theDirt Monthly: Everyone is waiting (for something to happen)

October 2023

DALL·E and me: Everyone is Waiting

the Down and Dirty (Squishy floors)

Last month I wrote of the possibility of finding a squishy floor despite interest rate increases. This holds true for September data: the Central Texas area saw a very slight decrease (0.72%) in month-over-month acreage property listings with a very slight (0.69%) increase in listing price. Closing averages for acreage properties also improved across the Central Texas area. A true test of the squishy floor thesis will be next month’s data and in light of the recent bond route.

The Fed announced on September 20th that they will maintain target interest rates at 5.25-5.5%. So a pause for now. Chairman Powell left the door wide open for another .25% hike later this year. The Fed remains fixated on the 2% inflation goal. As long as this remains true and as long as “inflation remains elevated”, we can expect interest rate bumps to continue. I think the Fed is waiting for something to happen.

Despite this interest rate pause, long bonds went into sell-off mode shortly after the announcement and the 10-year Treasury Note popped to rates not seen since 2000 (I know this statistic without looking because everyone has been citing it). As of this writing, I watch as the 10-year climbs to 4.74% on its way to 5%. The spread between the 10-year and mortgage rates for prime borrowers has been near 3% which equates to mortgage rates well north of 7% and approaching 8% (7.61% at the time of this writing). Ouch. This could be the start of something happening.

I think housing in the Austin MSA could get another kick in the pants as a result of significantly higher mortgage rates, but, based on what I see and hear every day, owners of acreage properties ain’t budgin’. So we shall see.

Dirty Thoughts

Paradoxical Effects

I highly recommend a recent podcast featuring the wonderfully Cassandra-esque Luke Gromen. He articulates the thoughts that have been rattling in my head like the steel ball in a can of spray paint: what if all the interest rate hikes lead to the opposite of what everyone expects? He points out stats like the price of oil: shale oil composes the largest source of oil in the US and is also very marginally expensive to produce and thus very sensitive to interest rates causing oil companies to reduce production thereby reducing supply thereby increasing price. So yes, increasing interest rates increases the cost of a tank of gas. Oh, and food. And everything that relies on the transportation industry which is everything. Which means that inflation numbers might… increase? Leading to more interest rate hikes? Whoa! A paradox, man.

There are also paradoxical effects in real estate: a balance-sheet-healthy homeowner with a job that just refuses to lay her off¹ (because it took FOREVER to find someone qualified and we are NOT going through that again) has a 3.5% mortgage and thereby refuses to sell her house because she doesn’t have to (just like all of her neighbors) causing a decrease in supply causing an increase in price. Now these are national numbers, folks, not Austin MSA numbers but still. National house price averages have been ticking UP in the past few weeks. And for all the distemper in the Austin market there are still properties trading at relatively healthy prices. It’s weird man. Weird.

Finally, Mr. Gromen touched on something that has been bothering me for a minute: if our national debt is so huge and now interest rates are so much higher, won’t interest rate payments act as a monetary stimulant in and of themselves? He supposes yes. Makes sense to me. Of course, for all the Dirty Thoughts out there, there is an equal and opposite Dirty Thought somewhere else. So take all of this with a big, dirty grain of salt.

Dear reader, talking heads (including Yours Truly) expected Something Very Terrible to have happened by now. To this day, my feeds are filled with Very Smart People telling me that the sky is going to fall any minute. And the doomer in me badly wants to believe them. I mean, we are talking about the fastest interest rate hikes ever. Surely something will break. Right? But… but… the economy-at-large is kinda shaking it all off. Where’s the wailing (aside from real estate industry in Austin)? Where’s the gnashing of teeth? Is all of this merely the calm before the storm? Is the expected crash still on the horizon? Or is the unseen gremlin beneath our bed the paradoxical effects of a dynamic and complex system taking non-linear turns that none of us expected (or could have predicted)? I dunno. It’s weird, man. Weird.

