Golden Handcuffs + Black Swans
Where’s the Black Swan, or is there one?
August 2023, where to start..? We’ve seen the 11th rate hike in 18 months, the most aggressive fed policy in decades.
The economy has held up remarkably better than pretty much anyone thought it might. The unemployment rate is where it was when rate hikes started. Headline inflation has receded noticeably, looking at mid 3’s YOY vs 9% – this is largely tied to fuel, grocery prices, etc. The fed is more concerned about “core inflation” (removing the above variables) which if you caught what J Powell said, he indicated they had made progress (It rose .2% in July, the lowest in 2 yrs) but that rate hikes weren’t out of the question. Recessionary forecasts are beginning to dwindle – perhaps that “soft landing” is in fact going to happen, or at least some form of it. For Pete’s sake, let’s not repeat the 70’s/80’s.
We’ve also been a month away from a recession for 18 months. Mortgages are at the lowest default rates in history, hovering at 3.4%. This is large in part due to the fact that over 65% of borrowers right now have a 4% or less rate on their current mortgage. Note: this fact in and of itself, has increased “disposable income” by default. I don’t have a stat for this, but the average monthly savings is relatively high for most households. I digress….
Business cycles happen, so at some point, there will be a downturn… it’s just an economic cycle that may or may not happen in the near future or happen to a lesser degree in a certain sector or a larger degree in another ( I’m not an economist, just connecting the dots). This is where we’ll be looking for the black swan, for some out-of-the-ordinary place in the market, somewhere in the economy that starts to send a signal.
Disinflation, it’s come down relatively swiftly compared to other economies. The American economy has done better recently due to being energy & food independent, along with the investments into renewables over the last 5+ years. This seems to be a major point economists are looking at in regard to how we’re able to recover from the massive inflation of 9%. Not to mention, most of the supply chain is becoming less-gunked (I know, that’s a super technical term..).
Then there are interest rates, influencing day-to-day decisions of my clients. The acceleration has been wild. I recall my father talking about having 12% in the late 80’s. Could you imagine that now? You’d think with this phenomenon, there would be downward pressure on the market in general, both in stocks and real estate. I’m not a stock expert (nor economist, see above), but the markets reacted positively and I’d have to think that they like to see a more responsible position and outlook from the Fed to get inflation under control and take hyper-inflation off the table, which may be in part responsible for the strong 1st half of the year.
Then there’s real estate and its resiliency given the run-up in rates. First, some of its demographic change – the millennial generation is moving into the home buyer phase at a later age (in their early/mid 30’s – call it a delayed life-cycle of starting families) and the boomer demo is slowing down & refinanced at a super low rate (the golden handcuffs as they say?). And, let’s not forget really low inventory and its ability to influence the “supply/demand” curve. Right now, in our local market, we’re running at about 2 months of inventory +/-. A normal market is said to have around 5-6 months’ worth of inventory. Who likes normal, anyway?
So, depending on what index you look at, there was a short decline in the market, then it seemed to flatten out, and I’ve heard recently that in some cases the market is starting to move upward again. Crazy. I don’t see one major factor that’s fully responsible for this. Home building & labor shortages are certainly part of the inventory equation as well.
In summary, do we feel like there are more rate hikes? Not sure. They may at least press pause. One thing holds certain, the shortage of inventory is here to stay. The demographic shifts in the market are coming (the millennials are going to have the greatest degree of buying power since the boomers). We do not, however, know where and if the black swan will show up. So when we look at what’s happening now, we have to understand where the opportunities lie and where to hold back when it comes to real estate opportunities.
One sector that stands out is the commercial side of real estate. It’s not a category I play in much, but it’s clear there’s been a small exodus given WFH changes. Another, which I hold close, is the small business crunch. Small businesses with 5-500 employees make up 60% of the workforce.
Access to capital has gotten expensive and tight. This is the smaller startup building energy technology. This is the local print shop that employs 5 people who bust their tails to print your marketing material (personal experience here). If they can hold on, they’ll be fine. If they need cash regularly, then it could be difficult if rates continue to stay where they are when it comes to accessing capital causing a ripple in certain areas.
August 2023 takeaways:
- For buyers in general, know your buying power & options that influence how you can make really smart offers. Ensure your agent communicates w/ the other party’s agent before making an offer
- For first-time buyers, there’s a lot of opportunity with inventory that is 40+ days on the market or has been withdrawn. In any general market, there’s 11-15% of people who need to move because life keeps happening. Find them & make them a reasonable offer.
- Sellers – be smart, know what your local market is doing, and ensure you’re presenting the absolute best. Buyers are savvy and are feeling the pressure of rates.
- Investors – Get creative with a strong offer and dig for the opportunity. If you can weather the rate for the next 12-24 months, now could be the time. Sooner or later when rates go down, prices & competition will rise.
