Home Real Estate Inflation Falls, Rates Drop, & Healthy Market
Real EstateTravel

Inflation Falls, Rates Drop, & Healthy Market


It finally happened. Inflation fell, mortgage rates dropped, GDP grew, and an unexpected jobs report was released. Is this the best news we’ve heard all year for the economy and the housing market? It sure sounds like it! We’re taking this episode to soak in all the good news from the past few weeks and point to an economic “sweet spot” that could make for PERFECT real estate investing conditions.

There’s been a LOT of good news to share recently, and we’re doing our best to give you the economic update you need! First, we’ll touch on updated core inflation numbers and why the stock market rallied and mortgage rates fell due to the announcement. Then, we naturally get into the Fed’s recent rate pause and why this might signify a strong housing market in 2024.

But that’s not all the good news. A new jobs report points to a shift in the right direction, one that not many people expected. Finally, we’ll give you a housing market update, from new home sales to days on market, homeowner equity, and all the signs pointing to a “sweet spot” for investing.

Dave:
Hey everyone. Welcome to On the Market. I’m your host, Dave Meyer. And today we’re going to do a very fun and uplifting show for you all. We were talking about a lot of the negative news that’s out there, whether it’s the US domestic economy or geopolitical or international affairs, there’s a lot of troubling and sometimes scary stuff going on. And we’re not trying to make light of those situations but we do want to bring to your attention that there is still good news and still some good things happening both for the housing market, the economy, and in the world. So we’re going to jump into some uplifting, positive stories today but before we get into that, I want to hear from each of our panelists about some good news in your life. So James, let’s start with you. What’s going on with you?

James:
There’s all sorts of good things going on right now. We’ve been getting a good deal flow. But most importantly, I bought a house primary finally for us in Newport Beach and we were able to obtain a 6.65% interest rate in today’s market. So that’s great news because My original quote was 7.75, so got it down quite a bit.

Dave:
Yeah, that’s great news. And the family is excited to move in?

James:
Yes, everyone’s super excited. Now we got to get it fixed and so I just met the contractor. We start demo in three days. So I’m just winging it.

Dave:
Nice. Good for you. That is very good news. Kathy, what about you?

Kathy:
I have my second grand baby and the good news is she’s healthy, she’s sleeping a lot. And her big brother is adjusting, hasn’t punched her in the face or anything.

Dave:
That’s good.

Kathy:
So all good.

Dave:
Congratulations again. That’s fantastic news for you and your family. Henry, what about you?

Henry:
Oh man, all kinds of good news. First and foremost, I just got back from Tennessee. I got to go to the University of Tennessee Chattanooga and speak to a bunch of college students all the way freshmen, all the way through seniors about the power of investing in real estate. So I prepared this whole new keynote on what I would do if I were starting over in real estate investing and I was in college. And so I think it was really helpful.

Dave:
Very cool.

Henry:
I love talking to young people about investing. I wish I would’ve been thinking about investing in real estate when I was in college. I was thinking nothing about anything that had anything to do with it.

Dave:
What were you thinking about, Henry?

Henry:
We’ll just say that I was preoccupied with other things, Dave.

Dave:
Okay. All right, fair enough. Congratulations. That’s super cool. Very cool experience. I feel like I want to hear this. We should just turn it into an episode. I want to hear your talk.

Henry:
Let’s do it.

Dave:
I’ll share my good news because I’m excited. By the time this episode is released, I will be somewhere in Thailand, hopefully on a beach on my honeymoon. So I’m thrilled about that.

Kathy:
Have some Thai food for me.

Henry:
Do they eat Pad Thai in Thailand or is that just here?

Dave:
I will report back to you. I think it is authentic and it does exist there. Our listeners, tell us if I’m wrong. But I don’t think it’s as ubiquitously popular as it is in the US. I would be lying if I said I haven’t been reading blogs about Thai food for the last [crosstalk 00:03:22]

Kathy:
My daughter’s had a lot of time in Thailand and she said the difference really is it’s just less sweet because Americans just love putting the sugar in everything.

