Down and Dirty this week
Interest rate roller coaster
The discussion last week ended on a sour note about interest rates. This week saw whiplash and compressed spines as rates soared then dropped then popped right back up. Interest rates rose on Monday. They rose a lot more on Tuesday. On Wednesday morning the 10-year Treasury topped 4% for the first time in over a decade and mortgage rates (conventional 30-year) popped to 7.08%. By Wednesday afternoon it dropped like a rock to again rest at 3.7%. On Thursday it rose back to - hold on, I am feeling queasy.
5-DAY INTEREST RATE CHART
*At the time of this writing, the rate on a 30-year mortgage is 6.82%. And the rate on the 10-year Treasury? Well, it probably starts with a 3. After that it is anyone’s guess.
We are definitely not not in a recession
No one official wants to utter the dreaded R-word so close to mid-terms but some of us just like to look the reality cyclops square in its cold, ugly eye. I opined a few weeks ago that we are, almost certainly, smack dab in the middle of a recession. But all the measurement-thingies and math-stuff take time and so what is obvious to most of us takes a minute for that old bag, the Government, to acknowledge. But here we are, two quarters of retraction. I don’t imagine Q3 is going to look any better. But don’t worry, we’ll all find out about it in 2025 when the official word comes in.
Having their beans on toast and eating it too
This is remarkably, but maybe not obviously, important for Texas real estate. There was a sort of economic Crisis in Great Britain on Wednesday as the new government there unveiled their economic plans and the British bond markets (Gilts) decided… nah, mate, sod off. Gilts sold off like mad and rates popped and suddenly pension funds with snobby upper-class accents started pleading Uncle! So the King’s government told everyone to calm down and said, ‘We (the royal we of course) will buy all the Gilts, thank you. Now how about a spot of tea’. All the king’s people were happy and lived happily ever after. Well, at least for the rest of Wednesday. Because then Thursday came and everyone realized that everything is not, in fact, okay.
On first glance it might seem absurd that the policies of cheery-o Britain could affect Texas real estate. But affect it does. This is largely due to the fact that Big Money Players across the world are as jumpy as an over-caffeinated blonde in a Mike Meyers flick. And our financial world is so inter-connected now that an economy like Great Britain passing out causes the world to get light-headed (a canary in a coal mine?). It could be a good thing for interest rates if the world decides that US Treasuries are the only safe place to be. It could be bad if everyone suddenly decides that no long term bonds are safe and the sell-off in long dated US Treasuries continues. The key words and phrases here are: global uncertainty, suddenly, jumpy, and nervous.
Importantly, Britain is now traveling down a very interesting and uncharted road. They are engaging in rescue bond buying (Quantitative Easing) while also raising rates to tame inflation while also cutting taxes to… increase inflation? I don’t know what they are doing. I am not confident that they do either. I guess we have officially reached the ‘throw poop at a wall and see what sticks’ phase of economic policy. Red-blooded American markets spiked on Wednesday on the QE news (interest rates dropped) as people wondered if religious Jerome Powell might turn back into fight-for-your-right-to-party Jerome Powell in sympathy with the King. He did not seem amused (Powell, that is, although Charles III also seems very scowl-y of late).
A Touch of Gas
Yeah - so Russia is still a thing. Putin mobilized that nation and is now doing what Russia in war does best: conscripting anything and everything with a pulse. Putin made Ed Snowden a citizen confirming that he (Putin) is an epic troll and the best Bond villain since Dr. No. The US Embassy also advised US Citizens to leave immediately making me wonder if Putin will instantly make every visiting US Citizen a Russian citizen and then conscript them all into the Russian army. That would be an evil-genius troll-king move although the Russian tourism industry might suffer (sigh, I so miss Siberia in January).
Oh, and let us not forget that two very large gas pipelines from Russia to Europe magnificently and violently ruptured at the same time. They blamed us, we blamed them. Fingers pointed everywhere. Why is this important for Texas real estate? Well, that is not immediately obvious to me aside from the very large but indirect effects that the Road to War has on all economies. I am not an energy expert (or any expert at all) in any way but I surmise that it might be good news if you own a gas lease. Or are in the O&G business in general. This might also be good for rural properties with bomb shelters. Or bomb shelter businesses everywhere. The news is likely not good for holders of real estate in Russia.
Speaking of gassy global powers
The rumor around town is that OPEC+ member nations are really, really excited about high oil prices and would like that to continue. They meet next week and a little birdie (Twitter) told me that they will decide to reduce output to keep prices up. If true, the brief respite at the gas pump might be very brief indeed.
Five finger equity punch
Equity markets were gut punched again this week. They are down over 20% from the peak in January which is the definition of a bear market. On Tuesday, as I was trying very hard for about an hour to NOT focus on markets while I watched my son kick butt in his 8th grade football game, I overheard a lady seated behind me animatedly describing the crash of her 401(k). Folks, desperate market talk coming from on-the-verge-of-retirement grandmothers while seated uncomfortably close in the bleachers of a middle school field is a very bad sign.