Came in as I was typing…

A Tale of Two Bad Options

I wrote a few months ago that I think the Fed (Uncle Jerome) is caught between a rock and a hard place. My view on this has not changed. As the King of Money (and therefore the economy too), Uncle Jerome gets to choose between a crippling, deflationary depression with high unemployment versus a sustained and nasty but fully employed inflation. I wrote before that I believe that he (and by extension all of us) will ultimately be forced into accepting the reality of sustained inflation as the politically most acceptable and least bad option (the people squeal less that way). Luke Gromen articulated this beautifully during the interview linked above. My take is this: the US economy still has enormous productive potential the likes of which are unrivaled across the globe. Our long term future is very bright. But our accounting system is effed. The books don’t balance. And that abstract, ephemeral, made up concept called money is so important to the physical economy that we cannot function as a society until the books are balanced. History shows that the easiest path to balancing the books when you are this far off the rails is for All the Kings Horses and Men to slowly (and in as controlled a fashion as possible) inflate away the debt. I just can’t help but believe that Uncle Jerome is only stacking interest-rate sandbags to temporarily defeat the rising tides of inflation.

**Now is a good time to remind you of my own baggage, limitations, and blindness. All of these are conjecture and Guesses. I claim no special vision of the future.

It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.

-Mark Twain

What it all means for real estate -or- The Long Slow Slide Sideways Continues

Looking back, we’ve all been stuck and slowly sinking in the quicksand all the while deliberating about what might happen next. Stuck being the key word here. Many potential buyers are handcuffed by interest rates leaving a good chunk of the population out of the market altogether. Then there are the delightful few who can pay in cash or who are in a position to seize upon the incredible deals offered up by new builders. But there ain’t a whole lotta those buyers out there. And the tale of the latter two types are those who want a good deal and are not apt to snatch up something at market price. Those able to buy and able to find a seller willing to sell are able to command concessions. On the flip side are a passel of potential sellers who don’t have to sell, have enormous equity, a steady paycheck, and who thus exhibit zero signs of motivation to concede very much at all. So, here we are back at the supply-demand standoff resulting in The Big Paradox. And we are left in the confusing quagmire of interest rate rises which don’t decrease prices through forced selling but by suffocating volume instead. Everyone is waiting for something to happen.

On the bright side… I’d like to note how much I appreciate real estate guru Ricky Carruth. He’s kind of a cliche when it comes to ra-ra real estate hypists, but he is also a joy to listen to right before I head into the Lion’s Den of rejection. He made a great point recently: even at the depths of despair in the housing crash of 2008, real estate was still being traded. Sure, volumes were thin and business was down. But dirt was still bought. And dirt was still sold. Today is no different. Even in the midst of all this doom and gloom, guess what? Deals are still being struck. Properties are still being traded for cash. Every day.

Or, be inspired by my fellow Realtor Brenda who has been in the game since 1978. I asked her what she thought of this downturn. “Meh,” said she, “just like all the others. But different. This too shall pass.” She didn’t seem overly concerned. She just went back to work.

Post Script

As I write this, long bonds are making serious moves. Could this be it? Could this be the catalyst? The Big One? The something that we’ve all been waiting for?

Maybe.

Or it could be just another blip on the long road sideways. Something the economy absorbs with alacrity leaving us all wringing our hands and wondering how. Time will tell. Maybe I’ll have something really interesting to write about next month as I warm my hands over the flames of an economy in full route. Or maybe not. Until then, Dear Reader, I wait right along with you. This I know for sure: one way or another, something will eventually happen.

The Nuts and Bolts (Market and Economic Data)

Data Disclaimer: The following data is for “acreage properties” in the Central Texas Area. I define an acreage property as any property over 10 acres. By Central Texas, I mean any listing within 120 miles of my house. This is very Dirty Data. I use it to track general trends. While I do try and remove obvious errors in the data, I do not scrub very hard. This means that there are duplicates, bad entries, and other nastiness that affect the averages. Buyer beware. Take it with a grain of salt. Wash hands after use. Safety not guaranteed. Et cetera.