Down and Dirty this week
3Q GDP is a mirage · Yield curves and manipulation · To pivot or not to pivot · Demand destruction versus demand postponement · What it all means for real estate · A return to seller financing · Mineral rights for Texas landowners
3Q GDP is up but it is a mirage
The US Gross Domestic Product (GDP) figures for the third quarter were released on Thursday. According to the release, the economy increased 2.6%. Keep in mind that GDP prints were negative in the first and second quarters. What gives?
First, as with all figures and statistics, one should look under the hood to make sure that you aren’t buying a lemon. For the anal retentive and adventurous, you might also crawl under the car and make sure there is nothing leaking. Because with GDP, there is usually a suspicious and greasy black stain on the ground. To whit: there are a lot of numbers working behind the scenes of the GDP release and one big number can skew the GDP figure either positively or negatively. Looking at GDP breakdowns, one sees how the skyrocketing US Dollar (compared to other nation’s currencies) increased the dollar figure of exports making our GDP print rosier than it should be. Government spending also added to the plus column. But important stuff like durable goods and residential investment are down. Which brings to mind that epic quote on statistics:
"Figures often beguile me particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: 'There are three kinds of lies: lies, damned lies, and statistics.'"
“Overall, while the 2.6% rebound in the third quarter more than reversed the decline in the first half of the year, we don’t expect this strength to be sustained,” wrote Paul Ashworth, chief North America economist at Capital Economics. “Exports will soon fade and domestic demand is getting crushed under the weight of higher interest rates. We expect the economy to enter a mild recession in the first half of next year.”
As quoted by Jeff Cox in this CNBC article.
Yield Curves and manipulation
Last week I discussed our continuing inverted yield curve in the US Treasury markets. An inverted curve means that shorter term debt demands higher interest rates than longer term debt. Which is completely backwards in the relationships of time, money and risk (hence inverted). I project that inverted curves will be a necessary addition to theDirt Weekly over the coming weeks; because real estate lives and dies by the credit market and credit markets are very skewed and unhealthy right now. And even farm, ranch, and land real estate, where most sales are still cash, can bog down if all other real estate sectors are down too.
If you are a Dirty Nerd like me and want to explore the specifics of our skewed debt markets, I highly recommend reading this substack by The Last Bear Standing: Draining the Repo. He does a great job of making the mechanics of government manipulation of debt markets to achieve various ends relatively easy to understand. For everyone else, the short version is that the Federal Reserve is using its tools to address inflation while the US Treasury (separate entity) is using its tools in a way that counteracts Fed policy (and might be, in fact, inflationary). The result is a curve that looks like this:
When it should look like this:
Folks, the money supply is both the fuel and lubricant of our economy. Starve the economy of fuel and lubricant and things will stop running at best. At worst, the engine will blow and you’ll be left standing on the side of the road in the middle of nowhere with nothing but bad words to comfort you. So yeah. This is not a good thing.
To pivot or not to pivot, that is the question
Speaking of faulty mechanics and the economy… the brakes are starting to smoke, the engine is still running hot, and the transmission grinds when shifting. There are several and serious problems under the hood. The Fed is caught between a rock and a hard place as Uncle Jerome desperately needs to get this load of rotting monetary and fiscal policy hauled from DC to San Diego without getting caught by Smokey. Oh, and he told the missus that he’d be home by Christmas. Shenanigans, no doubt, will ensue. But I don’t think the Bandit will show up in a shiny black Firebird to help poor old Jerome out of this debacle (maybe Dirty Larry in a beat up Taurus). The question is does Hammer Down J (Mr. Powell’s trucking handle) continue to increase rates and ignore signs of deterioration or does he down shift and try to nurse the rig to its destination? Dear reader, your guess is as good as mine. As of now, Uncle Jerome howls like a wolf while popping amphetamines and downing a bottle of tequila and hints that we are in for .75% hike in November and another .50% hike in December. But there are signs that he is slowing down and pooping out. During speaking engagements, some Fed governors have been hinting at a pause. Oh, and the politicians are squealing uncle too. Which begs the question: just how independent of politics is the Federal Reserve? I guess we’ll find out.
Signal: politicians are begging the Fed stop
Pivot or no, the Fed is not really solving any inflation problems. Because the problems exist now mostly on the supply side of the equation and the Fed can’t effect those; the Fed doesn’t build houses, grow beef, and cannot print oil. It sure as hell can’t make more land. When energy (fuel) is expensive the best way to make it cheaper is to make more of it. Same with houses and food. But increased rates, increased risk, and destructive polemic within political spheres do not encourage investment in real assets that make real goods. So Uncle Jerome can increase rates and beat the US consumer into a bloody pulp and then escape to Vegas for a week for a vacation. But the inflation problems will still be sitting at the kitchen table waiting for him when he gets back home. Which leads us to…
Demand Destruction versus Demand Postponement
A lot of the talking heads out there (and admittedly I may have written this phrase myself but never mind that now) speak of the Fed trying to destroy demand with high interest rates in order to bring prices down and cool inflation. But demand for goods is never really destroyed unless you have a substitute (e.g. when cars replaced horses and essentially destroyed the horse market last century). Outside of such technological innovation, demand for goods can really only be discouraged and postponed. And I have a hard time imagining any government that can destroy demand for essential goods like food and shelter.
Does anyone reading this truly think that most Americans out there don’t want to own a house regardless of price and interest rate? Or won’t continue wanting to in the future? Folks, the American dream is alive and well. It’s just that the dream can’t be realized by a growing segment of the population due to rapidly rising rates in the face of elevated prices (from when rates were too low). This is very important because, as noted above, until the underlying problems of the economy are fixed (supply satisfying demand), demand will just be latent until conditions improve. And once those conditions do improve, prices will pop once again, inflation will return, and policymakers will be forced to smash the brakes and give us all whiplash (again). This was the song playing on repeat throughout the 1970’s.
