It has been a good week over here. We’ve seen a noteworthy improvement in interest rates, continued improvement coming off the weak jobs report last week and into good inflation numbers this week. Good news in our space…that’s typically indicative of bad news for everyone else. Most are now saying the writing is on the wall for a recession that history books will note started in Q4 of 2023. Now.
The recession indicators range from consumer debt ($1.1 trillion; the sadly important aspect is that delinquencies are rising), earnings expectations for the retail industry – even ahead of the holiday season – are declining, and credit is tightening while banks cut back on staff to lean out. In seven out of 10 sectors, the forecast on earnings is down and the equities market pays very close attention to earnings expectations. I get the impression Americans are feeling all of this. Not just in casual conversations but in the data that shows the 8.4 million of them are taking on a second job. That’s a record high. This is just my opinion, but I don’t think you start working a second job in order to buy bougee shit. I think you make that kind of personal sacrifice because it’s required in order to survive, to make ends meat.
A former Fed Chair said this week that he predicts a cut to the federal funds rate will come in the summer of 2024. I spoke to a couple local smarties this week who agreed because, in their words, no way, no how is the current administration going into the election with a shitty economy – so rates will come down significantly in the summer. If we look at history, the first rate cut from the Fed has come on average 10 months after the last rate hike.
Are you feeling optimistic?
My only caution would be that we can’t rely on history. I’ve made this point before so you may know where I’m going with this. We’ve never been on the other side of a period like that one we just experienced – whether the Fed was so involved, for so long, in the marketplace. This is why an entire generation, or maybe two, might be ruined. It was historical patterns that led us to believe that rates would chill out this past summer and that we’d have rates in the 5’s before the end of this year. Where did relying on history and economic cycles get us? Very public humiliation from my personal point of view. (Kidding, I know you guys were definitely not laughing at me or talking snarky shit.) I’ve also read that health insurance is going to curb our inflation progress real soon. The Bureau of Labor Statistics is going to change how it measures health care costs but you don’t have to be an economic expert to know that whole scene is a similar level of extortion as what we see with appraisals. That might be why Goldman Sachs is predicting there won’t be any rate cuts until this time next year.
What’s happening locally?
At times like this, when things feel quite up in the air – I think the wise ones get hyperlocal with their data so they can make strategic decisions for themselves. Last weekend, all three offers I worked with borrowers and their realtors to make were multiple offer situations. I’m feeling the 18,000th shift of this year coming on and I’m wondering if any of you are as well? I’m also wondering investors are doing. Another local smartie told me that she’s struggling to rent her single family units. I would think that the buyers who’ve been priced out of the market would be eager to secure a home for their family but she said her mom and pop investors can’t compete with all the new apartment buildings locally. They are offering the first 2 months rent free. We know that Millennials and Gen Z don’t view money the same
way as previous generations. Still, I am scratching my head at if they don’t understand that after those two free months, that astronomical rent amount is due every month.
Fannie Mae reports that vacancies are currently sitting at 6.5% which is pretty high.
What’s happening globally?
Many of you know my brother, Arjun, lives in the Bay Area. Lots of local San Franciscans were displeased by Biden’s visit this week. Not because of their political affiliation. The city cleaned up the streets. For the first time in almost 5 years, they picked up the trash, displaced the displaced and put out planters. I’m not kidding, planters. I have an eye witness on the ground there. He usually tells me about witnessing humans in the act of defecating on his way to the office in the same spots some of those planters popped up this week.
I bring this up because Biden was in SF to meet with the Chinese President, Xi Jinping. China is in a recession. China is in a deflationary period. China affects us. Watching them may help predict what is next here. With one disclaimer, China’s housing market is in bad shape. I don’t see any data or mathematical formulation that would show our real estate market following similar path. And when our housing market crashed in 2008, their's didn’t. So don’t freak out. I know what I say here is of great importance to you all and I don’t want to keep anyone up tonight.
Would deflation be so bad?
After so much focus on the war against inflation, you might think deflation is the goal. It is actually a risk. If we have a fairly mild Recession, it will be ok and just bring inflation down into the zero neighborhood. If inflation readings go negative because the landing isn’t so soft, then we have a problem. If the cost of goods and services goes down too much, company profits go down. We care about those guys at the top because if they are concerned about profits, they lay off the people down below and then we have more unemployment. You can see how a recession that leads to deflation that leads to more unemployment becomes a vicious cycle…
Plus we know how to tackle inflation. We are living through that exercise now as the Fed pulls the one lever it has to control the economy – raise interest rates. When you have the opposite problem, deflation, what can they do? The Fed funds rate can’t go negative right…so they don’t have a lever to pull and it’s a harder problem to solve. It hasn’t happened since the Great Depression.
Let’s watch…
My best advice to survive this market is to grow thicker skin. Kidding again but only kind of. My advice was actually to watch for the rate you need to see in order to be able to afford the monthly payment on the price range you need to shop in. I cannot put together a tale of a housing market crash right now, even if I use my wild imagination. If you know me, you know what a statement that is. I’m really good at worrying about a worse case, nightmare outcome. It’s not on the horizon for real estate. So don’t set your sights on a recession bringing you real estate on clearance. Set your sights on the rate you need because it might be here quicker than we thought. That’s going to be your moment to capitalize. To time the market and win. And if you tell anyone I told you to time the market, I’ll deny it.