Recession, Inverted Yield Curve and real estate continues to be strong

 There have been 17 Inflation Periods since the 1970's when interest rates were increased by the FED. to combat inflation  All but THREE led to a Recession.  From a statistical and probabilities standpoint the bet is on RECESSION!

That is a tough pill to swallow as we are just getting out of the Pandemic era, still facing continued reinfection by various variants of Covid.

The FED is ramping up rate increases and the reduction of their $9 T bond portfolio.  The first to go in the bond portfolio is the MBS, mortgage backed securities, sector.  There are ample buyers in the banks.  It appears their portfolio composition are light in this sector.  

At a present mortgage rate of 4.75% and the historic average maturity of a mortgage in the MBS portfolio is 7-10 years.  To a bank, as an investor, 4.75% is far better than the 2.8% on present 10-year T-Bonds.  That indicates that there will be a faster redemption within the bond portfolio.  Further indicating that banks believe that home sales will increase from the present level.  Homes will sell, mortgages will be paid off and the average age of the MBS will decline.  This will allow the banks to re-invest at higher interest rates.

Going onto home sales, we are still seeing less homes for sale than demand requires.  When will that end?  That will go to the point of loan commitment letters.  Generally speaking they are good for 90 days.  At the end a new letter and a new rate is committed upon.  At present the rates expiring are in the upper 2% level.   "What to do"?  Buy a house fast, forget about if the color of the interior is not to the liking of the buyer, the kitchen is old, the floors need finishing.  All can be done with out the cost of increased loan payments based upon a present commitment of 4.75%, and very possibly over 5% when the FED increases rates in May.  The belief is the rate increase will be 1/2%.

On a monthly basis, commitments will drop off and new ones will be created.  With those increases in rates adjustments of buyers must be recognized.  The alternatives are 1. buy a smaller and less expensive home, 2. offer a price that is below list but equal to affordability,  3. make offer contingent upon appraisal and financing, 4. wait for home prices to drop, 5. MOVE to a more affordable area.

The last two are the least likely and acceptable to home buyers.   

Silicon Valley is unique to the rest of the country.  We have a wealth of Venture Capital firms looking and willing to invest in new businesses.  We have a wealth in well trained and highly educated workers.  What we do lack is a Service Industry who can afford to live here!  This is the real challenge of the Venture Capital Business.  How to develop a replacement to clerks, cooks and waiters.  Then there are the Fire and Police, Teachers, Health Care workers who are stuck here and we can't replace.

Inflation is 8% on an annual basis.  Where does it go from here?  Historically it does not stop on a line in the sand.  Supply must increase or demand decrease.  That seems difficult as it means investment by farmers, miners and oil companies and borrowing when interest rates are increasing.  Supply does not turn on like a faucet.  Drought and rain can cause issues for crops.  Finding oil and gas takes time.  Processing all of the above take time.  While time is being taken interest rates keep rising until.  The economy CHOKES!

Where does this process affect home prices?  That is a BIG Question.  In the 70's we had Stagflation.  A stagnant economy and inflation.  Interest rates were increased by the FED.  Bond prices declined.  The stock market declined too!  The irony of the 70's was residential housing was active and prices rose.  People did have money and jobs.  They did not invest in stocks and bonds to lose their investment.  They bought a home!  Yes there were foreclosures as some lost jobs.  The foreclosures sold at lower prices and there was always an eager buyer for a willing seller.   Professional traders and investors always made money in their investments.  It was the average "American" who stopped buying mutual funds and long term bonds that went to real estate.

Slowly we should see a real estate "sellers market" turn into an "balanced market".  The Month of March Report on Housing in the Bay Area is out.  Santa Clara County Luxury Homes declined for the second month in a row.  The average list price of $5,493,329 was down 3.69% from the proceeding month.  In San Mateo County, it too declined the second month in a row, the average list of $10,367,196 was down 3.69% from the preceding month.  The average sale of $7,155,493 is down 1.12% for the preceding month.  Whereas, single family homes continued to increase in both list price and sale price with shorter days on the market.  This further indicates to me the upper end of the market who do not buy with a mortgage sense a slow down.  Those who buy with a mortgage are buying before their commitment letter expires.

It all stops when the FED stops. Let's hope we have Putin solved by then and supply returns to the market.