The Problems are the Path: Much Ado About Nothing Part II

 The best description for the end of 2023 was a "Melt Up" in Wall Street terms.  Analysts were fighting amongst themselves as to who can predict the number of FED Interest Rates reductions.  Let's face it analysts are just selling themselves and the their predictions are soon lost, unless they are right.  It is always easy to point elsewhere when the prediction doesn't go according to their estimates.  Or, just simply forget and never say much about it until there are proven wrong December 31, 2024.  By then, who will remember or even care?

The Governors of the Federal Reserve System are now coming out and stating that they are not committed to rate cuts.  (Fed's Bowman and Bostic caution against rate cuts too soon). Especially when the rate cuts are from 1-7.  The historic possibility of 7 rate cuts do not forecast well for our economic situation.  Why would the FED flood the market with money.  There is over $7 trillion in the FED's Balance Sheet to create more forecasts of Economic Doom and Gloom.

I look at the slow down in the economy and the decline in inflation a combination of situations.  Interest Rates? Yes! The other factor to consider is China.  China is the Second Largest Economy in the World.  (The US is #1.)  When China falls into a recession, as it is presently in, the world feels it.  Unemployment in China in the younger generation is in the double digits.  President Xi wants them to go back on the farm.  Just like he did when he was in college.  Xi wants to bring back Mao, Xi sees real estate as a home you live in.  It is not a speculation, a rental, a business.  Xi is Mao's child.  The question will be how long can he hold on until the Bank of China cannot support all the local bank and non-banks loan portfolios of real estate loans.

I can see where there will be a potential crisis.  China and the Little Tigers of Asia work together.  The failure of business to flow to the Little Tigers from China will have serious consequences.  These Little Tigers have Debt.  Their debt is US$ based debt.  High interest rates will create crisis with the Little Tigers.  If the Tigers begin to default then the lender of last resort, the US Treasury and the Federal Reserve System comes to the rescue?   The Bank of China will be sell their vast inventory of US Treasury Bonds to support the home front bank, the largesse to the Silk Road, Africa and South America.  

READ Federal Reserve of St. Louis " Are Developing Countries Facing a Debt Crisis"

Doubt the FED does anything.  Better to see China fall upon its sword than help the Sabre Rattling China of President Xi.

Real Estate in the US is not as bad as the publications are making it out to be. Lennar Homes reported their earning recently.  Lennar surprised Wall Street with higher earnings, raised their dividend from $1.50/share to $2/share and increase their share buyback by $5 billion.  Lennar sells homes from $500,000 to $1,200,000, 1800 sf to 3500 sf.  Lennar provides financing, give discounts and credits for upgrades.

Now with all the no homes for sale nonsense that is going on, America and California are buying enough new home construction to create new lifestyles for the work from home to the newly marrieds looking to start a new life together and substantial profits for American Home Builders!

Lennar is not the only developer profiting from the movement to affordable housing: D.R. Horton, Pulte Home Group, NVR, Toll Brothers and Taylor Morrison Home Group just to mention the actively traded companies.   All of which are having great years, increasing profits, dividends and stock repurchase programs.

Where are high interest rates hobbling home buyers?

It certainly is hobbling home sellers when you look at reports like this one: San Francisco Landmark Nob Hill Condo Drops Over 30 Percent.  Listed for $1.798 million in January of 2016, the “tastefully remodeled and…ready to occupy” two-bedroom unit #1414 in the Gramercy Towers at 1177 California Street, “a Nob Hill landmark located in one of San Francisco’s most exclusive neighborhoods,” sold for $1.713 million, or roughly $1,224 per square foot, that April.

NOW

Featuring unobstructed views to the south and west, along with a south facing balcony off the living room and a parking space in the building’s garage, the 1,399-square-foot unit returned to the market priced at $1.345 million this past September.  Reduced to $1.245 million in December, the re-sale of 1177 California Street #1414 has now closed escrow with a contract price of $1.150 million, down 32.8 percent on an apples-to-apples basis despite the fact that the widely misreported index for “San Francisco” condos values is “still up over 20 percent!” over the same period of time and Nob Hill is a rather established neighborhood.

OR

With pending home sales in San Francisco having just dropped to a seven-year low and the asking price per square foot of the homes in contract across the city having averaged under $900 in the fourth quarter of 2023, which was 3 percent lower than in the fourth quarter of 2022, 8 percent lower than in fourth quarter of 2021, and lower than prior to the pandemic as well, the average list price per square foot of the homes on the market in San Francisco ticked down last week to around $970 per square foot, which is 4 percent lower than at the start of 2023 and over 10 percent below peak. At the same time, inventory levels are poised to jump.

OR, South Beach Penthouse , San Francisco, Trades well below its 2011 Price.

Look Far enough you will find the real story behind residential real estate.  People are moving elsewhere where prices are less, quality is better both in home construction and quality of life.

Rental homes need to come down in most areas to compete with the new construction developments.  $6000 for a Redwood City 1500 sf 3/2 versus less than $3000 in a gated community in El Dorado Hills for a 1800 sf 3/2.  Then think about the rent being substantially lower in the New Developments.

New Developments?  Wall Street Journal Heard on the Street, January 4, 2024 states:  "Wall Street Moves Into the Neighborhood". The "Mom and Pop" dominated rental market has a competitor.  Institutional Investors now own 55% of the rental market and they are not stopping.  Wall Street is building new neighborhoods.  they are building newer, better equipped homes with managers who listen to calls, not ignore them.  The interiors are hard wearing to tolerate movement. When movement does it occur it is after 4 years on average.  Whole communities keep construction prices down, hallways and stairs are large to accommodate movement of furniture.  

America is short 2-4 million homes and Wall Street and Developers are here to answer the call at reasonable prices for rent and purchase.  

Nothing Like Change!

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