Where Forth Art Thou Goeth Interest Rates

The Problems Are The Path: Interest Rates and Money Supply

The commentary and forecasting of interest rates have taken a Pivot from confidence that rates would be cut in 2024 to a point that there will not be a cut or the cuts forecasted will be late or slow in occurring.

All attention has been on interest rate commentary and very little if any attention on total FED actions in slowing down the economy.

Of the FED's tools the tightening beyond interest rates can occur in contracting Money Supply. Money Supply takes many forms if one looks at the Federal Reserve's Balance Sheet.  The most visible part the the Balance Sheet are the Assets.  

To save the US economy and the world economy during the Pandemic the Federal Reserve began a policy of Qualitative Easing.  A policy of lowering interest rates and simultaneously buying Treasury Bonds, Mortgage Backed Securities and debt instruments to feed liquidity into the monetary system to help business and the population in general survive the economy that was shut down by the Pandemic.  

On a World Wide Level, the process was copied by most, if not all, of the World's Central Banks.  The Qualitative Easing by some Central Banks went as far as mortgages were negative. Home owners did not pay a mortgage but were paid to have a mortgage. Government Bonds had a negative return.  Buyers of such bonds did not receive the full amount of their purchase. Thus a NEGATIVE RETURN!

All through these times the United States Federal Reserve accumulated over $9 Trillion in assets.  The money supply expanded.  Corporations borrowed heavily at ultra low rates, individuals refinanced mortgages at ultra low rates.

Now we are experiencing the reverse.  Quantitative Tightening. things are going too well, prices are escalating and inflation is or has increased.  The result is lowering rates to stop the economy rolling into a recession.

So far, there is little to indicate a recession.  

There is one item that has not been addressed, the Balance Sheet of the Federal Reserve. While raising interest rates in concept slows an economy down and reduces inflation.  There is one tool the FED has in slowing down an economy that media and Wall Street Economists and Investment Analysts fail to mention.....MONEY SUPPLY.

From over $9 Trillion to the present balance to March 2024 to $7.74 Trillion, the FEDis reducing Money Supply.  Interest rates have remained at the present level since Mid 2023.  During that time the FED has been taking money out of the supply of funds necessary to grease the economy's gears. Since the end of April 2023 the FED has shed $1.53 Trillion through the maturation of debt and sale of debt in the FED's Balance Sheet.  See Details Here

"By going slower we are going farther" said Chairman Powell in one of his recent comments.  Which means that as long as the economy keeps a positive trend and the inflation slowly comes down the FED can control inflation by reducing the Money Supply.  Thus investments in the economic growth will be evaluated on Risk Free Rates of Return as exemplified by the Yield Curve in Bonds.  SEE RATES

By going slower the risk level of speculation comes down.  The demand for higher wages comes down, with the exception of governmental interference.  Conceptually the price of goods come down and inflation comes down.

Frankly, the concepts do not work well when extraneous forces make conceptual theory fail.

We are at such a point.  Commodity prices are increasing.  The price of Oil is increasing.  These are all supply side economics.  Interest rates cannot help supply side economics and neither can money supply.  When Supply Side issues arise money supply reduction only accelerates commodity inflation as lack of supply of money must fight for limited supply.  Then the only alternative is a flip to increasing money supply and lowering interest rates again.  Until supply is corrected and then begin the cycle all over again.

Where are we today?  Far from the FLIP.  We are at the PIVOT.  The Pivot from lowering interest rates to lowering Money Supply.  The next phase is asset inflation decline.  The Dow industrial Averages, the speculation over Artificial Intelligence will eventually lead to profit taking and the placement of proceeds of sales in T-Bills at 5%+ will certainly be warranted.

Now the Big Question for a Real Estate Blog is what happens to Real Estate?  LOWER prices on residential housing is slowly occurring, but in most cases, hidden by the inability to have a look back.  Look back at your specific neighborhood, town or city and you will note the decline that has occurred month to month year to date year to year.  SEE HOME PRICES

As mortgage rates have increased it has diminished the number of those who can afford to purchase a home.  Lenders have seen money supply decreasing affecting the ability to have funds for mortgages.  Cash buyers have depleted savings.  Baby Boomers who own 25% of the housing market are getting older and getting ill or dying adding slowly to the housing inventory for sale. On top of all that, the equation of how to purchase a single family home has been upset by the recent NAR settlement.  Will buyers submit to a Broker Buyer Agreement that commits the buyer to a set $/% to the buyer agent?  Will the buyer attempt to represent themself?  Will sellers try to represent themselves?  Will the cost of selling a home be unbundled between seller and agent to lessen the commission fee?  All of this is unknown. When unknown my bet is the supply of homes increase because buyers back away from the market.  Sellers attempt to use online sources to sell a home to buyers who have no idea of the legal implications in doing so.  It all sounds like a Train Wreck waiting to happen.  SEE MORTGAGES

Based on the history of the FED, the wreck will occur and the FED will then try to stop it from happening....JUST TOO LATE....as usual!

