Tag Archives: Real Estate

Surging Bond Yields with Downtown Josh Brown

Reading Time: 2 minutes

This was so good on so many levels.

Catch me on Scott Galloway’s show

Long End of the Curve + Velocity:

28:11

An absolutely great dissertation on the yield curve, impact of rates, and flow through into the economy so far.  So many good points here, you just need to listen to the whole conversation.

Keep in mind, velocity matters a lot. Long rates matter way more than short rates.  There may be lags and some structural weirdness, but I am in this camp.

Catalyst:

44:07

“You need the shock.  What is the exogenous shock that is going to happen that is all of a sudden make the recession real.?”

Spenders gonna spend.  This has been my thesis for a while.  The American consumer is not going to stop spending until they are literally stopped from spending.  American consumers will spend until they run out of money or, more likely, cannot get credit any longer.

Rates are impacting this already.

Hold To Maturity:

50:52

I disagree with this somewhat.  Not his attractiveness of the starting yield discussion; I agree with that point. 

However, if I buy a 30 Year Treasury Bond with a 5% yield, and hold it for 30 years, then my (nominal) return is literally going to be 5% every year.  How would it not be, assuming the U.S. government doesn’t default (I felt I had to add this caveat, unfortunately)?  Only if I look at price on a short term basis and mark-to-market or sell the bond prior to its maturity will my return vary.  This is like the whole point of a bond.  It is why they call it fixed income.

In my opinion, too many fixed income investors are focusing on price movements (i.e., trading) and not focusing on yield and duration.  The fact that yields have come down for 20 years, has probably caused too many fixed income investors to focus on price movements.  ETFs also distort this a bit for a couple of reasons.  More on this later.

Credit Spreads:

53:37

“Spreads have not blown out…and until they do stop saying recession.”

Yes, totally, spot on.  Watch credit…especially consumer credit.  See above.

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The World of Low Rate Mortgages

Reading Time: 3 minutes

File this under things I don’t understand.

During the Covid-19 pandemic, the Federal Reserve lowered short term interest rates and rates across longer maturities followed suit.  The rates on mortgages, such as the 30 year mortgage which is common in the U.S., hit all time lows of 2.65% in January 2021.1

Home buyers and existing home owners financed new purchases or refinanced existing mortgages at these historically low rates.  This appears to be a very rational financial decision.

Banks and financial institutions; however, lent substantial sums of money at these historically low rates.  In hindsight, this appears to be a less good decision.  Using TLT as a proxy for the value of longer dated bonds, the value has fallen close to 50% in three years. 

Now, rates have increased sharply to unexpectedly high levels.  Mind you, these are not historically high rates.  The highest rate on a 30 year mortgage in the U.S. is 18.63% set in October 1981.1  But the rates are certainly local maximums in terms of the memories of most people.  You would have to go back to 2000 to find rates this high.2

So now what?

Existing homeowners are understandably reluctant to give up these rates – in other words – sell any property financed with low rate mortgages or paydown low rate mortgages quickly.  

Banks, financial institutions, and investors who hold these low rate mortgages appear to have locked themselves into an under-performing asset for a long time.  The thesis appears to be that these entities are going to hold these assets to maturity, which means they will eventually get the principal back, so the unrealized loss sitting on their books is not a concern. In this case, they will be earning roughly half as much interest as a similar mortgage made today.  In a poorer scenario, these institutions sell these assets – for whatever reason – and take a substantial realized loss.

It seems to me that I am missing something somewhere, and do not see how this plays out (efficiently).

Mortgage owners that locked in low rates appear to have received a huge financially engineered (one-time?) benefit.  But now have little incentive to sell their properties or pay down their debts.  So the gains are literally trapped in their house.

Lending institutions lent money at historically low rates and picked up transaction fees along the way.  But are now holding under-performing assets for a couple of decades.

Is that it?  Are we stuck in the world where:

  1. Most existing homeowners are unlikely to sell for discretionary reasons.
  2. Refinancings appear to be highly unattractive.
  3. Repaying mortgage debt would also be less attractive since Tbills are earning well above the low rate mortgages.
  4. Banks and financial institutions are holding relatively unattractive mortgage assets regardless of how accounting rules make these appear.
  5. Real estate transaction volumes are going to be substantially lower for the foreseeable future.

It is almost like the average U.S. mortgage holder outfoxed the supposedly sophisticated financial institutions.  But somehow the financial institutions appear to be unimpaired in any way.  And participants are going to wait in their respective corners until…until…until what?

  1. https://fred.stlouisfed.org/series/MORTGAGE30US/
  2. http://bonddad.blogspot.com/2023/09/new-20-year-record-high-mortgage-rates.html

Bears Watching: Cash & Real Estate

Reading Time: < 1 minute

I love this chart produced by Capital Spectator on a monthly basis:

Two things I find interesting:

  1. Cash is still the best performing asset through the one year mark.  Actually, cash is the only positive performing asset (in nominal terms).
  2. And the poor performance of Foreign Real Estate over five years. Foreign real estate is the worst performing asset, at least in U.S. dollar terms.

Bears Watching: Housing

Reading Time: 2 minutes

This draft has been sitting in my folder for a couple months now.  And is possibly some bandwagon jumping.  Although at least I have been on the bandwagon a bit (Bears Watching: Observations In Real Estate).  However, the transition to lower prices requires a psychological shift in the market, especially on the part of sellers, and that is going to happen reluctantly (and slowly).

I realize the residential real estate market is large and diverse.  And, most homeowners are not transacting frequently making price moves somewhat less relevant for many.

However, I might be nervous if:

  1. I bought a house in the last 18 months – to the right of the line on the price history chart below.
  2. In an area with a price history chart that looks like this one.

I am not really a practitioner of technical chart analysis.  But that is starting to look a lot like a head and shoulders pattern.

The question is – is how much of runups like the one above are due to inflation vs. speculation / an asset bubble driven by low interest rates.  The inflation component is unlikely to subside.  Or said differently, slowing inflation will not cause prices to retrace their prior ascent.  Only deflation will cause that.

However, the component fueled by historically low rates stemming from monetary and fiscal policies that appear to be in the rear view mirror are at risk of reversing. In fact, they are reversing – you just have to squint a bit and adjust for the rapidly declining transaction volumes.  Also realizing that asking prices on Zillow are not indicative of transaction prices.

But sellers will be slow to acknowledge that their houses have not doubled in price in the last two years and will be until forced to do so.

That’s A Bunch Of…

Reading Time: < 1 minute

Ok, what am I missing?

The seller wants to sell me house that will cost almost $10,000 per month, and wants to rent it back for $5,000 per month.

I presume that if I do enough of these, I will make it up in volume?