Time to Sell!
Real estate unhinges from reality, investors pile in and the Fed sleepwalks toward the edge...
(Source: Getty Images)
Bill Bonner, reckoning today from San Martin, Argentina...
Time to sell!
There are times to weep and times to laugh. And times to buy and times to sell.
Yesterday, we heard from former Treasury Secretary Larry Summers. He argued that the Fed has not yet recognized the magnitude of its errors. It kept interest rates too low for too long, failed to see rising inflation, failed to realize that it was not ‘transitory,’ and then failed to take any serious steps to stop it.
It was ‘sleepwalking’… while inflation rose to the highest levels in 40 years. Calculated honestly, US inflation may already be at its highest levels ever.
But the burden of today’s note is that millions of investors and homeowners may suffer from somnambulance too… and could soon step right off the edge.
“It’s crazy down here,” says our son, describing the real estate market in his area of South Florida.
“I wanted to move to a different house. But the prices have gone up so far, so fast that they are just out of my reach. There was a house over by the inter-coastal that I wanted. I had looked at it a couple of years ago. And when I saw it on the market again last week, I thought it might be worth another look. But they want more than $4 million. Incredible.”
Unhinged from Reality
Rents in Miami have been rising at the fastest pace in the nation. The South Florida Business Journal reports that landlords, in neighborhoods such as Delray Beach, are “making a killing.” They’re raising rents by 30% a year… and more.
As for real estate sales, Norada Real Estate reports:
It is a seller’s market with many sellers getting top dollar… The Miami real estate market continues to break records due to pent-up demand and low mortgage rates which continue to fuel real estate transactions.
Miami's hot housing market, fueled by domestic and international homebuyers, ended 2021 with 39,394 existing total home sales, up 49.5% from the 26,345 transactions in 2020 and 31.1 percent from the previous annual record of 30,041 transactions in 2013. Miami's dollar volume of sales will reach $30.3 billion in 2021, a 103.4 percent annual increase.
The typical value of homes in Miami-Fort Lauderdale-West Palm Beach Metro is $397,603. This value is seasonally adjusted and only includes the middle price tier of homes. Miami-Fort Lauderdale-West Palm Beach Metro home values have gone up 22.3% over the past year and Zillow predicts they will rise 16.2% in the next twelve months.
Real estate prices are becoming “unhinged from fundamentals,” says the Dallas Federal Reserve bank. Bloomberg reports:
“Our evidence points to abnormal U.S. housing market behavior for the first time since the boom of the early 2000s,” the Dallas Fed researchers wrote, citing data to measure “exuberance” on property markets that they’ve developed with scholars around the world as part of the International Housing Observatory.
The measure suggests that “the U.S. housing market has been showing signs of exuberance for more than five consecutive quarters through third quarter 2021,” they wrote. The surge in home prices has continued since then.
Yes, and behind the unhinged real estate boom are the Fed’s unhinged interest rate policies. The amateurs saw that they could ‘trade up’ by rolling over real estate debt at lower and lower rates. And the pros found that they could borrow money below the rate of inflation and make a profit by buying residential units and renting them out – en masse.
Swings Both Ways
Recently, about a third of house purchases were being made by investors, not owner-occupiers. This buying pressure then pushed up prices and left prospective homeowners scrambling to find a place to live. Type in “Room for Rent” on Bing search and you get 20 million results.
But the hinge swings both ways. The interest rate cycle seems to have run its course, with the yield on the benchmark 10-year Treasury Note hitting a record low in July 2020. Since then, the yield has swung back from 0.51% to 2.4% today.
This may not sound like a lot, but the rise in yields, worldwide, has already caused bond investors to lose about $5 trillion.
And now mortgage rates are spiking up. Homeowners face 5% mortgages.
Our guess, for what it is worth, is that mortgage rates will continue to rise, for many years. (Interest rate cycles tend to last a very long time.) Refinancers will be unable to keep up with the monthly payments… houses will go back on the market at lower prices… and recent buyers will wish they had waited until after the bust.
Regards,
Bill Bonner
P.S. A Note from our Investment Director, Tom Dyson...
Oh, man… check this out, from John Burns Real Estate Consulting...
My take? This is going to end badly. What is everyone thinking? It's the worst possible time to be speculating on house price appreciation. The way we see it, we're in the final stages of the greatest speculative bubble of all time, and the Fed's raising interest rates, hoping to engineer a soft landing. But they won't engineer a soft landing. They're going to break something, and give us a hard landing. And a long recession. The potential for huge losses in stocks, bonds and real estate investments is the greatest it's ever been.
Sure makes me glad to be in gold and cash... with the portfolio locked in Maximum Safety Mode. There will be plenty of opportunities, all in good time. For now the name of the game is patience. Patience and prudence.
Buying and holding investment properties over the past 40 some years has been exceedingly profitable for me, especially when I periodically sold some. I would plow the sales proceeds into the stock market, mostly into REITs which I understand better than the non-dividend paying Techs. However, unless you are comfortable dealing with TTT (tenants, toilets and trash), better be prepared to share up to 10% of your rent proceeds with a good professional property manager.
This is a great time to invest in RE. Probably not the best time for a flipper, who plans to buy, fix a bit, and sell for a profit. That's not investing, it's speculation. A real estate investor plans to buy, fix a bit, and rent out long term. The key to this investment is net cash flow. We are presently able to purchase or build new houses, get reasonable financing, often fixed rate for 10 years, and rent for a positive cash flow in year one. As the rents have climbed, the cash flow increases annually. All signs today appear to be heading to higher rents in 2022. Our costs are nearly flat, and our cash flow is great. How's the cash flow on your cash or gold investments? We have a near zero vacancy rate. We don't care what the property values changes to over the next couple of years. We're not selling.