All Forum Posts by: Andreas Mueller

BP Compatriots! My weekly article on the markets coming at you live from Nashville, TN. Every week I write a brief, hopefully insightful, dive into real estate and financial markets, for all you tubular dudes and dudettes out there.

What am I listening to? - Classical, my mix on Spotify. It’s pretty good, if I don’t say so myself.

Where am I? - Home office, but about to walk the pooch. He is giving me the sad pup eye that I can’t resist.

Today We’re Talkin:

• - The Weekly 3 - News and Data to Keep you Informed
• - New Inflation Numbers, UP
• - The President’s New Housing Proposals are Problematic
• - The Bottom Line

The Weekly 3: News and Data to Keep You Informed

1. - December Jobs report was revised 35% lower: 229,000 jobs added NOT 353,000. (BLS).
2. - Plastic is literally in our blood. And it’s contributing to clogged arteries, bonding with plaque. (MedicalNews).
3. - TikTok may be banned. House passes bill to ban the app by a wide bipartisan margin. (CSPAN).

Today’s Interest Rate: 6.92%

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

Mortgage interest rates have calmed down a tiny bit, after staying above 7% for most of February, although they remain volatile. Rates for the 30yr stand at 6.92% today, down ~.05% from a week ago. Bond traders are taking a few nibbles of the 10 yr treasuries, but nothing dramatic. For their part the Federal Reserve is starting to think about maybe likely possibly coulda shoulda perhaps cut rates. In testimony in front of Congress this week Fed Chair Powell said it is "Likely appropriate" to cut rates “[sometime] in 2024.”

What is the market thinking? Futures are pointing to 3-4 Fed rate cuts as the likely scenario this year (down from up to 6-9 at the beginning of the year), which just so happens to be right at the target we predicted at the time. 😁 And I’m holding firm. I still think we see 3 cuts in 2024, or a roughly .75% - 1.25% reduction in the Fed Funds rate, starting in June.

Economists are starting to publicly call for the Fed to cut rates, seeing that the Fed is putting at risk the resiliency of the economy. Mark Zandi of Moody's Analytics recently said as much: “The Fed threatens to misjudge the economy’s strength, hold rates too high for too long, and unnecessarily undermine it. Take the job market, which has been critical to the economy’s resilience - hours worked, hiring and quit rates, and temp jobs are all down. All signs of stress.”

Inflation Numbers this Week

The Consumer Price Index measure of inflation increased .4% in February (seasonally adjusted), after rising .3 % in January, or 3.2% YoY (BLS). Shelter and energy were the standouts, contributing over 60% of the monthly increase. Digging deeper, within shelter it was rents that were up the most, .5%.

But here is where it gets a little “weird.” The Fed doesn’t know why their efforts [to slow the economy/inflation] have not worked for housing costs. Speaking to CNBC,Austan Goolsbee, Chicago Fed President, said "That's the things that's really been weird…. We don’t fully understand why it hasn't dropped more."

Really, you don’t know why? (keep reading to end)

And it’s not just shelter, it’s transportation thats heating up NBA Jam style. Particularly car rentals and car insurance. Wow. Now it looks like car rentals are hyper-volatile so I’m going to give that a pass for this month (I’ll keep a Skeptical eye out) but insurance is up there at .9% - down over the last few months - but up 20% YoY. Yuck.

Ok here is some news we really care about y’all. Booze. Did you know the Gov tracks “Whiskey at home” as an economic data point? Looks like booze at home is the loser, up 1.4% MoM, but good news everyone, it’s wine time at Happy Hour. Wine away from home was down .2%. Yay! Finally some good news.

Spoke too soon. Eggs! Dammit eggs, why did you have to screw up the good mojo, and why am I still paying $7 bucks a box? Up 5.8% last month? At least my cheese addiction is looking good. Gotta get me some more laughing cow wedges this month. Don’t judge me.

So what’s all the hullabaloo about? I mean, if you’re like me and don't like to drink, drive, fly, eggs, enjoy reading by flickering candlelight, and prefer living in a tent in your buddy’s backyard (I actually did this in college) then you are good to go. Want a hot tip to save money? When I pick up the tab, I have my friend sign the check. I don’t look at it. Because if you dont look at it it never happened right? Duh, thats just science.

President’s Housing Proposal

Ok enough fun with inflation, some important stuff now!

In his State of the Union speech (don’t worry not getting political here) last week, the President made 2 housing-related proposals:

First, a $10,000 tax credit to middle-class, first-time homebuyers, given over two years. Unclear who “middle class” is but it’s usually defined in the past as sub-$250k income. And I assume they will allow poorer individuals the tax credit too, not just folks who can afford the $5 latte but are living in their parents basement. Just kidding Gen-Z. 😂

Second, a $10,000 tax credit to middle-class families who sell their “starter home” (defined as homes below the area median home price in the county). Catch #1, the prospective buyer has to occupy the home. No idea how the seller is supposed to verify to the IRS that their buyer is living in the home, but hey, if you are in binoculars sales / voyeur aficionado Facebook Group (haha this exists! I thought I was being cleaver), business may be booming next year. 🕵🏽‍♂️ And if you have a willing buyer but that person is buying it as a second home or as an investment, no $10k for you! Catch #2, many Gen-Z can’t afford the purchase of a home, and need $ from their parents to put up the down payment, 38% to be exact. These young homebuyers may not qualify for this credit or as an owner occupant depending on how the $ from parents / sale is structured. So again….no $10k soup for you Gen Z!

My Thoughts: Two problems.

First, let’s say this proposal “works” as intended. More buyers are incentivized to buy homes. That is the plan, i.e. buyers are persuaded to purchase a home to take advantage of a credit to their taxes a year later (they still need the money up front remember). So demand for homes is higher, what about supply? Well the proposal is mum on that. In fact, proposal #2 will require the home seller to go buy another home to live in (no tax credit for that, since it’s not their “first home.”) So demand up 2x per incentivized buyer. The result? Prices up, it’s just Econ 101. Demand up + supply flat = prices for homes increase, as a direct result of the proposals. Now, it is true that some buyers will realize a $10k lower tax bill, which is a good thing. But the effect will be higher home prices for everyone, especially on those “starter homes.” Further, the price for homes may even increase higher than the $10k credit folks got in the first place (I think it would). Again, if this proposal does what it is intended to do - demand goes up. How much will home prices go up? Depends on the success of the program, the more successful it is the more demand goes up the more prices go up. Interestingly, if the program is ultra-effective, the price of a median home in the US will only have to go up a corresponding 2.5% to completely erase the $10k benefit of this credit (median home price today is $417,700 * .025 = $10,442.50). Lastly, the demand effect may even be more acute today than in a “normal” market because high interest rates have suppressed supply of available homes. 

Remember, we are currently experiencing an extreme housing shortage, a 50-year low.

Second problem: Putting on my old congressional staffer hat, IMO this won’t get through Congress. Sadly, frustratingly, stupidly….not only will one party not allow the other party a “win” in an election year, these proposals will cost $, and that may actually be preferred. Seeing how partisan the wording is on the White House’s press release/website, maybe the proposal is just as good as a cudgel to beat the other party with, so they can say it’s “their fault you aren’t getting it.” Additionally, the national debt is becoming a thing. Folks are actually starting to care about it as a policy issue this election, making this an even tougher sell in Congress. How bad is the US debt getting? The new growth pace is $1 Trillion every 100 days. 😳 Shocking? Here’s another one, 80% of all US dollars ever were printed in the last 5 years. This is why we have inflation folks. The response to the specter of COVID was $10+ trillion pumped into the economy, more than 10x the amount spent during the Great Recession (2008), and it’s NOT stopping. Just the interest on the debt is more than $1.1 Trillion / yr,more than we spend on our entire defense budget. Not so fun fact, this is a wild “side-effect” of high interest rates, that our young generation will have to shoulder.

