All Forum Posts by: Andreas Mueller

Welcome BP compatriots! Another installment of my weekly brief, hopefully insightful, dive into real estate and financial markets, for all the kick *** dudes and dudettes out there.

Today We’re Talkin:

• - The Weekly 3 - News and Data to Keep you Informed
• - Interest Rates: What to Expect?
• - Housing Prices and Supply: Effects from Massive Apartment Unit Growth
• - Tangent Alert! Cancer Rates are up since 1980 at an alarming rate. The cause? Likely the food companies adding sugar / crap to food.
• - The Bottom Line - My Take on Markets

The Weekly 3: News and Data to Keep You Informed

1. - Government Releases Experimental “New Tenant Rent Index:” A new measure of rental rates; shows rents are down the last few months. (BLS)
2. - 25% chance of Recession in 2024. But economy will likely outperform estimates. (Moody’s)
3. - Foreclosures and Bankruptcies Remain Low: Be wary of numbers like 700% increase, that’s because they were paused during COVID. (Housing Wire)

Today’s Interest Rate: 6.77%

(👇 .03% from this time last week, 30-yr mortgage) Interest Rate: CPI, Mortgage Spreads…What to Expect?

Inflation numbers released last week by the Bureau of Labor Statistics showed that U.S. (CPI) inflation rose 0.3% in December, after rising .1% in November, a touch stronger than consensus analysts’ expectations. Of note, shelter continued to rise in December, contributing over half of the monthly increase (up .5%, and up 6.2% YoY). In aggregate, this puts 2023 inflation at 3.4%. We are staedily coming down, but, IMO, still too high. Adding to this, retail and food service sales released today were up $709.9 billion, up 0.6% MoM in December and 5.6% YoY. Why do inflation and retail sales matter? The Federal Reserve likely needs to see lower inflation to start cutting interest rates in March. Retail sales are an indicator of consumer strength.

IMO: Stronger than preferred inflation data and a robust labor market (unemplyment remaining low / strong consumer) = Fed does not cut rates in March. The Feds rate cutting committee, the FOMC, will remain data dependent, track leading indicators, and will err on the side of being late to cut, rather than early. Nobody can time the market, but my inclination is for a first rate cut to occur in June, 3 in total this year, at 25 BPS each (.25% x 3 = .75% in 2024). This belief is not religion. My opinions are strong, yet moderately held. Make sure to tune in to A Skeptical Dude each week to keep up to date on the market’s latest and get my analysis. You can follow here or here.

Bond Markets

For it’s part, the bond market is still pricing in a 97.4% chance of a rate cut in March - and a mind-bogglingly high 6-8 rate cuts in 2024 (though down from 6-9 a month ago). Every meeting a rate cut, on average and at over 50% chance. What do bond traders know that the Fed doesn’t? Well they just started using computers so… that’s probably pretty neat for them.

What do the Experts / Analysts / Financial Institutions Think?

• - Goldman Sachs: “We continue to expect the first rate cut in March, and 5 cuts total in 2024”
• - JP Morgan : Cuts to start “Middle of the year” and then “grinding lower”
  in 2024.
• - Mark Zandi: 4 rate cuts in 2024. (ResiClub)

Stubbornly High Mortgage Rates: A Result of High Spreads in the Bond / MBS Market

As we have highlighted before, in a normally functioning market, the 10-year Treasury rate closely tracks 30-yr mortgage rates. However, the difference between the two, the Spread, — has risen from 1.70% in January 2022 to 4.108% as of today, while the average 30-year fixed mortgage rate has jumped from 3.22% in January 2022 to 6.77% as of Thursday. The current spread between the 10-yr Treasury and 30-yr mortgage is therefore 2.662, much higher than the historical 1.74.

Why does this matter? If markets were functioning normally, at the historical average spread of 1.74, mortgage rates would be 5.848% today.

The Experts’ Take?

• - The Mortgage Bankers Association expects spreads to fall to 190 bps, Q4 2025.
• - Fannie Mae expects spreads to fall to 180 bps, Q4 2025.

My Take:

When will the market for Treasuries and mortgage backed securities normalize, reducing the spreads, and when will the Fed cut rates? IMO, these market mechanics will likely not happen until mid-2024 and even then will likely grind lower, slowly. But combine lower spreads with Fed rate cuts in the witches cauldron and we have an optimistic 12-18 month outlook brewing, it is highly likely that mortgage rates will be lower in 2024 and even lower still in 2025.

***For us uber-finance nerds out there, a good article from the NY FED on understanding mortgage spreads in detail. Its a bit dated but contains a great explanation. And the author has a fantastic name, if I do say so myself :)

Home Prices in 2024? Likely continue up.

Since the housing sector slipped into recession in the second half of 2022, after seeing a wild run-up in home prices during the COVID housing boom, prices are up. Most local markets bottomed January 2023. Depending on the data you look at, 2023 saw home prices rise 3% - 6%, near-ish the historical average. Of course, all real estate is local. In my home market of Nashville, we are up 9% since December 2022.

What am I thinking for 2024 & 2025?

5% home price appreciation is a solid conservative number, for 2024 and 2025. In my opinion, higher interest rates are still throttling housing prices, keeping demand on the sidelines, especially for the newest, largest generation who are now looking to form a household and move out of mom and dads (or their 8 dude group frat house, said my 26 year old self). Home Prices in growth markets (Nashville, Dallas, Tampa etc…) will be higher in 2024. And every day rates & prices remain high, the number of homebuyers standing on the sideline, just waiting for the coach to put them in the game, builds and builds. When rates decrease and folks feel like they can pull the trigger, expect prices to punch up, likely 2x the current rate. IMO.

What about supply of available homes? Is there hope?