My recommendation is to pay off your mortgage, wait, continue to rent and wait.  investors sell your single family home rentals in California and look for a states more friendly to single family rental market owners.  Buy multi-family rental projects, Triple Net Lease corporate guaranteed properties, Storage facilities and gas stations with marts and car washes attached.  Stay away from Bank buildings as they are closing. Car washes are intriguing but their competition is hard to battle and too many older washes needing upgrades are coming on the market.  Take your profits in the growth sectors of the stock market, especially technology where the Federal Trade Commission is taking on monopolistic tendencies of the Tech industry especially in Search Engines and Social Media. SEE REAL ESTATE COMMISSIONS. SEE FB. SEE OPENDOOR. SEE AMAZON. SEE AI.  

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: Is Real Estate Changing?

Realtor Settlement 

First allow me to make a disclaimer.  The comments are my own.  They are not related or part of any comments of the National Association of Realtors, California Association of Realtors or any local Realtor Association I am or was a member of.  Nor are my comments that of eXp Realty of California and any Real Estate Broker I have been associated with either now or in the past.

Now with that out of the way....6% real estate commission died years ago.  5% has been dying the similar death. (At least here in California) With the increase in property prices there has been a variable fee developed by listing agents with negotiation of services to the seller. Buyer/broker representation forms have been growing with acceptance.

In my opinion to claim the 20% increase in property prices since the pandemic, on a national level, is associated with real estate commissions is ludicrous and a bit of a exaggeration.  It is really supply and demand and the cost of money that drove prices.

Remember this if you can: Buyers are to sole source of value and they control prices.  If they cease to buy, prices decline until buyers come back in.  This is a Buyers Market and for the industry a Bear Market.  To the point Buyers continue to buy without regard to price this is a seller's market or a Bull Market.  Irrespective of what media tells you...Buyer's control markets for real estate to stock, gold, bonds, crypto or whatever asset a buyer feels is a Store of Value!

First: all should be aware that real estate agents are Independent Contractors.  They do not receive a salary, car allocation, insurance, pension benefits or medical benefits from their Broker.  As an Independent Contractor the real estate agent covers all expenses.  Those expenses are: association fees, MLS Listing Fees, Education expenses, Marketing expenses, they fund their own retirement plan, they pay for their own medical expenses.  Then too, there are the numerous marketing services that seek to sell leads and or get leads and referrals from agents.  Leads from agents, I may add in my opinion, that are never given back in a referral. They are the parasites, in my opinion, they prey on the inexperienced or gullible agent's desire to be successful.  

The split between broker and agent is normally 80/20.  But there are means by which brokers have gotten a larger cut for services and referral given to agents.  In some cases making it a 65% to 35% split broker versus agent.

It is recommended that agents put 30% of every transaction income into a side account to cover all costs associated with their profession.  Realizing that not all listing presentations result in a listing, not all buyers buy a house.

From this nest egg agents pay for their fees and marketing expenses and are under the supervision of their Real Estate Broker and the Department of Real Estate and all the Associations they belong to.  

The Real Estate Broker provides a platform that allows for supervision and reporting for the California Department of Real Estate and any and all laws and Codes of Ethics that Real Estate Agents are duty bound to follow.

Real Estate agents will pay their Brokers for a desk space (or the will work from home), they will pay for the Brokers Website platform and the website that incorporates all contacts, training, sales meetings and marketing programs.  In that regard, not all of those training or marketing programs are free.  The Broker, NAR and CAR and Local Associations all have their attempts to generate income off the agents in providing certification abbreviations that you may see on business cards..which the agent pays for that the broker requires.  Those cards, plus the signs and open houses signs are all paid for my the agent and the agent must follow the guidelines of the Broker.

Every 4 years agents are required to take new tests and pay for training for those tests to have their California Real Estate License renewed.

The question to put before you is the settlement really hurting the agents more than the brokers? 

There are a few benefits that will come from the settlement.  Buyers will now be required to sign Buyer Broker Representation form before they can see a property and or get any information from an agent on the property concerned.  Outside Services in Real Estate will not get the buyer access, it will not get the buyer the disclosures, it will not inspect the property for the buyer, review the disclosures or determine if title is clear.  Buyers will not be able to access without this form.  Even if the option is to view a property for a showing the form will be dated for the day of the showing.

This form has been part of agents forms that have been requested of many buyers.  Buyers have reluctant to sign these commitments.  Thanks to the settlement buyer will required to sign them.