Without taking a position on these policy proposals, staying objective and factual, I hope that we can agree that we do NOT need more demand for homes. We need more supply. Nonetheless, people like benefits promised to them especially when it appears they aren’t paying for it (we do) so these types of proposals could slip into a larger bill Congress passes. But I put the odds at 10000 to 1. Want more opinions on these proposals? Further reading here.

Bottom Line

Supply be too damn low!

The Skeptics Take: Government is overactive and it’s the Fed and Congress’ doing. The Fed was a major contributor to both sides of our housing problem. Demand is low because interest rates were jacked up, fast, like really fast (below) in an effort to blunt inflation, which was caused by Congress and the Fed injecting $10+ trillion into the economy in 2020-2022+. Supply is uber-low because few people - unless they have to or die, frankly - want to sell their home with a 2.8% mortgage only to trade it in for a 7% mortgage. Those ultra-low literally never in a lifetime loan % is a result of the Fed dropping the Fed Funds to 0 in 2020 and keeping it low for 2 years, while at the same time buying mortgage backed securities, all while the market was booming. They poured ether on a gasoline fire. I would add that they likely kept rates too low on avg. for the last 15 years as well. Regardless, it’s this yo-yo’ing back and forth of rates that creates a real estate cycle that is extremely difficult for homebuyers and the market to absorb. Especially when it happens rapidly. It will take more than a decade to unwind the current one.

Let’s end with some positive news. Prices for existing homes that are fixer-uppers and ripe for an investor to improve and rent to a needly household have stagnated. In a high interest rate environment, if you can cover the mortgage with the rents, you can get a great deal on a property. Once rates drop, and assuming demand will outpace supply (it will), prices will accelerate. So this begs the answer, YES it IS a good time to buy a home.

In other words, Stay Skeptical but positive y’all. There is always opportunity.

Most Interesting Tweet(s) of the Week

Said another way, the US government is spending $1 Trillion every 100 days. Not sustainable, we can’t get everything we want all the time.

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

Again, stay skeptical, all you dudes and dudettes.

Herzliche Grüße

-Andreas

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

you read my mind Phil :). Glad you liked the article!

Quote from @Phil K.:

@Andreas Mueller

Thanks for the share! Hope you were able to offset some of those glowing reviews, and maybe a courtesy report to the local BBB and Angie’s List. We need more sensible people to keep the shiesty ones out there in check.

Welcome BP compatriots to my weekly "Skeptical Take" on all things real estate, coming at you live from Nashville, TN. Every week I write a brief, hopefully insightful, dive into real estate and financial markets, for all you tubular dudes and dudettes out there.

What am I listening to? - The pounding inside my head. I’ve got quite the flu. 🤧

Where am I? - My living room floor, couldn’t make it to my office. See line above.

Today We’re Talkin:

• - The Weekly 3 - News and Data to Keep you Informed
• - Home Ownership Costs Double
• - Warning! - Don’t Get Screwed by a Shiesty Contractor
• - The Bottom Line

The Weekly 3: News and Data to Keep You Informed

1. - The US population should outgrow most global economic peers. Futureimmigration policy may be a factor. (JBRE)
2. - The anti-cancer and aging effects of vigorous exercise. A fantastic lecture from Dr. Rhonda Patrick. (RP)
3. - Crypto currencies/tokens are on fire. Is hype or just getting started? (CNBC).

Today’s Interest Rate: 6.97%

(👇 .19% from this time last week, 30-yr mortgage)

Well, I’m sick as a dog, which is a dumb saying since my dog never gets sick. Probably because I spoil him with real food and I give him “AG1” for dogs, aka Scout’s Honor. (Side note, it’s amazing. All stomach issues disappeared overnight. Can’t recommend higher for your pup. Not a sponsored ad).

Where was I? Sorry I’m elbow deep in cough medicine… Oh yes. I was saying I’m feeling a lot sick, and a lot more punchy. 👹 Warning, I get a little passionate in this issue. So if you are faint of heart, well too bad. Keep reading, I promise to delight.

Could you Afford your Home Today?

Here is an exercise for you. Do you currently own your home? If so, could you afford to buy your home today at the current interest rate and price?

You can use the Realtor home value estimator to get a rough estimate of your home’s value and this mortgage calculator to calculate the mortgage. Let me know in the comments what you find out!

• Home Value Estimator
• Mortgage Calculator

Unfortunately, the answer for many homeowners is…no. And therein lies the reason we have a low supply of homes for sale. Because the vast vast majority of potential sellers are homeowners (not investors or developers selling new), and will have to find another home in which to live. If they can’t afford the same standard of living they will be reluctant to sell, even if they have considerable equity in their home. Only those who can afford to buy in cash, want/have to move, want to downsize, and maybe a few other cases are unaffected by high rates.

But wait there more….

Home Ownership Costs have Doubled

Since 2020, the cost of owning/buying a home has doubled (Zillow). “In 2020, a household earning $59,000 annually could comfortably afford the monthly mortgage on a typical U.S. home, spending no more than 30% of its income with a 10% down payment. That was below the U.S. median income of about $66,000, meaning more than half of American households had the financial means to afford homeownership. Now, the roughly $106,500 needed to comfortably afford the mortgage payment on a typical home is well above what a typical U.S. household earns each year, estimated at about $81,000.” In this time, mortgage rates are up 103% and the average home ($417k) would require roughy 50% of a household’s total income. (It should be noted that the Fed’s Zero Interest Rate Policy of 2020-2021 absolutely skewed everybody’s idea of what a “normal” mortgage interest rate should be. This will likely never happen again, in my lifetime. I still estimate 5-5.5% as the future / long term mortgage rate).

My Take: I agree. And I’ll pile on. Construction material and labor costs makeup a large part of a home’s price appreciation as well. For example, during the pandemic some materials costs spiked wildly, as a result of supply chain issues and shortages, but have since come back to reality. However, we are well above pre-2020 price levels and we ain’t goin back. Inflationary powers have set a new floor for material prices. Lumber is a good example of this.

In fact, most construction inputs have found a new, higher price floor. Though they have remained relatively flat since the Fed raised interest rates, and for that reason.

Labor costs too, are likely going to be sticky, more so, in fact, than goods/materials. It’s hard to actually cut someone’s pay. For example, hourly labor for electrical work, what I’m seeing at least, is roughly 1.5x what it was pre-2020. And nationwide is staying up 30+%. (chart below is non-residential, I couldn’t find a good source for residential electrical labor, so I you have one, please share!).

So, while some labor costs may decrease slightly or flatline, we are likely NOT going to see the a reduction in real prices we saw for some materials. It also depends on the experience/skill level of tradesman. Simple stuff that an electrical company’s apprentice can knock out may be $40 / hour, while a master electrician may be 4x+ that, say for rewiring an electrical box or a 3 phase system for your Tesla. Regardless, my point is that higher prices are just today’s prices. We should plan for this.

Gumballs aren’t 1 cent anymore Boomer.

Don’t Get Screwed by your Contractor.

** Punchy Sick Guy Warning! **

It’s time to deliver a little pounding to a particular contractor out there in California that recently tried to pull a fast one… on my mom of all people, who just turned the big 8-0, although she is still spry as can be.

Let me say first off. My dad was a contractor, cousin’s contractors, I’m a real estate investor = I have many contractor friends. Plus I like to play one from time to time. BUT that is not to say there aren’t folks out there that are just down right price screwing over homeowners, given good folks in the business a bad name.

Frankly, screw those do%ch#b*gs.

So here we go.

Late in the day, just this past February the 16th, I got a call from my mom who was in a titch of a panic. Her heat had gone out and she had called a seemingly reputable HVAC company to come take a look. I wish she has called me first but, hey she didn’t want to bother.

