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".

The Problems are the Path: New Standards in Residential Real Estate and the FED on Interest Rates

 The National Association of Realtors nationwide settlement that takes effect August 16, 2024 will create a new standard in Residential Real Estate.

Prior to the settlement buyers and agents would link up, be shown property and made offers with the knowledge that the seller had posted on the Multiple Listing Service the seller's intention to pay the buyer's agent his commission and how much!

The new rules change dramatically.  The change may put many buyers on a defensive path of "what if".  The path is that the buyer will be required to sign a Buyer/Broker Fee Agreement that states the commission their agent/broker will have negotiated with the buyer to be paid if their agent/broker represents the buyer in a purchase. The agreement has a clause that states the agreed commission of the agreement will be offset by any fees received from the seller to the buyer's broker.

This may cause buyers to worry, what if the seller will not pay the agreed fee the buyer signed for?  The cost of buying real estate for Residential will look like Commercial Real Estate.  The old process in Commercial was that buyer pays his agent, seller pays their agent.  There were always conditions that the seller would pay the buyer's fees.  Some times the rebate of fees would be stated in an Offering Memorandum or an online link advertising commercial properties, or negotiated between agents.

On Saturday the new standard will be that NO SHOWING of residential property will occur without the agency agreement and the Buyer/Broker Agreement and a Negotiated Fee Agreement.  That requirement will be for any showing irrespective if the buyer goes directly to the listing agent or through their buyer agent or at an Open House.

As an example if buyer goes to an open house, the buyer likes the property and wants to see disclosures or talk to the agent showing the property regarding interest in purchase, the buyer will be required to sign the agency agreement and the Buyer/Broker Agreement with a Negotiated Fee Agreement.

This is a new situation, some agents are bewildered on the outcome, or the affect on their business.  Some may not wish to be in the new real estate world and seek other choices for a career.

In total the change will affect sales and agent population.  

The buyer will need to take into affect their planning of affordability. If they want to purchase a $1 million property.  The fee of 2.5% will be $25,000, for example.  If the seller will not pay the full amount the buyer must now look at a downpayment in excess of the negotiated deposit with the lender plus closing costs if any. Affordability will certainly be pressured.

In a buyer world where affordability is already under pressure from increasingly higher listing prices and sales and higher mortgage rates the addition of a possible payment to the buyer will put pressure on buyer interest

Will sellers be willing to pay for buyer's fees.  I would wonder if this is a seller's market why a seller would be willing to pay for the buyer's fees?  I believe we may see sellers not paying.  Now if the seller is pressured by a personal situation, they may pay. If the market turns to a buyer's market the seller will be forced to pay.

The next question is what is the seller willing to pay and how much is the listing agent telling the buyer's agent.  Once the mandatory posting on the MLS is gone the seller's agent/broker may decide to keep more than a 50/50 split.  The broker may decide the broker wants a large cut of the fees and the agent must get a larger percentage of the total fees paid by the seller.

This may be the Top of the Residential Real Estate Market!  Buyers hold back and sellers refuse to pay.  Standoff!

FED acton on interest rates may see this as an opportunity to not change rates in September.  Housing is One Third of the CPI basket of prices used the the CPI figures.

So far the CPI is slightly down from past numbers and housing prices increased, Consumer Spending is still strong and Employment numbers positive.  IF the FED thinks "let's see what will happen to housing"? The impact could be a benefit to the FED numbers.

First no rate cut, or small rate cut, will hurt Landlords of all nature.  From single family to multifamily landlords who will see the value of their properties decline in value.  That will affect the mortgages on them as they mature.  Landlord mortgages are 5 and 10 year maturity.  (30-year mortgages are only for residential buyers.). The low interest rate mortgages that were from 2020 to 2022 will be maturing next year for all 5-year mortgages.  To those owners who levered their properties, they will be faced with adding equity to offset the lower valuations and higher interest rates during a refinance or sell.

Certainly the stock market will not be happy!  Too many strategies have been created by investors over the planned cut in rates in September.  Stock prices lower, more equity losses.  More selling in the stock market in what many market forecasters are saying is overpriced.  A good reason Warren Buffet has sold Apple and Bank America position plus others to add to the still enormous cash position.