Will fees come down?  Will prices come down?  Will the services required by sellers and buyers be eliminated.  To answer those questions one must be aware that many of the forms and disclosures are either Federal, State, County and or City requirements of sellers and buyers. Those are mandatory.  The disclosures in themselves will make the the book Moby Dick seem slim.

Can Buyer's represent themself?  Certainly!  But, how many mistakes will be made before a novice becomes experienced?  The buyer will not be able to get a fee reimbursed to themself.  That is illegal according to Department of Real Estate Law.  Since there is no commission fee it is illogical to assume compensation.

Brokers through their agent will not be able to note the commission on a MLS listing, they will not be able to notify the buyer on any public source the seller willingness to pay a finder's fee to the buyer's agent.

To those who work as Commercial Agents, this has been their lives for decades.  Residential agents and their clients are just getting current.

Fees will be paid through Concessions.  If the seller will not pay for the buyer's agent, this will now be the responsibility of the buyer and the agent to negotiate compensation.

All of this will happen in July 2024.  I am certain there will be many changes between now and then.  But for buyers and sellers be prepared for the change.  Even what I am writing about here could change between now and July 2024

Who will be hurt?  Any of the various businesses who rely on real estate agents for a source of income.  I think overall some buyers and sellers will be hurt.  The complexities of being a real estate agent is nothing an uneducated can take over.  I know Zoom has a number of influencers that claim their expertise.  Unfortunately, to me, most look young enough to be classified as "just coming in with the morning mail".  It will be the experienced agent who will know how to navigate the new laws and requirements of their Broker.  What will happen to the part-time agents who saw being a real estate agent as an easy way to supplement income?  These agents will be hurt if they have not prepared and are not re-trained.  They will possibly quit.  The result will be a return to professionals who are trained and dedicated to help buyers and sellers in residential real estate; just as, commercial agents are full time agents dedicated and experienced to service their clients.  Overall a benefit for Full Time Professional Real Estate Agents!



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: California Legislature Takes Aim at Landlords

 From the beginning of the Pandemic to the present there has been numerous laws passed by Cities, Counties and the State of California to address the ills that landlords have placed on renters.  Most notably: Under Civil Code Section 1941.1 et seq. and the Health and Safety Code Section 17920.3 et seq. require landlords and property managers maintain rental units in a condition that is habitable.  Failure to do so is a breach of warranty of habitability.  I believe this law started the law suits and Town and Community awareness of issues that were being created by Landlords negligence.

The influx of laws accelerated with the Pandemic.  Landlords were banned from evicting renters during the pandemic and renters did their best to find reason to not pay rent.  When the bans ceased evictions sky-rocketed.  In California renters had the benefit of Civil Code Section 1941.1 et seq. and the Health and Safety Code Section 17920.3 et seq. This State law along with the support of Renter Coalitions helped stop evictions.  But that was not enough to halt the abuse that the Mom & Pop Landlords had created by past actions.  What followed was the action of the State Legislature which put restriction on the activities of Landlords.

In 2024 the following acts were passed: SB 567, AB 12, AB 548, AB 1317, AB 1418, AB 1607, AB 1620, AB 1679, SB 48, SB 267, SB 712, AB 309, AB 524, AB 548, AB 267, Ab 1312, AB 712.

Here is a brief summary of each act.

SB 567: This bill aimed to strengthen statewide rent and eviction controls, but it was watered down quite a bit.  As originally written, the bill would have lowered the statewide rent cap. Under state law, rent increases are limited to 5% plus the local rate of inflation, or 10% of the lowest gross rental rate charged at any time during the 12 months prior to the increase, whichever is lower. This will remain unchanged.  Under the first iteration of SB 567, there would be a complicated process for owners endeavoring to remove rental units from the market in order to sell or convert them, but this language was axed from the final bill that was recently signed into law by Governor Newsom.  As for those owners looking to end tenancies for substantial remodeling must now detail the work that is contemplated, and inform the tenant of their right to reoccupy the unit if work doesn’t commence or isn’t completed.

Assembly Bill 12 (AB12) Effective as of July 1, 2024: The California State Law will go into effect as of July 1, 2024. The New Security Deposit Limit: Assembly Bill 12 restricts landlords from requiring security deposits exceeding one month's rent.

AB 548:  This Bill allows for local code enforcement to act on unhealthy or unsafe code violations in a multiunit complex by inspecting and notifying other tenants of the conditions in the shared building. The law now mandates that the local enforcement agency develop criteria that would trigger additional inspections which need to be consistent with current laws regulating inspections. The code officer needs to notify the property owner or building operator of each known violation observed, and provide a notice or order to repair. The officer is then required to re-inspect the property to verify that the violations have been corrected.

