All Forum Posts by: Andreas Mueller

Welcome to the Investor Agent Newsletter. A frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

Today We’re Talkin:

• - The Weekly 3 - News, Data and Education.
• - Are Buyer’s Skipping till Spring?
• - How the Savvy Investors are Positioning.
• - My Skeptical Take.

Fuel for the Day: Found this great coffee from Olde Brooklyn Coffee. Silky smooth and grinds with the rich scent of chocolate. ☕

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

1. - “The US economy is not facing a recession,” says Apollo chief economist Torsten Sløk. Sløk cites strong employment data, wage growth, and consumer spending as key indicators. Corporate profits are at record highs, and GDP growth is projected at 2.1% for Q3, suggesting continued growth ahead (BI).
2. - Maned Spaceflight is back! Polaris Dawn just launched and will bring humans to the highest orbital altitude since Apollo in 1972. More than 3x further than the International Space Station (SpaceX).
3. - Book Recommendation: Long-Distance Real Estate Investing. I’ve recommended this before, and it’s a bit out of date with new software that automates much these days, but with prices only going higher, many investors are looking outside their expensive market for their next real estate deal. Can’t recommend this book any higher for new investors.

Today’s Interest Rate: 6.22%

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

Guten Morgan investors. It’s a lovely day to talk real estate.

Let’s get into it.

Skipping till Spring

Get excited! Interest rates will soon begin the pilgrimage down from their ugly nest atop the mountain. But the welcome spectre of rate cuts in just over a week now has homebuyers/sellers thinking… Perhaps the grass may be greener in the Spring?

I described the above to AI and well, this is what we got. Ha. AI is getting there, but it ain’t there yet.

So, if they can wait, they are. Pending home sales fell 5.5% during July and the data so far is showing another decline in August (NAR). I expect this to continue through the winter.

Lower activity will translate into higher inventory levels, which will continue their melt up for another 5 or so months. Buyers are Skipping till Spring, anticipating those cuts. Heck, if they waited this long, and it’s soon to be winter, what’s another few months?

Investor Tip: Look out for more ugly existing homes to snatch up.

Homes in need of a renovation should start to slowly accumulate on the market. The spread between the supply of existing homes and new homes is at a historical high, close to double what it should be. This is because the 2020-2021 ultra-low interest rate policies incentivized homebuilding and at the same time disincentivized exiting home sales as folks refinanced their mortgages only to have interest rates explode higher 1 year later (2022-present) locking them into that home and preventing them from selling and then buying another (remember, most sellers are buyers).

Although that is not to say new homes aren’t coming on the market, it’s just not enough. Single family housing starts are low, and moving lower fast into the winter cycle.

Inventory is up but Seller’s aren’t Waiting Either

Importantly, median (and mean) home prices are up YoY. And many sellers are not accepting, on average, drastically lower offers. They are also waiting. Inventory is rising because demand has cooled and homes are sitting longer, not from new listings.

ResiClub

Case in point: if their property doesn’t sell, sellers are taking them off the market. Canceled listings are at a 5-year high and increasing into Winter. For more on the whyof canceled listings, check out this quick talk from Altos Research. A nice short analysis on the months ahead.

Canceled Listing #s So, What’s the Point Again?

All this is good, very good.

Why?

For homebuyers and investors alike, it will produce the perfect cocktail to snatch a deal! Especially on that ugly home.

We should all take a moment to be in the present. We are likely experiencing one of the strongest buyers’ markets in the last 12 years, right on the tail-end of high interest rates and a homebuyer that is tired of it all. Close your eyes. Take a breath. And remember where you were when you had this opportunity in real estate.

A Worn Out Homebuyer

At this point, after a long 2+ years of inflation and high interest rates, homebuyers are resigned to sit on the sidelines until they can get motivated again. We see this in the moving data. A stat I found interesting: 57% of apartment tenants are renewing their leases, the highest in a decade. Starter-homebuying is expensive relative to historical levels and interest rates have been taking a toll on the psyche of homebuyers.

So, they are Skipping till Spring (or when your lease ends in 2025) and just renting.

JBREC

Anecdotally, I have several tenants who are young couples and were originally planning a move-out this year into a starter home. They want to start a family. But are frustrated with prices, interest rates, and the process in general. They all just renewed their lease this summer.

Savvy Folks are On the Hunt

So for investors, and homebuyers who have remained resilient (props to you!), in my opinion, will are starting a new multi-year bull market in real estate.

And you have a 5 month head start.

Remember we are still highly supply constrained relative to total demand, despite this pocket of inventory we are seeing.

Many more homebuyers (and sellers, remember) are waiting for rates to drop, now that the reality of lower rates by Spring is setting in. Pending home sales show us they are taking their foot off the pedal.

Anecdotally, I just picked up another great deal on an ugly house in the country that had been sitting on market. After some elbow grease, this is going to turn into a smokin’ hot deal. I’ll be looking for my next one in November.

My Skeptical Take:

I want to emphasize, once again I know, the unique state of play for the real estate market.

We are currently experiencing a Hot Rate Cut Summer-Fall.

But many buyers are Skipping till Spring.

If you are looking to invest, don’t get stuck in analysis paralysis. Take action.

You have a 5 month head start.

For the Federal Reserve, I expect their first rate cut in one week, by .25%. And the $46 trillion U.S. bond market agrees. In anticipation of rate cuts and a potentially slower economy, in the last 30 days, the 10-yr treasury has come down to 3.629%, with the 30-yr mortgage at 6.22% today. A spread of 259 bps. And I will continue to remind you all of this, if the spread between the two was at normal / historical levels (175 bps), we would be at an interest rate of 5.37% today. Even before the first rate cut. This means that it is within the realm of possibilities for interest rates to end up in the low 5’s, sometime next year.