The FED is still in a position of creating the next president.  A cut helps the Democrats, doing nothing helps the Republicans.  Which party will cut the deficit?  Which party will allow the FED to keep its independence?

I doubt Trump will have the power that Nixon had when he appointed Arthur Burns who bowed to Nixon on rates.  Too narrow of a senate to give Trump control to put Trump's man in charge.  Jawboning is the only pressure that Trump could create.  Doubtful Powell will bow and kiss the ring!. And Kamala?  Doubtful she puts any pressure on the FED.  A quarter of a point and then wait and see?  Whomever is elected!  Then too, no cut and wait and see.  

Even if the cut is a quarter a point and then nothing until next year?  What benefit is it to go from 5.25-5.5% to 5-5.25%?  Residential Mortgage Rates have already dropped to 6.5% in anticipation of a cut.  It went from just above and below 7% and home prices went up.  The net is ZERO!

I still like the Commercial Real Estate Market for Investors!  Residential is good for cash buyers and weakening prices.  To those who find the right residential property offer 10% less to figure in the possibility you may pay your agent.  if the seller pay the better off you are!

The Problems are the Path: Goldilocks Recession and the FED

You all know the story about Goldilocks and the Three Bears...Don't You??  Let me summarize it here.  Three Bears: Papa Bear, Mama Bear and Baby Bear lived in the Woods.  Mama Bear made porridge.  Poured in Papa Bear's Big Bowl, Baby Bear's mid sized bowl and Mama Bear's small.  It was Too Hot.  They went for a walk and here comes Goldilocks skipping through the forest.  She sees the open door to the the Bear's house and walks in.  She was hungry and the porridge smelled so good.  Papa Bear's was too Hot, Mama Bear's was too cold....BUT Baby Bears was just right.  

So we are in the Goldilocks' economy.  The last US Government report had July with a 2.8% GDP growth rate and a 2.5% inflation rate.  The stock market was hitting new highs and property prices kept moving higher with little inventory.  Mortgage rates were above 7% with affordability still big question.  The FED's measurement of inflation still had two areas that need to come in.  The Stock Market with former Greenspan's comment if "Irrational Exuberance" and housing.  Once those two number started to come in the inflation rate of 2% would be viable.

Prior letters from me had pointed out that we were already in a recession.  It was only a matter of time before the stock market and housing market realized it and the result would be a bite...a BIG BITE!  It appears we have finally had that BIG BITE.  The stock market has dropped three days in a row.  The NASDAQ has gone into correction territory.  Housing has finally had the realization with Stockton being the Top Foreclosure Town in the US.

The Financial gurus are calling for 3 rate cuts again for this year as the call was at the same time for last year. The call last year never happened.  Never happened as the CME futures market had forecast it as happening at over 90% probability.  The futures were calling for a 1/2 point cut.  SO TOO are the forecasts for this year.  Media power appears to be the thing as the forces that are behind the Media, commonly referred to as Wall Street, have big bets on the direction of interest rates.  Three rates cuts for this year and 1/2 cut and aggressive cutting to bring rates down to 3-4%.

BUT WHY?  For speculation profits?  The FED is supposed to be beaten into submission by financial gain for a few?

Several weeks ago Chairman Powell stated the FED would maintain its independence.  Many thought this was a response to Donald Trump....I think not...CME Futures did not hear it!

There are some political ramifications on an interest cut.  Cut before the Election would benefit the party in power looking for re-election to dominate Congress and the Presidency.  A cut after the election would benefit the opposing party.  No cut, the opposing party would have the power to be beaten on inflation, job loss, housing affordability.  (Leave personalities out of the equation)

If the FED were considering a rate cut by politics the Democrats want to raise taxes and continue deficit spending the Republican was the cut taxes spur the economy and take government out of regulation.  The Democrat policy would bring back inflation and Republicans?  The argument is the expansion of the economy and Drill Baby Drill with government out of regulation would cut the Total US Debt.  Well all arguments so my call is the FED lets the People decide and stays out of politics until there is a real sign of a Recession.  The recent decline in the stock market is not a panic...my bet it rallies back and all forget about the recent sell off!

The change in Job Growth coming in at 144,000. slightly less than forecasted, and unemployment ratio increasing is not really a recession sign.  The summer had a increase in new people to the job seekers....GRADUATION!