AB 1317:  A bill that advanced from the California Legislature this week aims to mandate that some California landlords “unbundle” parking costs from rental rates. The Act would apply to new residential properties with 16 or more units that receive a certificate of occupancy on or after January 1, 2025.  Serving as a pilot Project, the bill, will apply to Alameda, Fresno, Los Angles, Riverside, Sacramento San Bernardino, San Joaquin, Santa Clara, Shasta, and Ventura Counties.

AB 1418: This bill would prohibit a local government from, among other things, imposing a penalty against a resident, owner, tenant, landlord, or other person as a consequence of contact with a law enforcement agency, as specified.

AB 1607: Effective January 1, 2021, Assembly Bill 1607 (“AB1607”), Prevention of Gender-Based Discrimination, requires a city that issues business certificates to provide a business, at the time the business is issued the certificate or during renewal of the certificate, written notices of the requirements provided for by AB1607. AB1607 requires certain businesses to disclose, in writing, certain signage in a conspicuous place and the price for each standard service provided. To view the business’ rights and obligations under these provisions the Department of Consumer Affairs has provided the following informational materials.

AB 1620: AB 1620 authorizes local jurisdictions to require that tenants in rent-controlled units and who have permanent physical disabilities related to mobility be allowed to relocate to an available, accessible unit at the same rental rate and terms. The bill only applies to properties with five or more rental units

AB 1679:  Transactions and use taxes: County of Los Angeles: homelessness. An act to add Chapter 2.4 (commencing with Section 7286.01) to Part 1.7 of Division 2 of the Revenue and Taxation Code, relating to taxation.

SB 71:

This bill would amend Code of Civil Procedure Section 116.221 to  increase the small claims court jurisdiction over actions brought by a natural person, if the amount does not exceed $25,000, and would also increase the amount in controversy permitted in other specified actions within the jurisdiction of the small claims court. The bill would increase the limit on the amount in controversy for an action or special proceeding to be treated as a limited civil case to $100,000.



**SB 71 was signed in to law on October 16, 2023 and takes effect January 1, 2024.

SB 267:  SB 267, Eggman. Credit history of persons receiving government rent subsidies.Existing law, the California Fair Employment and Housing Act (FEHA), prohibits, in instances in which there is a government rent subsidy, the use of a financial or income standard in assessing eligibility for the rental of housing that is not based on the portion of the rent to be paid by the tenant. FEHA requires the Civil Rights Department to enforce specific provisions of the act, including the provision described above.This bill would additionally prohibit the use of a person’s credit history as part of the application process for a rental housing accommodation without offering the applicant the option of providing lawful, verifiable alternative evidence of the applicant’s reasonable ability to pay the portion of the rent to be paid by the tenant, including, but not limited to, government benefit payments, pay records, and bank statements, in instances in which there is a government rent subsidy. The bill would, if the applicant elects to provide lawful, verifiable alternative evidence of the applicant’s reasonable ability to pay, require the housing provider to provide the applicant reasonable time to respond with that alternative evidence and reasonably consider that alternative evidence in lieu of the person’s credit history in determining whether to offer the rental accommodation to the applicant.

SB 712:  

Gov. Newsom on Sunday signed legislation setting standards for the storage of e-bikes, e-scooters, and other battery-powered micro-mobility devices in California rental housing.

SB 712 by Sen. Anthony Portantino, D-La Cañada Flintridge, generally allows tenants to store these devices indoors, but with some exceptions based on factors such as battery type, whether the tenant has insurance, and whether the landlord can provide storage outside the unit.

AB 309: AB 309 would lay the groundwork for creating a new, statewide social housing agency that would fund, build, and manage affordable, mixed-income social housing for both rental and homeownership opportunities.

AB 524:  VETOED

AB 548:  This bill would require local enforcement agencies, by January 1, 2025, to develop policies and procedures for inspecting a building with multiple units if an inspector or code enforcement officer has determined that a unit is substandard or is in violation of the State Housing Law, and the inspector or code ...

AB 267: This bill would increase the amount of persons to 11 who may gather for any lawful purpose in any such tent, awning, or other fabric enclosure. instead apply the above-described requirement relating to tents to a gathering of 15 or more persons.

AB 1332: This bill would require each local agency, by January 1, 2025, to develop a program for the pre-approval of accessory dwelling unit plans, whereby the local agency accepts accessory dwelling unit plan submissions for pre-approval and approves or denies the pre-approval applications, as specified.

The consequences of the State's actions can begin to have compounding affects of the individual landlords who are looking for return and inflation protection. The more work involved with regulatory affairs will have the effect of frustrating those who lack the mental agility to work within state regulations.  This in turn will force them to hire professionals.  The extra cost will add greater pressure on holding, tolerating, complying and or selling.