Forced Sellers this Winter

Another reason why this the present time is such a great time for us investors. Real estate is cyclical/seasonal, and most activity is in the Spring. Folks selling in the off months, especially in the slow winter months, have a much higher likelihood of being “forced sellers,” in other words they’re selling for some life event reason. A move, a death, debt issues, divorce, job change, etc…. They have to sell and they wont be taking the home off the market, they will be reducing price.

Add to this, a housing inventory that is at 2019 levels, and buyers skipping till Spring, and we have quite a cocktail of opportunity for those looking to pick up a deal.

Find Fall Deals

So when are others are enjoying the pumpkin patches and apple picking, the savvy investor is hard at work in the office, scouring listings, running numbers and talking to expert investor-agents to find that Fall deal.

When will Demand Roar Back?

This also begs the question, how long will this last? When is demand going to roar back?

Move over March Madness, its going to be Makin’ Moves March in 2025! (I’m full of alterations today, and plenty of coffee).

That should be about the time rates are near or under 6.0% and should be timed perfectly with the hot Spring real estate cycle.

Will Rates go under 6%? Yes.

A note, and I’ve said this before. I vehemently disagree with the National Association of Realtors, which claims rates will stop at 6%. Their chief economist Lawrence Yun has lost touch with the market. And you know what they say about economists….

…Well I’ll let renowned mathematician, trader, investor, philosopher, and author of The Black Swan Nassim Taleb tell you, in the colorful way that only he can:

“Those with brains and no balls become mathematicians, those with balls and no brains join the mafia, those with no balls and no brains become economists.” — Nassim Taleb

Boom.

Keep a skeptical eye on statements from economists. It’s a lot of guess work and ego involved.

Again, the spectre of rate cuts and economic worries, mixed with inventory rising is the perfect storm of opportunity for investors. Sharpen your pencils, real estate deals are going to be plentiful for the next 5+ months, likely until interest rates have a 5-handle, IMO.

So don’t Skip till Spring. Put down that apple picking basket. And start running your numbers!

Oh and call your friendly Investor-Agent :)

Until next time. Stay curious. Stay skeptical.

Herzliche Grüße,

-Andreas

Please Share this Article!

It takes several hours to write this weekly article, and they will always remain free. All I ask is that you share it with 1 friend. Just 1. If you do, you will get two gifts: free education for one of your friends, and good karma for helping to grow a community of folks trying to figure out a way to create wealth for their family.

Contact Us Here in Nashville!

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 market to invest in? There is always a bull market somewhere, and one of them is Nashville. Nashville has the lowest unemployment of any major metro, 90+ people per day move here and our city population is still under 700k. Plus, we have 3 professional sports teams, massive healthcare and entertainment industries, large tech and manufacturing operations at Ford, GM, 3M, Nissan, Bridgestone, Oracle etc…, world-class universities, and no state income tax, to name a few.

And these folks need housing!

* I write this myself and get it out for you all on the same day. Apologize in advance for the likley errata. Don’t have a team of editors, yet.

** The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.

Welcome to my weekly post BP compatriots, where you'll get a frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

Today We’re Talkin:

• - The Weekly 3 - News, Data and Education.
• - Recession?! Says who?
• - Economic Review.
• - Quick Nashville Update.
• - Tangent! - There are now more obese children, than malnourished. Wow.
• - My Skeptical Take.

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Fuel for the Day: Joko’s sugar-free, nootropic, monk fruit blend to pep me up and get me into a flow state. Good human, good drink, with NO crap in it, highly recommend.

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

1. - Big shakeup at Bigger Pockets online real estate investor community. It appears BP is changing things up after being bought by a private equity group. David Greene is no longer the host and is doing his own podcast, although he will be a frequent guest. We will miss you!
2. - Real estate in Dallas suburbs is weakening. Prices are falling and inventory is piling up (Nixon).
3. - Education Recommendation: 15 Conversations with Real Estate Millionaires. A fantastic review of successful, everyday real estate investors, and how they did it. Highly recommend.

Today’s Interest Rate: 6.49% (Thursday)

(☝️.15%, from this time last week, 30-yr mortgage)

Guten Morgan investors. It’s a lovely day to talk real estate. Let’s get into it.

The American economy remains resilient, corporate earnings are exceeding forecasts (albeit moderately), and real incomes are rising. This continues, despite last week’s yen carry trade tumult, which roiled stock market participants. True US GDP and hiring are slowing, but so is inflation; the perfect cocktail to gently coax the Fed into taking action.

Bob Englehart, Cagle Cartoons
Fed’s Eye is on Labor Markets

Now that inflation is near their target (and assuming it stays there this month), the Fed is on a labor market stakeout. Today, we got the Consumer Price Index numbers, which were right in line with expectations, at 2.9%. Importantly, shelter costs remain stubbornly high and were responsible for 90% of the current inflation increase. Food prices climbed 0.2% while energy was flat. Yesterday, we got the Producer Price Index (wholesaler) inflation numbers, which were on average cooler than expected (.1% vs .2%, MoM). In fact, MoM food and energy prices for producers were flat.

The slow trend of downward inflation continues.

On the labor market side, unemployment ticked up .2% last month to 4.3%, still strong and what is considered “full employment,” which is generally around 5%. If we break above 5-5.25% we will start to get concerned about a slowdown in GDP, which may indicate a future recession. We will continue to monitor this.

Unemployment Types 8/9/24

Looking at industry categories, health care, construction, government and transportation / warehousing were stand out gainers, while information / technology, finance and mining workers lost jobs in July. Of note, technology (aka information) was particularly weak.

Employment MoM
Interest Rates Start to👇 in September.

It is expected that the Fed cuts rates in September, by .25%. But not yet, not in August. And don’t count on an emergency meeting / rate cut, like some of the TV personalities are calling for.