There just aren’t enough homes for folks to buy. The mortgage rate shock of the last few years didn’t = increased supply of listings. This is because 2 main sources of supply were/are being suffocated: 1) existing owners who were/are locked into 3% mortages, and 2) delinquencies/foreclosures which were/are still very low. Anyone who was at risk of foreclosure was likely able to sell their home for a positive gain pre-foreclosure. And 3), while new construction supply did increase, it’s still a minority of overall sales and not enough to move the entire market.

As you can see, builders did jump head first in to the market, when housing demand boomed during COVID. But we are now flat, and were underbuilding for years. Keep in mind it takes a while to build a house (2-3 years from start/land/permiting to finish).

Housing Growth: Apartments

One important note: overall housing may not see an insignificant (but not sufficient) increased supply in one sector: multifamily apartments. While not exactly the ideal single family home you can purchase for your family/investment, it will put pressure on shelter prices. The catch? The pipeline of apartments coming on the market is spiking in 2024, but will plummet in the coming 2 years. Let’s review:

New apartment supply was at its highest level in 2023 (since 1987), more than 439,000 units came to market. “Here's the intriguing part: Last year was just the warm-up act,” says housing analyst Lance Lambert. According to forecasts from @RealPage property management, 671,953 apartment units are projected to be completed in 2024 (the highest since 1974).

While this is only about a 3.5% increase to overall apartment numbers, this should have an affect on apartment rent growth, or even rent declines in the sector (RealPage). “Most of the multifamily supply expected to come online this year will be in fast-growing Sun Belt markets, including Nashville, Austin, and Dallas.” Interesting. Since I’m on the ground in Nashville, I have to comment. Strong apartment growth here has not translated into lower rents in the single family or small multifamily sector here; in fact, quite the opposite. Home rents are appreciating more than inflation, particularly as home ownership costs such as insurance and building materials increase. For it’s part, Invitation Homes, America's largest single-family home landlord, saw the same in 2023, reporting a 6.2% increase in single family rents. Of note: I am only talking about single family or small multifamily (2-4 unit) homes.

2025 is a Much Different Story for Apartment Construction.

According the RealPage, “the [2023-24] wave of supply is resulting from construction starts that began back when rent growth and occupancy rates were at/near record highs… and consequently, [apartment] starts have plunged. Supply will drop way off in 2025-26.” One-third of apartment developers surveyed in December expect new apartment starts to fall by more than 50% over the next 12 months, up from 25% when they asked 3 months ago (John Burns).

* TANGENT Alert - U.S. Cancer Rates are Drastically Higher sine 1970s -Why? Food Companies are Roofying our Food with Sugar.

We’ve been duped for decades about food: Turns out sugar isn’t benign. It’s the real poison. Fats aren’t actually bad. They are essential. Carbs aren’t terrible. Sugar activates cancer mechanisims (NIH). There are now 250+ names for sugar, to try to “trick” folks into thinking it’s not in our food. I can’t recommend this discussion with Neuroscientist Dr. Andrew Huberman and Endocrinologist Dr. Robert Lustig. The clinical data is out. Sugar (especially w/o fiber) is poison.

Cancer in the areas of the body that process sugar and produce / affect insulin are up in a way that is endemic.

Why do Americans have a particular propensity for obesity / cancer? It’s our food. Let’s take ketchup for example. Now, this food is usually always high in sugar BUT just look at the extreme difference. Same company, “same product.” Ever been to Europe? Folks are not as overwight as in the US, and the sad thing is that it may not be our fault.

Sorry, got on my high horse right there. I digress….

Bottom Line

There is reason for optimism on interest rates. All this being said, this Skeptical Dude is remaining cautious, a wider spread is cyclical and unfortunately usually occurs during periods of financial market stress, such as when the economy slips into a recession. And spreads could be wider for longer than the market is planning for. One of the reasons spreads will remain elevated is MBS investors don’t want to buy, concerned that future lower rates will result in refinancing of mortgages to lower rates, a risk for these investors called early prepayment. MBS investors want to see refinances (prepayments) slow. Thus Skeptics, we should remain cautions of becoming overly bullish by assuming mortgage rates will be lower in the next 3-6 months. Additionally, the Fed stopped buying MBS when they started tightening in 2022, removing a massive buyer from the marketplace.

Further Thoughts: Barring a Black Swan event, the housing market should appreciate more in 2024 than 2023, particularly in growth markets. Falling mortgage rates will (slowly) increase demand, accelerating when we get below 6%. Housing supply will remain lower than demand, propping up prices regardless of rates.

In other words….Stay alert, stay skeptical, all you dudes and dudettes.

Most Interesting Tweet(s) of the Week

Optimistic for 2024, cautious for the next 4+ months. Agree.

AND

Ok, now I want a really potbelly pig...major FOMO.

That’s it for this week. If you are interested in digging deeper into these ideas or talkin’ real estate investing - which I always love doing - don’t hesitate to reach out. You can message me directly on BP! I try to answer all the messages I get.

Again stay skeptical, all you dudes and dudettes.

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.

Hello all and welcome to the new year! It's January 10th, 2024 and here is a brief, hopefully insightful, dive into real estate and financial markets.

Today We’re Talkin:

• - The Weekly 3 - News and Data to Keep you Informed
• - Interest Rates: Down Sooner, or Later?
• - Consumer Update: What is the Qualified Mortgage and Why Does it Matter for the Real Estate Market?
• - Property Insurance Alert - Many Premiums Increasing in 2024

Today’s Interest Rate: 6.80%

(☝️ .03% from this time last week, 30-yr mortgage) The Weekly 3: Data and News to Keep You Informed

1. ADUs Gain Momentum Nationwide: Accessory Dwelling Units (ADUs) are growing in popularity, especially with the rise of the work-from-home trend as a way to offset mortgage costs from high interest rates (JBREC)
2. The housing market’s ‘lock-in effect’ is very real: Most sellers are buyers, naturally they have to move once they sell their home. 3% interest rates mean they won’t sell until rates come down (Fortune).
3. Yellen Declares US Economy Has Achieved Soft Landing: Too soon to declare mission accomplished? (Janet Yellen)

Interest Rates: Down Sooner or Later?

