Happy Thanksgiving...or is it?

 It does not seem so long ago that Wall Street, the Euphemism for the place were all savy investment decisions are made, was forecasting consecutive declines in interest rates from the (FED) Federal Reserve Board.  The FED would cut interest rates at every meeting.  Surprise!  The FED comments are that the economy is going too nicely along with inflation at a 2.1-2.3% on an annual basis for us to do so.  

Inflation rate may be well and good for the Nation at 2.3% annually, but we here, in California, we have some issues.  While gas prices at the pump have moderated a bit, the taxes that our Governor and Legislators put on gas keep the State of California as the highest in the Nation.  Add to that we have to contend with housing prices the highest in the Nation!

Next with all the push on the quality of the air and the carbon issues, the ability to convert to all electric has some road blocks.  The major roadblock is PGE ability to provide electricity.  As I look at the Nextdoor Neighbor site for parts of Silicon Valley there seems to be a regular outage somewheres in SV.  Poor Redwood City seems to be hit on a weekly basis.  Buying Gas Generators for power are hotter than pancakes, as the old saying goes.  Neighbors complain about the noise, the lack of power and the COLD in the house as furnaces are out.  Well that is for Silicon Valley.

Once one goes to the next Valley of our population, Sacramento Valley, solar panels are more common than EV vehicles.  

California Food prices are not really abating, or at least that is what my wife tells me.  Retired friends complain about medical costs and the cost of food.

Next we go to Savings Rates.  From 2020 to present the savings rate in the Nation is 2.3%.  That is down from 13.3% prior to the Pandemic in 2020 and during the Pandemic when savings skyrocketed to 38%.  

The Stock Market is cheering for the Trump Administration and getting a bit ahead of itself as the new president has not even been inaugurated.  His Cabinet and Staff have yet to be confirmed.  A bit like declaring a winner of a race before the bell to start has not even rung and the contestants are still in the locker room!

Housing prices continue to remain strong in sales, while the forecasts from Zillow are forecasting 2-3% declines in the next year.  New home sales are slowing down and existing homes sales see more price cuts and sales below list than that of a booming housing market.  

Mortgage rate hover around 7% and whenever this is a dip in rates below 7%, the Housing Industry shouts hooray!!.  A bit like a person coming out of a comma and the staff is already getting out clothes to discharge and getting the wheelchair ready!

With savings depleted the ability to afford home improvement lacks support in interest rates; even though, the equity in the home can support a Home Equity Loan, the borrower cannot afford the payments and the ability to take one out.

Where does that lead home buyers and sellers?  A Mexican Standoff?  Sooner or later prices need to adjust downward.  Sooner or later the migration to affordable parts of the state will continue.  I look at this as once living and working in New York City.  Great for a single person.  Not so great for a family.  The result is living outside the city and commuting.  That is similar to other big cities like Chicago.  Or even my home Town of Milwaukee Wisconsin.  

On the commute issue, I watch home prices on the East Coast.  North Carolina is up 3% and rising.  That seems to be the same for Tennessee too!  Florida and Texas have home prices declining and Arizona is up.

Rents too are adjusting downward.  Last year rents moved quickly and landlords were quick to raise rents and rent their homes and ignore work to make home habitable.  "Don't like it Move."  That creates other problems as lawyers and tenants revolt and lawsuits with State supported legislation force landlords to comply or pay heavy awards by Superior Courts and settlements by landords or their insurance companies.   

The commercial Real Estate Market is still reeling from the Pandemic.  Large Commercial Properties slowly go into default and foreclosure.  While it is not a newspaper item they are there.  Cap Rates that dictate buyers' and sellers' willingness to meet in agreement are slowing rising much to the chagrin of sellers and celebration of buyers.

The rotation of Commercial Properties in trouble have graduated downward from large properties to national companies, like CVS and Walgreen, even Starbucks is closing stores and buyers for their once sought after lease investments are finding it hard to get a buyer to take a risk for fear the store will close and they stopped getting rental income.

