theDirt Weekly: a thousand ways to say I Love You
February 18, 2023
A thousand ways to say I love you
I don’t know if there are a thousand ways to say I Love You. But it sure is a catchy title and theme for Valentine’s Day week so here we are. While I am no doctor of love (or doctor of anything for that matter), I do know that the number of variables affecting our economy approaches infinity. This means that there are a number approaching infinity variations of possible futures. Which can give a person a very painful migraine when trying to puzzle out exactly what is going to happen next. Not unlike a young suitor pining for the attention of his muse. Will she? Won’t she? What flavor of candy is sure to capture her taste and therefore affection? Ahhh, le amour. Here’s to love and money (and real estate). Ain’t it horribly grande?
Uh oh, mom and dad are fighting again
Uncle Jerome at the Fed shakes his head in consternation. He keeps sending love notes to the economy saying that he wants a more deflationary kind of relationship. But the economy sends back notes (CPI) saying that things are still very inflationary and we had an agreement and why are you changing things now? I mean inflation was the basis of their entire relationship! And now he wants deflation?
Things could get rocky. Will Jerome persist? Will he succeed? Or will the economy dump him for someone better? Will their love children (the financial markets), who are so confused right now and just innocents caught in the middle, side with mom or side with dad? Let’s just say that things are tense in the Eccles Building and no one really knows what to do.
Real estate, I Love You (let me count the ways) - or- What it all means for real estate?
In all relationships, there are good times and bad. Ups and downs. Highs and lows. Personally, I feel that my Dirty and Nerdy muse - Texas real estate - is in for a rocky year. Like Seasonal Affective Disorder but for Dirt. Interest rates are back on the rise and CPI and labor prints are sending mixed signals. And after reading bad news followed by mixed news followed by good news that is actually bad news because it is good news1, I begin to wonder what could right the real estate ship? Price and affordability are, of course, the big issues. A lot of talking heads suppose that prices must come way down for real estate to equilibrate and for the wide world to make sense again (pfft! As if the world ever made sense. But anyways). And price declines are certainly one way to get more consumers back into the real estate game. And to effect that end, real estate being very interest rate sensitive, interest rates must rise. BUT!
Interest rates have been skewed for so long that I do not think that merely raising them a la Volcker in 1981 is the one solution to rule them all. There are just too many second and third order effects for the Fed to keep kicking up rates. And this time is, in fact, different. And so I think there may be a glass ceiling when it comes to the Fed and rates.
Look folks, I am no grand expert on interest rates and government finance (although certainly an enthusiastic student), but it seems that raising short term rates too much requires the already quite large federal debt interest rate bill to also increase requiring increased debt to fund that debt etc etc. Seems like a nasty cycle. Oh yeah, isn’t there another political debt ceiling showdown looming? I’d bet a shiny nickel at 100 to 1 odds that they (Congress), after many speeches and sound bites and much showmanship, will pass another federal debt increase. Will that be inflationary? Deflationary? Nominal? Real? Oh god, my head hurts.
Of course there is also the extremely complex money supply that also must be considered. And the Expertsâ„¢ say that the money supply is shrinking. But I know quite a few people in the banking (money supply) sector and their business model is based entirely off of making loans and selling those loans to big loan-gobbling monsters called Collateralized Debt Obligations (or whatever the kids are calling them nowadays). That collateralized monster really really wants to make loans. In fact, it needs originators to make loans. Is that going to just stop overnight? Nah. Bankers vote too. They also fund Political Actions Committees and make election donations.
On top of that there are entire markets whose profits derive from ever-increasing asset prices. And a pretty good chunk of the middle class’s (and, hence, voting citizen’s) wealth is tied up in their house. Are our politicians more or less likely to let home prices slide too far? Isn’t that how we got TARP and the Fed getting into the business of buying mortgages in the first place? Dear reader, it is all a giant house of cards built upon a wobbly foundation of low interest rates. And now, at final quarter, when we finally realize that we are behind by a few touchdowns are we simply going to kick a field goal from our own 20 yard line and hope for the best? Seems suspect. I don’t care how strong Uncle Jerome’s leg is.