Mortgage interest rates were essentially flat this week, but down 60 basis points (.6%) from last month. As we saw last week, despite interest rates beginning 2023 at 6.2%, housing prices ended up 4.8% YoY in October, according to Case-Shiller. Nov / December numbers are still being tabulated nationwide but this number should hold. And in my home market of Nashville, TN the data is out (thank you real estate license). We were up 8.5% YoY, ~ double. Interest rates are still too damn high for a healthy market, but just like politics, all real estate is local, and certain areas continue to emerge from the 2022 real estate recession nicely. Not everyone can, but those who can afford the higher mortgage are taking advantage of low-er prices today. I.e. if home prices increase 5% as they did last year and the average home in America is now $431,000 - that same home will be worth $452k January 2025. Put another way, those able to buy today will be $21k richer that those who wait. By doing nothing.

My Thoughts

5% home price appreciation is a conservative number, for 2024 and 2025. In my opinion, higher interest rates are suppressing housing prices, which are keeping demand on the sidelines, especially for the newest, largest generation who are now looking to form a household and move out of mom and dads (or their 8 dude group frat house, said my 26 year old self).

Case in point, holiday mortgage demand was strong this year. Last week mortgage applications and refinancing demand was up 5.6% and 18.8% respectively (Mortgage Bankers Association).

So where do “the experts” think rates are going from here? We have a super special poll for that. According to the Fannie Mae Home Price Expectations Survey - comprised of 100 experts across the housing and mortgage industry and academia - rates should settle at 5.7%. Hot take, IMO, the “experts” are off. Bond spread regression to the historical mean alone should get us to 5.65%. Once the Fed stops trying the engineer the economy, and cuts rates, I think we settle at 5% or slightly below, in 18 months. Disagree? Feel free to tweet / DM at me! Bring it.

Chart of Historical bond / mortgage spreads

What do consumers think? They haven’t a clue… In December, 31% of consumers indicated that they expect mortgage rates to go down, 31% expect them to go up, and 36% expect rates to remain the same (Fannie Mae). Until this shifts towards cuts, available existing home supply will remain low. Of course consumers surveys are notfor making predictions, but they do matter. It’s a good directional signal for consumer confidence and the consumer is 2/3 of the US economy. And for the record anyone who tells you they know for sure what going to happen in the future is either lying, lazy or stupid.

How fast will rates drop 2024-2025? Well, that’s even harder to predict. The bond market is pricing in 6-7 rate cuts (.25% each) in 2024. The Fed has said they expect to do 3. In the end, it will depend on the strength of the economy, most likely the labor market. If unemployment remains below 5%, I would argue we have a longer cycle of rate cuts: 2 in 2024 and 4+ in 2025, with the cycle ending in mid-2026. This is the skeptical approach, dudes and dudettes, and I recommend you always plan for lower expectation, like Robert DeNiro’s character in Heat said, “Don't let yourself get attached to anything you are no willing to walk out on in thirty seconds flat if you feel the heat around the corner." Always have a plan for the tough times.

To which, U.S. Treasury Secretary Janet Yellen says…hold my beer, saying last week, “What we’re seeing now I think we can describe as a soft landing.” Soooo, mission accomplished? 😬 For its part the Fed is taking a much more skeptical approach. And Yellen’s comment was a departure from her previous comments where the said she saw only “a path” for a soft landing. (As a reminder, a soft landing is—loosely—when inflation recedes without a coinciding recession.)

The Consumer

The consumer may be prepping for the “Heat,” by stacking some cash. Of Gen Z and Millenials - those likely looking to purchase a home and are more affected by rates remaining high - are stacking cash. 63% have increased their cash allocations in the last 6 months (vs. just 27% of investors 45 or older) (eToro, @callieabost).

Counterpoint: US consumers now have a record $1 trillion in credit card debt, according to the Fed. And as you can see below, this amount spikes during times of economic tumult. Another indicator to watch as the Fed navigates 2024. Yellen’s soft landing call seems highly pre-mature, IMO.

Counter Counter point: unlike the last recession in ‘08-’09 (not counting the 2 seconds during 2020 government imposed lockdowns) we now have the Qualified Mortgage law. And for those of us reading this because we are interested in the housing market, this REALLY matters because if the economy goes to sh!^ the housing market will remain far more resilient.

What’s qualified mortgage? In short, “The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) requires a creditor to make a reasonable, good faith determination of a consumer's ability to repay a residential mortgage loan according to its terms (Bureau of Consumer Financial Protection).” Why does it matter? You must watch this brilliant scene from the movie The Big Short to fully understand:

As one of my favorite cheeky analysts Logan Mohtashami(@LoganMohtashami) is fond of saying, the 2010 “Qualified Mortgage Matters. This means everyone [homebuyers] is more legit now than at any time in history.” “[Leading up the the Great Recession (2005-2008) unemployment was low and falling; yet, foreclosures and bankruptcies were rising.]”

Before 2010, banks/lenders literally didn’t do this…Really… it was insane, and I was working as a staffer in Congress when we realized this. This is not the place for politics but let’s just say folks were asleep at the wheel. Nuts.

So what’s the point? We now have rising consumer debt levels and low unemployment, which one could argue is similar to the lead up to the Great Recession. The difference is the housing market will be more resilient to an economic slowdown/downturn. The Qualified Mortgage matters.

