All Forum Posts by: Andreas Mueller

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: A bold dark roast coffee from Bulletproof and some protein from Pilgrims Jerky. Looks like a marbled pancetta. Amaze-ballz.

Today We’re Talkin:

• - The Weekly 3 - News and Data.
• - New Mortgage Program will Exacerbate Inflation.
• - Hot Tip to Save BIG on your Next Renovation.
• - The Skeptics Take.

The Weekly 3: News and Data to Keep You Informed

1. - Apartment renters are signing longer leases than ever - incentivized by high supply in multifamily apartments coming online. (JayParsons).
2. - The cost of two kids in child care exceeds rent payments, by at least 25% nationwide and is more than double that in 9 states (CCAA).
3. - Book Recommendation: Long Distance Real Estate Investing. Highly recommend, a must for new investors looking to develop systems and invest long distance.

Today’s Interest Rate: 7.28%

(☝️ .21%, from this time last week, 30-yr mortgage)

Mortgage rates are up significantly this week, following a move in the spread between 10-yr Treasury and 30-yr mortgage rates. Nearly 1/4%. We need inflation to trend down, but so far signals are “mixed. ”

Counterintuitively, it seems wage growth has begun to outpace inflation growth, for much of the last 12 months (or has inflation merely seeped into wages?). Although if you ask anyone they certainly do NOT believe this to be the case. The last 2 years of hot inflation is still burned into all our minds.

Count on mortgage and bond markets to remain volatile, yet range-bound, circling the 6.7-7.5% range. Hot tip: If you are an active homebuyer and have locked in a mortgage rate, don’t hesitate to ask your lender if you can re-lock that rate. Ask them to monitor rates for you (they should be but don’t always). Take advantage of this volatility to minimize your future monthly mortgage payment. There can be a small fee for this so have them run numbers for you.

Fresh inflation numbers come out Friday, we will see what they portend for next week.

New Gov. Mortgage Program will Exacerbate Inflation

U.S. federal government spending "is the biggest threat to disinflation and lower interest rates" (Piper Sandler). I agree, at least in most part, and especially when the Gov spends money it doesn’t have (deficit spending). It’s a short term juicing that can be helpful to stave off an economic slowdown but is not and should not be used long term. Without wading into politics, that is unfortunately, what our government leaders continue to do. For years. The result? Inflation continues.

Deficit spending is a snake eating its tail.

I don’t need to tell you this, but one may only look at housing prices. News flash, they are higher. In fact, for the first time in 2 years, there’s no major American metro where home prices are falling (RedFin). Home prices are up up 4.8%, and monthly housing payments are up 15%, YoY.

Now, the Feds are proposing another program that will directly inject billions into the economy.

Why?

And this is on top of the Government’s announced plans earlier this year to boost spending and demand for homes.

Why?

Problematic Housing Plan #2 for 2024

In short, the Government is proposing to incentivize folks to take out second mortgages on their home, access that equity, so they can spend it. While it is true this would help folks “unlock” some of the equity in their home since home prices/values have appreciated greatly in the last 3-4 years, it also means they will spend it somewhere into the economy and that means more pressure on inflation. Not to mention the second mortgage payment / higher debt they now have (ie higher risk for homeowners).

Why?

Some more detail: How will the government do this? Freddie Mac, which is still under government conservatorship since the Great Financial Crisis, is proposing to buy these second mortgages on the secondary mortgage debt markets as a mortgage-backed security. Makes my spine shiver a la 2008. Importantly, some in Congress have signaled their opposition. Although unfortunately it has now become a partisan issue.

The proposal will simply amount to a stimulus program, inciting inflation growth.

Again, I do not dismiss that folks are feeling inflation so getting access to $ may seem like a good idea. I can understand the inclination, albeit misguided.

Case in point, home repair and reno costs are up since 2019. Way Up. Nationally, costs for home repair and remodeling rose +39.9% between April 2019 and April 2024. That outpaced overall inflation, which rose +22.7% during the same period.

But the solution cannot always be to throw more money at a problem.

Again, the government is focusing on the easy-button solution when it comes to higher housing related costs.

We need more Houses.

We need more houses. That’s it. Bottom line.

And the government does have a role here. We don’t need housing programs that give folks $, incentivizes spending or stokes demand (there is plenty of that). That is counterproductive. Must we forget the other federal agency, the Federal Reserve, is in a highly restricting posture right now, holding interest rates at historic levels to slow inflation. Boosting consumer spending is literally rowing in the opposite direction.