Dave:
Yeah, that tracks. All right, it sounds like everyone has some great stuff going on in their lives. Let’s talk about some things that are going on in the broader world and the economy that are going well. Each of us is going to present some information and I am going to start with some state of the economy news. So I know that not everyone feels like the economy is doing particularly well right now and for some people it is not. But if you zoom out and look at the high level picture and the statistics about the US economy, things are actually looking pretty good. So just the other day, we got inflation data and it showed that although the regular CPI, consumer price index, was at about 3.2%, it’s been stagnating there over the last couple of months, that the core inflation rate, which is really what the Fed cares about because it excludes food and energy costs because they’re very volatile, that has been falling really dramatically.
So that’s really good news and I think you see just in the last couple of days, I don’t know if you guys are watching this, just a lot of investor confidence seemed to come back just in the last two days. The stock market went up significantly on the news of the inflation data and that took bond yields down a couple of basis points, which was really good. And so we’re seeing good inflation numbers. At the same time when you look at the GDP, which is generally considered the biggest high level analysis of the US economy, it grew a very robust, strong 4.9% in the last quarter. So when you look at the US economy at the highest level, it is actually doing pretty well. Do you guys feel this? Do you feel like the economy’s doing well? I feel like every time I talk about what are these good points on Instagram or something, people tell me how wrong I am and how poor the economy is. So I’m curious about this disconnect between some of the data and maybe how some people are feeling.

James:
A lot of people feel like it’s slowing down because they’re just not making this money they were making the last year and a half and they’re like, “Oh, it’s not as good.” But when we’ve tracked it, our income levels in volume, it’s higher than it was before the pandemic. It’s just not what it was 18 months ago. So I think it’s like that and it was in such a massive jump and it was going so fast. It’s like when you get off the freeway and you merge on to a slower road, you’re like, God, I feel like I’m driving slow but you’re still going the speed limit. And it’s the same thing that’s going on. It was just so nuts for 2021, ’22, you have to adjust to what’s going on now. And I think that’s what it is because the economy, at the end of the day, housing is still selling, the stock market’s doing well, GDP growth, all the signs say it’s healthy, it just doesn’t quite feel it because we were in such a crazy market before.

Kathy:
I can just say personally we had one of the best months ever, our quarters ever and the years come out really strong and our business is helping investors buy real estate. So that’s amazing that we’d have such a strong sales year with interest rates this high. But then again, we’re able to negotiate those rates down. So there’s that.

Dave:
Part of me wonders if the sentiment is negative because some people were expecting a crash. Inflation was really terrible. It’s still higher than everyone wants it to be and people are saying that it’s bad because we haven’t had deflation. Prices haven’t gone back to where they were. But that’s a whole other can of worms that is generally considered not a good thing for the economy. So I wonder if people are expecting a correction to make things a bit more affordable and that’s why the economy doesn’t feel so good is because it’s growing but maybe their people’s individual spending power or disposable income doesn’t feel the same as it did pre-pandemic.

Kathy:
Everyone was wrong. There were economists including the Fed saying that they expected a recession this year. So of course people were paranoid but it’s quite the opposite.

Henry:
Yeah. And I don’t necessarily know that people are really feeling it in their pocketbooks as much as it sounds like they’re saying they are on social media. Again, yesterday walking through the airport, it was a zoo. People are traveling. They are spending money. Every airport bar you couldn’t get a seat at. It was insane. So people are finding money.

Dave:
Interesting. We’ll see if it continues. A lot of people are still considering that there might be a recession in the coming year. There are a lot of headwinds that might push these things down. But where we stand today, recording this toward the end of November, the US economy looks pretty good and I think that is good news. Kathy, what about you? What good news did you bring for us?

Kathy:
So far it is good news, with that inflation data, the Fed has paused as we know. They paused the rate hike in November and there seems to be general consensus that they’ll pause again in December, we shall see. But when you have the bond market speaking pretty loudly with the 10-year treasury coming down and that then falls through to mortgage rates coming down, that’s a lot of investors worldwide saying this is where we think things should be. And generally the Fed follows that. So if the Fed rate now is at five, at five and a quarter, but the bond market is below that at four and a half or so, wherever it is today, that’s a signal that maybe not only will there not be more rate hikes, but maybe they’ll actually, there’s a lot of people who think there’ll be lowering rates in the future. But take away the predictions right now with the Fed not raising rates. This is good for people with credit cards, with adjustable rate loans, car loans. You’re paying less today than maybe last month.