So I get one the phone and the tech starts telling me the unit is old, and to fix it will require several parts and even then they can’t warranty the work because of the age of the unit etc… I ask him how much and he says, more than $1500 for a new main circuit board and several other parts he needs to price out. First red flag, that part is extremely expensive (like new unit expensive), he may be steering me to buy a new unit which is easier and more straightforward than repairing. Could be true, or he could just be lazy. And in fairness, the unit is old (likely 15 years or so), and past its predicted usable life. But it’s a simple gas furnace, no frills, not much tech, no AC, and I’ve seen them go for a long long time. But if it’s kicked, so be it. Consider my skeptical ears perked.

I asked him if they tried any fixes and if they are sure the entire circuit board needs replacing. In my experience, often times a skilled tradesman can keep a piece of machinery going, so at least in this case mom has heat while we sort this out.

He responds oh no we tested it, it’s done. Not getting blah blah voltage. It may have been from a “power surge.” Hmmm, power surge….my spider senses are tingling now…

Clipping from the quote they later emailed me

It’s here where the fun starts….I’m going to summarize because this was a long back and forth…

The sales guy hops on my mom’s phone. He tells me that another cause of the furnace failing is not just the age of the unit or an apparent electrical surge thingy, but also the duct work. One of the lines (of 8) is partially kinked and all the lines are old. “We have to replace it all,” he tells me. AND they also want to redo ALL the insulation, so the unit isn’t “working overtime to keep up.” I’m now pacing on my back deck, this guy is off his rocker.

Now I’d been in the attic recently to replace some pot lights over the kitchen, maybe I stepped on one of the lines? But I know they should be able to either pop that duct line back out so it isn’t kinked, or cut our and replace it for a few hundred bucks, it’s just wireflex insulated ducting. And if the ducts are old I can get them cleaned, no big deal.

Insulation? It looked fine to me when I was up there, standard fiberglass rolls in every nook and cranny, and I didn’t notice any spots that were lacking. Also, it’s the California Bay Area, not Alaska. Avg temps were 45-65 this February.

So I asked the price for the new unit, the cost to repair the ducting and clean it, and frankly didn’t even address his insulation rec.

He says…. wait for it….

• - For just the furnace - $14,000! $14 Grand! (Full disclosure I never received a full quote for the replacement in writing, despite calling their office later that day. This is what he said on the phone).
• - Attempt to repair the furnace (but not guaranteed) - $1940! Includes 3 parts. (I got this final number in an email later).
• - Ducting - $8447.40! They don’t recommend repairing and cleaning old ducting. Say it’s too far gone.
• - Insulation - $7192.92! They highly recommend replacing the insulation, to “keep my mother safe in winter.”

Clipping from quote they later emailed me

After hearing his spiel, I told him “you are off your rocker my friend. I don’t think we are even in the same galaxy. How did you come up with these prices?”

He tells me they are the most reputable companies in the area, blah blah, to trust him, and I won’t find a better price anywhere (true, their google reviews are top notch and they are a relatively larger company, which I normally don’t like frankly price-wise. Hot tip. I normally only call larger companies when it’s a timely emergency repair).

But wait there’s more…..

He continues on to say that this is this price?… This is the special price, just for us. They have 1 slot open Monday and that if I make a decision today he can replace the unit with a brand new model then (it was a Saturday). But only if we decide today. Otherwise mom is without heat till they can get us on the schedule.

Come on boys….You going to try to do the pinch on me? I’m in full red alert mode now.

Now at this time, unbeknownst to me, my mom is getting a little anxious because the other guy in the room is showing her “spoooooky” pictures of insolation and ducting in the attic. And if you’ve never looked at attic work, it looks ugly. ( I later got these picts)

Now you contractors out there yes, the wrapping of the ducts could be better (I’ve already had it done and there were a few others) but those are simple fixes. Read on….

Insulation is fine….

This is my favorite… “Ahhh, you don’t have enough insulation. Just look at this scary picture! It should be stacked 6 feet high! ”

Continuing on…

And while the other guy is showing her these picts apparently he has her sign up for some “Rewards Membership” monthly subscription for preventive maintenance. Awesome. Still trying to cancel this.

So I ask him the model number of the unit they recommended/offered for the space and while we were on the phone I looked it up. $1800 retail.

I ask him a few more granular scope of work questions like: the number of man hours and how many guys he is going to have on the job. He doesn’t know, but he assures me they can finish Monday. So assuming they pay retail for the unit (they won’t), plus lets say conservatively $1000 for parts to install it (they won’t cost nearly that much), and it will take 10 man hours to install (they should be able to do much faster), that’s an imputed hourly labor cost $1120. 🤯

I tell him thanks for his time but I need to get a second opinion. We are just way off on price here. He tries to assure me I won’t find a better price, blah.. blah.. they are the most experienced in the area etc.. etc.., but that they will send me the quotes and I can have by the end of business today to decide.

I tell my mom to give me some time and to stay at a friend’s for a couple days while we fix this. I need to do some due diligence. And, honestly, the guy was a good salesman, now he has me turnt a bit. And I’m pissed, need to chill a bit. I operate my business in Nashville, TN is it just that much more expensive in CA? Am I being overly dismissive of super old ductwork that perhaps was there since Father Time himself? Did everything really look good last time I was in the attic?

I call my cousin.

Folks, now my cousin is fantastic, he’s a contractor/developer an hour or so outside the city from my mom. He agrees with my concerns and recommends a HVAC company he uses on his places. Their tech shows up and guess what…..WE DON’T NEED ANY OF THIS S%!T.

• - Furnace can’t be repaired? BU$$SH%T, he has it working in a couple hours, had to replace $300 igniter. Even pointed out several weaknesses (the pitch of the exhaust etc…) in the original installation that the other tech should have caught. Fixed em. Done.
• - Does the old unit need replacing? Fair question, and likely soon yes, I’ll admit. But the original $14k quote is more than 3x what is should cost. And guess who is getting the call to put in that new shinny unit? The guy who was able to take their time, do a little hard work and figure out how to keep the old one going. But for now, it’s been 3 weeks. Working like a charm.
• - How about the ducting? It’s so old and ugly looking? Do we need to replace the ducting to our entire home too? HE!! NO. Cut out and replace one section of wireflex. $200. Done.
•  -But what about the insulation? It can get pretty chilly in this Mediterranean climate of ours. Don’t we need to replace our entire attic’s insulation with 6 feet of R100 rated space blankets? B0LLOCKS! Wrap a few of those ducts with literal Duct Tape (yes that’s what it was actually made for folks), some insulation. $150. Done. (Ok, I am now channeling my inner Affleck in Boiler Room. Great flick.)

What? What is this price-gouging company out west do you ask?

Oh I wouldn’t think of holding that little tidbit back, especially after someone tries to fleece me for more than $24 grand and scares my mom into not thinking she isn’t safe in her home.

The company is ….

Moore Home Services

• Website: https://moorehomeservices.com
• Phone: (707) 243-8220

Google Reviews: Very good. But this review stuck out to me, posted just a day ago:

Jane Pritchard - “I’ve been a member with Moore for a while and I’ve gotten so I’m hesitant to have them come and do the free maintenance check because I’m left with not really knowing if there are really these monumental problems brewing with my furnace and/or AC or if they are just very well trained salesmen out to create more business. Either way I’m left more stressed than before the visit.”

I feel for all those poor souls that this company has taken for $1000s…

And IF any of you amazing skeptical dudes and dudettes out there want to prank call them, well don’t. Definitely don’t do that. I don’t want any of you prank calling this company. Again no prank calls please. That would be very uncouth of you.

Lastly, one kind word.

