One of the most sticky economic items in this “hidden recession” is the real estate bust. I said hidden recession because the numbers reported have been so distorted that even an eagle would not see the clues near the top of the lake. Bad analogy. lol In any event, this recession has had a bad set of circumstances in real estate, both commercial and residential.
Commercial real estate fell partly during covid as employees stayed home, actually were mandated to stay home and space emptied thereby bringing on a wave of defaults by companies too short of cash to keep their leases and mortgages good. This has been swept under a few rugs and kept at bay. The Banks holding the bad paper are quiet about it and running various schemes to keep them “good” on their books. That will eventually, soon I think, end and the real drama become the soap opera it actually is.
Residential real estate has a few dynamics driving its bust. Firstly, the baby boomers own most of these houses and at inflated values. They are holding prices high wanting to cash in on their equity and satisfied to stay put with their 3% and lower 30 year mortgages OR no mortgage at all. Those that do sell are selling because they really need to and some because they just cannot pay their ever rising Property Taxes, Insurance and maintenance expenses…yes it gets bad for some and in a few markets it is worsened by falling prices like Florida and parts of Texas. I feel bad for them but as agents say, price sells.
Secondly, the high interest rates and high down payments to qualify is keeping younger up and coming wood be home buyers out of the market. They just can't afford the high price and high interest rate…I think either changing like in lower prices and/or lower interest rates would make little dent in this equation. The overbuilt inventory also hurts existing homes by forcing down price and financing deals by builders, many done on the down low to keep prices from reflecting the downward pressure. Many many off MLS sales take place.
So the Fed lowered rates 25 basis point and the long term bonds went up again. This has happened before and was predictable. That more or less seals mortgage rates where they are which is a bit lower at 6.3% or so, and they will tend to rise as they track the 10 year bond. This exacerbates buyer's difficulties in buying and even as prices are forced down by the reality of “must sell” foreclosure rates rising due to loss of or fear of losing employment. To that last point, a recession usually will have a rising unemployment rate and this one will be no different. How bad is yet to unfold but I say it will get to 6-10% IF the real numbers get reported. Historically, the current unemployment rate is not high but they are reported using different calculations preventing apples to apples comparisons. Remember, those not seeking employment are not a factor in the Unemployment calculation because they are not participating in that arena. Essentially, the Fed Gov is trying to collect more and more tax from less and less employed tax payers. That hits the “entitlements” hard and that's how deficits were born.
Why this is a hidden recession is twofold. One, it is not reported correctly by the BLS or now as it's known the Bureau of Bull Shit and that obfuscates it. And two, the Fed has chosen to favor Wall Street and not Main Street again by pumping up assets like the stock market which as sadly reported is owned primarily by the top 10%. This in my opinion creates a facade that things are gong great guns when in fact the middle class has been hollowed out and now MIA in the Fed's plans. Not to let the current admin off the hook, they seem happy to have it this way and only give lip service to helping Main Street while their footprints betray that lie. Follow the money and cover your ears still applies. In other words, LOOK DON"T LISTEN. Or another fave, DO AS I SAY NOT AS I SO.
I do not own a home preferring to be a renter. With the deportations voluntary or not, the rental units emptying is now a fact. Will my rent go down? Not that likely in my market, but it is still the best choice for me and avoids the property tax nightmare, insurance and maintenance expenses too. I like calling to replace a light bulb etc. Plus, if rents do come down I win. If they come down a lot I win more. If they stay the same, I win less but my personal inflation stays the same and I win. Renting is one way to avoid this housing bust if it can work for you.
How low will prices get? I think in the end they get at least a 30% haircut before it stabilizes and maybe more like 50%. Even at that, high interest rates are likely to continue making the purchase still a difficult thing to pull off for new home buyers. Rising unemployment will hurt buyers too so it will be fed by a double edged sword. This is no doubt a depressing fact of life for young couples who want their share of the American Dream. That Dream is now morphing into a nightmare of converging shadowy figures.
Bargains for investors might be present again buying at depressed prices. Such purchases meant as rents must still have renters so this opportunity gets dampened by renter numbers and quality counts. Getting a renter who a month or tow later loses his job becomes an eviction problem. Good luck. Plus property taxes continue to rise at very high levels and that is now under closer inspection for fraudulent appraisal and bond issuances. THAT is a big story about to hit the headlines as the cases presented to the DOJ gains traction. There is also a Texas case that could blow up the entire subject and once and for all challenge the Constitutionality of Property Taxes. It is NOT authorized in the US Constitution and factually functions as a tax on unrealized gains. I am active in this movement and watching this case as a barometer of things to come. That would bring a big favorable change but also usher in new taxes, most probably a new sales tax tied to funding schools. But it will be a fairer approach and help eliminate the fraud. Will anyone go to jail? Don't hold your breath. IF Trump ever gets tuition vouchers mandated it will fundamentally change the school system, take some wind out of the Teacher's Union and could be instrumental in restoring the quality of education. That is a seriously needed change. Those who opted to home school were once chided but now they appear to be geniuses having averted the destructive DEI and Drag Queen nuttiness.
OK, we have a real estate bust. If possible be a renter for now. If you are an investor buy a good deal but with eyes open to the potentials for renter difficulties. This will eventually balance out but could take years and a decade could go by before real estate begins a solid return to being a good asset class affordable by the masses. One can hope.
Best to you all.
Donn Marier
DM-Your Own CFO