August will be the Dog Days and the Bull or Bear Market will turn into the Buffalo Market....Wild and Wooly!

Mortgage rates have dramatically come down below 7%, housing inventory has increased and Days on the Market in the Bay Area are now over 30 days.  Opportunity is knocking.  New listing are now seeing price cuts and no over bids and increasing prices. The commercial market of the initial layer of income properties are seeing the stand off between sellers at 5-6% Cap Rates and 7%+ in Cap Rates for buyers folding in toward the buyer.  All it took is a 1000 point decline on the Dow Jones to bring "I's a Believer" to the sellers!

I doubt if the 1000 point decline had anything to do with it; other than, a little nudge.  The debt and refinancing behind much of commercial paper has a maturity that is facing a decision to add to the equity in order to refinance or sell and move on.  Either Big properties or little Properties or medium properties are seeing reality of making a decision.  JUST LIKE THE THREE BEARS.  That is were the opportunity will lie for commercial investors and residential buyers alike.  From a demand side the medium ..Baby Bear..size of the market is the most in demand.  Affordability is the reason.

This affordability is not going to end quickly or kindly.  Fannie Mae and Freddie Mac are tightening their lending rules.  Too much fraud potential is the reason.  Tighter rules means qualification tighter and approval rates will decline.   The only resolution is home prices must decline to match rules and interest rates and of course affordability payments.  Just like the stock market too much money will impact over priced properties.  From my evaluation a home in Tracy is selling for one half of Redwood City.  A estate in El Dorado Hills and Loomis it is one tenth to one quarter of a similar property in Atherton.  

Good luck in your real estate ventures!

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: Recession Part 2

Where do I start?  The layoffs continue in Silicon Valley.  According to Layoffs.fyi, 107,370 workers have been laid off to date in 2024 by 366 tech companies.  Foreclosures are popping up in Paradise as Zillow notes foreclosure on Oahu, the most expensive state in the US per cost of living index.  Locally Notice of Defaults are increasing in the Commercial Sector for the smaller projects where investment groups took too much leverage and now are faced with an expiring mortgage with vacancies, permit violations, red tags and inability to refinance without contributing extra equity for a new loan with rates doubling the previously expiring loan.

Commercial buyers are looking for 7-9% Cap Rates.  Sellers are wanting 5% or even sometimes lower.  Triple Net buildings for Pharmacies, banks, discount shops . That does not include the large Commercial Projects that line El Camino Real in Silicon Valley or the offices of San Francisco and San Jose who are a major subject matter for newspapers all over California.  Will the Dominoes Fall?  Tough question to answer, but with each month of the FED not cutting rates makes things far worst that one can see from the statistics the Federal Reserve follows.

The FED and Mr Powell and other Governors are all saying that a rate cut is imminen.  Wall Street is a 100% certain it is in September.  That make me willing to take a bet with great reward if Wall Street is wrong.  It is like buying a lotto ticket with all odds on my favor not the house.  Why?  July 9, 20024 comments from Chairman Powell....., "But he warned Powell on a pre-election rate cut, saying "perception matters, and so I would just submit to you ...any move to lower interest rates or move interest rates either direction before November 5th could certainly be a bad perception."

On July 17, 2024 GOP Candidate Trump stated...."It’s something that they know they shouldn’t be doing," 

Will a Quarter a point drop in interest rates from 5.5-5.25% to 5.25% to 5% really help?  Of course Wall Street strategist will win. It is take much more for in rate cuts to save the commercial market and help first time buyers qualify.

On world wide interest rates, the International Monetary Fund stated recently that.....The International Monetary Fund said Tuesday that global inflation is expected to come down more slowly in the second half of the year, raising the prospect of interest rates remaining "higher-for-even- longer."

The high end consumer is cutting back as the Wine Buyers are either drinking their inventory or have declared prices just too high.  Per Jeff Lander of SF Chrionicle .......

Limon-Valentine originally listed Cabernet Sauvignon grapes at $9,000 a ton, which many wineries would use for a roughly $90 bottle of wine, but has dropped it to $8,000 and anticipates having to lower it more. If the vineyards don’t get any buyers, she estimates it will be a half-million-dollar loss.