Dave:
Yeah, I think it’s super important because as we’ve talked about on the show, but perhaps people just want a reminder, that in order at least for specifically mortgage rates to go down, the Fed doesn’t need to lower interest rates. There are a combination of factors that determine what mortgage rates are. The Fed funds rate is one of those things. But as Kathy alluded to, a lot of it has to do with the activity of both bond investors and the investors in mortgage backed securities. And they make decisions based on Fed policy, but they also make decisions based on inflation and how well the stock market’s doing and all of these other variables. So that is why we’re seeing mortgage rates come down at least over the last few days since the October CPI rating, is because bond investors are reallocating capital to higher risk assets and that pushes bond yields down.
So we can see this continue. We don’t necessarily have to wait for the Fed to lower interest rates from mortgage rates to come down as well. So I think for anyone who wants to buy in the immediate future, that is pretty good news.

James:
I think what Kathy touched on is really important. We’re seeing the trends coming down and for us, as we see these trends, and I think it’s important to watch these things because we get all the bad news, rates are going to keep going up, inflation’s not cooling down, and now we can actually start to forecast some relief because that’s been the question the last six months. When are rates going to start falling? We thought that they were going to start falling in December of this year and we missed the mark on that. They’re still a little bit higher, but now we’re starting to see that pressure release. What’s important for us as investors to do with that information is, for us, we actually just had a meeting last night where we’re looking at inventory. When we’re going to start building inventory. We just got some permits issued and we’re like, do we hang on to these for just a little bit longer, delay the construction so we’re going to time it right?
And as you start to see these trends, this is what you can really start building into your forecasting in performance. So it’s a very important thing for you to be watching right now. I think it looks very promising that we could be, hopefully in those sixes, high-fives, in the next 12 months if the trend continues. But the one problem is it keeps switching from month to month. So we’ve just got to really watch it and then watch for stability. Once you see the stability in trend, then you can really build it into your forecasting.

Kathy:
Yeah, and I’m glad you said that because the Fed, they weren’t conclusive. They’re like, “If the data comes in differently and we don’t know month to month we could raise rates.” So we don’t know.

Henry:
I think this is good news if you’re a home buyer right now because if you think about it, if rates do what we think it’ll do, which is come down eventually, 12, 24, 36 months, there’s going to be a sweet spot where rates are starting to come down a little bit but buyer demand isn’t increasing quite as much yet where you can still get in, get a decent rate, but not have to fight with all the competition that’s going to come when rates start to really come down to where people get comfortable. So if you can find that sweet spot and buy that property now or when the rates just start coming down before people start to flood the market, you can get a little bit of a lower rate and a lower price on your house and have some negotiating power. So I think it’s good news.

Dave:
That’s a great point, Henry. I am starting to think a little bit about when that sweet spot might come and obviously timing the market is impossible but it does mean that it might be coming soon. The other thing I just want to mention now that James said too is that I think that so much of this is not necessarily about what the terminal rate is, and that’s just a term for where the Fed holds rates for a while, but it’s so much just about predictability. I feel like as investors, no matter what you invest in, you can deal with conditions. What’s really hard is when you don’t know what to expect just even three months in front of your face. And that’s what we’ve been facing for what, two years now, with the Fed and with rates, it’s been really difficult.
So at least if we get some stability, the market will find equilibrium at the rates that they’re at. It’s just there has been so much fear because everything has been so predictable. So I think any move towards more stability and predictability is a good thing for anyone who wants to invest.
All right, James, what’s your good news?

James:
I have good news about the jobs report. This might sound a little bit weird because in September it was razor hot, it came in way higher than expected. The US economy added 336,000 jobs in September. In October, we only added 150,000 jobs. So quite a bit less. They were anticipating that the jobs report was going to come in at about 175 and they came in at 150. So why is this good news? We’re employing less people. The good news is we’re looking for those trends again, like we were just talking about. There’s certain things that need to get under control for the Fed to really take a step off the gas on these rates. And there’s numerous things. There’s the inflation report. In addition to the jobs, the job market has been too hot for too long. It’s causing employment issues, it’s causing wage growth, it’s adding to inflation. So now we’re starting to see it cool down just a little bit and that’s a good sign because the unemployment rate rose slightly from 3.8 to 3.9.
They were anticipating it to be flat at 3.8. So that’s showing a little bit of a trend and it’s a nice slower trend at this point. We don’t want to see that jump massively. Like 3.8 to 4.5, that’s not good. But if we can see it just gradually start to cool down, that’s going to put less burden on the economy, less on the inflation, and then the Fed should step in on rates and keep increasing them. Right now, the Fed is really trying to cool things down. And the faster things start to cool, the more normalized we’re going to get to get lower rates in there. So all these signs, as long as they stick, like what we just talked about, the federal funds rate could start to lower down with the job market cooling, the bond market, all these things are great signs to give us some relief that Mr. Powell is going to take his foot off the gas. And that’s what we want.
As I’m watching this, if the jobs report comes in, and that’s the one thing about this jobs report though, it’s been up and down, up and down. If it comes in again lower next month, that’s going to make me feel better and thinking I can forecast for lower rates over the next 12 to 24 months.