The technicians themselves were very kind, especially to my mom while in her house, despite overlooking the simple fixes that my cousin’s guy caught right away. I’ll just chalk that up to inexperience. Very fine folks just trying to make a living. It was their salespeople (who I mainly talked to), and the price-gouging managers who trained them, who are full on douchebags.

All I have left to say is, hey Moore Home Services…

….Go f*c% yourself.

Is that clear? Let me make sure.

Go. F#c%. Yourself.

You give great tradesmen a bad name. 

But I digress…..

Bottom Line

High prices for contractor services, materials, equipment, skilled labor etc… are major contributors to home prices. If the inputs to build a home are higher, so will be the final product. Of course, this will always be the case. Inflation and debt cycles are natural parts of a free market economy. But, for the last 10+ years before 2020, inflation had been below 2%. No longer. This is why the Fed had to raise interests rates so vigorously and keep them elevated. So in an inflationary time like this, seeing this kind of price gouging just really grinds my gears. It’s making the problem worse.

The Skeptics Take: Companies, like the one in my personal story above, that take advantage of folks who aren’t experienced, by charging wildly outlandish prices on top of beefy profit margins, are simply price gouging. And we shouldn’t stand for it. So, what can we do? Always make sure to get 3+ quotes for ANY major repair / renovation on your home. If the job is large, pay a small fee to another company for an assessment of another company’s estimate (they will always try to tear it apart). Ask for references, call them and ask your neighbors who they have used. If you are an investor, keep testing out new subcontractors/tradesmen constantly, even if you have someone you like. I’ve found my best folks that way. Plus, you always want to have several in your back pocket, the best folks are busy. And speaking of pockets, lean on the experts. A great resource for real estate investors is right here at Bigger Pockets, the best real estate investor site where you can find a realtor, property manager, contractor, CPA etc….Importantly, they also have a great forum board. Post your question there and get input back from fellow compatriots who have likely faced the problem you are up against.

There are a lot of great, hard working and honest contractors out there. And then there are those who seek to take advantage. Or just think “hey, it’s the price of doing business. If people are willing to pay it, I’ll keep charging it.”

Don’t get taken.

Don’t stand for it.

In other words, Stay Skeptical Y’all

Me playing contractor. Nothing more satisfying than knocking down a wall I say.

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

Again, stay skeptical, all you dudes and dudettes.

Herzliche Grüße

-Andreas

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

Welcome to my weekly take, A Skeptical Real Estate Dude, coming at you live from Nashville, TN. Every week I write a brief, hopefully insightful, dive into real estate and financial markets, for all you tubular dudes and dudettes out there.

What am I listening to? - Classical. More specifically Franz Schubert’s Trout Quintet. It’s a jam.

Where am I? - My home office (yes @IRS I do use it and will be deductin’ it).

Today We’re Talkin:

• - The Weekly 3 - News and Data to Keep you Informed
• - Inflation Back Again?!
• - Tangent! - Bring Back Home EC!
• - City Skylines - Check out Nashville!
• - The Bottom Line

The Weekly 3: News and Data to Keep You Informed

1. -Apple halts rumored car production. Redirecting resources to AI (WSJ).
2. -AI Chatbot Klarna replacing customer service reps with ease. Already has had 2.3 million conversations.()
3. -Bitcoin nears its all time highs. The “hype” hasn't even started yet (Kobeissi).

Today’s Interest Rate: 7.16%

(☝️ .02% from this time last week, 30-yr mortgage) Mortgage Rate Update

Mortgage rates are slightly higher again this week, to 7.16%. We are now back to Nov. 30th levels, making this a 3 month…. dare I say … Trend!

Inflation UP?

Oh the humanity! It appears that market folks (bond, stock, real estate, really all market participants) just keep receiving spooky inflationary signals, which are in turn propping up bond yields and mortgage interest rates. For example, Personal Consumption Expenditures (PCE), a leading indicator of inflation preferred by the Fed, was up .7% YoY in December - exceeding estimates of 2.8%. This is after a reading of +.4% in November and a +0% reading in October. We will get January numbers tomorrow. It’s going one higher or… higher.

Inflation is staying stubborn, much like my girlfriend likes to remind me about yours truly (fair point). So much so, folks may even be warming up to bitcoin as an inflation hedge. It’s over $60,000 today, up 20% in the last week. I must admit, I have a few speculative shekels in it myself.

Shelter is one big inflationary data point, driven by yes, lack of supply, and by input costs continuing to rise (contractor labor, HVAC systems etc…)

Mortgage rates are likely to stay high as well. Market participants are waiting to see what inflation will portend for the month of March, including bond traders who are staying away from the 2 and 10 yr. Add to this a Federal Reserve meeting in a few weeks, where the Fed may lower rates (they won’t), and folks are still seeing the proverbial starter waive the yellow caution flag. And I don’t see a green flag coming until inflation diminishes significantly. It’s just too being hard headed. My call: June for rate cut 1 of 3 at .25%. Home prices, up 6% this year.

Food Prices

For consumers, food has received much focus. After all, we all gotta eat. And as a % of total income it’s historically high. Or, as the WSJ put it “The last time Americans spent this much of their money on food, George H.W. Bush was in office, “Terminator 2: Judgment Day” was in theaters and was rocking the Billboard charts.” We can’t go without food so having to eat these higher and higher prices is painful. But what can we do?…

I would argue there is something we can do.

Cook.

TANGENT: If you are struggling with these wild high prices, there is a very doable way to cut your food costs to pennies on the dollar, and eat well. How?

First, don’t fall for the “cheap” packaged foods or “cheap” meals at fast food places. They are expensive (don’t be fooled by the sticker price, on a per/lb basis all packaged and prepared foods are expensive) and are well…full of crap. Ramen and even cereal “diets” (how is that a thing?) just put empty calories / more crap through your body holes, and literally into the toilet. And again, it's actually more expensive per/lb, and it’s not really food fit for human consumption. I put my broke-self through college cooking - and I may or may not have been able to reallocate additional $ to the beer fund 😁. A few cases of chicken thighs (or even better buy 2 whole birds and break em down yourself, here is a video of Gordon Ramsay showing 8 year olds how to do it), a 20 lb bag of decent rice, and a 20 lb bag of beans (change it up every so often) and you are good to go for 1 month for chicken and 3+ months for beans and rice. See below. And this is free range chicken, the cheap stuff is half the price. Less than $45 a month for food.

Want veggies too? Sure, go get em; this is a baseline for eating full meals on the cheap. Want variation? Me too, make different sauces / spice mixes every few days. Invent some fun ones and experiment. And DON’T throw away that chicken carcass. Put that in a pot of water and simmer for an hour (longer if you can). Throw in literally anything you want, plus salt, and boom you have chicken soup, with all the great nutrients from those chicken bones/fat. Simple chicken soup recipes here.

And fun fact, , (again, actual groceries that are whole food, and not processed). More savings.

In my opinion:

Text within this block will maintain its original spacing when published

A cheap meal is one you make yourself. It just takes a bit of effort. - Andreas Mueller

So if you are struggling with these food prices, or just want to save a few extra bones, buy real food and cook. You can eat simply yet fully.

Frankly, it’s a shame we don’t have Home Ec anymore. IMO, minus the sowing classes, teaching personal finance and cooking should be required at every high school, and on the top of lists for parents to pass on to their kids.

So I say, bring back Home EC!

But I digress…. Where was I? Oh ya real estate. 

February numbers will be telling on the inflation front and will signal to the Fed when they may be able to cut interest rates.

I’ll be keeping one skeptical eye open for y’all…

Home Supply is Weak

Home supply is virtually flat, sitting at 3 months supply of homes in January vs 2.9 a year ago. However, total housing supply is what’s most important. And it is historically low. Like, really low. Check out this chart from JBRC.

Yuck.