Rationalizing my way into feeling better
If one zooms way way out to the thousand foot level (let’s say at the level of a spy balloon over Montana) one sees that the history of money and our economy has been one of almost permanent inflation with occasional downturns. In the short term, prices can and will fluctuate down. Maybe even way down. But in the MACRO-macro it seems as though our culture of exchange is just up, up, up (not unlike my love and admiration for you, dear reader). Let us not forget that once upon a time land was like 3 cents an acre. No seriously, once upon a time the US of A bought a large chunk of our continent from France for just under 3 cents an acre. It was called the Louisiana Purchase and man was that a great deal. So with all due respect to Eric Basmajian above, there is no such thing as economic gravity in the long term2.
The point, dear reader, is that this all seems to be a matter of perspective and time. Can and will real estate prices continue to take a nose dive over the next few months? Of course. I would even say it is probable, especially for residential and some over-levered, over-played sectors of commercial. But over the long term is it more likely or less likely that real estate will increase in price (or value which is similar but different)? I’ll venture a guess and say more likely. If not, the house of inflationary cards that is our entire economy is in for far more serious problems than losing 20% on bad timing of a real estate deal; like revolutions and literal blood in the streets problems. But let’s don’t be too dire.
I’d also make the argument that price decreases are not the only way for supply curves to get back together with demand curves and for things to be lovey-dovey again. Guess what? We have a pretty strong labor market. Still. I think it is more than possible that, as we bounce along sideways for a long while (like years), incomes keep rising while prices also decline slightly but not too much. Because there is more than one way for a relationship to correct. Prices can certainly come down. Alternately, incomes can certainly go up. The labor market and demographics seem set for that scenario to occur. Keep in mind, I don’t think this will happen this year. Employers are stubborn when it comes to raising salaries too high too fast. Just as land owners are stubborn in decreasing listing prices. There has to be something that forces each of their hand. And, frankly, both of their hands are being forced right now. So sideways for a long time. I’d almost be willing to bet a shiny nickel on it.
Coda: Is it true love or puppy love?
I am proud to say that this year my wife and I are approaching our 20th wedding anniversary. As high school sweethearts, we seem to have beat the odds. Was it luck? Fate? Pure stubbornness? Something else? I dunno. I do know that it wasn’t always easy. There were days that I wasn’t sure if we were going to make it (I’ve heard I’m not the only married person to experience this feeling). But we have thus far. And what I’ve learned after 20 years of marriage (25 years of dating), is that puppy love (or romantic love) is easy. But true love is really really hard. It means sticking through it even when you might very much dislike the person you are attached to (and don’t fool yourself into thinking that you can’t temporarily but strongly dislike the person you are very much in love with). I think that with true, boring, real-gritty love (vice romantic, easy, puppy love), there is a certain belief underlying that, no matter what, no matter how pissed off you might be at that specific moment, you are better off with the person than without.
And now, it is time to draw the parallel. Yes folks, I am going to get really Dirty and really Nerdy and analogize true love and real estate. Because for some of us the right bit of Dirt is just like true love.
As with true love and long term relationships, the Wise Investor must look past the short term pleasures of puppy love. One must acknowledge the gritty reality of ups and downs. Of highs and low. Or, if we are being truthful, the boring monotony of the day-after-day grind. Folks, the Wise Investor is in it for the long haul3. And if you are in it for the long haul then trying to time the markets is silly. Should I wait? Should I move now? That is up to you. The Wise Investor analyzes the prospect and decides then and there based on what he or she knows here and now if the deal is a good one. Or not. Worrying about what new love might come down the pike in a few months is a game for cads and players. And there are simply too many futures too contemplate. Sometimes one must carpe the diem lest you lose the opportunity at hand4.
Awe. Who says that real estate can’t be romantic?
Oh yeah, the curve must revert
5% on a 1-year note versus north of 3.8% on a 10-year bond? Wow!
As opposed to bad news which is good news because it is bad news.
Reversion to the mean is a thing. BUT! That is a short term phenomenon. Over the long term the financial mean has been increasing across sectors and asset prices.
Okay, in real estate one can have very profitable short term flings. Like flipping houses which I love doing when the numbers makes sense. But that is not investment. It is speculation pure and simple. Investment is long term.
On the other hand sometimes passing up the deal is the right call. Who’s to say? Only you, dear reader, only you.