Dave:
I see what you’re doing here, James. You’re doing the old bad news is good news, good news is bad news that we’ve been living with over the last couple of years. But it is true. Normally you want to see more jobs. That’s typically a good thing, it grows the economy and growing economy raises the standard of living for everyone. That’s great. But inflation is a product of an overheated economy. So the logic goes that with too low an unemployment rate, with adding too many jobs, that’s going to further propel inflation. So as James said, I think it’s important too that we might be approaching a sweet spot where the labor market is cooling, it is not crashing. Like James said, we’re still adding jobs to the economy, 150,000. During a normal month, that would be a strong month. It’s just regulating and coming down a bit from where we are.
The other thing I want to address is that every time we talked about the labor market or jobs reports, people point out that the unemployment number or these jobs numbers are flawed. And there is no perfect data in any data set. And the labor market is no exception. Nothing is perfect. It is subject to the methodology and the availability of data. But I encourage people who want to understand the labor market to just look at the totality of all the different data sets there are about jobs. Look at the unemployment rate. Look at initial unemployment claims. Look at the labor force participation rates, job openings. If you look at the broad trends, the labor market is still very strong. And to James’s point, that might mean that we can see the labor market cool off to help the economy without completely breaking. To me, there’s a lot of cushion in the labor market before things get really bad. They can cool without getting really bad. Kathy, what do you think about this?

Kathy:
One metric to look at in this regard is the jobless claims, like you said, and that has been falling or staying flat. So that’s a good sign. People aren’t really losing their jobs and if they do, there’s plenty of more jobs to go get which is keeping the unemployment rate steady, like you said. Going up just a little bit, sometimes going down, it’s month to month. And again, that’s what Powell’s going to be paying attention to, the trend, not just monthly data.

Henry:
As a real estate investor, this is the news I’ve been waiting to hear. I just hope we can hear it consistently so that we can start to see some of these rates come down. Because obviously if you’re playing the investor card right, you should be buying when people are fearful. And if you’re buying when people are fearful, they put you in a position to take advantage of what we would hope would be equity and appreciation if rates come down. So yeah, let’s hear more of that.

Dave:
All right, great. And I just want to reiterate, I think I’ll speak for all of you and say that no one here is rooting for people to lose their jobs or for the labor market to implode. It’s just that it’s been so crazy. Just as an example, there is something like nine or 10 million job openings in the United States right now. So there are too many jobs at this point for the amount of labor that exists in the United States. And that’s a supply and demand problem that pushes up labor costs, it pushes up prices, and that’s how you get inflation. So we’re all basically just hoping for that sweet spot to exist.

James:
And you know what I am rooting for though? It’s consistency. And this will help with consistency because the issue with being an employer right now is the turnover rate is really high. People start jobs and quit jobs, especially in that median home price market or median income markets. So you can’t get people to stay and it causes a lot of cost and issues because they get bored and move on. If the economy slows down and there’s less jobs, people stay at their jobs longer, which it will be better across the board for everybody. So I’m hoping that this also adds employment consistency because that has been a nightmare for a lot of small business owners the last 12 to 24 months.

Dave:
All right. Henry, take us out with your good news.