Throughout it all we should be happy and give thanks. Give thanks we are not in the Ukraine, the Left Bank in Israel, or Lebanon.   Give thanks we have a home or a roof over our heads, not a tent under a freeway bridge.  Give thanks we are not in a Cancer Ward, give thanks our children are healthy.

I had spinal meningitis when I was young.  I was told I would not survive.  I am here.  I came home partially deaf.  Angry? yes.....then I saw a worker who was in a wheelchair crippled the day before his wedding in a car accident 30 years ago. I was thankful......So Should We Be Thankful...GOD BLESS!

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: Year End Comments

The last 2 months of the year are, or were, normally tied to "clean up" work.  Inventory was thin.  The properties that remained on inventory were usually: left overs from the year that have not sold, properties added due to moving or estate sales, and like in prior years from notice of defaults and foreclosure notice.  Buyers were generally on their hunt to find price weakness and reason for the reason WHY these properties have lingered on the market.  The general answer to WHY were they were OVER PRICED from the start.  Either they were overpriced due to condition or comparatives.  

From 2020 forward we have had a dramatic change to the Supply/Demand ratio.  The Pandemic took supply from the marketplace.  Whether that the supply was housing, restaurants, workers entertainment and travel.  Everyone was hunkered down in their homes fearful of the infection from others fearing all the horror stories of death.  A Present Day Black Plague was circulating the world. 

The Federal Reserve stepped in as the People in the White Hats to save the World and Humanity by lowering interest rates, buying long term bonds all to create historically low rates in the hopes of saving the world economy.

Their action had a two-fold effect.  It fed Speculation and eventual Inflation as as supply could not meet demand when the Pandemic was declared beaten.  

The risk of Speculation can be seen in the Commercial Real Estate market where improper leverage was taken and unrealistic growth was found.  Unrealistic when workers went to the "work from home" status.  The result was and is large commercial projects are being sold for a fraction of the cost of purchase or construction.  Those that are hanging on are doing so with the cooperation of lenders not wanting to take another return to the past Banking Crisis.

So, where does that take us today in the 11th Month?  Inventory in residential homes are still in short supply.  Commercial properties are still feeling the impact of high interest rates that occured to stop the supply side inflation.  It appears on a daily basis there are more small commercial properties being advertised for sale.  Small malls find in hard to get an empty site filled due to a closing of a business.  Banks are closing locations; as are, large pharmacies, large bargain centers.  All are feeling the recessionary effect of high interest rates and finding competition in the form of online competition.

COMMERCIAL PROPERTIES:  The correction in the Interest Rate Curve has had a major effect on the terms of purchase.  As short term rates declined and the FED is longer buying bonds, but liquidates their balance sheet and allows them to mature, long term interest rates move up.....NOT DOWN!  Investors seek higher Cap Rates for their investment. Where once 4,5,6% rates where acceptable.  It is now 7,8% Cap Rates are made in offers.  The credit of the property does not have much effect as even those with high credits are shunned as the fear they too may close a property in a cost cutting program.  

RESIDENTIAL PROPERTIES:  The day of low mortgage rates is behind us.  Something, if we remember, as in gas at pump lower than a $1 a gallon!  Therein lies the first problem with inventory.  Many homes have extremely low mortgage rates.  Rates are  1/2 of today's mortgage rates.  Then sellers must look at the cost of a new home and the capital gains and the property taxes that are going to dramatically rise from their present day property taxes on sale and purchase.  That is for those sellers who remain in California and are not qualified to transfer their present property tax to their new home in a reciprocal county.  

So where does that lead us as buyers or sellers?  

The State of California is a bifurcated state.  Silicon Valley with its Technology Engine keeps churning out businesses and technology improvements to keep jobs strong.  The money to invest in the new business keep growing and investing.  Along with that growth, property values will not depreciate over time.  There may some blips, but history tells us they are only opportunistic blips for buyers and then moving up. There is the normal loss of population to other states of some 300-400 thousand net a year.  (A minor impact). Those immigrants will create the opportunity to purchase at a discount as they must move.