In California 45.5% of the homes in California as rentals. Of that 45.5%, 28% are Big Landlords, leaving 32.76% to the individual landlords. California has 12,214,549 Total Housing Units as of June 5, 2020.  The various act will affect 4,001,486 housing units!

There are roughy 327,000 for sale in California today.  I find it hard to fathom 4 Million homes coming on the market as a result of the State Legislative action.  I question that there would be a mass exodus out  or single family rental by the Mom & Pop landlords.  It is doubtful any decision to sell would be generated by the various acts noted above.  Based upon constant knowledge of the owners. In all probability the issues would only occur through legal action.  After which a decision to hold or sell would be created.

To those of you who are landlords, or contemplating income property in California, the Bills are part of your due diligence in preparation to purchase.  Remember there are 40% of total renters in the market. With interest rates remaining high there are many affordability issues that will drive renters to Apartments and Single Family Housing.  

I consider this period an opportune time for purchasing Rental Properties.  1. Demand is high, 2. Financial Quality of Applicants is strong, 3.  Mortgage rate for Commercial loans are in the 6-7% level for Good Credit Applicants.  4. Net Operating income calculation offer 6.5% Capitalization Rates beating T-Bills and Money Market Accounts with Tax Benefits,  5. The annual movement out of California is offset by movement in to a point the difference is meaningless.

CLOSING THOUGHTS: "The Brain is a wonderful organ, it starts working the moment you get up in the morning and does not stop until you get into the office"...Robert Frost..  No wonder people are more productive working from home!

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: Investors are Almost Alway Wrong on the FED

Investors, home buyers, and agents are convinced the FED will lower rates later this year. However, their record is not that great!

Whether the investor is a Wall Street Titan, a Commercial Real Estate Investor or Speculator or an individual investor in stocks and bonds or real estate, they have been caught offside in both directions while making their decisions on the Path of Interest Rates over the past years.

Let's take the commercial bets on office buildings.  No one expected a major shift in employees working from home as a result of the Pandemic. The shift created massive vacancies in office buildings across the United States and major world centers.  Office building owners felt it wise to take additional loans on properties before the pandemic, planning to refinance at lower rates in the future.  It did not work out well for them.  The FED raised rates to combat inflation and vacancies created a fall in income that put properties at risk.  Offices were not the only victims of improper planning on interest rates and the FED. Apartment owners expected rates to remain low or go lower and also borrowed. Speculators saw great opportunities in remodeling and renting out new apartments or home at higher rents or resale prices with *Due On completion loans.  The loans were cheap.  Unfortunately, when the loans came due the rollover rates were not cheap.

*Due On clause in loans on real estate are what lenders put in to get their money back.  In residential properties the Due On Clauses have been mitigated by legislation.  Not so in Commercial Loans.  If a commercial borrower remodeled or developed a property with a construction loan or some variation of it.  They have a Due On Clause that states once occupancy or completion permits are issued by Planning Departments the Loan is Due and Payable.  Some loans may have a rollover clause to a new loan at market rates.  Other loans will have a repayment demand within a specific time frame. 

The FED has not complied to the plans of lower rates.  While the forecasters claimed a cut in rates in March 2024, maybe 3 rate cuts for 2024, no 7 rate cuts. The FED said NO.  The FED also indicated that rates may remain up for well after March 2024.

On a daily or weekly basis reports do not indicate a softer economy.  It is becoming evident that the savings of Americans have created a cushion that allows growth to continue at a steady pace.  Home owners have refinanced their mortgages at sub 4% rates, put more into cash savings instruments and accounts. That has created a resistance to the thought of selling and moving. The result is no resale of existing homes. Inventories of homes for sale are at historic lows.

Wall Street made bets in the future markets that rates would drop.  Mr. Powell said, not yet and maybe not so soon as you thought.  So now those waggers on lower rates have shifted to May 2024.  At some point those waggers unwind and rates move up and bonds sell off.

The economy keeps moving along as the employment numbers were above expectations and another blockbuster for the economy moving forward. Moving forward with the economy is INFLATION.  The Federal Reserve Bank of Atlanta has now forecasted inflation for the first quarter of 2024 at 3.4%  This is no where near the FED target of 2%.  Rates will remain higher for longer than expected all pointing out the inability to forecast.

Near the end of 2023 and the early days of 2024 a decline in rates from the high of 2023 unleashed a wave of borrowing by highly rated U.S. companies with issuance of debt at near records for 2024. That does not bode well for the belief of lower rates in the future.  The "in the know" U.S. Corporations are borrowing at the present higher rates.  They must foresee higher rates in future than lower rates.

