Real Estate Health

For the first part of this year we at REITactics have been predicting a looming recession. Our last guesstimate was for it start in the second quarter of this year.

There were a lot of indicators pointing that way and premium REITactics members will get a detailed analysis but some of those indicators are not as solid in the recession camp as they were.

It isn’t uncommon for indicators to thrash about and be inconsistent with each other at times but does this make us rethink our position/prediction?

Yes… No… Maybe. Reading tea leaves is always hard.

Seriously though, the economy is fairly strong but we are now beginning to see the affects of the housing correction in some areas. There will definitely be local recession pockets around the country but will the economy as a whole experience a recession or even a significant pause?

Istill think so.

The latest CPI numbers are out and while the core numbers are stable, rising only 0.1%, the overall number is getting hotter. As the rise in fuel costs works its way through the larger economy the core number is at risk. It is not at immediate risk and there is no way the Federal Reserve is going to raise rates before they are absolutely forced to do so but their only real purpose in life is to walk the fine line between rampant inflation and devastating deflation.

So, to answer the question of this post, is a recession still likely?

I still think so. While we no longer have an inverted yield curve between short and long term rates there are still other significant indicators pointing to a recession.

What does this mean to a real estate investor?

Aside from the obvious buying opportunities we are going to move back to a time when the long term interest rates actually correlate to the short term rates.

That means, mortgage rates are going to rise.

How high? It wouldn’t surprise me if the 30 year fixed rate approached the 1995 levels of 9% with almost two points in the next 18 to 24 months.

That is very good news to a long term investor. Why? Because it will allow rent increases. As the long term mortgage rate rises and the underwriting criteria tighten, there will be more demand for rental housing. If you are a landlord your life is about to get a little bit better.

It is of course a double edged sword. There will be more renters but it is even more critical you check them out thoroughly before handing them the keys.

A recession is still likely, I’m just not as sure it will still be as soon or as sever as it looked a few months ago.

Okay, besides that whole comparison to used car salesmen and such. I’m not really talking about the image, I’m talking about the reality.

Yesterday, I was talking to someone in a casual setting in a public place. They asked what I did for a living and I told them. I didn’t mention investing at all in any way. Then they started talking about how bad the economy was and how tough it is for them to make ends meet each month. I asked what they did for a living and they told me they were unemployed. I asked what skills, training or education they had and they said they had a high school diploma and some college. I asked them what they really would like to do and it was basically do nothing and get income each month like their rich landlord does.

I mentioned that the profit margins on rental property were rather thin and the reaction was like I called their baby ugly.

The wealth envy was so thick you could cut it with a knife!

They ranted on and on about how the landlord had no heart and expected their rent on time even if they didn’t have it. My eyes glazed over and I was looking desperately for a way to get away from this person.

Then the more I thought about it I realized it isn’t really their fault. They have no idea they are where they are because of their own actions or inactions at any given moment.

Then this morning I got an email from a former student and friend with this comment, “Do you think he knows this is his real target market?” It was a link to the comment section of a post at Housing Panic. The poster was railing against investors, his current landlord in particular and others while at the same time proudly proclaiming himself a smart renter. The ‘tard doesn’t understand if it weren’t for the landlords he wouldn’t have anywhere to rent. But, that is okay because he thinks government should control the rental market anyway.

I guess it is just an example of perceived wealth envy. The renters seem to think the landlords and landladies are all rich. Some are, most aren’t. Most are trying to make ends meet each month like everyone else. The difference is they have taken a step to be self-reliant in their retirement and that is probably what chafes people like that the most.

It is rather typical, throughout history people have often hated those they depended upon.

The stock and bond markets are turning bearish, real estate has not started to recover. Inflation is still straining against the restraints the Fed has placed on it. But, the economy is growing and the unemployment rate is amazingly stable.

The experts who were proclaiming the imminent lowering of rates by the Federal Reserve are now wringing their hands worrying about an increase.

Looks pretty dismal doesn’t it? Why the change and is it really all that bad?

What you are seeing are the micro gyrations of macro market conditions.

As other countries have been adjusting their monetary policy investors have adjusted their short-term strategies.

But, what does it all mean here to the average real estate investor?

Not much.

See, local markets and all real estate is very local, are driven to a larger extent by local factors. Lenders have basically the same problem builders have. The lenders make most of their profits not by holding or servicing mortgages but by initiating and closing them. If interest rates are too high in an area and are discouraging borrowers from buying the lenders will lower the rates in that area. This used to be little problem for lenders because it was unlikely someone in say Dallas would find out that someone in Little Rock was getting a better rate on the same type of loan with the same terms and similar credit and income ratios. Today, the borrowing consumer has much more information at their fingertips than ever before. It is harder for the lenders to regionalize their rates to maintain loan originations in sagging areas. As a result, the interest rates across the country are more uniform than ever before.

Mortgage rates are going to continue to be driven by the competitive nature of the lending market. Yes, over the next few months we are likely to see more of the marginal lenders go under. And yes, over time that means the remaining lenders might be able to inch rates up. But, as long as the current Fed rates remain near their current levels they are not going to be the driving factor in local mortgage rates.

My best guesstimate remains unchanged, I do not anticipate any change in the Fed rate unless the current market conditions change substantially. The Fed has demonstrated their desire to try everything else at their disposal before adjusting rates up or down.

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