The Problems are the Path: "What a Revolting Development"

Looking back in past messages you will find a comment I made on the course of long rates, 10-year plus US Treasury Bond Rates.  In particular the 10-year bond is the bond that makes all mortgages for single family homes.  The yield curve will correct as the FED lowers interest rates on all bonds from 1-year US Treasuries back to the 30-day Treasuries.  The FED rates will come down and therefore so will the yields.  The change will be the long term rates of US TReasury Bonds will go up!

Here is the present outlook.  The outlook is based upon the Swap Market that is used to trade one set of short term bonds for another set.  A bit like rolling maturities.  All the Swaps do is indicate the market forecast of FED action in where rates will be after the next FED meeting.

Date of FED Mtg.          Rate Forecast.           % Certainty

December 18, 2024......4.42%........................86%

January 19, 2025.........4.20%........................89.8%

March 19, 2025............3.956%......................97.8%

May 7, 2025.................3.799%......................62.8%

June 18, 2025..............3,676%.......................49%

july 30, 2025...............3.585%.......................36.4%

September 17, 2025.....3.472%.......................45.2%

It is obvious that once the Swap market goes beyond March 2025 the chance of rate cuts diminish substantially.

The forecast gives credibility to the stock market performance.  Lower rates on savings means more money goes into the stock market, goes into long term growth, stays out of fixed income.  WAIT!  Bonds and fixed income have been the largest sector of investor flow.  Commercial properties are for sale at high cap rates.

The yield Curve has begun correcting.  The normal spread between the 2-year and the 10-7ear is 250-300 BP. the BP is Basis Point and represents .0001.  The spread means that at today's rate of 2-year at 3.93% with the 10-year at 4.096%.  The indicate spread of 250-300 means that the 10 year goes to 6.93% and mortgage rates move up over 8%!  Mortgage rates over 8% the real estate market falls!

There is nothing the FED can do about the 10-year and greater market other than Quantitative Easing.  That is next to impossible as the FED's Balance Sheet is over $7 Trillion, still a record in FED history.

The 10-year has been increasing since the FED Cut.  Mortgage rates have been increasing since the FED Cut.  Commercial Properties for Sale have been going down in value with their Net Returns as measured in Capitalization Rates at 7% and going higher.  

1. Dollar General in Lexington Ohio offered at $856,800 with a 8% Cap Rate and 6.3 years left to current lease

2. Big Mesquite RV Park in 3 Rivers Texas with a 10.6% Cap Rate at $1,400,000

Are just an example of the investor market opportunities.

There has been a 34% increase in Homes For Sale Inventory Nationally.  "The National Association of Realtors (NAR) reports the inventory of homes for sale in September came in 34% higher than last year. It’s now at the highest level in more than four years after 11 straight months of annual gains."  

California is loaded with risks in home prices as many of the popular high tech markets have not seen any reasonable reduction in home prices.  

The recent issue of the Wall Street Journal says the investor market has been "head faked". 7 estimates of rate cuts have gone unanswered.   The FED response is "Data Dependency". Maybe the risk is lack of faith in the FED?

Going back to the market expectations indicates a 10 year at over 5.5% in near term..   Mortgage rates going back over 7% to 8% targets.  The HGX or Housing index is down 5% since mid September.

Too many Bulls and not enough Bears in the Stock Market.  Union members are defying their leaders and not approving contracts.  Failed contract Negotiations lead to layoffs.  Higher wages will indicate higher inflation.  

Still too many issues out there including who will win the Presidency?  The Senate appears ready to go Republican.  If William Bendix from and Old TV Show "The Life of Riley" were here he would say..."What a Revolting Development"

Uncertainties all breed investment opportunities.  Single Family still remains a great deal if offers are 10% under list, Cap Rates on Commercial Properties are over 7%.

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

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