An Update on 2024 Home Price Predictions

We have a few new price predictions y’all! And it’s actually a little bit of a mixed bag. I’ve summarized below to keep this article short(er):

• Fannie Mae - + 2.4% (down from 2.8%)
• Freddie Mac - + 3.2% (no change)
• Goldman Sachs - +5.5% (up from 5%)

All institutions are seeing prices higher in 2024, as one would predict. Why? Well, its boring but it’s just econ 101: stubbornly low supply and reasonably strong demand for those relatively few homes = price go up. The only question is how much higher. Below is a 5 year chart of best, average and worst outcomes for home prices (depending on who you are of course) from Fannie Mae, our more “conservative” price forecaster. Worst case, up 10%.

Bottom Line

Housing “experts” are constantly making predictions about price and mortgage rates but how often are they right? Eh, not very. Case in point, Fannie Mae now expects mortgage rates to be at 6.5% in Q1 2024….(.01% higher than preciously). Uh, it's almost March…

There are some green shoots - much like those pea shoots in my home garden right now (see obligatory pict below).

It does seem that higher rates are reducing demand for loans, which is driving up home inventory which could - I stress could - suppress home price growth. Mortgage loan applications decreased 5.6% last week, for instance. But so far the market has been just too resilient. Still not enough supply to affect price significantly.

The Skeptics Take: About the only thing going gangbusters are new homes from the large homebuilders, which are coming on the market like hotcakes. But…something may be bubbling below the water, like Will Ferrell and this . Questions have been raised by industry folks on the construction quality and of these new homes, that is, a smaller product at roughly the same price. Further, DR Horton’s earnings over the last few months have been gangbusters. No doubt. But, Warren Buffett recently sold his entire position in the homebuilder after owning the stock for just a few months (very not like him/Berkshire). This was his largest stock position in the homebuilder sector. And there may be other risks on the horizon for the homebuilders as well.

In other words, stay skeptical Y’all.

Sunflower, pea and radish greens! Most Interesting Tweet(s) of the Week

Woah, super wild change too the skyline. in 9 years. And we have 41 cranes in there as of today everyone. Nashville is in growth mode.

That’s it for this week. If you are interested in digging deeper into any of these ideas or just want to talk real estate investing - which I always love doing - don’t hesitate to reach out. 

You can message me directly right here on BP.

Again, stay skeptical, all you dudes and dudettes.

Herzliche Grüße

-Andreas

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

If you can, never sell. Selling = taxes. I've done a cash out refinance on a home more than once and you pay no tax when doing it. Barbara Corcoran is famous for doing that (before it was called BRRRR). I think she has several properties she has refinanced like 9 times. And,,, she said this on a Bigger Pockets podcast episode :) Shout out to

https://www.biggerpockets.com/users/davidgreene24

Welcome to A Skeptical Real Estate Dude, my weekly post here in BP, coming at you live from Nashville, TN. Every week I write a brief, hopefully insightful, dive into real estate and financial markets, for all you tubular dudes and dudettes out there.

Today We’re Talkin:

• - The Weekly 3 - News and Data to Keep you Informed
• - Main Story: The 2024 Apartment Surge. Does it Matter?
• - The Bottom Line

The Weekly 3: News and Data to Keep You Informed

1. - Fed May Keep Interest Rates High. More Federal Reserve officials at their meeting last month signaled concern with cutting interest rates too soon and allowing price pressures to grow entrenched. Yet, interest rates are likely at their peaks. (WSJ).
2. - Judge’s decision in Trump real estate trial may have deleterious impact on NYC real estate investments. Large investors believe risk too high now, since decision (@GrantCardone and@Kevinolearytv).
3. - Single-family existing-home sales prices Up. Climbed in 86% of all metro areas in Q4 2023 up from 82% in the previous quarter. The national median single-family existing-home price rose 3.5% from a year ago to $391,700. (@NAR_Research).

Today’s Interest Rate: 7.14%

(☝️ .01% from this time last week, 30-yr mortgage) Mortgage Rate Update

Mortgage rates are negligibly higher this week, up for the last 2 months, 7.14%. But otherwise not too much news here. SO…let’s sink our teeth into something more meaty: Wild volatility in apartment housing supply.

Apartment Supply Vs Home Supply: a Dickens of a Situation

The supply of total available homes is still too low. Like really low. Like totally low.

But don’t take just my word for it. Last month, Fed Chair Jerome Powell said “there hasn’t been enough housing builtand [is the reason for elevated home prices].”

We in the industry saw this after the Great Recession. Housing starts were far below historical averages, creeped up in 2020-21, only to fall again.

And most research analysis agree. We have an overall housing shortage, and it’s in the multi-millions.

Issue Spotlight: Available Land is Still Hard to Come By

Not often talked about, but this really matters. Housing undersupply includes supply of land for development, which you obviously need to build a home. And while the availability of lots for homebuilding has “loosened” we are still undersupplied in most all markets.

Zonda research

According to Honda’s analysis, “Current lot development [supply] is supportive of modest growth in the new home market [in 2024] but doesn’t support blockbuster growth.”

Snapshot in time: Housing Starts Down in January.

How is the undersupply or land and high interest rates affecting future home supply today? In January, new residential housing starts were down sharply, -14% (Census).

Gross.

Apartment Buildings

Now let’s look at apartment unit supply, which I’ve been getting a LOT of incoming questions on.

Apartments are a totally different story, they are booming. But will it matter and will it last? New research from John Burns Research and Consulting has the data. Let’s dig in:

It’s a real Dickens of a situation out there.

At the start of 2024, new apartment construction sits at historical highs, the most since 1974. Roughly 1 million units are under construction, with about 2/3 of them coming on the market this year. In total, it is expected that the US will have 40% higher new apartment unit supply in 2024 (1.4 million vs average of 980,000, this includes deliveries and under construction, JBREC).

Why is 2024 special for apartment housing construction? Just work backwards. Subtract 3 and 4 years to build something and you get 2020-2021. What was true in 2020 and 2021? ZIRP (zero interest rate policy, for all you young Dudes out there). ie when banks were lending at ultra low interest rates apartment builders jumped on the cheap capital to build that lovely new multifamily apartment building in a town near you.

But not every town.

Dallas, Phoenix, Charlotte, Houston, will boom in 2024.

How will cities do in absorbing this supply influx?

Comparing 2023 apartment supply growth against rent growth we can see that inventory grew at about double normal, and rents still rose .5% on average. Which cities did best?

My home market of Nashville was extremely resilient, for example. It had the 2nd highest supply growth of apartment housing in the nation in 2023 and rent growth slowed only ~1.8%. Charleston, Columbus, Richmond, Denver and many others where strong as well, adding a few % in rent growth, albeit with about half the new supply (JBRE).

However, this “housing boom” will be, dare I say…. transitory. Spookyyy!

The Real Story... It’s Transitory

In 2025, the apartment supply bubble will pop, fall off a cliff, come back to earth, whatever the metaphor you prefer to use…

Permits for development, the last 3 years of inflated material / labor prices and much much higher interest rates has made the environment for apartment construction highly challenging. Add to this the tumult in the regional banking sector - the sector that funds most all commercial real estate lending - and Na also! Apartments are not being started today like they were in 2020-21. It’s hard to make the numbers make sense today for new development.

What will the come down be like?

Nationally, the numbers should be down at least -20%, based on permits. But cities like Seattle, DC and San Antonio will snap back -40%, like an errant tree branch on a hike with your girlfriend when you both aren’t paying attention 😬. Cities Miami and San Diego are pressing forward however, up 40% (although those numbers are likely due also to delay in construction timing).

Bottom Line

As Warrant Buffet is fond of saying, “Only when the tide goes out do you learn who has been swimming naked.” And the 1-2 year spike up and then crater down in apartment supply is certain to add volatility yes, but in the long term, what will it mean?