Insurance Shockwave on the Way

Home insurance is slated to increase significantly in 2024, especially in areas with above average weather events: read TX, CA, FL. Case in point, State Farm will raise rates 20% in CA starting March 15th, 2024. State Farm is the largest home insurer in CA (SF Chronicle). And in FL, premiums increased 102% the last three years, 3x the national average (Insurance Information Institute). Worried about your home’s/business’s insurance premiums? Get this free report here from First Street Foundation, showing at risk areas of the US.

Do you live outside CA, TX or FL? You won’t escape the projected increases. In fact, their situation affects your insurance prices, just like your health care insurance costs are also directly related to the health care needs of others. Why? Well, in brief, insurance is about distributing risk. And insurance companies have an app for that. They purchase reinsurance, to insure the insurer (and some rely heavily on re-insurance, like I believe startup Lemonade does, allowing them to “very capital light mode”). This means, when an insurer makes a claim with their reinsurer, who also reisnurers other insurance companies, the price of reinsurance goes up, which the insurer passes on to you. I know that reads like word salad but stay with me. So, for example, insurance company 1, 2 and 3 uses reinsurance Bravo Company. So if insurance Company 1 has to pay out claims, say for the latest disaster in FL, and is reinsured by Bravo Company, Bravo Company will likely raise rates not just on Insurance 1, but also 2 and 3, distributing their risk and recouping costs. This is how even a hurricane Mexico can increase your insurance rates win New York.

Nationwide, the insurance industry predicts that "We're going to see double-digit increases again in 2024. We don't have an exact number at this point, but we're hopeful it will be much lower than 42% [the increase in 2023] (Insurance Information Institute)." For us real estate investors / landlords, insurance premiums mean cash flow compression, resulting in the unfortunate fact, passing on some of that cost on in the form of rent increases to our residents. No bueno.

Anecdotally, I was just texting with my insurance broker, who is fantastic if you need someone and are in the South, and who let me know it’s just a new reality. We are seeing premium increases across the board amongst all insurers in 2024. From her: “One thing a lot of carriers are doing to try and combat the losses is moving to a percentage deductible (meaning 1 or 2% of the dwelling amount). Overall, the insurance carriers need to make sure they are still bringing in enough money to be able to pay for these huge catastrophic claims that are happening more and more frequently.” A note on messing with your deductible: your lender has to approve any larger deductible and has their own standards for coverage, so make sure to check with them first! Don’t learn that the hard way. And make sure they are covering the cost to rebuild the home in case of catastrophe, not just calculating it based on current value.

When my properties renew this April, it’s going to be painful.

Bottom Line

2024 will be action packed, to say the least. Will GDP slow? What will happen to rates? Will the Fed be able to bring us in for a landing? (or have they already) Oh by the way, there is a Presidential Election 🤦….Regardless, we all can make moves to protect our downside. For instance, you can call your insurer and find out if they are increasing rates significantly in 2024. Then do what I do with my cable/cell/streaming company, go quote shopping.

Are you looking to invest in real estate in 2024? Start saving / setting aside / raising that money now. I believe we should see at least a couple rate cuts, and housing supply should tick up. More deals should be out there to be had. But be careful of building into your numbers lower rate assumptions that are overly optimistic. And remain cautious of tail risk (low likelihood, high consequence events).

In other words….Stay skeptical all you dudes and dudettes.

Most Interesting Tweet of the Week

On the nose. This made me spit up my coffee laughing. #smallwindowsandwhiteplease

That’s it for this week. If you are interested in digging deeper into these ideas or talkin’ real estate investing - which I always love doing - don’t hesitate to reach out. You can message me direct, I try to answer all the comments I get.

Again stay skeptical, all you dudes and dudettes.

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.

Happy 2024 BP Compatriots! Congrats, you made it 😉.

First post of the new year, where if you haven't read one of mine in the past, I do a brief, hopefully insightful, dive into real estate and financial markets. Plus something Nashville related, my home market :).

Today We’re Talkin:

• - Quick Data and News Items of the Week
• - Interest Rates: Is sub 5.5% in 2024 Possible? YES.
• - Consumer Update: rents disinflating but home sales down. Most homebuyers still on sidelines.
• - Tangent! What is the Federal Government Doing?
• - CNBC Special on Nashville: In case you missed it.

Today’s Interest Rate: 6.77%

(☝️ .16% from this time last week, 30-yr mortgage) 3 Curated Items: Data and News to Keep You Informed

1. 1 - Consumer remains resilient: Personal Income (+.4%) and spending (+.2%) increased in December (BEA)
2. 2 - New Homes Sales Down, But a Rise Expected in ‘24 + Gains in residential construction spending and construction job openings (Homebuilders)
3. 3 - Home Insurance will continue to rise faster than inflation + State Farm will raise rates 20% in CA starting March 15th, 2024. TX, FL also inflating rapidly. (SF Chronicle)

Interest Rates: Down Soon to ~5.5%?

Rates were up this week, but down on average these last 30 days. What will this do to home prices? 2023 ended up 4.8% YoY, the strongest annual gain seen in 2023, according to Case-Shiller. December numbers are still being tabulated nationwide but this number should hold relatively constant. In my home market of Nashville the data is out however, we were up 8.5% YoY. Interest rates are still too damn high but those able to buy are taking advantage.

What’s next for interest rates? The 40,000+ employees at the Federal Reserve (still an insane number to me) are probably watching labor markets most closely for signs of cooling. Fortunately, we did see this week some Jack Frost, which should keep the Fed on its course to stepping down rates in 2024: we are now at a pre-COVID job quits.

Look out Lower Mortgage Rates - Is sub 5.5% in 2024 Possible? YES.