That is fiction.

Fortunately, the bond market is starting to do the Fed’s job for them. In the last 30 days, the 10-yr treasury has come down to 3.83%, with the 30-yr mortgage now at 6.49. A spread of 266 bps. And I will continue to remind you all of this, if the spread between the two was at historical levels (175 bps), we would be at an interest rate of 5.58% today. Even before the first rate cut. This means that it is within the realm of possibilities for interest rates to end up at 5%, sometime next year. I vehemently disagree with the National Association of Realtors, which claims rates will stay around 6%. Their chief economist Lawrence Yun has lost touch with the market. Keep a Skeptical eye on them.

It’s Morning for the Real Estate

If you're looking for signs of a crash / slowdown in the economy, you won't find it in real estate, especially the rental market. Overall demand for rentals, despite rents at historical highs, is strong, with wages growing fast (see above). Of course, again, we will be watching the labor market to for signs of weakening past what we view as ‘normalizing.’

And it’s here that we have to talk about something important. Sentiment. For some reason, there is a feeling of negativity about the economy, stock market and generally about life. My thoughts? I blame the election cycle, and the divisive politics on both sides blaming each other for inflation and stoking fears about the end of democracy. Really?

STOP.

This will be an unpopular take, given most of us have picked a “team,” but we will be just fine no matter who wins. Vote for who you want and let’s move on to real sh!t that’s happening in our world, like generating wealth for you and your family through real estate.

Case in point, there is a massive, gaping disconnect in sentiment between individuals and business leaders. Individuals think the world is ending, and business leaders see the clouds of past recession fears parting. This is a telling positive signal, IMO.

Example: Google searches by individuals for the word “recession” are spiking…

Yet mentions of recession fears from CEOs doing business in the real world are down, and have been, consistently, for the last year.

So how Should We Posture? Bullish.

5 Letters for everyone out there: R-E-L-A-X. We’re going to be ok. In fact, this may be one of the greatest times to buy real estate in my 40-yr lifetime. As I have said before, I believe we are at the beginning of a new 10-yr bull market. There is too much pent-up demand, like a coiled cobra, ready to spring once interest rates tick down.

Here are 3 pieces of evidence:

• - An anecdote, from Redfin: “Recent mortgage rate drops have created an optimal window of time to buy a home before competition and prices pick up….Don’t wait to buy; buyers who were scared off by high rates are poised to enter the market, which may boost prices.”
• - Another anecdote, from my investments: lower rates and higher inventory (aka choices) are bringing out the investors. I had 3 multiple-offer situations last month. First time in over a year.
• - Last anecdote, from a survey of rental investors (ResiClub and LendingOne).

  Key survey findings: “Most single-family landlords … are cautiously optimistic, expecting a balanced single-family rental market over the next 12 months. Many plan to buy properties, raise rents, and anticipate rising home prices and falling interest rates. 60% of single-family landlords say they’ll likely buy at least one investment property over the next 12 months.” “And 76% of single-family landlords expect to raise their rents over the next 12 months—including 35% who say the increase will be over 4.0%.”
  

Very positive market signals.

Nashville: A Closer Look

Speaking of labor markets, remember that all real estate is local. And Nashville is one of those steady growth markets that have endured, no matter the macro-headwinds.

For example: unemployment in the Nashville metro area is far below the national average, at just 3%

Nashville has a robust labor market, with heavy manufacturing, technology, entertainment, and health care jobs.

People make and so stuff here.

Today, Nashville still has about 2 job postings for every unemployed person. We aren’t overheating like other markets, just steady growth. And folks continue to relocate here for a better quality of life.

Nashville Development Update

Very cool new development just breaking ground downtown.

“1010 Church St. will. now be known as Paramount (60 stories, 750', 360 apts., 140 condos, 517 capacity garage). It will be Nashville's tallest tower when complete. Foundation work is currently underway (NashUrbanPlanet).”

Our skyline continues its evolution. Amazing.

Sharing is caring. Don’t forget to share this article with a friend, or even a frenemy.  :)

TANGENT!

There are now more obese young folks globally, than malnourished ones.

Really?!?!

Global levels of obesity for children and adolescents aged five to 19 years surpassed those for moderately and severely underweight youth from the same age group in 2022 (WHO).

In a world of overabundance, wealthy countries are screwing it all up, and those without, are still very much without.

In light of this, perhaps we all should consider 2 things:

1. - Donating to UNICEF to help a child in need.
2. - Cutting sugar out of your and your child’s diet. It’s not easy I know, the food companies put it in everything. Literally everything. When you can, as much as you can, COOK! Perhaps watch a free cooking show/chef on YouTube (here are 32 10-minute, simple recipes from Chef Gordon Ramsay) and make some simple recipes at home where you can control the ingredients.

   It’s fun, healthier, and far cheaper anyway.

But I digress…

My Skeptical Take:

Business is good. But inflation still be too damn high.

Fortunately, this too shall pass.

Hourly wages are growing faster than inflation, and business sentiment is in a year long positive trend, including small businesses which just reported today as extremely bullish, the highest since February 2022.

People need a home, and they can’t hold out much longer. In my experience, consumers can typically change behavior for about 6 months, then they revert to mean. Cost has prevented this reversion; so homebuyers are stacking on the sidelines ready to buy a home and form a household. Inflation is trending down, as are interest rates. The negative sentiment of the election will soon pass.

It is about to be Morning in Real Estate.

Let’s get after it.

Until next time. Stay curious. Stay skeptical.

Herzliche Grüße,

-Andreas

Please Share this Article!