D’Ambrosio’s struggle is reflected in a report released last week from Wine Business, which revealed that June grape sale listings on its classifieds website jumped 93% from June 2023 and are up 113% year to date. For five months in 2024, grape listings have hit a five-year record high. Wineries aren’t renewing grape contracts, and it’s placing growers in a “pretty hairy situation,” said Jeff Bitter, president of Allied Grape Growers, a cooperative that represents 400 growers in California. Growers are forced to continue investing money into farming a crop that might end up on the ground.

This crisis comes with the entire wine industry in turmoil. Global wine consumption is declining, and growers are ripping out their vineyards en masse due to a yearslong oversupply. Bitter has urged the California wine industry to remove 50,000 acres of grapevines statewide to correct the oversupply issue; thus far, he estimates about 30,000 acres have been removed this year."

The most disturbing forecasts are coming from Zillow.  The service most buyers, sellers and even residential real estate agents look at.  Zillow's one year forecast is down! -3% for Redwood City CA, -3.3% Belmont CA, El Dorado Hills CA -1.3%, Cool CA -1.9%, Granite Bay CA -2.2%, Reno NV -1.5%.  Those are just a few as most of Silicon Valley from Woodside to Atherton Los Altos are all forecasted for negative returns in FACE Of a Sellers Market from Media and Real Estate Sponsored sites.  There are some bright spot as Scottsdale Arizona has a +4.4% forecast and a pop in Pinehurst North Carolina...golf any one?  That's if you can tolerate 125 degrees in the summer or 89% humidity while you play the famous Pinehurst course, home of the PGA.

I still believe rates will be cut after the election.  Cut aggressively to stave off further economic deterioration.  Don't expect it to last.  If Trump is elected and he gets the Red Wave taxes will be cut, tips will not be taxed and revenue needs a strong economic recovery to offset the loss in Government Revenue that will doubtfully be offset by higher tariffs.  I pray the GOP can accomplish it.  Otherwise; high interest rates will come from larger debt offerings to offset budget deficits that will require higher interest rates.  On the plus side Clinton did with the help of his predecessor the GOP states.

On a long term basis real estate will still be the best hedge as we watch as the Mighty Seven are sold off as investors shift to defensive stocks and Trump stocks of his commitment to MAGA.

BUY or SELL, and What?

A recession has a historic precedence of being the best time to buy asset that will appreciate.  The first question is what asset?

The are two basic asset types, Income and Appreciation.  The question is stocks, bonds, gold, Bitcoin....What do you buy?  

Recessions have an effect of depreciating an asset, until the Recession is cured.  When you look at depreciating assets the first thought is commercial real estate and the losses due to the Work From Home Movement as a result of the Pandemic.  It goes further in that regard.  When interest rates collapsed and a mini depression was rapping on our economy's door, interest rate were dropped to near Zero.  The sector of a market that prospers on low interest rates is Growth.  Now let's look at what is growth and was is income.  It is easy to see stocks that are considered growth.  The first thought my reader may have is Nvidia.  Correct?  What a run along with all the AI stocks.  A run that was in the face of higher interest rates and a plateau of high interest rates.  By all standards in Fundamental Analysis high interest rates are the death Knell of Growth Stocks, especially technology stocks.  Yes, yes I know, there is a New Normal.  Or is there?

Let's walk away from stocks and think about real estate.  Growth is Single Family Residential, Income is Commercial Real Estate.  Like Nvidia single family real estate has skyrocketed in value in face of higher interest rates, higher mortgage rates and suitability and debt coverage ratios.  But like Nvidia and the other AI and Growth Stocks that have dominated CNBC and other financial medias interest rates will sooner or later make holders re-examine their portfolios take profits and readjust portfolios into the lure of safe and secure high yielding cash instruments.  Another set will look at dividend and value stocks.  Then too the real estate investor will look at selling growth and buying income properties.

This is where investors should look for their investment portfolios.  Income Producing Real Estate. The choices are numerous from Multi-Family properties to  office buildings (small and large) shopping malls, Properties leased to well known highly regarding and investment grade companies like Tesla, Starbuck, JP Morgan/Chase, 7 Eleven.  The returns are varied from 7-9% to 5-5 % and in between.  All of which have the ability to increase rents, thus increasing Net operating income and increasing return on investment which in turn increases the value of the underlying property.  Not much different than Apple which increases its dividend buys back stock and creates value from their product and their allocation of profits to shareholders.  Your choice is Apple in Real Estate or Nvidia?

