The Problems are the Path: Opportunities II

Irrespective of what Wall Street and interest rate analysts thought a week ago, the FED may not be done with raising interest rates.  The debate over debt limits and spending continues as it has been for a number of years.  There must be a point where son is told by Dad, no more allowance increases just for you to spend more.  Once one has money the thought is it continues forever....TRY RETIREMENT!  

I did not believe that the Government will stop paying interest and maturing debt.  Per a recent Wall Street Journal article some days ago, the analysis was that the monthly cash flow of Government Receipt outdistanced the payment of interest and maturing debt by a large multiple factor.  Then there is the 14th Amendment of the US Constitution that mandates payment of principal and debt.  

What will happen when an agreement occurs with a spending cut?  The first obstacle is House of Representatives and then the Senate.  Not an easy choice.  The Republican control the House by a hair, the Democrats control the Senate by one or maybe two votes when the VP is the tie breaker.  That puts the ends against the middle.  That is not to fail in recognizing that the Speaker can be tossed out with one vote.  Then All Hell Breaks Loose!  As the only mediator is the center of each party.

Now let's assume there is agreement and we get passage.  Less Government spending in the economy.  Less spending, less earnings, less earnings less demand, less demand less inflation.  Less inflation less the need in raising interest rates.  Now here is the kicker.  Less need to raise interest rates.  The yield curve begins a slow process of correcting.  That means the low end bonds in 3 month and up to 2-3 years all come down.  As they mature they are replaced with lower yielding debt. The long end of 10 year and 30 year go up.  Why, investors want secure yield.   This is really a Recession!  But, housing prices and the stock market is not recognizing it!

When will this occur?  That is in the specter of Hedge Funds, those esoteric vehicles that use computers and forward risk analysis to determine a investment strategy to capitalize on the return of a normal yield curve where the shirt end is lower than the long end.  

What happens next?  Banks and insurance companies had better have lightened up on their inventory of low coupon 30 year bonds or we have a domino effect of Silicon Valley Banks.

While the Government cuts back on spending and hopefully the industrials pick up the slack.  We then go on better footing with American Industry supporting our economy than the US Government.  At least in my opinion.

How does that affect housing and housing prices?  We have begun to see it already.  As I look on my daily tour of home prices, price cuts and sales I see two things.  Prices are down from last year.   The greatest cuts occuring in the Luxury High End.   Atherton, Woodside and Emerald Hills see 25% decreases in Y.O.Y. (Year On Year) value.  Many of the cases a $1 million is only a slight cut.  There are price cuts from a Year Ago.  In the starter home areas of Redwood City, San Carlos, San Mateo every price cut is met with demand.  Agents are under pricing homes to get multiple offers.  They are getting them.  So far there has been a rough 1.5% increase in homes prices sold on a month on month basis.

Where does that leave those that lost?  They either quit, look elsewhere or join the over bid wagon.  Don't think that cash is king!  Banks are all too willing to lend to those with good credit rating and cash accumulated from the Pandemic.  To a seller it is price not if the buyer is paying cash or paying with a mortgage. In the end it is all cash, so why should the buyer sell to a cash buyer at a discount??

My Father told me, "use your common sense son".  Why would I, as a seller, take $120,000 less from a cash buyer to close in 10 days when I could wait another 20 days and get $120,000 more than the cash buyer's offer?   Wasn't my Father right?

I had once thought that we would see Foreclosures.  Not so, I was wrong.  The foreclosures are on with homes with positive equity.  Owner and bank work it out.  Sometimes a trustee is chosen by courts when there is a standoff between owner and bank.  In the end the owner get their equity, unfortunately not as much if he worked on an agreement with the bank to remove foreclosure for time and the owner sells cleanly in the after market.

Renters?  this is a tough market to analyze.  By all my standards rents should be a function of Capitalization rates.  For example you own a House for $2 million, have a $1 million mortgage your investment is $ 1 million.  The Rent is $5000/month or $60,000 a year.  Then deduct property taxes, costs of renting and you have a net figure.  dived the annualized net figure by $1 million and you have your Cap Rate.  Cap rates don't necessarily mean they are higher than saving rates.  Properties do appreciate, rents do increase and costs to increase by management and repairs. The renters sooner or later look to become an owner.  They get tired of the emails and notes under the door on the first of the month "Your Rent Is Due". they get frustrated with repeated calls to repair broken items, replace heater filters, fire alarms, broken water heaters and worst of all no power for a month without a willingness of a management company or owner to waive rent.  Travels to Small Claims Court and hiring performance attorneys to collect money due, rent forgiven gets real boring.  A new set of buyers come to the fore.  They are willing to up bid just so they own a home and not have to deal with Landlord or Management Company.

This is a perfect market to keep a very active real estate market in the Bay Area.

Waiting has a benefit, one by one a waiter decides to buy, soon to replaced by another frustrated buyer or renter and the trend goes on.

Athletics are gone, the Raiders are gone, Oracle is gone, HP is gone, Tesla is gone, 700,000 people last year left, but we still have buyers and investors who fix and flip to supply buyers who want new or as new homes. Observing the daily set of the 7-day averages; new listings are not keeping up with "Pending" and "Sold" Homes.  Inventory is declining and home prices have stability. Those willing to buy need to see value, that's why discounts get multiple offers. This is also a sign of Recession.  Potential sellers are worried, see loss of jobs, income declining all result in the "Stay Put Mentality"

Opportunity avails itself for those who recognize opportunity, the Gift the Creator has for us that is not put in his closet in Heaven!

As before, call or write for any question you may have and think of me of your "in the know real estate agent".