It takes several hours to write this article, and they will always remain free. All I ask is that you share it with 1 friend. If you do, you will get two gifts: free education for one of your friends and good karma for helping to grow the community. You can share it here:

Share The Nashville Investor Agent Newsletter

Contact Us Here in Nashville!

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 market to invest in? There is always a bull market somewhere, and one of them is Nashville, where we are seeing record tourism this year. 99 people per day move to Nashville and our city population is still under 700k. 3 professional sports teams, massive health care and entertainment industries, more than a dozen colleges….Look for bullish drivers like this.

Looking for a realtor in the Nashville area? We work with the best here who specialize in helping investors find great properties.

* I write this myself and get it out for you all in the same day. Apologize in advance for any typos / syntax errors. Don’t have a team of editors, yet :).

** The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.

Happy to share a few as well, congrats on the Reno!

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: I realized one thing I should be buying in bulk is coffee, I sure have enough. So I picked up a 5lb bag from Black Rifle. Highly recommend if you want to save a few shekels.

Today We’re Talkin:

• - The Weekly 3 - News, Data and Education.
• - Fed Comments by Jerome Powell
• - A Skeptical Look: The Chevron Decision Could be a Big F*$%*%g Deal!
• - The Skeptics Take.

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

1. - The mortgage market is experiencing a severe recession. It's one of the worst mortgage downturns in history. Mortgage purchase apps are at the lowest levels of the post 1995 era (Lambert).
2. - Love high-speed rail AND Taylor Swift? Well you are in luck. The high-speed rail ride to Miami will have sign along trains to her next concert. (Trains)
3. - Are Homebuyers OK with Small Lots? A record 65% of new single-family detached homes sold in 2023 were built on lots under 9,000 square feet, per the latest Survey of Construction (SOC). Unclear how many home buyers want/will accept lots that small. Or just keep renting/waiting (mortgagetruth).

Today’s Interest Rate: 6.99%

(👇 .09%, from this time last week, 30-yr mortgage)

Briefly, because I want to get right to our main topic of today’s newsletter, a few comments on what Jerome Powell said on inflation this week.

Speaking in front of the Senate Banking Committee yesterday, Powell was questioned about everything from inflation to odd political issues and grandstanding. The takeaway?

In short,

1. - Powell is serious about smashing inflation, saying of the inflation in the 1970’s: “People [the Fed] didnt get in there and get it done, so inflation kept coming back.”
2. - Powell is not going to come to the rescue of the housing market. When asked about it and if in his opinion we should build more “affordable / workforce housing.” He responded: “This is a job for you. But let me say this, I am aware that housing is in short supply.”

Powell also reiterated that:

• - unemployment while still low is steadily notching higher;
• - job and wage growth while still strong are steadily moderating;
• - inflation is moderating, on trend, and the Fed’s target of 2% is on the horizon.

The Bottom like: I still think we get interest rate cuts in September, and a second one after the election. It is becoming harder to justify a restrictive 5.5% federal funds rate.

The Chevron and Loper Decision

A new Supreme Court Decision may Hopefully Bring Clarity and Efficiency to the Mortgage and Housing Market.

A recent Supreme Court ruling may bring impactful regulatory changes to the housing market, and people aren’t talking about it.

So, let us.

First, what’s the Chevron doctrine?

For nearly 40 years the courts have been of the opinion that they should defer to a federal agency / regulator and rely on their interpretation of a law, if it is ambiguous or unclear.

No longer.

Now, courts will provide a check on federal regulators. From the decision: "Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority. " More specifically, on June 28, 2024, the Supreme Court overruled the previous Chevron framework in the Loper decision (H.K. Law). Previously, under the Chevron doctrine, when a court determined that a statute was ambiguous or that Congress had not directly addressed the precise issue in writing a given law, the Court, rather than applying their interpretation of the law, would instead defer to the regulatory agency’s interpretation.

In other words, the courts will now interpret whether regulators are acting lawfully in applying new regulations instead of allowing them decide themselves, again when the law is reasonably unclear. The Supreme Court has now made clear that it "remains the responsibility of the court to decide whether the law means what the agency says (H.K. Law)."

A Double-Edged Sword?

Thinking objectively and trying to remain intellectually honest, the Chevron decision likely cuts both ways. Although I do on the whole, today, think this was the right decision. However, the original ruling allowed federal regulators to function efficiently, which they cannot if every interpretative gray area in the law requires a court decision.

But, Chevron also allows federal regulators to be judge, jury and executioner in matters of law. So, IF the agency is working in the public interest, we would want them to exercise broad interpretations of a given law. For instance, in regulating chemical companies to not pollute with new novel chemicals in our rivers and oceans, without needing a new law from Congress.

But when corporate interests or lobbyists (trying to stay a-political!), or frankly just well-intentioned government regulators looking to stay active in their bureaucracy (I have personally seen this) get involved, then that same interpretive leeway gives the regulator even more power at the expense of the public interest. Think, the USDA brining armed feds to shut down Amish farmers for selling their unpasteurized milk, or the FDA allowing harmful chemical additives in our food that are banned in hundreds of other countries.

And too often, businesses complain about a lack of clarity in a given regulator or lack of regulation. For example, in many instances, the regulator does not reveal how to stay within the law. The federal agencies don't have to do that. They just have to say that you broke the law, and no explanation is really needed. Think the Crypto industry, who is literally begging for clear regulations.

One example: Coinbase just sued the SEC for a lack of transparency in their regulatory policy, saying that “Financial regulators have used multiple tools at their disposal to try to cripple the digital-asset industry.” And noting that the SEC “has claimed sweeping authority, but refuses to provide any rules, let alone consistent or coherent ones.”

Got it?

Ok, So what’s the big deal with overturning Chevron for Real Estate?

The Court's decision in Loper will create a sea change in administrative law with wide-ranging implications and potential opportunities for highly regulated industries, like the real estate.

