The Problems are the Path: The FED Picks Up The Pace. What does the FED See?

The FED followed the analysts forecasts on a rate cut. One member dissented.  The Trump appointee felt that the inflation figures are not in line with the FED Model.  We will see.

The Yield Curve is coming into line as the 30-year, 10-Year and 2 -year are now in line to indicate no Recession.  The 1-year is quickly following to a few basis points above the 2-year.  So all is well in the Government Market.

The follow up by the FED looks to be another cut shortly.  Consumer Confidence is falling.  The Census forecast of growth next year is down.  The commercial market is under pressure as owners from the multi billion and multi million properties are taking a toll on the smaller investors as the inventory of smaller investor properties are flooding the Commercial Listing Markets.

UNEMPLOYMENT?  According to the Thursday September 26, 2024 Wall Street Journal the unemployment numbers are forecasting recession.  More than enough reason for the Zillow numbers to forecast a decline in home prices.  More than enough reason for Buyers to wait to buy.  More than enough reason for home prices to soften and more price cuts.  More than enough reason for Days on the Market to expand.  More than enough reason for investors to look at Multi-Family homes as an investment.  Fearing job security is a sound reason to stay as a renter and hold off making the biggest purchase of their lives!

Now for those with a secure job, large investment portfolio, and the ability to pay cash it is Buying Season.  There is an Old German Saying my former partner in real estate once said...Schadenfreude....Happiness over another's misfortune!

In these times of uncertainty it is those who are willing to step up in the face of uncertainty to grasp the golden apple.  Are you one of them?

While the Yield Curve has flipped from Inversion to normal indicating no Recession.  The market is giving contrary indicators. Layoffs are spreading from the Technology area to the industrial sector and Airline...Southwest...is laying off workers.

Residential properties are under pressure as Zillow is now forecasting 3-4% declines in once chosen California Residential areas, cities and towns.

The latest forecast of buyer attitude with mortgage rates dropping from 7.125% to 6.125% on 30-year mortgages is dire.. buyers are taking a look and see attitude on buying.  The chatter is that buyers are looking for lower mortgage rates with the anticipation of more rate cuts to come.  Logical thought when the cost of ownership is really what one pays a month for the mortgage payment, not the price of the home.  The second reward for waiting is home prices are falling as sellers see buyers are holding back.  The seller cuts the price to a point affordability will match with mortgage payments.  That all adds up to a self fulfilling prophecy.  WE Wait,Rates come down, Sellers cut prices.....A win win for buyers.

So how to negotiate this quandary?  Offer 10% below list is my suggestion.  Sellers list below whatever the listing agent recommends.  There is never too low as buyers will recognize value.  That is a tough acceptance for sellers who have had it their way for so long.  Things do change!  An Old Chinese Curse...May you live in a changing world!

The irony of this market is that Commercial Properties are still looking for buyers with low cap rates from sellers, when buyers want high cap rates to recognize economic risks.  There is still a feeling from Commercial Investors that things are not that good.

The issue of investing in a Presidential Election year is best to wait to see who is elected before making investments.  Once in office and the lay of the land is set in Congress, the ability to pass bills will be noted for investors to begin to address their 4 year holding pattern.  The only issues that hangs around the American People's necks are Deficit of Payments and the expanding level of US debt.  Soon it becomes an issue of servicing debt especially with rates at high levels. Then deficits expand with the level of debt expanding as the FED issues bonds to finance the deficit.

This concept of election year of cutting rates was a reason I thought a 1/2 point would not happen. Now that it has happened, my thought is....What does the FED see I don't see?. There is a RISK out there that the FED sees.  What is it?

One last thought on that is the FED Balance Sheet. As the FED liquidates Bonds the Bonds are with lower interest rates.  That means the FED loses money. How much money can the FED loose?  Infinet  The FED is a different entity, they can capitalize the loss and hold the loss as an asset to offset it with gains in the future. So it is in the FED's best interest to lower rates, liquidate asset to break even or gain on sale to eliminate Capitalized loses.  That liquidation has the effect of taking money out of the system and keeping the inflation low or at least declining. That slows down the economy!

So What Does the FED See?

UNEMPLOYMENT?  According to the Thursday September 26, 2024 Wall Street Journal the unemployment numbers are forecasting recession.  More than enough reason for the Zillow numbers to forecast a decline in home prices.  More than enough reason for Buyers to wait to buy.  More than enough reason for home prices to soften and more price cuts.  More than enough reason for Days on the Market to expand.  More than enough reason for investors to look at Multi-Family homes as an investment.  Fearing job security is a sound reason to stay as a renter and hold off making the biggest purchase of their lives!

Now for those with a secure job, large investment portfolio, and the ability to pay cash, it is Buying Season. There is an Old German Saying my former partner in real estate once said...Schadenfreude....Happiness over another's misfortune!

In these times of uncertainty it is those who are willing to step up in the face of uncertainty to grasp the golden apple.  Are you one of them?

As before, call or write for any question you may have and think of me of your "in the know real estate professional".

