Hi all! Thought I would continue sharing my thoughts on the market. This time for week 2, November 2023.
Today I'm talkin’ prices of everything, housing market positives, home builder incentives continue, and is this the most popular vacation time ever?
Yesterday, the Labor Dept. released the monthly consumer price index, which measures goods and services costs. In short, prices increased less than was expected: 3.2% YoY price inflation vs 3.3%. This seemingly negligible difference provided a strong signal to investors that high prices are easing. Treasury and mortgage rates dropped, and boosted expectations that the Fed is done hiking interest rates. Importantly, prices are still increasing, but we are getting ever closer to the Fed’s target of 2% annual inflation.
According to economist Mark Zandi, a [CPI] report like this does cement the path the Fed is headed on. They should feel very good about how things are going… It just confirms that the rate hikes are over…. But, the bar is pretty high for them to cut rates… Likely slowly and starting mid-2024.” Investment bank Morgan Stanley agrees.
In other words, with respect to real estate, this is a super positive sign that we are likely on target for lower mortgage rates in the 2nd half of next year. Of note, shelter (housing) inflation remained high, clocking in at +6.7% YoY.
Housing MarketConsumers, however, aren’t rejoicing yet.
Neither are consumer-facing real estate companies…
Nonetheless, one positive: if you are a potential buyer of real estate, you are in the driver’s seat. Homes listed for sale are seeing more price cuts, as Seller’s Sentiment continues to come back to earth. In October, ~25% (3x normal) of sellers dropped the listing price on their homes, up from the ~17% seen last year at this time and a low of ~8% in 2021, according to Reventure Consulting. Still, home prices are only down ~6% from their all-time high. Yet another testament to how weak homebuyer demand is right now. There is just not much supply to be had.
Most real estate markets have recovered from the Fed raising rates at lightning speed 2022-2023. For example, my home market of Nashville has fully recovered. What real estate markets are still on the mend? Looks like mostly in the West + Austin, which clearly was in wild housing bubble. Importantly, all markets are far above March, 2020 prices.
How about rents? Well, rents continue to rise in most all markets, according to Invitation homes.
How are developers / home builders doing? New homes continue to sell at a rate 2x+ the average, primarily due to generous incentives from developers/home builders. Home builders continue to offer low rates, which they ultimately have to pay for. At the recent John Burns research conference, home builders noted significant costs of 8% to 10% of the mortgage to buy rates down for homebuyers (Equating to an interest rate of roughly 5.75% for the borrower).
The costs to buy down rates like this are significant and is the norm for new home purchases. And as a result, homebuyers now expect it. How are they able to afford it? Profit margins for this decade are far higher than last decade.
Home builders are still killing it, unless you’re in California, where home building can be both time and cost prohibitive (and thus housing supply and costs are wildly out of whack). To build a home in San Francisco, and other CA cities, it can take 87 permits and 627 days, just for permits!
Guess that’s why A record-high (24%) of Americans are planning to vacation abroad within the next six months. Nearly double 2019. Heck, I’d need a vacation after 87 permits, for sure.
How about Apartment Development? A recent survey shows they expect a big drop in starts over the next 12 months. 25% expect apartment starts to plummet by 50%+, and 52% expect a drop of 20%+. Very, very few expect construction growth. This lower supply hitting the market for the next 3+ years will put downward pressure on supply and upward pressure on home prices.
Is there any weakness in the housing market? Little. But one area of weakness could be the STR (Short Term Rental) market. Case in point, Airbnb-backed short-term rental operator Zeus Living is reportedly shutting down (an AirBnB backed venture).
With so much happening in the world today, from Ukraine-Putin, to Israel-Hamas, to volatile energy, bond, mortgage, stock prices… there is a lot to be aware of. And I hope you picked up few tidbits here you weren’t tracking. Heck, Moody’s credit agency changed its outlook last week on the Federal Government’s credit rating, from stable to negative! Got pretty much ignored. Why did they do this? Fiscal Debt. (which I have been harping on for months now…). Specifically, “In the absence of policy action [ie Congress], Moody's expects the US' debt affordability to decline further, steadily and significantly, to very weak levels compared to other highly-rated sovereigns [other countries]...”