This will create an opportunity for more efficiency and lower costs in the real estate economy. It also means more time is needed to see how new challenges in the Courts will affect things like Fair Housing, HUD and FHA regulations / costs.

In short, if you are operating in a business that touches any part of the housing economy, this likely will affect you. Startups, bankers, mortgage lenders, home builders, technology companies, new finance / fintech, estate planners, CPAs, wealth managers….. all will be highly affected.

But don’t take my word for it, let’s see what a few industry professionals are saying of the Loper decision:

• Mortgage bankers - “The [Loper] decision… will be welcome news to the mortgage industry. One of the principal industry concerns about the vast power granted to the Consumer Financial Protection Bureau was that these powers were too insulated from review….The ruling sends a crystal-clear message to federal agencies that their powers are not unlimited…We would not be at this point today if government agencies were more prudent and consistent about staying within their statutory authorities, grounding their rulemakings in empirical facts, and heeding appropriate procedural safeguards…Instead, too frequently, our regulators appear to be chasing headlines and short-term political wins.”
• National Association of Homebuilders - “Today’s Supreme Court ruling is an important step forward to advance meaningful regulatory reform because it means that federal agencies can no longer continuously change the law – and the intent of Congress – by implementing their own interpretation of statutes as long as the interpretation is viewed as being ‘reasonable.’…Today’s ruling that overturns Chevron means that federal agencies will now have less discretion to impose new regulations that Congress did not clearly authorize.”
• Real estate attorneys - "The most specific [impact] is in the multifamily context because they're living under the Fair Housing Act, and that statue is very broad and ambiguous, and HUD in particular has had a great deal of latitude in setting guidance and bringing enforcement as to what they believe should be the law even though it's not congressionally written as such."
• And here is an anecdote from a mortgage lender: “I work in mortgage and I think this is huge for us. We would call the CFPB for clarification on what was/wasn’t allowed for advertising and they would refuse to answer, but would give us $10,000+ dollar fines if we guessed it wrong (@mortgagenmore).”

On Taxes, is the 1031 Exchange still Legal?

The Loper decision will likely lead to a surge in challenges to IRS authority / rule making. The IRS has made thousands of interpretations of tax policy. Heck, my CPA and I regularly discuss and are forced to make our own assumptions on how the IRS may interpret something in our real estate taxes, if we were to get audited. It’s super unclear. And there are so many small carveouts for special interests in IRS interpretations. For example: Is the 1031 exchange at risk? Should we even allow it and does it help or hurt consumers? According to the IRS, “Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.” However, in practice it often is a tax-free exchange when applied to real estate. Will this change?

On Real Estate Transactions Costs

Why is it so expensive to even do a real estate transaction? What are all these fees and why are they continually going up? Why am I forced to buy title insurance that insures the lender, not me? Will the CFPB install new regulations or fewer? Will those lower costs or increase the burden on lenders, which I have to pay for? Why is recording the deed with the county so expensive, can we use technology (like crypto) to make this process more efficient? Why does it often take 3-4 years to build something?

You can see how this gets complex quick.

On Building Big Infrastructure in the USA

And, if I may be so bold, a note on larger infrastructure that obviously affects the real estate economy: What about large infrastructure project that get bogged down in litigation? Can we start building bridges, roads, electric infrastructure, high-speed rail, and large impressive buildings in this country again?…

It took 13.5 months to build this in 1930. Let that sink in.

Empire State Building

…These are just a few of my thoughts bouncing around in my noggin. And there are probably hundreds of positive use cases we aren’t even thinking about today. We need more startups in the industry!

The Skeptics Take:

Business craves clarity, and there is a hope across industries that allowing the courts back in to check the Executive Branch will help ease the perceived burden of overregulation.

But time will tell.

Anecdotally, I witness much frustration in the mortgage industry. I hear often that lenders often don’t know why a regulator interprets the law this or that way. Nor do they always provide explanation for their decisions. One can imagine this makes it difficult (ie more costly) when adequate guidance is not given. Businesses don’t operate well with uncertainty, in this case mortgage lenders. So one would hope that this provides certainty of what regulations are and are not lawful.

Technology in banking, particularly at “FinTech” finance / bank companies that do not have a physical presence has been often difficult to start / operate. This ruling may be helpful in allowing more alternative lending institutions participating in the housing market. Using Bitcoin and cryptocurrencies to purchase real estate and, perhaps even more importantly, creating Smart Contracts or Tokenization to record real estate ownership etc… comes to mind. These ideas would create efficiencies in the real estate transaction, lowering costs to purchase real estate, and also to democratize its ownership. To date the regulators have not given adequate guidance, or just flat out banned, many technologies.

Objectively, and on the whole, it seems quite odd that the Chevron doctrine was in place for so long. And I get that in the 1980s the worry was that the courts would be activist so the Supreme Court decided to instill the power of deference in the Federal regulator. But, isn’t this how checks and balances work? Isn’t this why we have 3 branches of government who have equal power to check the other? Seems crazy that we have allowed regulators for 40 years to ostensibly be judge jury and executioner.

Lastly, it is important to note that the previous Chevron regime only applies when a regulator acts in the void, when they make a rule that the law does not reasonably address. As the third branch of government, Congress can always act to change / clarify for businesses and regulators the law they originally wrote.

But on the whole, is Loper as a positive opportunity for decreasing regulatory burden on businesses and consumers alike.

But, Congress, please keep a watchful eye, ok?

Until next time. Stay curious. Stay skeptical.

Herzliche Grüße,

-Andreas

P.S. Just a lovely scene. (And where I wish I was typing this from).

@valentynedreams

* I write this myself and get it out for you all in the same day. Apologize in advance for any typos / syntax errors. Don’t have a team of editors, yet :).