While U.S. Corporations are borrowing the Banks are not.  The recent survey by the FED of loan officers show fewer banks are tempering their willingness to lend.

The U.S. budget deficit is increasing.  The increasing deficit is financed by U.S. borrowing and issuing new debt.  The debt has higher interest rates. The higher interest rates keep rate on all loan high.  The increase in debt and higher rates create a larger Federal deficit.  High interest rates feed on themself.

What is at stake?

The prospect of higher rates for a longer period than expected could upend the Bond Market.  The decline in the Bond Market will create higher yields, with the higher yields will come a decline in the stock market as investors are willing to take on secure returns and sell their stock positions and speculative investments which pay capital gains.  More and more commentators are questioning the value of stocks and whether the advance has gone beyond fundamentals into risky bets based upon concepts of technology developments yet to be proven in growth and earnings.

The prospect of higher rates will create issues on valuations in the home residential market.  Higher mortgage rates will put first time home buyers back into rentals or back to Mom and Dad.

The Biggest Risk is the Bond Market!

As time passes and rates remain high debt will have to be refinanced. If the financing rates are too high for the the party needing to pay off the debt, the only recourse is to sell the underlying asset.  Should a Bond Market sell off occur, more assets will be discounted.  New Housing Developments will sell off their inventory and fail to take on new projects in face of high rates.  There will be some buyers in real estate who will take on property in discounted markets, even if rates are high to finance their purchases.

The risk that lies ahead is for the highly leveraged private equity, commercial real estate or lenders as regional banks. This could end up being a slow burn as as delinquencies mount, notice of defaults become more common and with that Foreclosures.



The Problems are the Path: History Repeats in Interest Rates

REMEMBER!  Lenders and owners are Diametrically Opposed!  This Adversarial Relationship stems from GREED, an entrepreneurial trait which brings both parties together.

From the 1960's forward, Legislatures and Judiciary parts of our government have worked to protect lenders from the abuses that created an uneven playing field that favored lenders. (Residential)

The most important legislation came from California in the "Anti-deficiency legislation of the 1930's.

Rising inflation during the 1960's produced a severe real estate recession in 1965-67.  This occurred while the economy improved due to employment from the war effort of Viet Nam. 

1963-64 Boom Led To The Savings and Loan Crisis.  

Lenders viewed excess money on deposit as wheat to be harvested.  Money was lent quickly and deals where chased aggressively.  Brokers were in control, rates were below 7% and deals were taken on without regard to risk as inflation was low. 

The result was excess Real Estate inventory.  To save themselves Savings and Loan and Small Bank mergers created larger firms with the same insolvent inventory.  

In 1965 Interest Rates Increased!  Money Supply Tightened! Availability of funds decreased and inflation soared!

Savings and Loans who provided most of mortgages were caught in a vice.  The cost of funds, deposit interest, increased over the Fixed Rate Mortgages income of mortgages held.   A quarter of the Savings and Loans in California were in Financial Trouble.  Added to that risk the developments financed by the Savings and Loans could not sell new homes without mortgage funds and qualified investors.  Foreclosures came in by the thousands and a new term for the Balance Sheet of Banks became known as REO, Real Estate Owned.

To avoid "Due on Sale" covenants of mortgages All Inclusive Trust Deeds or wrap mortgages were formed using Land Sale Contracts so the new buyer assumed the old lower mortgage rate.  Variable rate or Adjustable Rate mortgages became popular.  Land Sale Contracts, Carry Back Financing all were used to bypass the "Due On Sale" clause of mortgages.

While Wall Street and Owners got creative, the Federal Reserve still tried to stop the inflation from the boom in real estate prices.  By the time the FED rates hit 14.5% the Real Estate Bubble had busted and with it Savings and Loans!  Resolution Trust Company liquidated Savings and Loans REO properties at wholesale prices.  Home owners were evicted as the recession was more in line with a depression with loss of jobs and income to support their homes or real estate Speculation.  The recession was not kind to other assets, the Stock and Bond Market collapsed.  Only Gold became a Store of Value.  

The Next Cycle: Millenium Boom

Legislation was passed, interest rates declined and the stock market and bond market rallied from a severely depressed level.  But still Foreclosures increased eightfold in the early 1990's.  The economy righted itself, jobs and income increased.  The dramatic increase is asset values and the return to work created another cycle of inflation.

In 1998 the Federal Reserve once again began rising interest rates to induce a recession.  By FED action and legislation real estate prices froze on their highs without having a chance of adjustment.  On September 11, 2001 the FED opened the Floodgates controlling the flow on money into mortgages.  The FED bought treasuries and loaned money for mortgages.  This added large amounts of cash to the Money Supply.  The seeds of the MILLENNIUM BOOM began to sprout.  