STOP deficit spending. The young / less well off populations are shouldering this inflation and we now see the consequences. The Congress and Administration need to 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?

This really grinds my gears!

Ok, whew, let’s focus on something positive. How about a hot tip!

Hot tip alert! Buy your Own Materials

The hot tip for the week is: Buy your materials / supplies, especially for high-priced /large / single items.

Case in point, I recently had a water heater go out, one of these pricier tankless systems that was on its last leg after about 10 years.

I called Plumber #1. I saw them at the neighbors house and I always like trying new subcontractors that seem busy.

The quote I got was $5500 (which is insane). But it got me curious, so I asked them what make/model they were going to install, and how many man-hours it would take?

Answer: State Proline XE 199k BTU and 6 hours (although they were very fuzzy on the latter).

I looked it up and saw I could get it for $1500. Taking into account some necessary supplies for installing the new unit (let’s say generously $800), that means their / hr rate was $533. And they probably are tacking on some margin for the unit too.

Yuck.

So I searched around for a deal and bought the next model up online for $1600.

I called Plumber #2, who I have used in the past, but who I also found by calling a random van doing work at a neighbors.

I told him I need a water heater replaced, and that I already had the new unit.

Quote to install it: $1500.

A savings of $2500.

Boom.

I take this tact on many high priced or specialty or design items, like countertops, light fixtures, appliances, large glass or window replacements, mechanical anything, etc….Contractors have their preferred suppliers who they know and are reliable, but are not always the best deal. They won’t normally look, or look as hard as you will, for a deal / sale since they will just pass on that cost to you. They are busy folks so I don’t (usually) blame them, I get it. So if you can take a little of the workload off them and buy the supplies/materials, do it. Hot tip #2, if you get a wildly high quote, it’s probably because they don’t really want to do the job or are too busy. Don’t take offense, just get a few more quotes.

In other words, they just aren’t that into your job.

Also, I’m never using Plumber #1 ever again. That neighbor of mine got hosed.

The Skeptics Take:

Government needs to get their you know what together. People need homes. This issue is not going away. It’s not acute, housing supply is now a chronic issue. We need fewer regulations (or at least the correct ones) to incentivize housing construction and more up-zoning in appropriate areas to add density to existing lots. This should focus on supply of new homes, adding density to existing lots/homes and bringing down inflation costs.

We can do this, let’s F&%ing Go!

Bonus hot tip!

Homes getting too expensive where you live? Invest remotely, I did before I moved to Nashville. Where should you invest?

My advice: skate to where the puck is moving, which cities are growing and where the young folks are going.

Where are young folks moving? Let’s see:

• Booming: Provo, Austin, San Antonio, Charlotte, Nashville, Orlando, Dallas/Fort Worth, Denver, Greenville, Raleigh, Tampa, Phoenix, Seattle, Houston, Atlanta
• Strong Growth: Indianapolis, Las Vegas, Riverside, Detroit (!!), Boston.
• Contraction: San Francisco, New Orleans, Los Angeles, Chicago, New York.

Focus on growth and young demographics. My 2 cents.

Until next time. Stay curious. Stay skeptical.

* 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 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. Today’s fuel is just caffeine and a cold shower. No AI generated content here folks. Nie!….Oh and some Offspring.

Today We’re Talkin:

• -The Weekly 3 - News and Data.
• -Time to Lean into Interest Rates.
• -What makes up a Home’s Costs?
• -Tradesmen, Thank you for Your Service.
• -The Skeptics Take.

The Weekly 3: News and Data to Keep You Informed

1. -Median Home Price is now $397k, up 4.7%. Heavily skewed by the West, which is $613k (NAR).
2. -Using Sleep to Improve Learning (Huberman).
3. -Oracle Moving Global HQ to Nashville! Suck it Austin :) (CNBC).

Today’s Interest Rate: 7.39%

(👇 .11% from this time last week, 30-yr mortgage) Interest Rates are Higher, It’s Been Longer

I hear constantly on the news (@CNBC @CNN @FOXNEWS etc…..) “interest rates could be higher for longer.” Well, I’ve got news for you Mr. Blitzer, they already are. It’s been more than 2 years since the Federal Reserve started to raise rates. It’s a damn rate mesa at this point. Rates are higher, it’s been longer.

But while rates went up the ski lift on the incline, they will likely come down the bunny slopes on the backside. Absent a recession.