Henry:
All right, let’s talk about some good news in the housing market. So first and foremost, new home sales. So new home sales have increased by 12.3% in September. I think a lot of that is due to builders buying down rates and offering incentives. I think a lot of it too is a little bit of people seeing the interest rates now as a more normal thing which there are still people buying homes. The current median days on market is 50 days on market and that’s pretty normal. That’s about what it was pre-pandemic here in the northwest Arkansas market. Typically, you list a home for sale and it takes anywhere between 30 to 60 days for that thing to get a decent offer and you start going through the process. And I think that that’s just a sign that it’s a healthy real estate market. When things were flying off the shelf and the average days on market was 10 days, that wasn’t really a healthy market. People were overpaying for properties, people were buying properties that had problems.
They didn’t have time to do the due diligence necessary to ensure that they were spending their hard-earned money on a asset that was worth that money. So normal days on market just helps both buyers and sellers ensure that we’re doing healthy things for the housing market. Then for US households, they’re showing that there is approximately $30 trillion in equity in homes. And subsequently the total number of mortgaged residential properties with negative equity have decreased by 6%. So even when people were overpaying for properties, there was this concern that they were going to be upside down. And if pricing goes down, then it’s going to be really bad for those people. But it looks like there have been less people that have negative equity and there’s tons of people who are sitting on equity right now and we all know that that equity can be leveraged and that’s how people can tap into some of the wealth that they’ve built. So there’s a lot of good stats happening in the housing market.
I think all in all, as an investor, what I’m seeing is the market is much healthier. When I list a property for sale, most of the time, if that property is renovated properly and we take the time and do the things right, it shows well, it’s a good clean property, then it typically will sell within the average days on market timeframe. And when properties are on the market and they are done poorly and they’re just polished up pieces of poop, they take a lot longer to sell, which is what you want in a healthy housing market. So I think all of this is good news for home buyers.

Kathy:
And you’re adding to those sales numbers as we speak, right? Are we seeing you at the closing table right now?

Henry:
Yes. I am literally at my title company about to buy some property. So this is my life guys.

Dave:
This is how authentic Henry Washington is. His slogan is not just see you at the closing table. We actually just see him at the closing table.

James:
It’s very impressive, man.

Kathy:
That’s some good multitasking right there.

Dave:
What are you buying?

Henry:
I’m buying a duplex.

James:
He got a good deal.

Henry:
Got a good deal. Buying it for 225. It’s probably worth about 325.

Dave:
Oh, wow. Nice. All right, you got to get out of here, man. You got to go buy that deal.

James:
What’s the overall cashflow in that deal? Because I was looking at that. I’m like, man, I need to start buying duplexes for these prices.

Henry:
Yeah, what I like about this deal is it is a three, two on both sides, which is hard to find in my market. So three, two on both sides, all brick, all the way around, solid, really, really solid property. And it’s extremely under rented right now. So the old owner hadn’t raised rent in years so each side’s paying about 600 to 650. They should be paying closer to, I would say, 1800 or more. So they’re extremely under rented. And it’s not an old property by any stretch so it doesn’t need a ton of work. So it’s just one of those deals where you find the right landlord at the right time looking to get out. So e were able to come in pretty quick, snag a deal, we’ll be able to raise rents and make a pretty decent cash flowing deal even at these crazy interest rates. And that’s how you build wealth, right?

James:
Yeah. And then if these trends stick, that cashflow is really going to juice.

Henry:
That’s the goal. That’s the plan. So thanks for the loan but I plan on refinancing sooner than later, James.

Dave:
I just love how we ignored Henry’s good news that he was sharing about the housing market and just had to ask him about the deal that he’s [crosstalk 00:25:45]

Kathy:
Deal junkies.

Dave:
But that’s good news, Henry. It sounds like you found yourself a good deal and just shows that there was more good news for real estate investors out there that if you find the right market, the right kind of deals, there are good deals to be had right now. Thank you all for sharing the good news. I think this is a nice break from hopefully all the other news that you see out there, whether it’s about the economy or something else. And you can see that there are still some things to be excited about, particularly for real estate investors. So Henry, James and Kathy, thank you for joining us and thank you all for listening. We’ll see you for the next episode of On The Market.
On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico Content. And we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

 

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [email protected].

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.



Source link

Leave a comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Articles

Real EstateTravel

4 Hot Housing Markets with Huge Home Price Appreciation

Most real estate markets in America saw huge home price growth over...

Real EstateTravel

Does the BRRRR Method Still Work in 2024?

For years, the BRRRR method (buy, rehab, rent, refinance, repeat) was every...

Real EstateTravel

Invest in Real Estate or Start a Franchise: Which is Best?

In this article Real estate and franchising are two popular investment options...

Real EstateTravel

Can You Flip Houses While on Disability? (Investors Beware)

In this article Disability benefits provide important lifelines to those who are...