Luxury, land, and ugly... What’s Working and What’s not in Real Estate

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.

Fuel for the day: The girlfriend roasted up some of this Murdered Out coffee from Black Rifle, and used 3x the beans I think. Reminds me of when I was on a Navy ship in the off the coast of Mexico. That stuff was certified black powder (great coffee name, I call copyright!).

Today We’re Talkin:

• - The Weekly 3 - News, Data and Education.
• - Economic Update
• - Immigration (no politics)
• - Luxury, Land and Ugly, what’s up with the real estate market?
• - The Skeptics Take.

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

1. - The health of this housing market: Comparing 2024 to 2011. Hint, the landscape isn’t even in the same universe (Mohtashami).
2. 
   
3. - Office Vacancy Rate surpasses 20% for the first time in history (Fortune).
4. 
   
5. - Manhattan real estate is showing signs of becoming a buyer's market (CNBC).

   
   
   

Today’s Interest Rate: 7.08%

(☝️ .05%, from this time last week, 30-yr mortgage)

Economic Check Up

We had the European, U.S. Fed, Brazil central bank heads Sintra, Portugal yesterday for the ECB Forum talking monetary policy, geopolitical risks, inflation, trade, and other global economic issues (must be nice).

Sintra, Lisbon, Portugal

But unlike the National Palace of Pena, their heads remained relatively grounded.

Focusing of Powell’s remarks, he remained on message: expressing his pleasure with progress on inflation; yet, wanting to see still more before the Fed signals interest rate cuts. He was asked what his prediction was internally on the Dot Plot (the Fed’s internal survey of future rate cuts). Alas, he declined. But I bet he said September (keep reading).

Speaking on the topic, Powell said, “We want to be more confident that inflation is moving sustainably down toward 2% before we start the process of reducing or loosening policy.” He did express some oddly bearish hopeium, that inflation may get back to “2% late next year or the following year.” But that would mean it would have taken the Fed 4-5 years to quell the inflation flame. And if that is the case, it begs the question, should the Fed have just spiked rates higher (+ QT) to force a recession in 2022 so we could have avoided this next level price shock we are all fighting through?

With hindsight, and looking toward future inflationary environments that we will no doubt encounter, I say YES. It’s looking more and more that former Fed Chair Volckerhad it right in the 80s.

Hey Government, just rip the bandaid off next time.

** Tangent Alert ** - Immigration is still ☝️

Just data, not getting political here, but net immigration has absolutely skyrocketed in the last couple years. According to the nonpartisan Congressional Budget Office (think of it as the numbers folks for congress members and their staff), it was up to 3.3 million in 2023! Now, many may object to these official numbers and how they are counted (they think they are low and overly-rely on border encounters) but either way you cut it, it’s up, way up. Also curious that official projections have net migration crashing down again in 3 years to average levels. I read the report (linked below). No real explanation why they think that. Maybe they just don’t want to project out.

Why mention immigration? This maters for real estate investors and housing (buying and renting) supply. Most immigrants are 20s-30s and of the age they need a home and are creating a household.

Something to watch. And yes, a hot button for this election.

CBO, 2024

But I digress…

Housing Market Analysis

@AltosResearch, one of my favorite housing analysts, is out with updated numbers for today and what they think the rest of 2024 will look like. So today I’m going to be lazy and rely heavily on one (great) source, while inserting my thoughts, analysis, and wit, of course.

“New listings volume has likely peaked of for the year.”

“646,000 single family homes unsold on the market now - That’s up 1.8% for the week, and 39% more than last year - 11,000 unit gain in inventory is a decent size, a little bigger than we expected - Since 2023 had a late surge in inventory when rates jumped over 8%, plan for 2024 to end with about 20% inventory gains over 2023.”

Skeptic’s Take - This is normal / cyclical, and should remain true for 2024. March-May is the most popular time for real estate sales (40% of annual sales). Followed by the Fall season. I think Fall 2024 could be a banger (keep reading).

“Total inventory won’t peak until probably October.”

“There were only 67,000 new contracts pending for single family homes this week, a fraction fewer than last week. And basically unchanged from a year ago. - There are 398,000 single family homes in contract. That’s up a smidge from last week and just 3% more than last year at this time - There’s nothing encouraging coming out of the pending sales data. That means we’re likely to see the headlines continue to print sales rate disappointments. Staying around that 4 million SAAR level.”