** The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.

Highly recommend you get it permitted! And Nashville / Davison county is not California. If you are straight with them they will work with you. My 2 cents. 

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

Coming at you live from Nashville, TN.

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

Today We’re Talkin:

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

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

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

Today’s Interest Rate: 7.08%

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

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

Sintra, Lisbon, Portugal

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

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

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

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

Hey Government, just rip the bandaid off next time.

** Tangent Alert ** - Immigration is still ☝️

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

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

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

CBO, 2024

But I digress…

Housing Market Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Skeptics Take:

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

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

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

So far, so good.

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

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

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

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

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

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

Until next time. Stay curious. Stay skeptical.

Herzliche Grüße,

-Andreas

P.S. Just wanted to share. Enchanting.

@ValentyneDreams Please Share this Article!

It takes several hours to write the Skeptical Dude article, and they will always remain free. All I ask is that you share it with 1 friend. If you do, you will get two gifts: free education for one of your friends and good karma for helping to grow the community. 

Contact Us

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? We work with the best here who specialize in helping investors find great properties.

* I write this myself and get it out for you all in the same day. Apologize in advance for any typos / syntax errors. Don’t have a team of editors, yet :).

** The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.

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: Cucumber Botanical soda water, zest of lemon, and a dash of Guaranaplant extract. WoW. It’s like a Celsius but better and no crap in it (be careful, this stuff is powerful). Workout today is going to be intense! Like camping. 😊

Today We’re Talkin:

• - The Weekly 3 - News, Data and Education.
• - Good News to Report!
• - Woo-Girl Inflation?
• - The Skeptics Take.

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

1. - Elon Musk's AI company @xai is planning to build the most advanced supercomputer in the United States, in Memphis. It's expected to be the largest investment, by dollar amount, in Memphis history (MBJ).
2. - Dolly Parton’s business empire is expanding yet again, this time with Dolly Wines. The singer’s collection of wines comes to stores next month with a peaches/cream chardonnay (food dive).
   1. Bonus - A Nashville native broke the 100M butterfly world record at the U.S. Olympic Swimming trials Saturday. Hell ya! (News5).
3. - Book Recommendation: Man’s Search for Meaning. Not for the faint of hear, but if you think you have it bad or are searching for meaning in an otherwise good life, this will put you in your place. A classic, and something all adults should read, IMO (Frankl).

Today’s Interest Rate: 7.02%

(☝️ .04%, from this time last week, 30-yr mortgage)

Good News Day!

Enough already all you doomers! Begone you negative Nancies and fragile Freds. I’m in a good mood so let’s talk about some good news for once. eh? (well, mostly, I promise).

American’s Net Worth is UP

Total net worth for the bottom 50% of folks is UP big time, and has been since the Great Financial Crisis, but it took 13 years, until ~2019, to get back above 2006 levels. Thats a long time, and just goes to show that the GFC was a big deal (a BFD!).

Still, good news.

But then something happened, government COVID intervention, where we printed $10 Trillion and injected that intravenously into the economy’s carotid artery. BOOM. Net worth for the bottom 50’s was supercharged. Up more than 200% in 4 years.

This was a doubled edged sword for the bottom 50, however. Those folks now are wealthier but we had wild inflation in the price of, well, everything (more on this later). And this matters more if you are in the bottom 50, of course.

Yet, something great happened. Folks actually saved a lot of that wealth in their bank account. Total checkable deposits for the bottom 50 remains high. Way high. Also up more than 200% since 2019.

Now the rich are still getting richer, a lot richer, to be sure. The top 1% gained about $15 Trillion in net worth in the same time. But that was from a high baseline, so their gain was (only) ~150% higher.

So the rate of wealth increase was far more pronounced for the bottom 50% of folks than for rich folks.

All things being equal, that’s pretty cool.

Let’s also look at income, not just total wealth, since many folks, especially hourly workers, in the bottom 50 unfortunately, really can’t/don’t save much money or own income producing assets.

Wages > Inflation

Wages for hourly workers are actually growing faster than inflation.

It’s true.

And, moreover, except for 2021 - early 2023, that has been the norm for the last 10 years. Wages > inflation.

The problem is, it really doesn’t feel like it. Inflation is a son of a b$t$&, and we had a bad case of it. Still do. We went from $9 beer night to straight woo-girl summer cocktaillevels of inflation, and fast.

And the speed of that inflation has been psychologically painful. Cars, Eggs, and of course Houses,,,all UP. Inflation is still high, to be sure. But we really are in the hangover phase from all those inflated cocktails (myself included, damn being 40 isn’t the same as 24 kids).

BUT, all this being said, wages for hourly folks are up more, and have been since early 2023.

Good News.

And the most updated numbers from last week show the trend continues. Inflation (CPI) came in at 3.3%, and hourly wage growth was 4.1%, YoY, making real average hourly earnings .8%.

Better news.

CPI vs Wage Growth

All while folks are still saving and have more $ in the bank.

That’s the best news.

Rent vs Income

Now, we have to tie this back to real estate, of course. So finally, let’s look at rent vs income of apartments.

Rent costs are nearing 2019 levels. “Operators are pricing to move units…National year-over-year rent change has fluttered around 0% for 11 straight months. We’re likely closing in on 19 straight months where wage growth has topped new lease rent growth – which means rent-to-income ratios are retreating again (Parsons).” Rent-to-income ratios (among new lease signers) are nearing the pre-pandemic norms of 21-22% (Whitaker).

More good news.

* *Side note, overall shelter costs (not just apartments) is trending higher than both: overall inflation and wage growth, at 5.4% YoY. But is steadily decreasing and this government number is lagging/not terribly precise. Good news on the trend. Remember, shelter costs have normally averaged higher than overall inflation. See chart.

