Fixer-Uppers
US investors will get a reprieve from top-tier data in the new week, but likely not from volatility.
The docket is comparatively sparse. Notables will be confined to the housing market, which is struggling beneath a surge in mortgage rates that has no recent precedent.
Rates are the highest in 20 years. They've risen more than four full percentage points from the lows last year, and are up 150bps in eight weeks (figure below).
As Harley Bassman put it recently, the market will simply come t
Even if nominal prices don’t fall, real adjusted for inflation prices will do so. If I had to guess, because of favorable demographics (demand) and favorable technicals (pretty tight supply) you are probably looking at flat prices over the next 5 years. But real prices will likely be 20-30% lower. Over time this will reduce the sting of high prices and the market will be better balanced in most places.
That said, I would not want to be making my living in a residential real estate related job.
Anecdotally, it did seem to me that 20% down was required for a few years after the GFC, but at some point since every homebuyer I talked to was taking out PMI to get into their house quicker.
Banks must’ve remembered that they like making money…
Has anyone but me noticed how easy it is to talk about “trillions” these days? Eleven trillion disappears. To paraphrase the late, great Everett Dirksen, “A trillion here and a trillion there and pretty soon it adds up to real money.”
I have noticed in my subdivision the developer is suddenly in a real hurry to build out every lot he has left so he can bail. I have noticed each new build is dragging out a bit and sales are taking longer to make. I suspect closing prices are falling as well. On the other hand my first real estate student, now semi-retired, still did $20 mil in sales last year and is still going.
Home prices in the U.S. are too high. Prices were in bubble territory before 2021 — and then they went much higher. They need to come down, and hopefully (for the sake of millennials and Gen Zers) normalized mortgage rates at 7% will do the trick.
I put my house on the market in July and have sold. Instead of purchasing a new home, I am going to rent at 2.5x my mortgage in a much nicer location. I plan to purchase a new home once the Fed has done its job and interest rates tumble back down.
Fingers crossed.
If you wait until interest rates tumble, you’ll be competing against every other Dick and Jane out there who are also waiting for interest rates to come back down.
I think your strategy is sound, Wave. I have done similar things in the past successfully. What dayjob may be missing in his comments is when it is again cheaper to buy and take out a mortgage, Dick and Jane will be shell shocked and expecting housing to keep going down. It is not easy to buy when most are still selling; we are herd animals and like to be in the middle of the herd, even if it is galloping off a cliff.
For example, looking at various technical signals and how the market reacted to bad news on the CPI, I have a strong sense that a sharp counter-trend rally began in the markets on Thursday and will continue for at least a month, maybe longer. But there is no way I can convince any of my friends to put money on it. They will only jump on board when the crowd does too, which is probably when I will be looking to exit.
It will be the same in real estate, but I expect you will be renting for at least a few years.
“During a recent conversation…I let it go.”
Your discussion reminds me of the scene in The Big Short in which the MS team was conducting field interviews while sitting in a female realtor’s car. Let’s observe what occurs by the middle of 2024. I believe democratic transition will play a part in this situation.
I think, more than anything, she was concerned about not saying the wrong thing vis-a-vis fair housing. She really is just an “acquaintance,” not a friend. I mean, she knows me, but not well enough to completely switch off “professional mode,” so to speak. So, I think she was being cautious not to say anything that might suggest she’s inclined to not giving everyone who technically qualifies a fair shot. I don’t think that particular conversation was indicative of obliviousness. The obliviousness I mentioned seems to be concentrated among agents, or at least seller’s agents. I don’t know what buyer’s agents are saying right now.