Skeptic’s Take - I also like watching new pending sales to get an idea of future inventories and prices. If inventories push a lot higher we could see a renewed interest in the Fall, bringing inventory back down, as folks start seeing more price reductions from list price and think they can score a deal. Importantly, I do NOT think median sales prices will decrease. But more price reductions from lofty list prices are likely.

“Prices have plateaued, and we expect YoY home price appreciation to stall by the end of the year, but it hasn’t really done so yet.”

“The median price of single family homes on the market is $455,000. That’s basically unchanged from last week, and it’s unchanged from last year. - The median price of the homes newly in contract is just under $395,000, which is still 4% higher than last year- If we measure all the homes in contract, the median price is $399,950 that’s still 4.4% above last year. - In the home price chart below, see how the dark line is plateaued. Prices will ease down in the second half of the year. The question is how fast? I expect the dark line to drop faster than last year’s red line. But that trend hasn’t started yet! I keep expecting it to.”

Skeptic’s Take - The statement above needs to come with a bright red warning flag.All real estate is local, so this is highly dependent on where you are investing. If you are in a growth city, prices will likely not plateau along with a population that is growing. Come to Nashville, the water is toasty. Literally, it’s like 95 today.

What About Price Reductions? Luxury, Land and Ugly: Yes.

“Price Reductions - Now 37.6% of the homes on the market have taken a price cut. That’s up 70bp for the week. - The level of price cuts around the country is relatively high, though not alarmingly so. It’s rising quickly though not disastrously quickly. - Compare now to 2022. At that time rates were first jumping very fast and price cuts were climbing like 150 basis points each week (compared to 70 now). That slowdown led to home price declines in Q1 2023 - about 6-8 months out. - The story now is soft but more muted than in 2022. I continue to expect this leading indicator means we see sales prices flatten by the end of the year, but it hasn’t happened yet.”

Skeptic’s Take - Low and mid-tier renovated / nice homes, priced right, continue to sell well. In my market especially. High demand. As are mid-tier rentals ($1500 - $2000 / mo). In the residential real estate today it’s luxury, land, and ugly that are sitting on the market and contributing to the overall inventory growth. This is extremely important to highlight. Again, investors are in a great position for the Fall.

“Sales rates are blah and don’t show any signs of improvement.”

Skeptic’s Take - See my comments above. I do think that the Fed cuts in 2024, which may reverse the sales data and projection from Altos Research. When the Fed cuts, we will start a strong bull market cycle for property purchases. As a result, investors should think about moving their purchase timetable up from 2025 to Fall 2024. IMO.

The Skeptics Take:

As of now, I do not see a recession around the corner, or even on the horizon. The Four Horsemen of recession indicators aren’t flashing yellow, yet. We do however remain vigilant. Keep an eye on:

1. - Unemployment (NonFarm Employment)
2. - Industrial Production
3. - Real Retail Sales
4. - Real Income

If we had a recession, traditionally, we would see these 4 horses stumble (and unemployment claims rise).

So far, so good.

Inflation; however, remains a severe problem. And it may be that the Fed may never gets inflation under 2%. IMO the new 5-yr avg base rate for the Fed is going to be 2.5%-3% for at least the next 2 years. In the meantime, real estate investing is full of opportunity. High interest rates are helping us return to a more normal real estate market, with inventory now at 2019 levels in my home market of Nashville. I still do think we will have 2 rate cuts in 2024, likely .25% each.

When this will happen is anyones guess, but you came here for a few informed hypotheses, so I’ll give you mine: September. I think they have to do something before the election but not too close to it where they appear political. Overly simplified and optimistic I know, but its my gut feeling from being in the DC swamp for many years.

That isn’t to say that real estate investing is taking a pause, far from it, especially for us smaller folks. High interest rates and inventory rising is good for buyers of real estate. In our real estate fund we are scooping up deals from sellers frustrated with their ugly home sitting on the market. In fact, we are finding more A+ deals on-market now than off. Want to learn how we get these great on-market deals? Reach out. I’m always happy to talk turkey and what’s happening in Nashville real estate.

This is to say, don’t get frustrated with real estate.

Think only you are having problem properties and trouble getting deals? Take it from one of my favorite real estate investors, Michael Zuber, on his real estate journey and the bumps along the road. My favorite quote: “Wealth is a very simple formula. And the third step is 10 years. You gotta own assets for 10 years.”

In other words, this too shall pass. Buy that property, take care of it, do it again, and wait. The wealth will follow.

Until next time. Stay curious. Stay skeptical.

Herzliche Grüße,

-Andreas

P.S. Just wanted to share. Enchanting.

@ValentyneDreams

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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.

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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.