Interest Rates, Inflation & Real Estate

" Breaking Up is Hard To Do", a 60's, or so, song from Neil Sadaka is a song for our era.  Just like our first love, things were going so smooth and then BANG.  What happened, everything was going so well?  Interest rates were declining, stocks were alway going up and every dip we bought more, home values kept moving up, we made unbelievable money with a thing called Crypto.  Then all of a sudden we had Covid, things came back and went higher, people shifted home searches away to areas were they could work remotely and have a better lifestyle at a lower cost of living.

A buyer prospect backed away from a purchase recently, he lost over a $million in Crypto....he is sick.  The happy smiling guy is gone.  FAANG Stocks are down so much people hate looking at their statement on line.  Yet....home prices keep going up.  Los Altos Hills is up 37% in the month of January and the entry home there is $4+ million.

Yahoo Finance says..."How will the economy and markets handle hikes? Clearly risk assets are vulnerable. One way to view the recent stock market correction is that with the Fed no longer in deep denial, markets have caught on to the idea that inflation is a problem and the Fed is going to do something about it. As the Fed pivot continues-and the bond market prices in more hikes, we could see more volatility," said Bank of America's head of global economics Ethan Harris. 

‌Harris — who is now calling for seven rate increases and only 3.6% GDP growth in 2022 — will be on Yahoo Finance Live this morning. If you own stock, this is a must watch interview.

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"Rates — seven or eight increases — may also shock the economy. And that could possibly even cause a recession," Stifel's long-time CEO Ron Kruszewski told Yahoo Finance Live.  

When I reflect on our situation both domestically and internationally I think about my first decade out of college, the Jimmy Carter Presidency.  Iran took our Embassy, Allies were cautious with us, Nam took some of friends and never gave them back!  Inflation was crazy, gas lines, food prices escalating.  Through it all housing prices were strong.   Why?  I guess if you bought stocks you lost money, if you bought bonds you lost money and if you bought real estate it stayed firm and went up.  Inflation stayed with us for some time until finally it broke with 14% T-Bills.  My first mortgage on a flat in Pacific Heights was 14.5% for a 3 bedroom at $265,000.  My newly wed wife and I spent after work and on weekends cleaning up old door knobs and shining brass.  Sold it in a year for $395,000 and bought a home in Woodside for $425,000 and never looked back.  Real estate did so much better than stock.

Today's inflation is a bit of an enigma.  When I look at the Census reports there is something wrong with the report.  7.5% inflation seems out of reality.  Gas at Costco keeps going up, my wife comes home after shopping and complains about the price of milk and bread.  When I look at the Census reports there is a calculation of 7.5% .  Fuel oil +9.5% for January with 46.5% year over year.  overall energy costs +25% on the year.

Two interest rate increases for 2022 when to 4 then 5 and now to 7 before rate increases with a 1/2% increase among the1/4% increases.  The 10-year T-bond is 2.022%, a big jump after the recent CPI figures.  The 10-year is most important because it sets mortgage rates, credit card rates and most other borrowing rates.4 increases in 2022 could take the 10 year to 3% and mortgage rates to close to 5%

The real estate markets most vulnerable will be the lower end or starter homes.  That market is where budgets are tight.  The next target is the "Fix & Flip" market where margins are tight and lenders quick to pull the trigger if sales are not fast.  A pull back in that market will cause a hesitation across the board.

So far, we have not had a FED rate increase.  The mortgage rate has remained steady and starter homes have maintained value.  That should be enough for buyers to get out and buy before the FED starts increasing interest rates.

Seller, should not be so cocky.  When rates pinch pocket books of buyers in the starter and move up market,  price cuts in listing and sales prices will be expected to cover their budgets.

The biggest challenge in forecasting presently is the workers not being tied to desks and working remotely.  

The next challenge is the return home of manufacturing.  Russia and China are back in the Cold War Syndrome.  Asian work place will find better conditions in Texas, Arizona and Nevada and States of the south east close to ports.  The energy industry will see a come back as oil, and gas will be needed in Europe to supplement the lost Russian gas.

I can foresee a FDR type program to take care of the homeless and unemployed  sleeping in tents and cars.  All tied to massive building programs.  The talk of subdividing Woodside properties will cease and people will be able to afford the higher costs of living.

OPTIMISTIC?  No just following the Playbook of Pericles of Athens, about 450 BC, and FDR.