Recession is the time to buy long term assets that have stability and potential to appreciate due to their inherent growth.  There may be an opportunity with President Biden dropping out of the 2024 Election.  The democrat agenda is a universal Rent Control Amendment.  How many Single Family institutional and individual owners of rentals will give that as a sign to sell? 

A final comment on residential real estate.  Price is not the issue, mortgage rates are the issue. My former home in Woodside sold at $1.8 million went to $3.5 million during the interest rate decline.  Interest rates at $1.8 million was just over 7%. The interest cost on the home then was over $10,000 a month.  At $3,500,000 the interest cast was about 3% or $8,750 a month.  It was over priced at $1,800,000 and under priced at $3,500,000.  More people could afford it.  Today at 7% the cost is still $3,500,000 with a 7% mortgage rate or over $20,000 a month in interest.  Get the point.  It is the cost of money than create affordability not price!  That is also why the owner who has a 3% mortgage rate at $3,500,000 will not sell.  All those who have 3% mortgages will not sell.  The price of their home would have to depreciate by 2/3 just for them to be able to buy an equivalent house at high interest rates of today.

Now let me give you the difference in Commercial rates and why I think they are a buy.  I can get a 7% return on equity, cash on cash for a non residential commercial property.   Say and storage facility or Car Wash.  I can get a 6.5% loan with a 35% down payment over a 5 or at max 10 year term.I can make 7% on my 35% down payment and .5% return on the debt.  I 2will make 9% on the borrowed money and 7% on my investment for a 7.9% rate of return.  I will still have ability to earn more from car washes and storage facility because there is no risk of Rent Control!

Interest Rates will take a long time to come down in the future.  go to the FED history on line at the Federal Reserve of St Louis website to see my rational.

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: Recession!

Recession: " ...a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarter", from a 17th century definition it is, "...a temporary suspension of work or activity".  The Present Day standard needs measuring devices or formulas, the 17th century is simply put and to know that there has been a decline in business is easy to experience without a Economist declaration.

I have found that the best place to see the beginning of a recession is the reduction of spending by the "Nouveau riche".  There is no better place to determine a recession other than to look at Bordeaux Future Sales.  The premise on Future Sales is from the en primers of the Bordeaux region who sell futures in spring after a harvest.  They get cash up front to finance the next crop and the consumers get a discount on wines that will be bottled two years later.  China was booming the World was booming and then the Pandemic, Then President Xi became Chairman Xi and the demand collapsed.  Futures prices were higher than the bottled wine from years 2022, 2021, 2020, 2018, 2017.  I imagine you can add Ukraine, Iran and its subordinate groups to the problems the issues of evolving nations in Africa battling Islamic groups.  2023 futures are down 12%-49% depending on which of the chateaux you favor.    

In real estate the evacuation of office buildings from the Pandemic was followed with open apartments from the movement of employees who could work from home to more enjoyable and less expensive locations.  This in turn created growth in areas once affordable and out of the way: within our state South Lake Tahoe became an ideal location to ski and enjoy the lake but still be able to commute when absolutely necessary to the Bay Area.  Texas, Florida, Utah, North Carolina, Arizona, Nevada and even the shores of a island in the State of Hawaii became destination points for the new economy.

New economies have their price.  For lease signs became more prevalent in the Bay Area.  Newly built apartment complexes in the Bay Area were offering free months rent, their benefits included pools, exercise room, conference rooms, patios with grills and picnic tables, wifi and satellite communication to mention a few.

CVS and Walgreens, along with some discount stores began to shutter up.  Banks closed branches and consolidated.  With the closure of the former small business closed from the lack of patrons: restaurants and family stores were among them.  Bank of America has announced plans to close numerous branches nationwide in 2024 as part of its ongoing efforts to consolidate its physical locations due to the rise of online banking.  In 2024, Citibank plans to close approximately 60 branches across the United States, with the majority of these closures occurring in California. This is part of Citigroup's broader strategy to consolidate its physical footprint due to shifts in customer behavior towards digital banking and declining foot traffic at physical locations.  JPMorgan Chase has closed several branches in California recently. Following the acquisition of First Republic Bank, Chase closed 14 First Republic branches in September 2023. Additionally, Chase announced further closures of 22 First Republic branches, mostly in the Bay Area, in late 2023 and early 2024​.  Overall, Chase has been reducing its branch network in response to changes in customer behavior and the rise of digital banking. This trend is not unique to Chase, as other major banks, including Bank of America and Wells Fargo, have also been closing branches nationwide​.