So, perhaps it’s time to lean into interest rates?

Interest rates are fluctuating in the 7-7.5% range, so let’s start operating under the assumption that 5-5.5% is not around the corner. I do think we will land there, but we sure ain’t there today.

Let’s recognize where we are and the effects. There are some good aspects of 7% interest rates, as I laid out Last Week. One is upward pressure on available home inventory levels. We have been in a housing recession (arg, 2022) with regard to inventory and we do require inventory to increase to the mean, to return to a more normal market.

Housing Inventory is Rising

Unsold inventory sits at a 3.2-month supply, up from 2.9 months in February and 2.7 months in March 2023, or This is a product of fewer real estate transactions. Total existing-home sales were down 4.3% from February to a seasonally adjusted annual rate of 4.19 million in March. YoY sales waned 3.7%, down from 4.35 million in March 2023. Juxtapose this with 2007 where we were at 4,000,000. In my home market of Nashville, we are at 3.8 months supply, above Pre-COVID March 2019 levels of 3.2.

Good.

This is Not 2007

Interest rates are unlikely to crash housing prices, the labor market, consumer spending and economy are too strong. Good. Plus (*mini Tangent Alert*) is the Federal Reserve even capable of steering the economy with interest rates? We are still plowing forward despite their best efforts. Hell, the Fed employs 100+ researchers and 400 PHD economists.They are usually wrong about both: where inflation will be, and what their own interest rates (Fed Funds rate) will be. They literally use a “” to predict/estimate future interest rates. Let’s call it what it is, a damn dart board.

IMO, it’s important to recognize that despite the high costs of real estate / interest rates, and depressed demand as a result, this does NOT seem to be the 2007 housing crisis all over again. Something to keep a Skeptical eye on however as inventory ticks up.

Home Prices are Higher, Forever

Inflation higher? One area of concern is construction costs, and the resulting increase in home prices. A new single-family home in 2022 cost $392,241* to build. The pie chart below breaks out those costs for the “average” home (ResiClub).

*Unless you are living in California, where impact fees are often $100,000 of the cost of building a new home. Ease off the gas pedal local governments, holy sh!t.

And an important note, labor / services costs are a majority part of each of these costs. More than the raw material, in my experience.

So what to do?

Gen Z to the Rescue?

Gen Z may be leading a revival in the trades. 1) In an aging population, the median age of electricians, mechanics, and plumbers is falling. 2) Vocational school enrollment is growing faster than at 4-year colleges.

More young folks are considering the trades as a career.

Tradesmen. I have one thing to say to you.

THANK YOU FOR YOUR SERVICE.

And before you start talking sh%t, the trades are a tremendously under-appreciated job. Have you ever fixed a 110 kilovolt power line hanging from a helicopter?

This past week was lineman appreciation day (April 18th). So I’ll say it again:

THANK YOU FOR YOUR SERVICE.

To all the trades. Badass.

The Skeptics Take:

It’s spring and I think I speak for everyone when I say, time to double click on those sunny clothes and put the sweatpants in the lower drawer. And this means people activity picks up, especially in real estate. Fun fact, typically 40% of all annual home sales take place March-June. Prices are / will continue to rise (especially in the hot season), so I’m gettin out there now!

We desperately need more tradesmen. Construction costs are a large part of the home price appreciation. And this is an area where all levels of government can be helpful in providing the right incentives and programs. Are you are listening, city / county officials? (I know you read this, I see you open my emails :).

Also, parents! Do you have a burgeoning young adult that is thinking of being an “influencer?” Maybe they should consider one of the trades? The money is just as good as technical fields and you can actually do / build / contribute something to the world.

Speaking of which, time to get outside! Gonna go fix a tenant’s dryer, see a few properties and hit the gym.

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! Drop me a note right here on BP. 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.

Quote from @Bruce Woodruff:

@Andreas Mueller I got it. I am not a 'waiting for rates' kinda guy. The first house I ever bought came with a 18% loan, gulp....

I agree that if rates drop even slightly, the market will go crazy.....there has been a year or more of a 'slow market' and scared buyers and sellers. Most people are rate driven and don't get the long-term math.

 Bruce, that's right. Folks usually look at their payment (even more than home price). I think there will be tiers of demand that flood back to the market as we step down in rates over the next 12-18 months. 

Quote from @James De Stefano:

This newsletter is better than 80% of the junk that hits my email! nice write up!