The Skeptics Take: This news is positive in my view. We can see the cliff coming and a little certainty, is always a positive in my book. Event if it’s “bad” news / especially when it may scare others. If you are in a city expected to receive an influx of supply, you may want to be prepared to weather the 6-12-18 month volatility in your city. Let tenants know today you aren’t raising rents this year, and have them renew their leases today instead of waiting for their lease to come due.

My home market of Nashville (and in Salt Lake, Austin, Jacksonville, Orlando) already had much supply come on the market in 2023 and weathered it well, so perhaps in those cities you have to be less active in managing your portfolio (ostensibly you did this last year). In fact it may be a GREAT time to buy your next rental so you are ready with a nice new place come end of year when overall supply may be in the gutter; and interest rates are likely a little lower.

Apartment vs Residential Landlords. Additionally, and importantly, I’m not buying large apartment buildings so the effect on my and my clients’ portfolios will be muted. Small multifamily and single family real estate supply is still low and under-built. And while, to a degree those assets compete, they offer a different style of living, and thus are relatively insulated from volatility in apartment supply. According to ResiClub analysis, “Multifamily rent growth has softened more than the single-family rental market. And in some regional pockets, multifamily rents are experiencing outright declines.” According to Zillow national multifamily rents rose +2.7% in 2023, while national single-family rents rose +4.6% in calendar year 2023. The disparity between the two should be even more stark in 2024, with the possibility for apartment rents to be negative.

Anecdotally, we saw steady rent growth on average in our portfolio of homes here in Nashville during last year’s apartment boom, in which the data pointed to a -1.8% decrease in apartment rents. And it matters what kind of apartments are coming online. In Nashville, much of the new apartments are considered luxury, which do not compete directly, only indirectly, with my portfolio. Rents for my units / homes are about 1/2 that of a similar sized luxury apartment. Renting modest homes/units is a large part of why my portfolio is resilient in a down market as well.

As I said last week, take some time now to improve / harden your properties to remain robust against any potential downturn. Because you can NEVER predict exactly when it is coming. Don’t try. Just keep improving and building that moat of resilience ….

And as always…Stay skeptical.

Most Interesting Tweet(s) of the Week

A little turbulence and arrive 1 hour early? Am I crazy to be totally into this? Bring back the Concord!

That’s it for this week. If you are interested in digging deeper into any of these ideas or just want to talk real estate investing - which I always love doing - don’t hesitate to reach out. You can email me direct here on Bigger Pockets!

Again, stay skeptical, all you dudes and dudettes.

Herzliche Grüße

-Andreas

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

Hi Chris! I do but BP blocks it so I just copy paste it here. It’s on substack. 

Linking to outside blogs for some reason, violates their forum policy, which is crazy because we can link other peoples articles to not our own. Interested with other folks here on the forums  think about this BP rule??

Quote from @Chris Seveney:

Quote from @Andreas Mueller:

Welcome to A Skeptical Real Estate Dude my weekly post on market insights coming at you live from Nashville, TN. Every week I write a brief, hopefully insightful, dive into real estate and financial markets, for all you tubular dudes and dudettes out there.

Today We’re Talkin:

• - The Weekly 3 - News and Data to Keep you Informed
• - Mortgage Market is in Severe Recession: Mortgage Brokers are Quitting
• - No Job, No Problem Loans Making a Comeback??
• - Chocolate is the New Gold
• - The Bottom Line

The Weekly 3: News and Data to Keep You Informed

1. - Fed’s Goolsbee: Rate Cuts Will be Warranted. Inflation progress need not be as good as it has been. Policy is tight. "If we stay this restrictive for too long, we will start having to worry about the employment side of the Fed’s mandate." (WSJ).
2. - China's current population of 1.4 billion people is projected to fall to 525 million by the end of 2100. A 63% decline (@charliebilello).
3. - Bitcoin Crosses $1 Trillion Market Cap (@KobeissiLetter).

Today’s Interest Rate: 7.13%

(☝️ .17% from this time last week, 30-yr mortgage) Mortgage Rate Update

Mortgage rates are climbing higher again this week to 7.13%, doubling last week’s increase - up ~1/2% in just 2 weeks. We are back to Nov 29th levels folks. It appears the bond market continues to call BS, remaining dubious that inflation will come down rapidly (or potential labor market weakening).

And those traders may be right, at least for now.

Fed Fund futures are now pricing in ~4 rate cuts in 2024, down from 6+, which it has fluctuated around the past few months.

IMO, we are still most likely to see roughly 3 rate cuts, totaling 100 bps (1%) this year, given current available labor and inflation data. Inflation is still lingering around, like that creepy guy who's just a “little too old to be in da club.”

Inflation Rearing its Ugly Head

Inflation numbers this week showed core CPI in January was hotter than expected, 0.4%, which is a 4.8% annual rate. Of note, housing costs [shelter] accounted for over two thirds of the monthly increase. Looks like rents are not weakening like many pundits have been warning. And it is important to note, shelter costs have been up every month, not down. Lower inflation (disinflation) just means at times shelter costs were rising less-fast. Not decreasing (deflation). And this is a lagging number, meaning they are likely higher today than we think. IMO.

And

Mortgage Market is in Severe Recession

This may be one of the steepest and longest downturns in the history of the mortgage market. Mortgage applications are negative YoY, and remain near the lows during the Financial Crisis.

Mortgage demand is down 14% over the last year and 40% from pre-pandemic levels (Reventure). Supply of available homes to buy remains low, as 90% of homeowners have mortgage rates below 5%. Additionally, low rates for homeowners mean refinances are virtually zero (only those desperate to get out of hard money, construction or bridge funding).

What is this doing to the Mortgage Industry?

It’s tough to be a mortgage officer. Layoffs and mergers by necessity are happening almost every day. Since the beginning of the year we have seen mergers and layoffs at:….

• City National Bank to cut 56 jobs in Los Angeles (2/14/24)
• Guild Mortgage acquires Academy Mortgage (2/13/24)
• Proprietary Capital acquires American Financial Resources, LLC (2/12/24)
• 1st Priority Mortgage to acquire Hudson United Mortgage (2/6/24)
• Fairway Independent Mortgage Corp. to shutter wholesale lending division (2/2/24)
• Newrez layoffs (2/2/24)
• New American Funding (NAF) to acquire Draper and Kramer Mortgage Corp. (DKMC) (2/1/24)
• Crescent Mortgage Co. to shut down, lay off 65 employees (1/31/24)
• Heritage Bank to exit retail mortgage lending (1/25/24)
• UMortgage acquires Community Mortgage Brokers (CMB) (1/22/24)
• Country Club Mortgage to let go of 105 employees in Central California (1/17/24)
• Wells Fargo mortgage layoffs (ongoing)
• Truist Financial to close bank branches, cut mortgage jobs (1/8/24)
• Kinecta Federal Credit Union layoffs in El Segundo, CA (1/3/24)

But are there any serious concerns in the Mortgage Market? - Yes!

Case in point, Treasury Secretary Janet Yellen recently testified in front of Congress and expressed explicit concern over non-bank mortgage lenders. These mortgage loan originators, originated a whopping 70% of mortgages in 2023! (I had no idea it was that high).

They are reliant on short term financing not deposits (like a bank) or access to financing from the Federal Reserve, so “in stressful times their credit lines can be pulled.” “There is concern that in stressful market conditions we could see the failure of [these lenders]…this has become very significant in the mortgage market.”

And if rates, drop fast this actually could spell disaster for these mortgage companies. Anyone in a high rate mortgage (I have a few admittedly, b/c I got a fantastic deal on the property) is going to refinance immediately and repay the loan. Are these mortgage companies ready/aware of prepayment risk for loans they at making today? This could happen faster than income from new loan originations.