Economists will also be watching the bond market, most notably the 10-year Treasury yield. 30-yr mortgage rates track the 10-year and the spread between the two is still historically high. The current difference (“spread”) between the two is 287 basis points (or 2.78%). The historic average “normal” spread is ~175 bps. So if mortgage spreads “normalized,” regressing to the historic mean, and the Fed did nothing from today to lower interest rates, the 30-yr mortgage would be 5.65%. In other words, if the bond market cooperates and the economy doesn’t overinflated, rates should be close to 5.65% in 2024 even without the Fed cutting.

Today’s rates: 10-yr Treasury Yield - 3.90%, 30-yr Mortgage Rate - 6.77%.

My Thoughts

10-yr / 30yr spread can go up from here of course. The current spread of 287 is down since spring 2023 where it hit a whopping 330 bps. IMO, spreads will go lower in 2024, but we do need to observe a cooling labor market (and continued lower inflation).

We are emerging out of a real estate recession and so far the data show slowing key indicators, good news for rates. As long as we don’t see a spike in unemployment above 5% and inflation doesn’t tick up above 3% by Q3, the 2024 environment should bring back demand for homes. Again, the Fed says it’s cutting 3 times, the market says it will cut 6 times. IMO 2024 should bring rates somewhere in the 4.75% - 5.5% range.

This insight is HUGE. But keep a watchful eye. (and keep reading my posts 🙂)

The Consumer - Mixed

Some thoughts/data on the consumer.

Consumer sentiment was way up (14%) in December, reversing all declines from the previous four months. “These trends are rooted in substantial improvements in how consumers view the trajectory of inflation” and likely due to dropping mortgage rates, IMO.

But…

A record 85% of Americans now say it's a bad time to buy a house, according to Reventure. Two years ago, 30% of Americans thought it was a bad time to buy a home. Even in 2008, during the worst housing crisis of all time, this metric did not top 85%.

Millennials (ages 26 to 42), the largest potential buyer of homes, are still on the sidelines. Damn I’m technically a millennial? Although I Identify as a latchkey Gen X-er 😁. I digress….

Millennials, have been hit hard financially and are facing a housing market with high interest rates and low inventory. Many are choosing to rent, and rents are showing signs of disinflation. In fact, median U.S. “asking rent fell 2% year over year in November to $1,967—the biggest decline since 02/2020.” (Redfin)

My Quick Take: Redfin cited a building boom as the culprit but that hasn’t been my experience in Nashville, despite having the most apartments under construction in the country. Rents are still rising, but are disinflating. (I’m referring to single family and small multifamily homes. Now apartments/condos, which I don’t track as closely).

In 2022, millennials were the largest generation of homebuyers, accounting for 43% of all purchases. But that number fell to 28% in 2023. (Business Insider)

Additionally, total household debt is rising higher.

As are credit card defaults. Although still at historical lows.

So all considering, the consumer is looking in decent shape.

** TANGET Alert!

BUT, compared to the Federal Government’s books… well. Take a look at Household Debt to GDP and Federal Debt to GDP. Who looks like they are in more trouble?

Now look at Household Debt to GDP. Lower.

Looks like the Consumer learned their lesson after 2008 (and in fairness banks/congress did do some good here to put credit rules in place, like the Qualified Mortgage). The US National Debt is now past $34 Trillion! Up a whopping $ 29 Trillion since 2000. Insane….

But I digress…

One silver lining: it looks like this largest investment-aged demo is at least putting their money to work, even if they can’t invest in a home. The number of Americans who own stocks is at an all time high; 58% of households, according to the Federal Reserve, as reported by

Unusual Whales (a great Twitter follow). Especially if you are in California, where only 15% of Californians can afford a home. As a result, home sales are at a 16 year low. Homebuyers are leaving Los Angeles more than any other metro area in the country, however, the total migration out of cites has slowed considerably, driven by COVID policies.

Probably not used to seeing California colored red :)

In case you missed it: Nashville CNBC Special

Just in case you missed last week’s newsletter. This is a great series, and they started with my home of Nashville! More of these to come around the country. Stay tuned.

Cities of Success: Nashville. A CNBC Exclusive on the growing city. (TV subscription needed, but should be available soon widely).

Bottom Line

2024 will likely be a banner year for real estate, if you have the dry powder. Start saving / setting aside / raising that money now. We should see 3-6 rate cuts, and housing demand / home sales should tick up. But be careful of building into your numbers debt service and mortgage rates that are too bullish. Keep those numbers skeptical.

To quote the late giant Sam Zell, “Real estate isn’t just about buildings as inanimate objects. It often reflects the pulse of the nation.” Pay attention to what’s happening in your local market and in the economy around you. Talk to business owners, waiters, bartenders, subcontractors. 2024 may be a volatile year, protect your downside.

Most Interesting Tweet of the Week

Yuck. Hey @nerdwallet, I know your business is based on ads from lenders/banks/credit card companies that pay for your crappy site that has more pop-ups/ads than a porn site, but…maybe don’t promote stuff like this? It’s predatory and reeks of 2008.

That’s it for this week. If you are interested in digging deeper into these ideas or talkin’ real estate investing - which I always love doing - don’t hesitate to reach out. You can message me directly right here on BP!

Stay skeptical, all you dudes and dudettes.

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.

Tennessee, 10-20 min outside Nashville is in your buy box. Happy to show you properties and see if it meets all your number requirements! Send me a Message. And good luck regardless! -Andreas

Quote from @Becca F.:

Quote from @Account Closed:

Quote from @Michelle Backer:

Anywhere I can buy property still for cheap

Possible good investment?

Iowa? Nebraska?

I have not been keeping up lately although now i am.

I live in NYC.

Did someone ask if there were any cheap areas left?