During the same period the U.S. Treasury and Congress deregulated mortgage lenders and Wall Street Bankers.  This removed the safe fundamental lending practices for safe mortgage lending.  Wall Street bypassed the FED and created MBB, mortgage backed bonds and no longer looked to the FED to create money supply.  Wall Street took over with no oversight!

Congress got into the game by 2005.  The legislature had succeeded in removing what few restraints remained on mortgage lending by withdrawing bankruptcy court authority to help insolvent and over mortgaged homeowners.  

This was the Final Straw following 25 years of loosening controls over Wall Street's involvement in the mortgage industry.  By 2007 mortgage borrowers began defaulting en masse!  Almost overnight the Millennial Boom became the Great Recession!  It left 40% of California's 6.5 million homeowners with Negative Equity!  Another foreclosure Crisis was created!

The Next Cycle: Today

Back From the Bottom again, the FED fed money by buying MBB to keep funds flowing into mortgages, government subsidies in the form of tax credits to home buyers were issued.  Dodd Frank Act and the creation of the Consumer Financial Protection Bureau were created to help homeowners.

Then came the pandemic and the FED and Government increased the flow of funds into the economy to the tune of a FED Balance Sheet of over $9 trillion dollars!  A double in the size of the FED's Balance Sheet which had already doubled from past historic averages.  

The Pandemic ended and Americans found themselves with savings and cash reserves from being home bound and splurged, inflation was fed and the FED just watched.

When the FED acted by raising rates rates went to a +20 year high.  The economy was resilient just as in the past.  Stock prices boomed again, but only in a select group of technology stocks, the Mighty Seven led the run.  Last half of 2023 Wall Street pumped the public with forecasts of interest rates cuts in March of 2024 and possibly 7 in total for 2024.  The stock market went to a new high on the promise of lower rates.  Lower rates that did not come.  January 31, 2024 the FED said no rate cuts coming and none for March 2024.

How long will high rates continue?  Will high rates create the repetition of the past 60 years?

As Yogi Berra was supposed to have said, "It's Deja Vu All Over Again"?

In the past 60+ years there was never a Soft Landing.  Crashes were the norm.  

The past does give some guidance as commercial property now seems to be the area of concern.  Watch for Commercial sales when owners are Private Equity Groups who purchased property in 2019-2021.  The loans given were basically construction loans created in the form of mezzanine loans.  These loan give lenders the rent and income flow when in default.  The Due On Clause is valid in Commercial Loans where they are not in Residential Home Loans.  Generally speaking the Due On Clause is exercised when the commercial units are given building permit releases of their construction permits.  At that time the loans must be renegotiated to current market rates or properties must be sold. The refi efforts are the main benefit for new buyers as the refinance rates are +10%.  Owners must sell or be faced with high interest rates that may not be able to be covered by rental income.  Junk Bond rates for CCC rated corporations are 13.5%,

This the the Opportunity Area for investors.

Signs of lowering rates or a repeat of the past

1. Credit Card Debt as historic high with defaults

2. Luxury Rental Market declines: Austin Texas down 20%, Chicago giving free month(s) rent.

3.  December 2023 inflation numbers lower than expected.

To counter the signs of a slowdown the Federal Reserve of Atlanta has forecasted a 3.4% inflation rate for the first quarter of 2024, wll above the 2% FED target.  Rate will remain high until signs indicate a FED forecast of 2% inflation rates.  What lies ahead?  Bond market crash, stock market crash?

History Repeats Itself?

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: FED calls interests rates Wednesday January 31

On Wednesday the FED will tell what the tendency is for lowering interest rates.  If you readers just rely on CNBC, Bloomberg or some Social Media Site, I suggest you get on the St. Louis Federal Reserve Bank's mailing list.   Add to the Wall Street Journal and the U.S.  Census Department.  With those three sources you will not find yourself being jerked around by Media promotions and investment banks and advisors promoting their positions.  

The Wall Street Journal had a list of the four new members of the Federal Reserve Voting Panel.  All four say too soon to cut rates.  The Federal Reserve so indicted the same.  The U.S.  Census reports showed slight declines in inflation with nothing near 2% annual rates.  The Census also stated POSITIVE growth in the US Economy.  All quite good for high interest rates.  It would appear to me why cut rates if the economy is doing so well?  The next issue the FED Governors must be looking at are housing prices and rents.  The Gen Z cannot afford homes per a local news media.  California average homes are of $850,000.  I take difference to that comment as I see my mentees selling homes in new developments to Gen Z'ers in new developments at a level of $650,000.  With new developments creating competition it will sooner or later put pressure on Existing home sales.  