Mortgage Officers are Choosing Not to Renew their Licenses at a Wild Pace.

According to data by the NMLS, the Nationwide Mortgage Licensing System, the number of registered mortgage officers dropped 24.5% YoY in Q2 2023. In other words, One Quarter of mortgage officers decided to call it quits from the mortgage industry and not renew their license (for some reason the NMLS is only up to Q2 2023 data collection, odd…IMO full year 2023 was probably a blood bath. We will see.)

And in 2022, more mortgage licenses expired or were withdrawn than were approved (again, the 2023 annual report is not yet out, see below).

WOW.

And in some states the data is even wilder. Check out the linked chart below.

Check out California and DC…

Quick Story: Are mortgage lenders making risky loans again?

Perhaps, and they are some bizarre loans that remind me of 2008. And this is crazy…

I was having breakfast with a local mortgage lender, at a bank, but who is also a mortgage broker. FYI many mortgage officers are both a lender of a bank’s/institution’s money and also a mortgage broker where they broker mortgages for other mortgage originators. 😬😬😬

So anyway, he told me that he recently brokered a loan with no income verification (This was not a VA loan, backed by the government).

My jaw dropped. I thought this was illegal since the Financial Crisis / Dodd Frank?

But that’s not the bad part. Listen to the terms:

• - 11.5% interest rate
• - 5 points up front (pay 5% up front as a loan origination fee)
• - Have to hold 18 months in reserves for PITI.

Now the story is quite sweet. It was a local musician who just got a record deal but has been only making $30k a year and, with a hopeful advance on that deal coming, wanted to buy a home. I get it. They want a house…

Unfortunately this is a tremendously high risk loan with terms so terrible 1) I will be surprised if he doesn’t default, and 2) he is getting, well, screwed. It’s frankly worse than 2008 products and the word expensive doesn’t describe it. Hard money may have been better. 3) How many of these loans have been made and who was the lender he was brokering to?

Champions Funding and I wish I knew how many loans they have made. But if they were public I would, in the words of Steve Carroll in the Big Short, “short everything that guy owns.”

They are literally advertising on Twitter that they are the “best” at lending to folks that are “Not Qualified.”

I hope he can really sing….Absolutely insane.

Home Prices

Yet, home prices are up 5%. Which makes sense given lower home sales volume, driven by low market supply. And remember, CPI of nearly everything is higher every single month, which permeates into materials, services etc… that are necessary for building / renovating homes.

And the predictions for higher home prices keep being revised higher.

My Take? Get it while the gettin is good (bonus points for who gets the reference :).

Valentines Day Tangent!

You know what else is up, all you lover dudes and dudettes?

Chocolate!

Holy smores, cocoa prices have skyrocketed to a record high, mostly due to disruptive weather, and also higher freight costs. Good thing I …. hate chocolate! Gimme wine and cheese and olives all day for dessert.

Queue the hate 😁.

But I digress…..

Bottom Line

We just simply need more homes (and larger/expanded) homes to house more people. In my home market of Nashville. Median inventory was down 9% in January. Not great given the lows we are at already.

True, so far 2024 is looking like a potential turnaround year to makeup for the 2022 housing recession, as long as inflation and labor markets act right. But certain areas like mortgage lending are hurting, bad, and we are seeing areas of additional risk-taking to try to make additional $. I had no idea non-QM loans were even legal.

This leads me to why I am getting a little more cautious when it comes to the overall economy. In short, it’s because things are looking, well… good.

How? Well…

• Stocks are trading like the Fed already cut rates.
• Bonds are trading like inflation is still a big problem (and rate cuts aren’t going to happen anytime soon, ie economy is still running hot or traders have labor market concerns).
• Housing is trading like there are no problems.
• Gold is trading like there are no problems.
• Chocolate is trading like gold.
• Oil is trading like we are in a recession.
• My spider sense is tingling….

The Skeptics Take: So when you jump on your next real estate deal. Remain cautious. Make sure it's a great deal. Don't build into your IRR returns a refinance down to 5.5% in month 6. Make sure you can afford that higher mortgage payment for an extended time IF needed. Maybe set aside additional reserve funds in the property's checking account. Sure a faster rate drop could happen, but if it were to, that would likely mean we are in a recession, and you may have other issues then. Like finding renters or higher eviction / vacancy rates. I'm targeting mid-level rentals as investments (buildings that rent for $1500-$2000) / unit. These units rent in any economy. And I am building in a 12-18 month timeline for rate to remain high. In other words, rates will remain above my target refinance rate of 5.5% for the next year / year and a half. I'm also reinvesting in my current portfolio of properties. For example, adding a back deck, garden area and dog washing shed in a few of my properties to ensure I attract the best tenants and they appreciate living in my property (and don't leave).

When times seem good, that is precisely the time to be prudent. Tighten up costs. Run market analysis on rent renewals. Take some time to improve / harden your properties etc….to remain robust against any potential downturn. Because you can NEVER predict when it is coming. Don’t try. Just keep improving and building that moat of resilience ….

And as always…Stay skeptical.

Most Interesting Tweet(s) of the Week

So sweet. Happy V-Day y’all.

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

Again, stay skeptical, all you dudes and dudettes.

Herzliche Grüße

-Andreas

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

 I recommend you make this a blog post

Welcome to A Skeptical Real Estate Dude my weekly post on market insights coming at you live from Nashville, TN. Every week I write a brief, hopefully insightful, dive into real estate and financial markets, for all you tubular dudes and dudettes out there.

Today We’re Talkin:

• - The Weekly 3 - News and Data to Keep you Informed
• - Mortgage Market is in Severe Recession: Mortgage Brokers are Quitting
• - No Job, No Problem Loans Making a Comeback??
• - Chocolate is the New Gold
• - The Bottom Line

The Weekly 3: News and Data to Keep You Informed

1. - Fed’s Goolsbee: Rate Cuts Will be Warranted. Inflation progress need not be as good as it has been. Policy is tight. "If we stay this restrictive for too long, we will start having to worry about the employment side of the Fed’s mandate." (WSJ).
2. - China's current population of 1.4 billion people is projected to fall to 525 million by the end of 2100. A 63% decline (@charliebilello).
3. - Bitcoin Crosses $1 Trillion Market Cap (@KobeissiLetter).

Today’s Interest Rate: 7.13%

(☝️ .17% from this time last week, 30-yr mortgage) Mortgage Rate Update

Mortgage rates are climbing higher again this week to 7.13%, doubling last week’s increase - up ~1/2% in just 2 weeks. We are back to Nov 29th levels folks. It appears the bond market continues to call BS, remaining dubious that inflation will come down rapidly (or potential labor market weakening).

And those traders may be right, at least for now.

Fed Fund futures are now pricing in ~4 rate cuts in 2024, down from 6+, which it has fluctuated around the past few months.

IMO, we are still most likely to see roughly 3 rate cuts, totaling 100 bps (1%) this year, given current available labor and inflation data. Inflation is still lingering around, like that creepy guy who's just a “little too old to be in da club.”

Inflation Rearing its Ugly Head

Inflation numbers this week showed core CPI in January was hotter than expected, 0.4%, which is a 4.8% annual rate. Of note, housing costs [shelter] accounted for over two thirds of the monthly increase. Looks like rents are not weakening like many pundits have been warning. And it is important to note, shelter costs have been up every month, not down. Lower inflation (disinflation) just means at times shelter costs were rising less-fast. Not decreasing (deflation). And this is a lagging number, meaning they are likely higher today than we think. IMO.

And

Mortgage Market is in Severe Recession

This may be one of the steepest and longest downturns in the history of the mortgage market. Mortgage applications are negative YoY, and remain near the lows during the Financial Crisis.