Nobody know what's going to happen, but man o man there's just so much freaking money out there.   I don't think $100,000 will ever buy a "nice starter home" again. At least not one with any decent schools or economy nearby. 

The biggest ripple effect in the coming years will probably be from something we do NOT see coming. or at least 99.9% of us.  

 James, you are so kind! And if you want my last few articles may be helpful too. Check out my twitter, I post them there. Its in my profile her on BP. 

Nothing to add to tax side. Just want to say great strategy! had 2 clients buy places to House Hack and rent by the room. Good on ya! 

In the words of famed real estate mogul / investor Barbara Corcoran.....

"If rates go down just another percentage point, that's what I'm hoping for by year-end, prices are going to go through the roof...Everyone will come out and buy. There are probably 10 buyers on the sidelines waiting for interest rates to come down that are actually active in the market. So everybody's going to charge the market...I wouldn't be surprised if real estate went up by another 8 or 10% if interest rates come down."

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

1. - “On current facts, a rate cut in June would be a dangerous and egregious error comparable to the errors the Federal Reserve was making in the summer of 2021. We do not need rate cuts right now.” (Larry Summers)
2. - Boston Dynamic just unveiled their newest Atlas robot. This is not a render. Wow (MKBHD).
3. - 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.

Thanks @Marian Huish, glad you liked! Ha. AI isn't that snarky. Yet...

Welcome to A Skeptical Dude’s Take on Real Estate: a weekly frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

Coming at you live from Nashville, no AI generated content here folks.

Today We’re Talkin:

• -The Weekly 3 - News and Data
• -Inflation Report Today!
• -Real Estate Doomsdayers be Damned!
• -I am …. Postive?
• -The Skeptics Take: Good Vibes in the Market.

The Weekly 3: News and Data to Keep You Informed

1. -11 Studies, 1 Conclusion: Housing market is underbuilt (ResiClub).
2. -Would the Fed actually RAISE rates? Possibly, if inflation keeps rising (Bloomberg).
3. -President Biden says Fed will Cut Rates this year. "Before the year is out there’ll be a rate cut.” (Bloomberg)

Today’s Interest Rate: 7.06%

(Flat from this time last week, 30-yr mortgage)

Today is a big day for us folks in the arena, it’s inflation day for consumer prices (CPI). Price action today will be heavily watched, more than usual. We have had 2 months of higher than expected inflation numbers. So according to NBA Jam rules, we are “heating up.” A hot inflation number for March, a trend it would make. And many believe, myself included, that if the Federal Reserve sees a trend up in inflation, they will be less inclined to lower interest rates. After, all, why would they? The economy is humming and we have very low unemployment (3.8%).

So get to it Skeptical Dude! What does today’s CPI number tell us?

In short…we are “”

January and February were not seasonal irregularities. CPI was up 3.5% YoY.

This was hotter than all estimates by the big financial institutions and higher than CPI in February (3.4%):

• Kalshi: 3.4%
• Barclays: 3.4%
• Citigroup: 3.4%
• Deutsche Bank: 3.4%
• Goldman Sachs: 3.4%
• JP Morgan: 3.4%
• Morgan Stanley: 3.4%
• UBS: 3.4%
• Bank of America: 3.3%

Core CPI has risen at a 4.6% annual rate, faster than any three month period from August 1991 to 2020 (Furman).

In the words of oft-cited economist Mark Zandi of Moodies Analytics… “Ugh. March CPI was a bummer…”

Ditto.

Shelter inflation is one of the major forecasts by economists watched by real estate investors. And the assumptions most economists made in projecting inflation numbers these past few months was that shelter would come down from its 9% to the 2-3% range. It hasn’t; in fact, it seems to have bottomed / plateaued at 5.5%. In fact, in fact… core goods (stuff you can buy) are underperforming services (people do/provide labor for you). In fact, In fact, in fact…Much of services’ increase is shelter. Shelter and gas prices were more than half the monthly increase for all items measured in the CPI for March.

Of note, recently you may have read quite a lot about the tremendous apartment unit growth we are in the midst of (as I have written about). But it hasn’t had a significant effect above the market’s ability to absorb that supply. Anecdotally, in Nashville, where we are in the middle of an apartment supply “surge,” rents are not ebbing. Not for anyone I know. This despite article upon article of impending supply doom!

Slight Tangent!