*** Tangent Alert! - Honest Question, Why do Car Fuel Standards Matter Anymore?

The National Highway Traffic Safety Administration, just announced new rules requiring the average efficiency of new vehicles 50+ miles per gallon by 2031. Sounds like a fine thing for carmakers to do, on average. We literally had cars in the 80s that got 50 MPG so should be pretty easy for car companies to do. No?

The fuel savings, according to the NHTSA, should translate into about “$600 less in gas costs over the life of a new vehicle.” Nice, I like saving…. what what??? Only $600? Over the car’s life??? Am I missing something??? So, over what, 20 years I save $600 bucks? $30 bucks a year?

Shut up.

How about an EV? How much will you save (avg) on car-life gas costs?

$1000/yr or $20,000! (not counting lower maintenance costs like no more oil changes etc…).

Tell me NHTSA, why are you spending time on meaningless fuel efficiency for gas cars? Seriously. Start working on something important, like approving autonomous taxis will cost 1/4 the price of an Uber? Get on that will ya? We have the tech now.

Whew… ok…I digress…..

The Skeptics Take:

We know, even though we choose not to believe it, we are never going back to 2019 price levels.

Ice cream was once 10 cents too. Never again.

For the last 15 years we have really been living in a prolonged recovery period, IMO. This period, from the GFC to let’s call it 2009-2018, was pretty sweet. Inflation was low, cost to borrow/capital was low, and Gen Z’s taste in music was still bad…

Interest rates were low because inflation remained low, so the Fed really didnt have to do much, and only started pulling levers again at the end of 2018. Then a pause, then they started up again briefly in 2019 as the economy was slowing and WHAM, COVID ZIRP policies. Combined, the Fed and Congress (with 2 Presidents) busted out the printing press and went HAM.

$10 Trillion later, inflation took off like starship.

(And Congress wanted to keep spending more, thankfully those bills didn’t pass.)

That all was a lot for the economy to take it, and in real estate, it broke parts of the economy, especially housing. We had the largest housing recession since the GFC.

I believe we are again in a protracted recovery period, which could last 10+ years, much like 2009-2018. Sure there will be volatility, as is the human experience and the markets we love to screw with.

But, hear me out:

• - AI and robotics are leveling up every day it seems. They will significantly boost labor productivity;
• - Inflation is trending down;
• - the Fed is itching to lower interest rates and bond markets are starting to sniff out a shift in the winds;
• - there is a ~$70 trillion wealth transfer from the Baby Boomers to their kidsbeginning (including their homes and real estate assets);
• - home prices are increasing steadily, not chaotically;
• - overall rents are up, but steading thanks to apartment rents / supply;
• - wage growth, for more than a year, is back to above inflation levels;
• - and the bottom 50% have more $ in their checking accounts than ever before as a % of wealth.

We Skeptics MUST remain vigilant of all these data points, nobody knows where Mr. Market may take us. But so far, in the roulette game of life, good news comes in streaks. And right now, the trend is our friend….

…until the end, when it bends.

Until next time. Stay curious. Stay skeptical.

Herzliche Grüße,

-Andreas

Please Share this Article!

It takes several hours to write the Skeptical Dude article, and they will always remain free. All I ask is that you share it with 1 friend. If you do, you will get two gifts: free education for one of your friends and good karma for helping to grow the community.

Contact Us

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.

* I write this myself and get it out for you all in the same day. Apologize in advance for any typos / syntax errors. Don’t have a team of editors, yet :).

** The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.

Hi Nicholas, you may want to read again. Definitely did not complain about medical debt and it keeping folks from buying a home. Actually the opposite. 

you got it!

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 little English Breakfast aged tea, full fat cream, and, my favorite, raw unadulterated organic honey. Delish. I’m having another.

Today We’re Talkin:

• - The Weekly 3 - News, Data and Education.
• - Quick CPI Report
• - Government has taken a permanent intellectual vacation
• - The Skeptics Take.

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

1. - Barry Sternlicht warns about troubles in Commercial real estate: “We have a problem in real estate. In every sector of [commercial] real estate, not just office, because of the 500 basis point increase in rates that was vertical.” (Sternlicht)
   • * Bonus: his take on interest rates and when they will come down.
2. - The largest and most powerful rocket just went into space. And its booster recovered. What an amazing feat of science. (SpaceX)
3. - Book Recommendation: The Millionaire Real Estate Investor. Ignore the cringy title. This is a classic and a fantastic detail of how to succeed in real estate investing (Keller). A must for your library.

Today’s Interest Rate: 6.98%

(👇 .09%, from this time last week, 30-yr mortgage)

Inflation? What Inflation?

Everyone’s talking about the inflation report today, so I’m not.

Ok, I’ll give a cursory summary:

• -We had more consumer price inflation in May (3.3%)…..
• -which was the exact same number as we had in April…..
• -but it was less than the “experts” and economists expected (3.4%)….
• -and it is still much higher than the Fed can stomach (2%)…
• -markets are roaring upward on the news (1.1%)…
• -Why? Wall Street thinks there may be, possibly, potentially, feasibly, conceivably… a slightly higher chance for an interest rate cut this year.
• -When? Nobody knows.

Got it? Good.

You can read the Bureau of Labor Statistics CPI release here, if you really want to waste your Wednesday. I say go for a walk instead and listen to some long form interview, aka a podcast, like this one on real estate deals gone south.

These are the inflation report Cliff Notes (Oh man! I just realized Chat GPT has, if not soon, probably killed Cliff Notes. You got me through English class (obviously). RIP, I’m going to pour out some moderately priced wine in your honor tonight).

Ok on to a new topic…

Government has Taken a Permanent Intellectual Vacation

This week, the Federal Government announced rules to block medical debt from credit reports, ie being used to evaluate a borrower’s financial fitness for mortgages, car loans, aka, easier to get more debt.