As Sam pointed out, cheap is subjective. For people who live in coastal California or NYC, buying a $450,000 to $500,000 is "cheap" compared to buying a $1+ million property but to someone in less expensive state, that might not be cheap. I would say $500,000 for a SFH or duplex, I think is reasonable if I were to spend it on an appreciating city/state (e.g. California, Nevada, Arizona, Florida, Texas, Nashville Tennessee) but those would be negative cash flow right now as long term rentals unless I'm doing MTR or STR - I'm buying off the MLS or using an agent, no wholesalers, no tax liens, etc..

I wouldn't call $500,000 cheap - I use sub $200,000 as my parameter for "cheap" and if I'm not in a severely negative cash flow (-$100 to -$150 at most for first 2 years at current interest rates) but it's hard to tell since I can't predict precisely how many tenant turnovers, capital expenses, how much my property taxes/insurance will go up, repairs I would have on a renovated Class C Midwest property that's 100 years old over 10 year time span. My recent 2 Indy purchases were a renovated $130,000 SFH (rented out for 6 months now) and $132,600 (still needs repairs before being rented out). And I'm hoping these Class C will become Class B and appreciate as there's more development. I'm considering 1031 exchanging 3 Indy properties in the future back to one California or Nevada property. Will cheap cost me more in the long run?

Not sure where that map is from but wouldn't Miami or Orlando areas and parts of Colorado (Denver, Boulder) and Utah (Salt Lake City, Park City) be considered "not cheap" so would be in red? What was the cutoff purchase price or current market values used to establish "cheap"? 

Kyle welcome to Nashville! Always up for a beer and chatting real estate. Lemme know if you are around!

Hi all, another weekly installment of my brief, hopefully insightful, dive into real estate and/or financial markets.

Today I'm talkin:

• - Nashville Exclusive: CNBC Cities of Success
• - Interest Rates: An Update
• - Home price predictions and 2024 outlook
• - The state of the consumer
• - Am I turning bullish? 😲

Today’s Interest Rate: 6.61%

(👇 .04% from this time last week, 30-yr mortgage) Top 3 Curated News Articles

1. 1) Cities of Success: Nashville. A CNBC Exclusive on the growing city. (TV subscription needed, but should be available soon widely)
   1.    I found a Free Sneak Peak here:
2. 2) US banks could get slammed with another $160 billion in losses as commercial real estate faces its biggest crash since 2008
3. 3) Among employees who use AI at work, 72% say it makes them more productive.

Interest Rates

Rates continue their slow move downward after the elevator drop last week. But what will this do to home prices? Well 2023 is ending up 4.8% YoY, the strongest annual gain seen in 2023, according to Case-Shiller. Higher mortgage rates, while they certainly had their effect last year, were outweighed by strong demand and extremely low supply.

2024

Building on my thoughts last week, what’s in store for 2024? Likely up, as more demand enters the market. But don’t take my word for it. Let’s take a look at what sources around the industry are saying...

Redfin - Homebuyer Demand Index spiked up 5% from last month, a leading indicator of strong demand and a good sign since the winter months usually bring the reverse. Home tours are also up from last year, although still not to 2020 levels.

NAR - November existing-home sales climbed .8% after a 5 month drop. Home prices should keep marching higher form here. "Only a dramatic rise in supply will dampen price appreciation."

Home Construction - Homebuilders broke ground on a heightened number of homes in November (Census Bureau). Housing starts rose 9% from a year ago, primarily because of an 18% increase in starts on single-family houses. This is significant, but not overboard. At the November clip, companies would have built about 1.1 million single-family homes and (1.56 million homes overall). We are 4 million homes underbuilt today. Homebuilders are anticipating even stronger demand for homes in 2024, riding lower interest rate tailwinds.

Outliers - There will be some markets that lag, like Dallas, which has some real estate industry leaders calling for continued pressure on home prices, potentially dropping 8% YoY and sales volume down nearly 13%. Really? Even I think this is overly conservative. But bears mention (no pun untended).

My Thoughts: The next 30-90 days

I feel confident in saying, the hard landing / recession for housing is behind us. In 2022 we saw home prices down 6 - 20% of the year, bottoming in December 2022 / January 2023. The last time home prices acutely decreased was the great financial crisis, before then, 1992 (and then it was mild, a couple % for a few months) . That’s it, in the last 30 years, 3 times. In my home market of Nashville we were down 12% almost exactly 1 year ago. We bottomed in January are up from there.

Inflation has / is receding in a meaningful way, without a stark increase in unemployment, as historically observed during this point in the cycle. The labor market remains strong and wage growth, while moderating, remains so as well. Still, wage growth is above what the Fed would likely like to be seeing at this time in the cycle. The Fed could slow its anticipated 2024 rate cuts to put more pressure on wages, if needed. Watch out for this.

Consumer Confidence

US consumer confidence rose in December by the most since early 2021 (Conference Board). Folks are upbeat about job availability and the inflation outlook, ending 2023 with positive momentum.

Gains in consumer optimism were largest among those aged 35-54 (a key indicator of good vibes). The survey’s top issue affecting consumers remains rising prices in general, but, importantly, politics, interest rates, and global conflicts all saw downticks as top concerns. Consumers’ Perceived Likelihood of a US Recession over the Next 12 Months abated in December as well, to the lowest level this year. “Consumer expectations for the next six months also increased in December, reflecting improved confidence about future business conditions, job availability, and incomes.”

Bottom Line

There is a saying, I don’t know to whom to best attribute it: “Strong opinions, loosely held.” In the face of new / changing information one is ‘obligated’ to change one’s mind. And that’s what I’m doing. For the next 30 - 90 days, count me Bullish. For now.