Once the view of outside of Silicon Valley is made, the areas within the state that saw growth from the"Work from Home" movement find the movement has stopped.  Stopped and inventory of homes for sale are growing.  Price cuts in these areas are the norm, and sales are less than the price cuts.  There the long term outlook is not asset appreciation but the quality of life.

To those who are moving the price of the move is not solely benefiting in Quality of life and cost and savings, it is the frustration in finding a new medical professional, dentist, accountant, cleaner, grocery, and most importantly....new friends.  The adjustment process is not an overnight process. It will take years to develop new friendships.  Frustrating months to find a barber, hairdresser, dentist or doctor.  

So my Dear Reader, Where do you fit?

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: "What a Revolting Development"

Looking back in past messages you will find a comment I made on the course of long rates, 10-year plus US Treasury Bond Rates.  In particular the 10-year bond is the bond that makes all mortgages for single family homes.  The yield curve will correct as the FED lowers interest rates on all bonds from 1-year US Treasuries back to the 30-day Treasuries.  The FED rates will come down and therefore so will the yields.  The change will be the long term rates of US TReasury Bonds will go up!

Here is the present outlook.  The outlook is based upon the Swap Market that is used to trade one set of short term bonds for another set.  A bit like rolling maturities.  All the Swaps do is indicate the market forecast of FED action in where rates will be after the next FED meeting.

Date of FED Mtg.          Rate Forecast.           % Certainty

December 18, 2024......4.42%........................86%

January 19, 2025.........4.20%........................89.8%

March 19, 2025............3.956%......................97.8%

May 7, 2025.................3.799%......................62.8%

June 18, 2025..............3,676%.......................49%

july 30, 2025...............3.585%.......................36.4%

September 17, 2025.....3.472%.......................45.2%

It is obvious that once the Swap market goes beyond March 2025 the chance of rate cuts diminish substantially.

The forecast gives credibility to the stock market performance.  Lower rates on savings means more money goes into the stock market, goes into long term growth, stays out of fixed income.  WAIT!  Bonds and fixed income have been the largest sector of investor flow.  Commercial properties are for sale at high cap rates.

The yield Curve has begun correcting.  The normal spread between the 2-year and the 10-7ear is 250-300 BP. the BP is Basis Point and represents .0001.  The spread means that at today's rate of 2-year at 3.93% with the 10-year at 4.096%.  The indicate spread of 250-300 means that the 10 year goes to 6.93% and mortgage rates move up over 8%!  Mortgage rates over 8% the real estate market falls!

There is nothing the FED can do about the 10-year and greater market other than Quantitative Easing.  That is next to impossible as the FED's Balance Sheet is over $7 Trillion, still a record in FED history.

The 10-year has been increasing since the FED Cut.  Mortgage rates have been increasing since the FED Cut.  Commercial Properties for Sale have been going down in value with their Net Returns as measured in Capitalization Rates at 7% and going higher.  

1. Dollar General in Lexington Ohio offered at $856,800 with a 8% Cap Rate and 6.3 years left to current lease

2. Big Mesquite RV Park in 3 Rivers Texas with a 10.6% Cap Rate at $1,400,000

Are just an example of the investor market opportunities.

There has been a 34% increase in Homes For Sale Inventory Nationally.  "The National Association of Realtors (NAR) reports the inventory of homes for sale in September came in 34% higher than last year. It’s now at the highest level in more than four years after 11 straight months of annual gains."  

California is loaded with risks in home prices as many of the popular high tech markets have not seen any reasonable reduction in home prices.  

The recent issue of the Wall Street Journal says the investor market has been "head faked". 7 estimates of rate cuts have gone unanswered.   The FED response is "Data Dependency". Maybe the risk is lack of faith in the FED?