But it’s important to keep things in context. These concerns - credit ratings, inflation, interest rates, wars, recessions - don’t mean you / businesses should suspend all risk-taking. Amid the Fed’s fiercest inflation fight (late 70s-early 80s) Apple went IPO, George Lucas made the Star Wars Trilogy, and…I was born (huge risk!).
Awareness is key to a successful life. Watch out for that tiger prone in the brush.
That’s it for this week. If you are interested in digging deeper into these ideas or talkin’ real estate investing, especially in Nashville - which I always love doing - don’t hesitate to reach out. You can direct message me!
Until next time, stay Aware, 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.
Hell ya, welcome!!! Nashville is fantastic, welcome to the dark side :)
happy to help if I can. Im an investor, raise a fund and agent.
With tech/software it makes PM super easy and cheap these days. You probably aren't going to unclog toilets yourself anyway, I assume? PM companies take you for a ride. A fee for leasing, a fee for paperwork a fee for this a fee for that, plus 8% or so from REVENUE not profit each month... I say do it yourself. (Plus you will learn a lot) Check out software to help automate things
Welcome fellow BP Compatriots! I thought I would share my brief, hopefully insightful, dive into real estate and financial markets.
Today I'm talkin’ the topsy-turvy mortgage market, consumer sentiment, Mayo lattes?, and I take a closer look at my home market of Nashville.
Mortgage interest rates dropped considerably in the last 7 days, a well-welcomed reprieve from seemingly ever-increasing rates. I was sick of sounding like a broken record, talking about broken records.
Mortgage rates are determined by trading in the bond market, which take cues from many sources. For instance, yesterday, weak economic data in Europe put downward pressure on rates globally and perceived dovish comments from Federal Reserve speakers allowed bonds to hold the gains. The average mortgage lender was able to offer lower rates nearly every day for the last week. We aren’t out of the jungle yet, far far from it, but it’s directionally positive.
The US economy is humming along, remaining resilient in the face of high costs of capital/interest rates. Deflation is slowly ticking down the various price indexes, despite personal consumption remaining strong. Core PCE was however down to 3.7% in September, the lowest reading since Q2 2021. Not yet the 2% the Fed would like but again, directionally positive.
The Fed, while not increasing interest rates during their meeting last week, are quietly continuing Quantitative Tightening. Each month, the Fed has allowed $60 billion in Treasuries to mature and roll off their balance sheet. As the Treasury continues to issue new bonds to fund Congress’ tremendous appetite for government spending, we should continue to see volatility in the bond market, and by extension, mortgage rates. The next 2 months should tell us a lot about 2024.
Mortgage Market Status UpdateAverage monthly mortgage payments (existing homes) are still elevated, a record high $2,326, a substantial increase from $977 in March 2020. But that's not the story….
The mortgage market as a whole is in complete and absolute disarray. This week mortgage applications hit a low not seen since 1995.
One result: mortgage industry employment is down 20%. Why? Higher interest rates = fewer loans and higher costs. The Senior Loan Officer Survey this week cited “uncertain economic outlook” and “deterioration in the credit quality of loans and collateral.” But… banks reported being “more likely to approve credit card loan applications.” Really? (more on this below).
And Some lending institutions are even trying to claw back hiring bonuses previously given to employees! (great WSJ article).
What’s happening in the mortgage industry? A LOT of distrress is leading to mergers and firings, in just the last few weeks, this happened: (Big credit to @NewsLambert)
And RIP refinances, unless you are holding an even higher interest rate loan (like a construction/bridge loan or hard money, or perhaps you just fixed your credit. Then by all means).
So how are consumers feeling? After 2 months of flat readings, consumer sentiment fell about 6% this October. This decline was driven by consumers concerned about deteriorating stock holdings, business conditions (plunged 16%) and expectations over personal finances (fell 8%), reflecting ongoing concerns about inflation and uncertainty over headline news abroad. Inflation expectations for 2024 reversed, rising to 4.2% from 3.2% last month, the highest reading since May. Long-run inflation expectations edged up from 2.8% last month to 3.0% this month. Again this is sentiment not actual. But the signs of uncertainty can become self-fulfilling and could be leading indicators.