Adding to the pressure of new home developments the supposedly Gray Tsunami of the Baby Boomers selling wave is sure to begin gaining momentum.  Especially so, as the Home Mortgage rate drop.   

There is one more item you would have learned from the Wall Street Journal before you found it on your You Tube site of Novices who promote themselves as "Influencers" seeking your subscription payment.  The FED has a special program which will come to an end on March 11, 2024.  The special program is providing a 5.5% rate to all banks and acceptable institutions' deposits with the FED.  What has that program done? It has removed funds from Money Supply.  As the deposits are locked up, banks no longer need to take risks with mortgages, consumer loans and business loans.  Remember there are several trillion dollars in loans to large commercial projects that are coming due. 

Commercial projects are not foreclosed upon.  They either sell to another investor or the banks renegotiates the loan.  If you believe the "World is Coming to an End" You Tube Influencer...DON"T.  With the funds flowing back to the Banking System there will be funds to negotiate commercial loans.  

Keep in mind China is in a recession and the property sector is collapsing developer by developer and taking state and local banks with them.  The Bank of China cannot let that happen. If China won't let it happen do you think the FED will?

Zillow just issued their forecasts for real estate in the US HERE.  It is quite interesting.  Those areas which were once under pressure and saw double digit drops are forecasting 3-5% home price increases.  Places like San Francisco are still in the negative forecasts and is most of Silicon valley.  The Sacramento Valley area are forecasting increase in home prices, scant by increases.

Going back to the Census Reports, the New Home Sales

01/25/2024 10:00 AM EST

Sales of new single-family houses in December 2023 were at a seasonally adjusted annual rate of 664,000. This is 8.0 percent (+/- 24.2%)* above the revised November 2023 estimate of 615,000.

December 2023: +8.0* % Change
November 2023 (r): -9.0* % Change.

Not bad reading for those looking for a first time home with existing home sales frozen at new low inventories.

From the same Census report of January 25, 2024 high interest rates are not have a detrimental affect on the economy per this report: Advance Monthly Manufacturers' Shipments, Inventories, and Orders

01/25/2024 08:30 AM EST

New orders for manufactured durable goods in December, up three of the last four months, increased $0.1 billion or virtually unchanged to $295.6 billion.

December 2023: 0.0° % Change
November 2023 (r): +5.5° % Change

From the same rporting wholesdale inventories are showing confidence in the future in spite of high rates: Advance Wholesale Inventories

01/25/2024 08:30 AM EST

December end-of-month inventories were $897.7 billion, up 0.4 percent (+/- 0.4 percent)* from last month.

December 2023: +0.4* % Change in Inventories
November 2023 (r): -0.4* % Change in Inventories

The Consurer has confidence in spite of hiigh interest rates: Advance Retail Inventories

01/25/2024 08:30 AM EST

December 2023 end-of-month inventories were $803.3 billion, up 0.8 percent (+/- 0.2%) from last month.

December 2023: +0.8 % Change in Inventories
November 2023 (r): +0.1* % Change in Inventories

Retail Inventories are up: Advance Retail Inventories

01/25/2024 08:30 AM EST

December 2023 end-of-month inventories were $803.3 billion, up 0.8 percent (+/- 0.2%) from last month.

December 2023: +0.8 % Change in Inventories
November 2023 (r): +0.1* % Change in Inventories

Durable Goods remain strong: Advance Monthly Manufacturers' Shipments, Inventories, and Orders

01/25/2024 08:30 AM EST

New orders for manufactured durable goods in December, up three of the last four months, increased $0.1 billion or virtually unchanged to $295.6 billion.

December 2023: 0.0° % Change
November 2023 (r): +5.5° % Change

Advance Wholesale Inventories

01/25/2024 08:30 AM EST

December end-of-month inventories were $897.7 billion, up 0.4 percent (+/- 0.4 percent)* from last month.

December 2023: +0.4* % Change in Inventories
November 2023 (r): -0.4* % Change in Inventories

We are buying less overseas: Advance U.S. International Trade in Goods

01/25/2024 08:30 AM EST

The advance international trade deficit in goods decreased to $88.5 billion in December from $89.3 billion in November as exports increased more than imports.

December 2023: 88.5° Billions of Dollars
November 2023: 89.3° Billions of Dollars

To summarize my position from the help of the US Census, Federal Reserve of Sta. Louis and the Wall Street Journal no cut in interest rates ahead.

This will give investors opportunities in the commercial small apartment sales area.  Last month properties were being listed with 5.5% Cap Rates, today they are 6.72% Cap rates and up to 8%.  My impression is the debt the small commercial projects have to contend with is a loan that will not and cannot be renegotiated.

I am in touch with numerous apartment rental projects that sellers are willing to negotiate.  Some will finance the sale!

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