What does this mean for real estate (and specifically land)?
Dear reader, I have a vague idea of what my own future might look like 24 hours from now. Beyond that everything is fuzzy, and I have no certain prognostication to offer about what is going to happen for all of us in a few months. I have ideas, of course. Thoughts. We have to plan for something, right? So I try and think of a range of possibilities. But most of these theories come with the caveats that my vision is narrow, my logic is linear, and the world is a very big and dynamic chaos so anything that I hypothesize as a possible future is bound to be wrong in any number of ways. When it comes to the future, I am ecstatic if I can hit the broad side of a barn door. Right now, my hypothesis is that the economy goes mostly sideways for a few years with a lot of turbulence in between. I also think that inflation will be the biggest bed bug that bites us over the next few years. So… stagflation.
Which is why I love real estate and land. In a stagflationary regime, the name of the game is more wealth preservation than wealth generation. And land has a very good track record on this front. And it comes with all of the very important wealth preservation tax benefits important if one is not disposed to forking over money to Uncle Sam. But in the short term we are still in for some shock until an over-stimulated Uncle Jerome decides that he can sit still for a second. There will be hurt until the riff-raff shakes out and markets adjust. For those with dry powder, this will be an opportunity. But the Dirty and Nerdy would be wise to consider the possibility (I’ll go ahead and guess probability) that we are still very early in the shaking out process.
Return of seller financing
In the wars to come, it will be the creative problem solvers who will benefit. I once visited with a real estate millionaire that professed that over the past few decades anyone with two brain cells and an extra buck could make money in real estate. I’ve a feeling that these times are over and the successful investor of the future will be a fleet-footed problem solver who can navigate obstacles and leap tall buildings in a single bound. I also have a feeling that seller financing will be a very useful tool in this prospective future. The Dirty and the Nerdy would be wise to brush up on the idea.
TALB Mineral Rights class review
I had an opportunity this week to expand my knowledge at the monthly gathering of of the Texas Alliance of Land Brokers. A Mineral Rights class was taught by the always engaging and extremely knowledgeable Dr. Charles Porter. I take every class of his that I can. The issue of mineral rights can be thorny in land transactions. It is such a complicated topic that, even over 100 years after Spindletop started gushing in 1901, new questions and legal issues still bubble to the surface like a sticky black tar. It is mostly due to the funky severance of mineral real estate from surface real estate e.g. you might own the surface estate while someone far removed owns the minerals underneath. And guess which estate has final say when it comes to extracting those minerals? That’s right, in Texas oil usually wins. If you are a land professional, a land investor, or even just a land enthusiast and you are not well versed in minerals then I question your sanity. Fun fact: did you know there are Uranium deposits in Texas. I had no clue until I took this class. For the Dirty and Nerdy, here is a fun map which I also came across during the class (and you know that I am a sucker for a good map): Industrial Minerals of Texas.
Dirty Deep Dives: October Land Price Report
While all of you are enjoying this weekend of wonderfully cool weather by relaxing on the porch, watching football or baseball, enjoying fine whiskey (or not), and roasting to perfection a very large slab of beef, my eyes will be bleeding over spreadsheets and price data for the month of October. Because I am Dirty, and I am nerdy (and I like it). The product will be theDirt’s monthly land listing price report for October. Dirty Deep Dives are for paying subscribers but there will be an opportunity for anyone to sample the goods with a free 7-day trial. Look for it on Tuesday.
What? What did I miss?
It’s a big old world out there and my vision is narrow. No doubt I missed something important, and you, dear reader, can help sort me out. Please leave a comment and tell me about what I didn’t see.
Texas Land This Week.
The following information comes from LandWatch.com. (Read Data Disclaimer1)
As of October 28, 2022 there were…
14,089 acreage properties listed as Available (very slight increase over last week)
1,031 acreage properties Under Contract
2 properties up for auction
Five counties with the most listings:
Edwards County - Edwards Plateau West Region (274 listings)
Grayson County - Texoma Region (271 listings)
Hunt County - Dallas Prairie Region (238 listings)
Henderson County - Piney Woods North Region (223 listings)
Gillespie County - Highland Lakes Region (220 listings)
For the last 7 days there were…
571 properties listed or changed
7 properties marked as under contract
1 properties identified as Sold
Five counties with the most listing activity in the last 7 days:
Edwards County - Edwards Plateau West Region (24 listings)
Hudspeth County - Trans Pecos Region (14 listings)
Coryell County - Blacklands North Region (13 listings)
Grayson County - Texoma Region (12 listings)
Anderson County - Piney Woods North Region (11 listings)
Interest Rates (Compliments of the Mortgage News Daily app for iOS and my iPhone)
Financial Markets (compliments of the MarketWatch app for iOS and my iPhone)
Where I get my information:
An analyst’s analysis is only as good as the information they possess. As the old programming saying goes: garbage in-garbage out. The following is a list of my sources…
I follow a bunch of smart people on Twitter. A sample is represented above. I hope that you will also follow me on Twitter:
LandWatch.com and LandsofTexas.com
MarketWatch App (market quotes and data)
FRED: Federal Reserve Economic Data, Federal Reserve Bank of St. Louis
North Texas Real Estate Information System and Heartland Realtors
Houston Association of Realtors
The information is based on properties that are greater than 10 acres and which I refer to as ‘acreage properties’. This information is single source. Which means that this is NOT an exhaustive list of all properties available and sold everywhere in the Great State of Texas. Texas is a non-disclosure state and is therefore a Dark Market. This means that there are a great deal of data that are hidden, dispersed, not allowed to be shared publicly, or just plain unavailable. The following information is for reference and entertainment purposes only.