Anecdotally, google searches for the phrase “need financial help now” are straight up and to the right. 😱
A Closer Look: Nashville Market
It wouldn’t be my opinion without a little flavor from Nashville in the mix from time to time…Below is a quick snapshot of the economy in the Nashville area for October.
TANGENT! The Tennessee Titans have a new quarterback, rookie Will Levis, who took over after an injury to starting quarterback Ryan Tannehill, and he has an interesting coffee routine: he puts mayonnaise in his coffee. Not kidding. But! Before you laugh and spit up your own coffee like I did, this little quirk recently earned him a lifetime sponsorship by Hellmann’s brand. (and he threw 4 touchdowns during his debut). Amazing. When will your coffee shop add Mayo Lattee to the menu? Probably better than almond milk (sorry, yuck!).
Ok, I Digress…..
Back to Nashville:For October, unemployment in Nashville ticked up slightly to 2.8%, in lockstep with national increases due to tight/expensive credit, but still remained nearly 1% lower than the national average. Average weekly wages were at $1574, 7% higher than the national average.
EditSign
Emplyemnt was positive across nearly all categories, most notably in Education and Health services.
EditSign
Average spending distribution remained lower than overall US, and despite the rapid growth in the City over the last 3 years, spending on housing costs is still lower than the national average by 11%.
EditSign
Real estate activity, unlike most markets, is remaining more energetic than most markets. YoY property listings were up 7%, while most markets retracted.
Nashville Development
Dozens of exciting real estate developments are popping up all over the city. Here are a few, curtesy of Beata Lorincz.
Feature Development: Neuhoff(* Fun fact, in German “Neu” means new and “hoffen” is to hope. Pretty deep for a real estate development.)
In 2019, developer New City Properties acquired a 14-acre site in Nashville’s Germantown neighborhood, on the western bank of Cumberland River. The site comprised buildings that used to house a meat packing facility built in the 1920s. In mid-2021, the company joined forces with Cousins Properties and entered into a joint venture partnership to develop Neuhoff, a new mixed-used development. Cousin’s $275 million investment secured a 50 percent ownership in the project’s first and second phases.
The first phase is set to include 388,000 square feet of office space, 60,000 square feet of retail and 542 multifamily units, a new 14-story office building, as well as the adaptive reuse of an existing structure dubbed the “curved building.”
John Clifford, founding principal at S9 Architecture—the studio behind the design of Neuhoff—told MHN that the development establishes a new sub-neighborhood that connects Germantown in the north, south and west. The project’s other main goals include maintaining the slaughterhouse buildings, as well as creating public access to the river.
For more Nashville developments, see her fantastic article here.
High cost of capital be damned, the US economy, and even more so my local market in Nashville, remain strong. Robust GDP growth and deflation, albeit slow, are holding into the holiday season. Consumers have uncertainty yet continue spending. This is good.
But much uncertainty remains. Take consumers for instance, yes they are continuing spending, but is it mostly plastic? Today, US consumers, since 2019, acquired 70 million more credit cards. 70 million in 4 years?! Really? Do we all have Costanza wallets? Holy cow!
I am still of the opinion that something in the economy “breaks.” It’s more likely than not. In 6-10 months, something requires the Fed to act, which results in lower mortgage (and bond) rates. However, for those who can afford the higher mortgages for the next year, keep on alert for potentially once in a lifetime real estate deals.
Case in point, central banks around the world are now cutting interest rates at the fastest pace since 2020.
Are you looking to start investing in real estate and need to find deals that pencil out? I highly recommend this FREE tool to find a real estate agent that understands investors. Most agents suck. This is a great resource.
Great deals are out there.
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!
Until next time, 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.
Recommend you don't sell in this buyer's market. You will be kicking yourself that you didn't wait until rates dropped, which could admittedly be 12+ months from now. But it will happen. Hold, rent, take this time to improve the properties.