All things being equal, not a good idea.

Let’s ignore, for now, whether or not this is right or wrong and try to exclude all political thoughts. Let’s just look at the facts.

It bears mention that exorbitant medical expenses happen all too often in this country. I, for one, needed heart surgery when I was born. Twice. And let me tell you that was not fun for my folks. I would go so far as to say it sucks. So when you get a large expense like this, and because our health care system is….to put it politely, buggy, you need a loan, and these expenses become debt. And debt in one thing means you can’t pay as much for other things. Like a mortgage. Or car loan. Or new shoes (ok, that may be a good thing for someone with whom I share a closet 😬). So creditors have included debt, all debt, as a strike against one’s credit, limiting one’s ability to dig themselves into a debt grave, and yes to obtain another large loan, like a mortgage.

Speaking on the announcement, VP Harris said, “Medical debt makes it more difficult for millions of Americans to apply for a car loan, a home loan or a small-business loan, all of which makes it more difficult to just get by, much less get ahead,” Vice President Harris said on a call with reporters. “No one should be denied access to opportunity simply because they have experienced a medical emergency.”

This statement is unfortunately laden with poor assumptions.

First, we really should fix the health insurance system (we don’t really have health care system its an insurance system). Intervening in financial risk management is dangerous. Why? I’ll tell you.

At the individual level, again, having one loan you are paying makes it harder not to just apply for another loan but to pay that loan back. Obtaining more debt is what makes it harder to “just get by,” it’s not an “opportunity to get ahead” as she put it. It’s a liability that will hold you back. Literally.

At the market/economic level, this policy is highly problematic in 2 major ways, both of which are inflationary.

1. Mortgage Costs UP - There will now be folks with a higher risk obtaining more debt, a lot more debt. Lenders will need to offset this risk with fees/interest rates so they recoup losses when those riskier borrowers default. while / because lenders can’t use medical costs to judge the credit worthiness of a borrower well, all loan costs will have to go up, to spread the risk peanut butter. Arg! Also, why should the borrowers pay off the loan at all if it won’t affect thier credit? And if they don’t, well then all our medical expenses will also go up! Hospitals will have to change more for procedures to makeup for the $ they lose for the folks who don’t pay their debts. Unfortunately, not everyone is a Lannister.
2. Housing Prices UP - This is just simple economics. More folks will be able to obtain debt to buy a home. How many more individuals will realize this “opportunity” to pile more debt on their plate? An estimated 22,000, which at a median home price of $420k is $9 billion in inflationary spending added to the economy. This increased demand and consumer spending during a time of extreme low supply, means prices go up.

Remember, this is the third inflationary housing policy in as many months proposed by the federal government, all during an extended 3-year time period of high inflation, which is still near double the Federal Reserve’s target rate. Back in March, the Administration announced a:

• $10,000 cash tax credit for many homebuyers, and a
• $10,000 cash tax credit for some homesellers.

Highly inflationary. (click the above links to see my write up on these proposals).

Remember further that shelter costs made up much of current inflation. (blah, now you got me talking about the damn inflation report!)

Returning to our Cliff Notes, we just found out today that shelter costs increased .4% for the fourth consecutive month, and was the largest factor in the monthly inflation numbers. Shelter increased 5.4% over the last year, accounting for over two thirds of the total 12-month inflation increase (BLS).

Yuck.

And if you overlay shelter on top of inflation in the graph, you can see just how much higher we are than pre-2019. Shelter is still rising, each and every month, faster than ever before. Overall inflation is at 2011 levels, interestingly, the same time housing prices bottomed, following the Great Financial / Housing Crisis.

Total Inflation vs Shelter Inflation

And one more thing on the stupid inflation report…

Think shelter was bad in May? Medical care costs rose even more this month (.5%), meaning this policy of easing access to more debt on top of medical debt, will be even more inflationary and risky for lenders.

This is why passing policies that are inflationary to the housing market are so problematic. It’s just so pervasive in our everyday lives.

The Skeptics Take:

As was said many years ago by some old French dude, “the road to hell is paved with good intentions.”

True. IMO.

And this is what happens when you have well-intentioned policymakers (ostensibly) intervening in a marketplace. I can guarantee you Fed Chair Jerome Powell took a deep sigh when he heard about this proposal from the Administration. It’s not helpful. Without a significant drop in inflation he can’t cut interest rates, because doing so it also inflationary.

Ah the humanity!

It is important to note that this announcement is still in the rule making stage so it will 1) take time to become policy, ie after the November election, and 2) the Congress or courts may block it. But they did put out a press release showing they are serious about implementing it. And unlike the other 2 policies, they likely don’t need Congress’ approval to implement them.

Also, the irony is not lost on me. And I can’t help but laugh. The Federal Government is doing the opposite as what it is intending. They are proposing to use $7 billion in American Rescue plan Funds, which it borrowed, to pay medical expenses, which people borrowed, so that people can borrow more and lenders can make it more expensive to borrow. A lot more. Mortgages are the largest debt line-item for households. All during a horribly inflationary economic environment.

Inflation is here to say. Today’s report is being received positively in the press and equity markets because it wasn’t worse. Not because it was good.

And the cycle continues.

Just check out this article from 1979, sound familiar?

But I digress…

I can only assume this announcement is just political. The Washington Post calls this announcement “poised to be part of President Biden’s closing argument that he is addressing pocketbook issues.” So I get it. That actually makes rational sense at least, with the election 5 months away. But if it’s not, and they seriously believe this is helping? Well then….

….Its official, government has taken a permanent intellectual vacation.

Until next time. Stay curious. Stay skeptical.

Herzliche Grüße,

-Andreas

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* 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.