Mortgage demand is down 14% over the last year and 40% from pre-pandemic levels (Reventure). Supply of available homes to buy remains low, as 90% of homeowners have mortgage rates below 5%. Additionally, low rates for homeowners mean refinances are virtually zero (only those desperate to get out of hard money, construction or bridge funding).

What is this doing to the Mortgage Industry?

It’s tough to be a mortgage officer. Layoffs and mergers by necessity are happening almost every day. Since the beginning of the year we have seen mergers and layoffs at:….

• City National Bank to cut 56 jobs in Los Angeles (2/14/24)
• Guild Mortgage acquires Academy Mortgage (2/13/24)
• Proprietary Capital acquires American Financial Resources, LLC (2/12/24)
• 1st Priority Mortgage to acquire Hudson United Mortgage (2/6/24)
• Fairway Independent Mortgage Corp. to shutter wholesale lending division (2/2/24)
• Newrez layoffs (2/2/24)
• New American Funding (NAF) to acquire Draper and Kramer Mortgage Corp. (DKMC) (2/1/24)
• Crescent Mortgage Co. to shut down, lay off 65 employees (1/31/24)
• Heritage Bank to exit retail mortgage lending (1/25/24)
• UMortgage acquires Community Mortgage Brokers (CMB) (1/22/24)
• Country Club Mortgage to let go of 105 employees in Central California (1/17/24)
• Wells Fargo mortgage layoffs (ongoing)
• Truist Financial to close bank branches, cut mortgage jobs (1/8/24)
• Kinecta Federal Credit Union layoffs in El Segundo, CA (1/3/24)

But are there any serious concerns in the Mortgage Market? - Yes!

Case in point, Treasury Secretary Janet Yellen recently testified in front of Congress and expressed explicit concern over non-bank mortgage lenders. These mortgage loan originators, originated a whopping 70% of mortgages in 2023! (I had no idea it was that high).

They are reliant on short term financing not deposits (like a bank) or access to financing from the Federal Reserve, so “in stressful times their credit lines can be pulled.” “There is concern that in stressful market conditions we could see the failure of [these lenders]…this has become very significant in the mortgage market.”

And if rates, drop fast this actually could spell disaster for these mortgage companies. Anyone in a high rate mortgage (I have a few admittedly, b/c I got a fantastic deal on the property) is going to refinance immediately and repay the loan. Are these mortgage companies ready/aware of prepayment risk for loans they at making today? This could happen faster than income from new loan originations.

Mortgage Officers are Choosing Not to Renew their Licenses at a Wild Pace.

According to data by the NMLS, the Nationwide Mortgage Licensing System, the number of registered mortgage officers dropped 24.5% YoY in Q2 2023. In other words, One Quarter of mortgage officers decided to call it quits from the mortgage industry and not renew their license (for some reason the NMLS is only up to Q2 2023 data collection, odd…IMO full year 2023 was probably a blood bath. We will see.)

And in 2022, more mortgage licenses expired or were withdrawn than were approved (again, the 2023 annual report is not yet out, see below).

WOW.

And in some states the data is even wilder. Check out the linked chart below.

Check out California and DC…

Quick Story: Are mortgage lenders making risky loans again?

Perhaps, and they are some bizarre loans that remind me of 2008. And this is crazy…

I was having breakfast with a local mortgage lender, at a bank, but who is also a mortgage broker. FYI many mortgage officers are both a lender of a bank’s/institution’s money and also a mortgage broker where they broker mortgages for other mortgage originators. 😬😬😬

So anyway, he told me that he recently brokered a loan with no income verification (This was not a VA loan, backed by the government).

My jaw dropped. I thought this was illegal since the Financial Crisis / Dodd Frank?

But that’s not the bad part. Listen to the terms:

• - 11.5% interest rate
• - 5 points up front (pay 5% up front as a loan origination fee)
• - Have to hold 18 months in reserves for PITI.

Now the story is quite sweet. It was a local musician who just got a record deal but has been only making $30k a year and, with a hopeful advance on that deal coming, wanted to buy a home. I get it. They want a house…

Unfortunately this is a tremendously high risk loan with terms so terrible 1) I will be surprised if he doesn’t default, and 2) he is getting, well, screwed. It’s frankly worse than 2008 products and the word expensive doesn’t describe it. Hard money may have been better. 3) How many of these loans have been made and who was the lender he was brokering to?

Champions Funding and I wish I knew how many loans they have made. But if they were public I would, in the words of Steve Carroll in the Big Short, “short everything that guy owns.”

They are literally advertising on Twitter that they are the “best” at lending to folks that are “Not Qualified.”

I hope he can really sing….Absolutely insane.

Home Prices

Yet, home prices are up 5%. Which makes sense given lower home sales volume, driven by low market supply. And remember, CPI of nearly everything is higher every single month, which permeates into materials, services etc… that are necessary for building / renovating homes.

And the predictions for higher home prices keep being revised higher.

My Take? Get it while the gettin is good (bonus points for who gets the reference :).

Valentines Day Tangent!

You know what else is up, all you lover dudes and dudettes?

Chocolate!

Holy smores, cocoa prices have skyrocketed to a record high, mostly due to disruptive weather, and also higher freight costs. Good thing I …. hate chocolate! Gimme wine and cheese and olives all day for dessert.

Queue the hate 😁.

But I digress…..

Bottom Line

We just simply need more homes (and larger/expanded) homes to house more people. In my home market of Nashville. Median inventory was down 9% in January. Not great given the lows we are at already.

True, so far 2024 is looking like a potential turnaround year to makeup for the 2022 housing recession, as long as inflation and labor markets act right. But certain areas like mortgage lending are hurting, bad, and we are seeing areas of additional risk-taking to try to make additional $. I had no idea non-QM loans were even legal.

This leads me to why I am getting a little more cautious when it comes to the overall economy. In short, it’s because things are looking, well… good.

How? Well…

• Stocks are trading like the Fed already cut rates.
• Bonds are trading like inflation is still a big problem (and rate cuts aren’t going to happen anytime soon, ie economy is still running hot or traders have labor market concerns).
• Housing is trading like there are no problems.
• Gold is trading like there are no problems.
• Chocolate is trading like gold.
• Oil is trading like we are in a recession.
• My spider sense is tingling….

The Skeptics Take: So when you jump on your next real estate deal. Remain cautious. Make sure it's a great deal. Don't build into your IRR returns a refinance down to 5.5% in month 6. Make sure you can afford that higher mortgage payment for an extended time IF needed. Maybe set aside additional reserve funds in the property's checking account. Sure a faster rate drop could happen, but if it were to, that would likely mean we are in a recession, and you may have other issues then. Like finding renters or higher eviction / vacancy rates. I'm targeting mid-level rentals as investments (buildings that rent for $1500-$2000) / unit. These units rent in any economy. And I am building in a 12-18 month timeline for rate to remain high. In other words, rates will remain above my target refinance rate of 5.5% for the next year / year and a half. I'm also reinvesting in my current portfolio of properties. For example, adding a back deck, garden area and dog washing shed in a few of my properties to ensure I attract the best tenants and they appreciate living in my property (and don't leave).

When times seem good, that is precisely the time to be prudent. Tighten up costs. Run market analysis on rent renewals. Take some time to improve / harden your properties etc….to remain robust against any potential downturn. Because you can NEVER predict when it is coming. Don’t try. Just keep improving and building that moat of resilience ….

And as always…Stay skeptical.

Most Interesting Tweet(s) of the Week

So sweet. Happy V-Day y’all.

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

Again, stay skeptical, all you dudes and dudettes.

Herzliche Grüße

-Andreas

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

@Carlos Ptriawan , yep, I rent it I won't ever sell it. More of an emotional asset than an investment. It's in the hills, super 70s still. I'll redo it over time. All my investments are in Nashville however. 

Thanks @Carlos Ptriawan !