The Problems are the Path: The FED and the Slow Rabbit

The first knowledge I had with the concept of the Slow Rabbit was when I attended the Wharton School of Business Management Program for Investment Management Analysis.  Slow Rabbit?  That is a measurement against which an Investment Advisor measures their performance to make their performance superior.  The slower the rabbit the better the advisor's performance looks.  

So too is my opinion of the FED's measurement "rabbits".  Every month we get a number of reports on inflation to consumer confidence to measure, which the FED uses to measure their performance in adjusting interest rates and FED Policy.  I remember when the FED made an adjustment to Inflation and CPI numbers to omitting gas and food from an index.  What sort of index on the cost of living does not want food and energy in it?  The basics of life... Food and energy for homes and business and cars.  The largest share of the poor 's budget to live on is dependent on energy and food.  So are the FED governors playing the populace to help their performance?

If so, the FED may have some surprises to their Slow Rabbit.  Record Harvest in grains will cause falling grain prices: corn, wheat, soybeans.  That will relate to falling meat prices as livestock are fed grain.  Gas prices should go down as ethanol as a supplement to gas will be lower.  

With inflation declining from supply not from a recession, interest rates will be cut to help the economy grow.  Now the $64,000 Question is what happens to housing supply and prices.  Interest rates decline does not automatically mean that the long term bond yields will decline.  What is will mean is that the Yield Curve will return to normal.  Interest rates near term will be lower than interest rate long term.

Those who were waiting to sell will find a better economy with inflation declining from oversupply; rather than, the FED choking the economy to pass out!

Do not expect an immediate Snap Back in real estate.  It will take some time to repair the Commercial Market.  Expect some losses and write offs on the high end.  Changes in the economy could resurrect the working in an office. 

There will still be an adjustment in the retail and banking sector.  Amazon and Costco and the other online vendors have crippled the Brick and Mortar vendors.  Online pharmacies are killing Walgreens and CVS along with the retail giants.  More stores will close.  The banks do not need large facilities any longer and more banks will close due to online banking and ATM machines.

Housing is a Question Mark.  There is evidence of slight declines in home prices per Zillow.  Is it enough to upset the market?  It looks like 3.5% declines for the year.  Not enough to upset the seller market but enough to help buyers with further declines in mortgages rates.  There is a slow change in the housing market as per a Census report.  The West Coast is seeing more sellers than buyers as is: Florida, Texas and Arizona.  The East coast is a Seller's Market.  A major change from the past 10 years plus.  California Dreamin seems to be a dead as Mama Cass.

The Rental Market is finding many landlords moving to sell their properties.  The Landlord/Tenant Act and subsequent tenant protection acts have put pressure on landlords.  The pressure has resulted from lawsuits by tenants and awards to tenants that have made those landlords who do not have the knowledge and support staff to advise them on following state laws active sellers of single family homes.

The rental market is under pressure as those looking to fix and flip are turning into renters waiting for a better price.  The high stock market has turned many investors into property owners and landlords.  As previously stated the end result of these two inexperienced landlords are the lawsuits from the various Landlord Renter acts the  State legislature has passed and soon will become law.  I saw some 10-12 so far for this year.  An earlier Blog or Newsletter has a detailed list of the laws passed and soon or are enforceable.  Counties have set up Renter help departments to assist renters in filing suits against their landlords.  I have a few clients that have told me some horror stories and large settlement they made by court order to their former renter(s).  The Legal Department of the California Association of Realtors has news briefs that try to help realtors.  When working on rentals the best property is Corporate Owned.  the corporation attorneys keep the corporate owner within the law and out of court.  The other nervous situation for landlords is the threat of a Nationwide Rent Control Act.

Those landlords who want to sell and have not gotten their price are returning to the rental market with rents under the market with low deposits and month to month rental agreements.  BEWARE RENTERS.  The landlord can give a 30 day notice to vacate, without cause.

The results of Buyer/Seller Markets are deceiving.  As I review city by city is selected areas I see many cases of Sellers market with price cuts and sales below list.  A notable example of an exception was a recent sale of a Palo Alto home listed just under $3 million with 30 offers.  The exception is the average price in this area of Palo Alto is over $4 million.  A great E-Bay trick of underpricing to get action and over bids.  In this case the realtor did an exception job....worth his 2.5%?

The BIG WHAT IF is this month as the FED will decide on the direction of interest rates.  Inflation without home prices and rents are a poor measure...another Slow Rabbit.....but it gets Good Press.  The other item this week is Jobs.  So far it does not appear there is a slow down in jobs.

"1) Employment. August's employment report (Fri) should show payrolls rose by 200,000-225,000 to another record high and that the average workweek rebounded from July's weather-depressed reading. In any event, the average monthly increases recently suggest that the labor market has normalized back to its pre-pandemic average of roughly 170,000 per month."  Ed Yardeni Quick Takes

If the FED holds the line there will some interesting consequences.  On the other hand, I wonder if .25% will be taken in a positive frame of mind?  I have a feeling with the sell on news in Nvidia has had or will have some carry over as many stocks have move too far on over optimistic economics, that too could be the effect of a FED decision.

As before, call or write for any question you may have and think of me of your "in the know real estate professional".