Hurricane Ian gives Florida (and all of us really) a swirly
Storm porn abounded this week with lots of videos of flooded neighborhoods and sharks swimming in (on?) flooded highways. Hurricane Ian touched down in Florida on Wednesday as a Category 4 storm and weather reporters across the US braced themselves for the required ‘reporter gets blown about by wind’ shots. Importantly for real estate, big events like these can be bad for real estate insurance.
Catastrophic events like hurricanes and epic winter storms in Texas cause catastrophic payouts for insurance companies. You might have noticed that real estate has been increasing significantly in price over the past couple of years and insurance companies are now on the hook to make good. Well those same companies will no doubt recoup their losses by increasing premiums everywhere and all at once. So just more great news about rising homeownership costs in an already inflationary environment. Ian is the kid who asks about homework on a Friday afternoon right before the bell rings. Thanks Ian. Jerk.
Subprime Car Bubble
The car market felt really left out in 2008, and they all decided that they too wanted a subprime bubble. Well their day has come at last. After working for most of a decade to write just the most terrible loans known to man, the auto industry is now reaping what they sewed. Or is it sowed? Sown? Whatever, the point is that the auto market is in rough shape.
This is important for real estate because credit, rates, contagion, blah, blah. It is also notable that cars, food, and houses have surged in price while wages have not. So Average Joe gets to pick between food, a car, or a house. Can’t have all three. Text me back Joe when you decide.
Will someone please think of the children
Demographics are destiny. Especially for real estate. Peter Zeihan has a great take on the very poor state of our demographics (and the rest of the world). I riffed off of Peter and think he makes - A really, really good case for land…
How our culture and society react and adapt and change to the reality of our New Economy is something that I think a lot about. When buying a house is too much even for a dual-income household, what is one to do? My current hunch is that we will see the re-emergence of multi-generational households. I wonder: in 30 years will parents like me realize that they must shelter their children and grandchildren in the same house that they’ve owned since 2021 when they got that great rate because the kids have nowhere else to go? Maybe that is a touch hyperbolic, but I think the point remains that cultural shifts will occur. On a similar note: will housing, not just real estate but an actual Home, become a part of inheritance like the grand old manors of yore? Will the most mobile generations alter overnight to become the most stagnant? Dirty thoughts for sure but I know that I know nothing and stand firmly behind none of it. I would like to hear your take though so be sure to comment with your thoughts.
What does it all mean for land? - wrong guesses only please
In this very uncertain interest rate and credit environment, things will remain tough for a while. Real estate is in the midst of its very own epidemic, and rates are the virus. The disease is affecting every acre, directly and indirectly, and across all domains - residential, commercial, land. A lot of properties are poised to get very, very sick. Others will feel just a little under the weather. Some will be just fine. It all depends on that particular parcel’s DNA and underlying health as it is exposed to the interest rate virus. Fortunately for you, I did not spend years at evil real estate medical school for nothing. Folks, the doctor is in, and I am accepting new patients. Reach out for a consult: dustin@grandlandco.com.
On Wednesday, I released my very first report on land prices across the Great State of Texas (paying subscribers only - BUT! It is easy to sign up for a free 7-day trial to see the report).
INSERT DEEP DIVE LINK
The report shows a slight but general month-over-month decline across most counties. My hunch (not a prediction! - an intuition based guess) is that the closer to the metro areas one gets, the more declines you will see in the coming months. This will also be more true depending on the size of the parcel (smaller parcels might see bigger price declines). And also the type of parcel (recreational versus tillable ag acres, etc). As of right now my opinion is that the more residential-like a property, the more susceptible it will be to residential malaise: a 15-acre gentlemen’s ranch just outside of Austin listed on the market today is probably going to suffer from multiple “price improvements”.
I wrote previously about Inventory Arguments. The classical understanding of Supply versus Demand affecting price holds true and analysts look hard at inventory today compared to inventory yesterday to determine how healthy (or not) a market is. We all focus hard on inventory because it is easy to measure. Demand on the other hand is very hard to measure because no one really has any idea of how many buyers are actually out there. My argument in the inventory discussions is that absolute supply of real estate is still constrained. But what matters more in today’s environment is the dramatic and quite sudden demand destruction that occurs as a result of very very rapid interest rate increases. While I maintain that rising rates will not affect land prices to the degree that they affect residential or commercial real estate, we must still consider how many potential land buyers are removed from the market at 7-plus percent rates. We must also consider how many potential cash buyers are in a wait-and-see pattern in this terribly shifting economy. The proof will be in price moves in the months to come. I will be watching. I will be reporting. And I will be discussing.
Other news that is important but harder to be snarky about…
What? What did I miss?
It is a big world out there and there is too much going on at once for my little brain to get it all. So I probably missed something important. Please, please do me the most enormous-est of favors and put any important news that I missed in the comments.