By the way doomsdayers…. a “surge” of housing supply is good thing. The US housing market is deficient in its supplyfor homes and apartments both, which is why price growth hasn’t abated. If we had more supply, that would be great for these things you may remember…people. “To keep up with annual demand, the US needs 1.86M new homes (for-sale and for-rent) per year through 2033, based on underlying demographics and current undersupply. We're currently starting homes at a [rate] of 1.42 million homes, ~400K fewer than needed.” (JBRE)

Real estate investors are long term thinkers and are a part of their community. We need a healthy supply of homes. It’s not healthy for the longterm viability of the/a housing market to be structurally undersupplied. The benefit of raising rents in the short term, on the back of strong demand, is far outweighed by a potential structural supply problem over the longterm. Those backs will break. Plus, high inflation and shelter costs hurt productivity, damaging economic growth. Large multifamily developer/operator worried about a high vacancy rate? It’s your fault if you built into your numbers ever exploding rent growth. That’s on you. Skeptic investors know you have to be conservative in your rent projections and ensure resiliency in a potential downturn.

Speaking of which. There are soooo many of these doom / salacious articles re: housing apartment supply. Like this one. And this one… and this one…

Are you wanting for an economic crash?

Blah, gets me fired up! I need more coffee now. Side note, just tried a new coffee this week: Death Wish coffee. It’s fantastic, super bold. Especially the dark roast. Highly recommend.

But I digress….

The Market may be Sniffing Something Out

As it stands today, the stock and bond markets are taking the inflation news with zero grains of salt. Stocks have so far fallen +1% and long dated treasuries are down +1.5%.

The market may be starting to realize something else than just inflation. It may be that the Fed may never get inflation under 2%.

So what? Why do I care? You are too Skeptical, Dude.

Well, to complete the sentence of Mark Zandi above…. “Ugh. March CPI was a bummer… and will surely delay the Fed’s first rate cut.”

I agree.

I am officially revising my rate cut estimate for 2024 from three .25% cuts to two .25% cuts. While the Fed may cut in June or July, to signal to the market all is healthy and / or to provide confidence (or for us conspiracy theorists because it’s an election year), they will then pause. Mortgage interest rates will remain elevated for a longer time period and I am estimating we won’t be back to an attractive rate - below 6%, where folks storm back to the market and feel comfortable leaving their home w/ a low interest rate mortgage - until the 2nd or 3rd quarter 2025. I would say 5-5.5% is the sweet spot for when folks will demand will rush back, partially due to mortgage payment affordability and partly psychological, after seeing both 8% rates and 2% rates in just the last handful of years. JBREC has a great chart on this:

Higher for longer interest rates could be a GOOD thing for the real estate investors.

High interest rates will continue to suppress demand for homes, build inventory, and allow for buyers to better negotiate for home prices. If they are able to afford that 7% mortgage for 1-2 years, they can then refinance having bought an asset for under what it will be worth in a “normal” market.

In the words of famed real estate mogul / investor Barbara Corcoran:

"If rates go down just another percentage point, that's what I'm hoping for by year-end, prices are going to go through the roof...Everyone will come out and buy. There are probably 10 buyers on the sidelines waiting for interest rates to come down that are actually active in the market. So everybody's going to charge the market...I wouldn't be surprised if real estate went up by another 8 or 10% if interest rates come down."

The Skeptics Take:

I remain quite positive on the real estate market, and asset markets in general.

Inflation has risen a few months in a row, but barely, and much of that growth is concentrated as of late. We are still likely on the down slope, but it will be more cross-country vs slalom. Up, down, flat, up, flat, down, down, repeat…

And to quote Economist Mark Zandi for the third time today, “[The Fed’s] got everything they need to start cutting rates…It’s just a question of precisely when.”

The housing market is improving, the supply of homes on the market is up double digits this month, and in my business I am seeing a healthy spring flow of demand for both homebuyers and investors. Very healthy. I had a few multiple offers last week. That was 2021 nostalgic.

Home prices, like wages, aren’t likely to go down (deflation) but we are likely to see the rate of increase slow as the Fed keeps rates restrictive (lower inflation, disinflation). I am still on alert for stagflation. This last longer than folks think + harm labor market = stagflation. Labor numbers remain important to watch. So far not though.

But for now, call me positive. It’s Spring! Get out there and start doing. My home market of Nashville is heating up, literally. And I bet your local market is too.

Don’t be an armchair sourpuss critic. It’s time to get in the arena.

That’s it for this week. If you are interested in talking real estate investing especially here in Nashville, reach out!  You can message me right here on BP.

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.