Interest Rates Higher for Longer? Good.
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, fueled by today’s amazing beef jerky and caffeine of choice. No AI generated content here folks. Nie!
Today We’re Talkin:
- - The Weekly 3 - News and Data
- - Interest rates Higher for Longer? Good.
- - Bad Government Fiscal Policy is Driving Inflation
- - Nashville is Just Getting Started. A Closer Look.
- - The Skeptics Take: Bad Vibes in the Market? Good.
The Weekly 3: News and Data to Keep You Informed
- - “On current facts, a rate cut in June would be a dangerous and egregious errorcomparable to the errors the Federal Reserve was making in the summer of 2021. We do not need rate cuts right now.” (Larry Summers)
- - Boston Dynamic just unveiled their newest Atlas robot. This is not a render. Wow (MKBHD).
- - Nashville is Booming. But like all growth cities, affordability is worse. We need incentives to boost supply of new homes and light housing density (ResiClub).
Today’s Interest Rate: 7.50%
(WAY☝️from this time last week! 30-yr mortgage) Interest rates Higher for Longer? Good.
Well what a week. Rates are up nearly 1/2%.
What do I think?
As one of my favorite men on this whole earth, Jocko Willink, is fond of responding when a seemingly unsavory thing /problem happens. “Good.”
Spill your coffee? Good, now you get a fresh cup. Got beat? Good, time to learn/get better. Interest rates high? Good, market normalizing (keep reading).
When something is wrong, or going bad, there is always going to be some good that comes from it, or and advantage that YOU need to find. Always. The power of is a remarkable thing.
So what’s good about high interest rates? They suppress demand for homes, build inventory of available properties, crowd out HGTV posers, and allow for us real estate investors and first time homeboys to negotiate for a better price. If you can stomach that 7.5% mortgage for 12-18 months, you will be able to refinance to a lower rate, having bought an asset for less than its market value. Good. Disagree with this? Message me, I always like a healthy debate.
A Quick Word on Inflation
Last week was a big week for economic data, most notably consumer and producer inflation data (CPI and PPI). While consumer prices came in hotter than expected (for the 3rd month in a row) and markets roiled on the news, producer/wholesale prices came in lower MoM , coincidently by the same amount. (.1%), and +2.1% YoY. PPI is the preferred measurement tracked by the Federal Reserve.
But I loath merely tracking the inflation horse race like much of the media enjoys doing. So let’s just say this on the topic and be done with it: inflation is higher than we would like and is remaining sticky. It’s going to be volatile and right now that trend is hotter. IMO this is because of government fiscal policy, ie spending.
Bad Government Fiscal Policy is Driving Inflation
Deficit spending is a snake eating its tail: deficit spending → more inflation → higher interest rates to slow inflation = more inflation = keep interest rates higher → debt more expensive / accelerates…..repeat.
The US debt has is currently rising by $1 trillion every 100 days, or roughly the budget of our entire defense budget (which is larger than the next 10 countries combined). In one year, the US Treasury Dept issued $21 trillion in treasury bills to fund the spending of the federal government (Kobeissi). Lot’s of folks (mostly rich) are making real money from Uncle Sam, gettin that government paper! (must watch).
Hey Congress. Ease off the gas pedal will ya?
So, you think today’s prices are too high …?
You’re gonna love these prices in 5 years.
A Closer Look: Tennessee
Let’s switch gears, and do a brief, closer look at a part of the US that is doing quite well: my home base of Tennessee. Yes, I’m biased, but it's my article, so we’re going to check out Tennessee and use tons of semicolons, which my former boss (hi Nick) always redlined. No more semicolon handcuffs!
But I digress…
For backdrop, despite high inflation, the labor market is holding up well. Unemployment is ~steady at 3.8% and new unemployment filings fell 11k last week. Within that data, only 6 states increased their hiring from last month, led by Florida (56,000). But the runner up? The 3x smaller state of Tennessee (35,000).
Nashville is COOKIN and It’s not Just Taylor Swift and Garth Brooks
CNBC recently did their Cities of Success expose on US cities that are booming with a wide variety of activity. The first city they visited? Nashville. And it’s not just because of the music or tourism industry, which is what most folks think about when they think of Nashville (who spend $27 million / day). It’s heavy manufacturing, finance industry, health care, Tech Giant presence, 3 pro sports teams (and hopefully an MLB team), zero state income tax, and nearly 1100 companies have located to nashville in the last decade. Let’s dig in.