While economist point to the inverted yield curve as an indicator of a portending recession, they fail to look beyond the books to the streets of the city or town they are in.  We are in a recession, a rolling recession.

This type of recession will be harder to view from a text book analysis.  It is a common man analysis.  The stock market chugs on to new highs, bond have done very well.  Underneath those indicators we have problems that will lead to the path of recovery.

The commercial Real Estate market is the best measure.  A recent sale of an office building in Silicon Valley for $17 million was compared to the cost not more than 3 years ago of $37 million.  

The smaller commercial market of offices and malls, banks and restaurant buildings, CVS and Walgreen buildings, Bargain Centers are overwhelming the inventory of smaller commercial properties for sale, nationwide.  An inventory that the common man does not see.  No MLS.  

The residential housing market continues to evolve higher in price as Baby Boomers and those fortunate enough to refinance their home when mortgage rates were in the 3% level will not sell. The question is, are home overvalued?  Greg Ip of the Wall Street Journal, Friday June 28, 2024 puts that same question to the reader.

• Homes are as overvalued as they were near the peak of the 2000's bubble, according to a variety of metrics, including the Federal Reserve model
• Homes are assets, and overvaluation is a predictor of stagnant, even negative, real returns in coming years, a headwind to anyone counting on real estate as a source of wealth.
• Valuations are stretched by S&P CoreLogic Case-Shiller U.S. National home price index.  Up 51% since the end of 2019.
• The stream(s) of income generated from an asset are: living there which can be measured by the cost of rent of a similar property home.  Since the end of 2019 rent is is up 24%. That is a lot but far from the increase in home prices and the cost of the monthly mortgage payment which is up 114%.
• Since 2019, 10 year interest rates have moved from 2% to 4% a factor in the higher cost of mortgage payments.

A model in the Federal Reserve's semiannual financial stability report shows homes are 25% over valued.  That is just below the 28% peak in 2007. 

John Burns Research and consulting says relative to history over valuation is from 24% in Northern California to 37% in Southern Florida.

Over valuation in Homes are the same as stocks.  Over valuation can continue for some time more than when first discovered or commented by writers like Mr. Ip.  

Demand exceeds supply by 2.1 million units today.  In 2009 demand exceed supply by 1.9 million units.

Burns Research goes on to state 74% of Metropolitan markets are high risk for investors right now.

High Stock Prices can be justified by earnings, home prices are justified by rents.  If rent growth stops or stabilizes; home prices like stock and earnings will be subject to adjustment. 

DON'T EXPECT REAL ESTATE PRICES TO COLLAPSE AS THEY DID FROM 2009-2011.  Since then income and appraisal standards have become more stringent, credit scores are higher, especially at the bottom end.  Foreclosure prevention is more effective.  90% of mortgage backed securities are Federally Insured.  Leslie Goodan a housing finance scholar at the Urban Institute has stated, "You will not have the big price declines because you've taken out the contagion effect that caused them"

To substantiate that thought Goldman Sach, Blackstone and similar monied organizations have created and solicited multi-billion dollar funds to lend to those owner's of real estate who need help and are financially stressed due to old loan due with cash flow from vacancies.

We are not in a crisis market as we once were.  Opportunity will present itself to investors who are willing to search and investigate.  Buyers of residential properties will find opportunity by working diligently under new Buyer Broker Agreements and Retainers with experienced career agents.  For every listing either commercial or residential that sell, there at least 3-4 others that are overpriced and will find price cuts.  The rest will sit and wait until they too either cut or run of market.  In the Bay Area Price Cuts have averaged double digits in the 20% level with the greatest cut of +40% in Woodside!

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

Soon to be added: Consultant Services, Commercial Loan Services

The Problems are the Path: The FED balks at lowering rates