IMO: 2024 will bring an almost 2021 bull market feeling. This aided by consumer confidence as 1) inflation recedes, 2) the Fed cuts rates 3—6 times and 3) bitcoin skyrockets due to a slew of ETFs beginning trading in the next 30-90 days. It’s going to be a banner year.

Still. I would urge vigilance over the market and cautious of what’s to come. Some investors may be getting a bit over their skies, assuming rates will slam back down to 3%. I do not think this will happen, frankly ever again, in my lifetime. Case in point: the bond market is starting to price in 7 interest rate cuts (.25% each) in 2024, according to the CME watch tool! There's even a 10% chance of 8 rate cuts into 2024 with roughly a 1% chance of 9 rate cuts. Now that’s pretty bullish. I’m percolating on this possibility…

I do remain ‘default skeptic,’ which has always served me well. I’m always trying to - as the great, late Charlie Munger was fond of saying - “be consistently not stupid, instead of trying to be very intelligent.” Protect your downside. In short: several rate cuts will come in 2024, and housing demand will follow. But be careful of building into your numbers / debt service / mortgage rates that are too bullish / low. You don’t want to high-side and face-plant.

Most Interesting Tweet of the Week

Toyota caught tampering with safety data 🫣. Frankly, Tesla appears to be emerging as the safest and most popular car company.

That’s it for this week. If you are interested in digging deeper into these ideas or talkin’ real estate investing - which I always love doing - don’t hesitate to reach out. You can email me directly, send me a direct message on Bigger Pockets!

Until next time.

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.

Hello Jason. Rates are going down, today's quote is 6.61%

Charlotte park and east Nashville are fantastic areas of the city, highly recommend you look there. And I'm also an Agent in Nashville, happy to chat if you would like off-line? I can definitely help you find a great investment property at 400k. 

-Andreas



Quote from @V.G Jason:

Where are you buying a house for $400k in Nashville and getting a 6.65? In NW Nashville? I did not like this area very much.

 I get very good rates, I think-- I get 6.75 with minute amount of points for investment I do not think average investor gets this. In Nashville, I put large downpayment too. I don't find any quality house below $600k in Nashville, and most of these I have fixed up. So real value is a lot higher. My leveraged(20-25%) are in Cleveland Park area between 41/31 which are more spec properties. My cash ones are south part of Nashville, just north of 440. I have yet to see a quality house in Nashville under $600k.  Even the land in the area I speculate on is about $300k for a 5k sq ft lot. 

hi Carlos, totally get that chart of course but that’s not my experience. I have 12 properties, raised rents on all them this year at various times.And I plan to again in April, 6-8%

Quote from @Carlos Ptriawan:

this is your nashville rent growth, basically there're more supply > demand, causing rent growth to be flat.

Hello BP Compatriots! Below is a brief, hopefully insightful, dive into real estate and/or financial markets for the week. Let me know what you think in the comments and what you are seeing in your local market? (I'm in Nashville).

Today we’re talkin:

• -Mortgage Rates take a decent step 👇
• -Is it a good time to buy a house? Or wait? I run through the numbers for you.
• -Market Outlook: Nashville

Today’s Interest Rate: 6.65%

(👇 .44% from this time last week, 30-yr mortgage)

Well, what a week! Federal Reserve Chair Powell made a historic pivot in rhetoric, tampering down his hawkish tone and re-posturing on interest rates, saying rate cuts are something that now “begins to come into view” and “clearly is a topic of discussion.” Before this the Fed was only talking about how many more rate hikes may be necessary and did not have any future predictions of rate cuts. Even going as far as saying: that discussion was “premature.” The Fed now is projecting 3 cuts in 2024. While it is important to note that we are still above the rate levels we had at the beginning of 2023 (6.45% Jan. 3rd, 2023), the momentum and official Fed outlook has shifted markedly in just a few days. For its part, the bond market is pricing in 3-6 rate cuts in 2024. So far the bond market has been right.

Still, the Fed did not change rates, only rhetoric. For now, this may be enough to begin a shift in demand for housing (and hopefully for builders as well to boost supply). As long as inflation continues lower. But to see a continued reduction in mortgage interest rates the Fed will have to actually cut rates. Will they wait until inflation is at 2%? That still may take a while.

So Now What?

Powell, , also reminded the crowd of reporters / analysts that the Federal Reserve has a dual mandate from Congress to maintain "maximum employment" and "stable prices." And on the inflation front, has made “real" progress.” So IMO, as long as employment doesn’t blow up above 5% (which traditionally has been considered ‘full employment’) and the rate of inflation continues a steady decline, peak interest rates have even reached, 30 days ago.

But, interest rates are still very high, is now a good time to buy a house?

Doubling down what I said back in October, I would argue no… It’s a fantastic time to buy a house. But, it’s a not so good time to sell one. Follow me here…

It is absolutely true that home affordability is at an all time low. Why? Interest rates have gone from 3% to 6.65%. To put this in perspective, a $400,000 home with a 20% down payment would have a monthly payment today of ~$705 more than it would have been two years ago. Put another way, the same mortgage 2 years ago would buy you a $600k house, now you can afford a $400k house. Meanwhile, inflation for most of life’s items, while the rate of increase has wained, are still getting more expensive.

Echoing this, the National Association of Realtors NAR Housing Affordability Index is at 91.4, as of October, down from 94.5 in September, the lowest reading since the 1980s. At this level, the median household earner can’t even get approved for a mortgage on a median-priced home. ** Important this chart does NOT include the last 30 days of rate decreases which will slightly improve this number but actually not move the needle significantly.

Home affordability is hurting buyer’s ability to buy, meaning, those looking to sell are having a hard time finding buyers and are being forced to lower their asking price. Price reductions are now not only commonplace, but savvy buyers who are able to afford the mortgage (or have cash) are finding themselves in the driver’s seat. See chart below of listing price vs final sales price. Buyers are negotiating large reductions in list price.