Going back to the market expectations indicates a 10 year at over 5.5% in near term..   Mortgage rates going back over 7% to 8% targets.  The HGX or Housing index is down 5% since mid September.

Too many Bulls and not enough Bears in the Stock Market.  Union members are defying their leaders and not approving contracts.  Failed contract Negotiations lead to layoffs.  Higher wages will indicate higher inflation.  

Still too many issues out there including who will win the Presidency?  The Senate appears ready to go Republican.  If William Bendix from and Old TV Show "The Life of Riley" were here he would say..."What a Revolting Development"

Uncertainties all breed investment opportunities.  Single Family still remains a great deal if offers are 10% under list, Cap Rates on Commercial Properties are over 7%.

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 Cuts Rates and Property Improvements

If one can get their faces off the Election and look at how interest rates will affect Real Estate, there maybe a chance Buyers can manage their decision to buy a home or invest in real estate.

The frustrating event of a rate cut of 50 basis points, or one half of one percent has created, most buyers and investors with, a HUH?  Moment.  The mortgage rates dropped to 6.09% on the day of the interest rate cut by the FED.  On the investor side, interest rates for commercial properties dropped, but the down payments remained at 35%.  No big benefit there.  The Yield Curve corrected further with the 2-year Treasury Bonds dropping below the 10-Year Treasury Bonds.  A major improvement with the first time in years that the interest rate market was not forecasting a recession.  That is really good news!

What happened after that was something I expected, the most market commentaries did not.  The Ten Year US Treasury Bond yield increased!.  This is normal for a growing economy, in our case a Goldilocks Economy.  Long term rates should increase as demand for loans are reflected in higher yields. We still have a number of economic reports that will substantiate the FED's aim at lowering interest rates.  Next week is the CPI figures.  Along with that will be a number of economic reports that the FED will view as to determine if we are truly in a "soft landing".  All hope is that the FED is successful.  Still, Housing is the Bad Boy in the CPI figures.  The jump in Mortgage Rates after the Employment Numbers indicate that Inflation may not simply die away.  If that is the case, will the FED continue to cut rates or hold off? Big Question Mark! 

Buying Real Estate on a long term basis is still the best way of investing for the future.. The Home buyer may find that the property that is affordable is the property that needs the most work.  Investors will have the same decision.  If a property is providing a Cap Rate that provides a good long term return.  How much work is needed to make improvements that will allow for future rental increases.

The decision of improvements needs to be looked at with an accountants mind, not an emotional mind.  Prudent decisions must be measured over time.  Here are some suggestion for both Investors and Residential buyers to consider.  Consider your budget in your purchase should also include your budget for improvements.  The worst thing you want to do is put all your money into the purchase with nothing left for improvements.  You will not be happy!

You’ve bought an older property that needs some work. How do you decide what needs improvement or repair, and how much money to spend?

#1 The first rule of thumb is: don’t improve more than the best properties in your immediate neighborhood. A starter home, or a lot-value home; as well as, investment properties with high Cap Rates, can be renovated to be attractive and functional, but keep in mind that if you future homebuyer/investor wants a finer home/property, they’ll look at more expensive neighborhoods where all the properties are equally upscale.

#2 If your target needs everything, tackle the changes that will make the most difference in your convenience, comfort, and utility, like the kitchen for single family and multi-family units. Will you need new cabinets, countertops and appliances, or a whole new floorplan? Is there room to borrow space from another room? If so, a kitchen designer can help you plan, manage costs and get more storage and workspace.

#3 Realtor.com advises that you also have a plan B and C, in case what you want is too expensive or becomes unavailable. You can price high-end appliances, then choose less expensive back-ups. Ask your designer/architect or contractor to provide a schematic with different price points.

#4 Budgetdumpster.com recommends, for single family units, that you spend no more than 10% to 15% of your property's value on any single room. If you also need to remodel baths, cut the total remodeling budget down to 10% per room, and set aside another 10% for unexpected expenses.

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!