And call me in a year, my team will get you top dollar :)
-Andreas Mueller
KW Commercial Agent
Cancun? Lets go!
These are great meetups in Nashville. Follow Brent on Eventbrite
https://www.eventbrite.com/e/august-monthly-real-estate-meet...
Sent you a few Sai!!!! Go get it!
Mortgage interest rates remained relatively flat this last week, and, high interest rates (sorry to sound like a broken record) are here to stay. Just this hour the Fed announced the results of its meeting of the Federal Reserve Board, where they kept Federal Funds rates unchanged.
(Tangent! Isn’t it interesting that “sounding” like a broken record and a “broken record” are idioms that literally mean the opposite? ie repeating the same thing and something never achieved before?….Ironic.
I digress….
Real Estate Market Outlook: A look at Bull vs BearSo where is the real estate market going and what should investors be watching out for in 2024? For now, it’s a strong buyer’s market, they hold the leverage in negotiating. But buyers must also need to be a ‘strong buyers’ ie somebody with enough $ and the ability to afford/stomach/weather the higher interest rates, until they retreat.
Eventually the market will achieve some form of relative normalcy/equilibrium. Buyers and sellers will both feel like they are getting a deal/what they want, flowers will bloom, puppies will nuzzle your cheeks, and my garden will finally grow something other than weeds.
But until then, we may not see a more normal/equilibrium/regular/fair/attractive or whatever term you want to use, for 12-18 months… unless something breaks. But is ‘hoping’ for the economy to break really the recipe for a bull market case? Unfortunately, it seems that way to me. But let’s say I’m wrong (which does happen, I must admit) and we are on the edge of a more normal market sooner. What signals could be pointing us in that direction? Let’s dig in:
The BULL Case
The BEAR Case
Interest rates are likely remain high for a while. Why? The government is issuing a TON of debt right now as well as next quarter, as they just announced. In total, $1.6 Trillion, yes that’s right. Trillion, in 6 months. And, put simply, government debt (treasury bonds) compete with mortgage debt that are resold by your bank into the bond market. So as the government floods the market with new bonds to finance their spending, and since folks (investors, institutions, foreign governments) aren’t clamoring for Treasuries right now, bond prices will go down, and their yields up. High yielding Treasury bonds that are risk free, backed by the US gov, are attractive vs risky-ish mortgages, so fewer folks will buy mortgage bonds, and thus mortgages rates also go up, in competition.
And here we are, even higher mortgage interest rates (8%!) in the last few months and for the next few months (at least) even though the Fed is not continuing to raise rates (*yes yes I know there is more to these mechanics, but this is a primary reason why this is happening, IMO).
Whew, thats a lot I know. Need a refresher on how mortgages are broken up into little pieces and resold in the bond market? Here is a quick 1 min video:
Additional Reasons for the Bear Case:
With each case in mind, we are setup for next year to be volatile. If mortgage rates stay high (or heaven forbid rise even higher on the backs of heavy bond competition) any 2023 home price gains will be wiped out. If mortgage rates ease, we’ll see both pent up buyers and sellers entering the market, and home prices will increase in 2024.
IMO, there is a 70% chance that something in the economy “breaks,” within 6-10 months requiring the Fed to act, resulting in lower mortgage (and bond) rates. However, I am posturing my investments / real estates activity more conservatively, assuming that will not be the case and we don’t see lower rates for 12-18 months. In fact, we may be in a housing recession right now.
With this much uncertainty, it is more prudent than ever to stay skeptical. Keep on alert for great deals. To paraphrase Warren Buffett: there are no balls and strikes in investing, just wait for that fat pitch and swing.
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, just DM me here on BP!
Until next time, 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.
Hi all! Adding my 2 cents:
This time of the year is tougher than the rest, I highly recommend ending leases in the summer which is a much more popular rental market. You may have to lower rents, rental starts are very seasonal.
Last note, there is significant inventory not the market, make sure you are comping your rents correctly to what is currently available now on the market.
Other than this, I own a bakers dozen properties around town, no issues finding tenants.
Hope this is helpful.
-Andreas