So while it is true that home affordability is at an all time low, this is a direct result of higher interest rates, not a systemic financial or housing crisis, as there was during ‘08-09. The Federal Reserve is holding rates artificially high on purpose, in an effort to slow the inflation wildfire, which again we all see in the grocery store. Gas prices are fortunately cooling, but total inflation today still is 3.1%, and that is on top of last year’s prices, which were 8% higher than the year previous. Inflation sucks because it compounds.

Once interest rate waters recede back to the 5 - 5.5% levels, home prices will spike dramatically higher (just like other rate sensitive assets) as literally millions of households get back into the market looking for a home. Demand 👆 = Price 👆. And you will have wanted to have purchased that home already. This may take 12-18 months, but it will happen.

Let’s look at a case example on a typical investment property or primary home and determine if the numbers tell us to buy now or wait…

Quick Example

Let’s say you are purchasing a home for $400k in Nashville, TN, using my home market as an example. (And see next section with my Nashville market update).

At 6.65%, your mortgage is $2454.

Let’s assume it takes 18 months for rates to come down by then to 5.5%. The 3% COVID-era mortgages are likely never happening again. FYSA, I also think a bottom of 5% will be our new “normal.”

Purchasing that home today will cost you 18 months of higher interest at 6.65% vs 5.5%: $238/ mo., or $4284.

So, if you purchase a home today you will want to make sure you get a deal, and pay $4284 less for the home than comparable homes. Hire a great agent and they will make this happen (Need one? Message me and I’ll give you a fantastic referral).

The Strategy?

Once rates come down, you refinance your current loan into that lower 5.5% (or lower) rate. Importantly, make sure to select the right lender, ask your agent for their preferred lender list, which any self-respecting one should have in their hip pocket. Many banks are offering free refinancing too, meaning no or very low closing costs to refinance into a cheaper rate. Lenders are calling this “Buy now, refinance later for free.” And check the fine print for any fees. Don’t pay those.

And let’s not forget we are in a buyer’s market. Why stop at $4284 off the purchase price? You can be much more aggressive in our home purchase negotiations.

So, is it a better idea to purchase a home now or wait?

Using my home market of Nashville, TN (one of the most resilient real estate markets for home prices) as an example, the median price reduction from list is still a whopping 22% or $129,000 on an average home of $704,000 (see chart above).

So, if we can get just an average deal, let’s say 15% off the purchase price, the shrewd investor / homebuyer can save 14x their money if they purchase a home today vs wait for interest rates to drop. Let me say that again, you are likely to save more than $50,000 on a $400k home if you purchase today vs wait for rates to rebound.

Further, it is important to note that home prices bottomed in January, and are rising on average since. Over the next 18 months home prices will likely continue to rise, and you will be missing out on that valuable home appreciation if you are sitting on the bench.

If home prices rise a conservative 5% in those 18 months while you are waiting, that’s an additional $20,000 you are missing out on, or 4.6x the amount you were trying to save in interest by waiting!

So, if you are a prospective homebuyer, the answer is yes. I would buy today vs waiting. It’s a no brainer.

Market Insights: Nashville

I buy real estate where there is growth. And one fantastic growth area continues to be Nashville, TN. Homebuilders/apartment builders recognize this and were building in 2023. Big time.

One criticism/discussion I often hear/have is will there be too much supply - too many homes - which will depress home values. In my opinion, thats a strong no. We are heavily under built and there is extreme pent up demand to purchase a home today. To back this up, just this week Bank of America analysts released a report showing we are still“underbuilding” and this has been going on for the last decade. In fact, we find ourselves in a "deficit of 4 million" U.S. homes. Interestingly, BofA said the exact same thing in 2021. We haven’t made up any ground despite some improvement in future supply.

Simply put, Bank of America thinks we went from an over-built nation pre-financial crisis to an under-built nation today. According to the report, “The most direct solution for the housing shortage problem is to build more homes.”

In fact - and I believe this is a critical point we also sometimes miss - if a city/locality doesn’t have robust homebuilding numbers, especially if the city/locality is experiencing robust growth , the underlying economy of the area is at risk. A city must have strong homebuilding numbers to maintain growth.

Bottom Line

If you are a first-time homebuyer, or investor, it’s a fantastic time to purchase a home. I wouldn’t advise selling, unless you have to. As long as you can afford/stomach/hold your nose at the moderately higher mortgage for 12-18 months, it should make far more financial sense to just eat that higher mortgage cost and refinance later into a rate for the long-term. This gives you the best of both worlds. Your investment today will likely make you several times your money back in additional interest payments for a temporary period of time. And if you can improve the home through renovation, or a little DIY, your home’s value will grow significantly faster.

I hope this has been insightful. Obviously I made some assumptions in calculations here but I tried to keep them conservative. I’m actively purchasing more rental properties myself. This is a fantastic time to be in real estate, waiting on the sidelines for interest rates to drop is like stepping over a nickel to pickup a penny. Just keep disciplined and make sure you get a good deal.

Favorite Tweet of the Week

This is why inventory is low. Most sellers are buyers. Why move if you have a low rate?

That’s it for this week. If you are interested in digging deeper into these ideas or talkin’ real estate investing - which I always love doing - don’t hesitate to reach out. You can DM me right here and I read every message personally. 

Until next time.

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.

Welcome Anthony! Great to hear from a fellow Nashville Investor. My new favorite spot is Charlotte park, the northern side. There is a new development going in up near the marina there that is going to be amazing. Im showing a few clients a duplex up there and there is another available too if you may be interested. Also happy just to talk local real estate if you have time? Send me a direct message. -Andreas