Steady Population Growth
Tennessee is growing, steadily for decades and is one of a handful of states that have continued to do so in nearly every corner of the state. This, without having a housing bubble or other economic meltdown, like some counties in Utah, Texas, California, Washington etc…2022 was particularly strong as folks flocked to the state
Heavy Manufacturing is booming near Nashville: Both GM and Ford have / are building their new EV battery plants here. Just this week Ultium Cells (GM+LG) delivered the first cells to GM from its plant just south of Nashville. GM (and Nissan) have their auto plants nearby as well. It’s also the home of manufacturing for 3M, Bridgestone, A.O. Smith, Tyson, Schneider Electric, Hankook Tire, General Mills, Mars…to name a few (Chamber).
Food!
“I’ve cooked whole hog in a lot of places, but none quite like Broadway,”
Tennessee is known for its’ BBQ, mainly in Memphis. But that is steadily growing in Nashville, which is finally a burgeoning foodie city. Case in point: James Beard Award-winning chef Rodney Scott is opening his newest BBQ joint right on the downtown strip. Whole Hog BBQ.
Health care is one of the largest industries in Nashville, and the US.
Health Care brings in $67 billion annually to the area, 7x the size of the entertainment industry. More than 500 health companies are located in the Nashville area. HCA has 35 million patient encounters annually, more than any. Vanderbilt Health is one of the top heart transplant programs in the world, something many of us, myself included, may need in the future. And it’s not just about private business. Nashville is home to two major medical schools, Meharry Medical College and Vanderbilt University Medical Center. Vanderbilt is the largest clinical training center in the Southeast, with over 1,000 residents and clinical fellows training in more than 100 specialties.
Here is a fantastic write up of health care services and its growth in Nashville (Forbes).
I could go on and on. We didn’t even get to the new waterfront or Titans stadium developments, but I’ll stop there, for now :) We’ve got jobs for every type of interest and a deep entrepreneurial spirit. Oh and did I forget to mention 0% state income / low property tax, limited government regulatory interference and pro-real estate policies for developers/investors?
Suffice it to say, come visit!
The Skeptics Take:
I remain quite positive on the real estate market, although certain asset markets may be experiencing turmoil. Stock and bond markets are taking the inflation news with zero grains of salt. Stocks have so far fallen ~4% MoM and long dated treasuries are down ~4.2%. I have to reiterate again this week: Mr Market may be starting to realize something further than just today’s inflation rate. It may be that the Fed may never get inflation under 2%. IMO the new 5-yr avg base rate for the Fed is going to be 2.5%-3%. And I officially lowered my rate cut prediction last week to 2 cuts (from 3) in 2024, at .25-50% each (while the bond market is also pricing in just 2 cuts, from 6).
On Interest rates: Ironically, high interest rates may actually be helpful to help us return to a more normal real estate market. But there are many other options that governments can take to incentivize productive behavior. Here is a short list in the time it takes to finish my coffee:
- - STOP deficit spending at the current rate. Current young generations are shouldering this inflation and we now see the consequences. The Congress and Administration need to really get our fiscal house in order. It’s been too long since ideological opposites Bill Clinton and Newt Gingrich were able to strike a budget deal. Why can’t we do that again? Not to get political, but getting involved in new wars is not helping.
- - Incentivize supply of new homes, NOT demand (as the current Administration housing plans do). We don’t need housing programs that give folks $ or provide incentives to BUY homes. That is counterproductive. We need to boost supply.
- - Crack down on the building regulatory, permitting etc…process. This one is on states. Time is money.
- Incentivize medium density / small Multifamily development. CA (and other states) are starting to do this. Good damn job CA.
- - RV and Mobile home parks. Incentivize their utility costs and construction. There is nothing wrong with this type of living. I would go as far to say “Mobile Home Parks are the last true affordable housing.” - Andreas S. Mueller (I don’t own any, but I want to).
I have more, but finger workout for the day, done.
What are yours?
That’s it for this week. If you are interested in talking real estate investing and digging deeper into any of these ideas don’t hesitate to reach out! I always like a rigorous discussion and helping fellow real estate investors.
Looking for a realtor in the Nashville area? Shoot me a note! We work with the best here, all specialize in helping INVESTORS find great properties.
Until next time. Stay curious. Stay skeptical.
Herzliche Grüße
-Andreas
* 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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