.

In other words, he REALLY knows how bonds, mortgages, and the housing market all work together in symbiosis.

He is now going to try to “break” high interest rates.

What’s Happening over at the Fed?

Federal Reserve Chair Jerome Powell is keeping his options open. Speaking last week at an event he highlighted the "highly uncertain outlook" due to President Trump’s tariff threats, saying, “It is too soon to say what will be the appropriate path for monetary policy,” but that “recent data show continued moderation in growth and progress toward better balance in the economy…”

All this being said, the data is trending in the right direction, inflation seems to still be on the path downward, albeit slowly during this last mile. I do believe, however, that concerns over a slowing economy and continued positive inflation prints boost the likelihood of the Fed cutting multiple times in 2025.

The implied probability of at least 3 cuts rate cuts this year just hit 78.3%, per the futures market.

Housing Market Activity is ☝️

As we highlighted last week, and again this week, folks making offers are way up in 2025 vs 2024, and are approaching 2023 levels (Mohtashami). Activity appears to be accelerating.

I do expect next week’s numbers to be down, with the wild volatility we are seeing in the bond market pushing mortgage rates back up to 7%. Will be interesting to see though, we are coincidently entering the hottest time of the year for real estate.

Apartment demand is hot

Home prices and stubborn interest rates seem to be pushing demand for apartments. Apartment leasing in the first 3 months of the year was hot, nearly everywhere. In fact, it was the best Q1 on record! But this is not the whole story, not only was it best on record, this was the case despite a 50-year high in supply here in 2025 (though numbers drop off later this year).

Wow.

Why? Housing Analyst Jay Parsons has a great take: “No one talks about this enough, but wage growth has outpaced rent growth for 27+ months. Rent-to-income ratios have come down. (Even Census data shows median rent-to-income ratios in line with pre-COVID.)…More broadly: There's a lot of noise right now around tariffs and we don't know exactly how that'll impact the market. But for Q1, it continued a story of jobs/wages being better than headlines/sentiment suggest.”

Ie. folks are still doing pretty good these days, despite all the pessimism in the ether.

And rent inflation - not overall rent price but the rate of increase - is down. For the first time in 3 years, it’s below 4%. Good news for renters rent! Increases are now at the historical average (Parsons).

Tariff Threat to Real Estate Seems Muted

The big question mark is tariffs and how this will affect housing unit demand. My take: not much at all, relative to the previous status quo. Unless it pushes us into very slow economic growth (or recession) which brings higher unemployment. But I do think no meaningful effect. And this is likely the same for housing construction/renovation costs….👇

$14 billion vs $190 billion, that is the difference between residential construction materials that were imported in 2024 vs domestically sourced (Lambert).

My Skeptical Take:

Sentiment is depressed, still. The sudden bear stock market and rebound, is/was/could/definitely a drag on our feelings. And our mental health, as investors.

Ah the humanity!

But frankly, sentiment is overrated. And the way the data is gathered is through a biased survey that is rarely accurate in signaling economic demise, or jubilation, for that matter.

Case in point, the University of Michigan’s consumer sentiment survey - arguably the most cited and watched sentiment index - shows inflation expectations surging to 6.7%, which is 32% “more negative” than folks polled thought a year ago.

Really? The hell is happening up there Detroit?

This is fairly preposterous, in my opinion. Especially if the same folks think this will happen concurrently with a slowing in economic activity, or even a recession. It reads more like a reflection of political bias, if I am being candid.

But, as I have said before, negative sentiment can in fact become a self-fulling prophecy, especially when the news media and doomers on Twitter, Facebook, TikTok…. are catalyzing bad vibes on the interwebs.

When sentiment sours, opportunity presents itself

I know, I know…by now you are sick of me beating a dead horse (gosh that’s a screwed-up saying), but I want to ingrain this way of contrarian rationale into your critical thinking skillset.

IMO, markets are overreacting to negative sentiment, caused by political tumult.

This feeling is understandable, it’s been quite the last few months. We are all drinking from a firehose. But, this emotional state is judgement-clouding.

Fed Chair Powell, agrees, who is hardly a fan of the new President, saying “Despite elevated levels of uncertainty, the US economy continues to be in a good place…Sentiment readings have not been a good predictor of consumption growth in recent years.”

Volatility is an expression of uncertainty about the future, and the market is feeling froggish.

Don’t leap. Resist Credulity.

In my opinion, in the medium or long term. Let the financial-class lose its mind over all this. Keep yours level.

It may take 6+ months for inflation levels to become clear to the market and for us to get through the “growing pains” of the current political tumult.

As an investor, prepare your psyche for this. How?

Contrarian Thinking: Ask, What Could Go (really) Right?

As Neil Humphrey said in his famous book, The Art of Contrary Thinking, the “ ‘crowd’ is influenced by the heart (emotions), not by the mind. The ‘crowd’ is most enthusiastic and optimistic when it should be cautious and prudent; and is most fearful when it should be bold.” The crowd often overreacts to negative stimuli.

This is helpful to think about in today’s market.

Have you noticed the tendency we all have to immediately ask “What’s wrong?” when some economic or political question comes up for discussion?

How about “what could go right?” People have developed what psychologists refer to as depression psychosis or the looking-for-trouble habit. Resist this.

And today, there are a slew of potential economic catalysts on the horizon to be aware of, such as:

• -The federal government incents bond buying with bank deregulation, federal spending cuts, significant energy production and exportation, new tax cuts etc…,
• -a peace deal with Russia / new Iran agreement,
• -Congress extends current tax cuts,
• -new moves from the Treasury to smash interest rates,
• -DOGE spending cuts are ratified and make it through the courts,
• -large corporate mergers and acquisitions,
• -Federal Reserve cuts rates, or revises their dot plot of future cuts, or stops quantitative tightening,
• -and of course, tariffs coming down, IF they can negotiate a long term end state. (Prediction: I think deals with Japan and Argentina could be within 2 weeks).

These would be highly satisfying and disinflationary for markets.

In summary: My posture is positive, with a skeptical eye on the political noise. For those who own assets, a recession or weakening in sentiment of the economy will very likely bring opportunity we only see every 10-20 years. Again, I believe 2025-2026 could be the greatest time to buy real estate you have seen in your lifetime, at least since 2011.

Don’t be that person in a self-imposed sequestration. Your cage door is open.

Embrace the discomfort. Mut!

Until next time. Stay Curious. Stay Skeptical.

Herzliche Grüße,

-The Skeptical Investor

PS. Want to talk real estate? I'm a real person. DM me!