The Housing Market Has A BIG Problem

Speaker A: 00:00:02

Well, hello, everyone. Welcome back to the number one financial literacy podcast in the world. Sitting next to me today is not my partner in crime.

The one and only side, Omar. And believe it or not, behind the ones and twos is not DJ Arun. I know you're thinking, oh my God, oh my God, did the boy brand break up?

No, they did not break up. There's unfortunately been a passing in their family and as a result of that, they were unable to record this week.

So I thought I would take this opportunity to, number one, say that I'm fantastic and you won't miss out on me because, you know, you're welcome. But number two, have a really educational, high detail conversation with just me and you, the audience.

And for those of you thinking, oh my God, this is going to be incredibly boring, why the hell would anybody ever want to do this?

Well, for those of you who might go back to the very, very, very beginning, almost four years ago now, I actually recorded the first six months by myself solo in the garage. It was a much hotter environment and said joined me in it later, but we're going to give it a shot. It's been quite a long time.

So a couple of caveats here. Right off the top.

Whenever I do a solo show, um, I am going to talk to myself, which is essentially talking to you, but I will not be able to put up the graphics like Arun normally does. So I'm going to try to do my best to describe it to you and I'll obviously insert them in post production.

For those of you watching on YouTube and on Spotify and any other video streaming platform that might be carrying us, and for those of you listening, well, you know what? You get the added benefit of some extra colorful dialogue. But let's jump into the meat of the show, shall we?

One of the things that I think is really, really important post rate cut that we've seen a lot of in the meat media is that there is a narrative now.

And I know that for those of you listening to the show for a long period of time, you know that we have long believed that, that when the rate cuts came, there'd be lots of optimism and positivity in the market, but we weren't entirely sure if it was going to be justified. And I put out a post a couple days ago on every major social platform, whether it was LinkedIn or tick tock and Instagram.

bout tonight. And that was in: 2001

Those are the only two times the Fed began an interest rate cutting cycle with 50 basis points. It's usually 25. And to see that tack taken recently and the recently announced September meeting for Fed rate cuts I think was stunning.

And I think it really told us a lot about what the Fed was thinking.

And obviously we have the summary of economic projections, the s and P and things like that that's come out since then, which really highlight, I guess, kind of this change in rhetoric, if you will, from the Fed and the FOMC. But certainly not everybody agreed, and we'll get into that later.

But a lot of people thought this was going to explode the housing market, and we were very skeptical of that, even at 25 basis points, and we actually got 50, like I mentioned, mentioned.

was the tech bubble burst in: 2001

And I thought, okay, no better time than this to really highlight the data. Let the data speak for itself. And look, I'm not leaning one way or the other. I'm not Republican or Democrat on this. I don't have a bias or anything.

I'm just going to give you the raw data to look at and to explore.

And hopefully it leads you to the same conclusions that both said and I have come to when it comes to our insecurity for the market right now, because we don't feel great about it. We just don't. But I don't want to give you opinion as to why. I want to explain to you using data like we typically do on this show.

And without my sexy co host here to break it down for you, I'm going to do my best to try to refrain from, as he puts it, being too colloquial with, I guess, theory.

One of the problems that we have is we're so steeped in banking because we do it all the time and we watch this stuff all the time, that sometimes we forget that some of the language that we use is not language used every day by everyone. And I don't chalk it up to us being smart or anything like that.

It's just that this is what we do for a living and we just get very colloquial, if you will. These are words that we throw around a lot. So I'll try to avoid that to the extent that I can.

So, to be clear, in: 2001

I can't remember the name of it all the time, but people were pointing to everything they possibly could, and then they said, oh, a great financial crisis had this housing and subprime mortgage meltdown. And, yeah, all those things are right, and they all contributed to both those circumstances.

h, my God, Chris, this is not: 2007

You're right, it's not. And no one ever suggested in a million years that it was ever going to be exactly that.

And I'm not highlighting those two dates on social media as a doomsday or naysayer who wants to just give you this dark path forward. I'm doing this as somebody who steeped in the business, who says, I am concerned about the data that I am seeing.

ction by the FOMC has been in: 2001

And for those of you watching on any kind of video platform, I am going to be reading a lot from my phone tonight.

Again, I don't have a run in the back shop, so I apologize if I'm not going to be looking you deep into your eye sockets, but trust me, all the content's here and you don't have to look at my face so much. So we all win, right? So the kabisi letter. Us consumers believe the economy is in a recession.

e hit the lowest levels since: 2020

levels that we saw during the: 2008

That means something, even if it's not quantifiable, tangible data about what's going on in housing or the stock market. If most Americans feel that way, it's for a reason. And we've talked about this on the show so many times, inflation is cumulative, right?

9% inflation a couple of years ago, 2% inflation today. That means that things have gone up more than just 9%. They continue to go up from 9%, and now they're going up over 2%.

Unless you have a deflationary economy where prices go down, negative inflation, if you will, things are always costing incrementally more. And that has been pressure that has been put on americans back. And yes, the Fed may believe they've won the war against inflation, but guess what?

All those added increased costs over years that they've been fighting at the last 16 months during this holding cycle, if you will. Guess what? Those costs haven't gone down. They're still going up.

in a recession, except for in: 2003

It's now at a 30 plus points, as seen in the chart, which hopefully Arun will bring up for us here. Consumers do not believe in a soft landing anymore. That's really important.

ave a sentiment tantamount to: 2008

And from the data's perspective, the consensus viewpoint of this poll returns is such that people believe that this, this is a recessionary economy. And what we're going to next is not going to be soft. It's going to be a hard landing.

Or, hardy aside, would say, if you were here, that's a bad situation. So I say this not because it's validating how I feel, but it's validating how most Americans feel.

And it's an example of how Saeed and I, as much as we want to be positive and rosy, this is how most Americans feel.

And why would we lie to you, the listener of the show, who spent years with us, in some cases since the very beginning, listening to what we have to say, why would we lie to you? To give you a rosy, optimistic perspective. That's what the mainstream media does, and that's everything we stand against.

So, yeah, I don't care if social media calls us doomsdayers or naysayers. We're going to tell you how it is, whether they like it or not, because that's what we're here to do. Again, from the Kobe C letter.

Those of you follow the show, you know I like it a lot. They had some really good stuff this week. If you're not following them on x, I do highly recommend it. Kobe C, spelled k o b e I s s I letter.

Fantastic data source. We use them a lot on the show. If you follow them, it'll help enrich your financial expertise.

This from the Kobesi letter breaking the US Consumer confidence index declined to 98.7 points. This is another way of pulling Americans perspective on how they feel about the economy, making the steepest decline in three years.

The index significantly missed expectations of 104 points and is near levels seen during 9% inflation.

So not only do most Americans feel that a soft landing is not attainable, not only does the data point that we are in what would normally be a recessionary economy as far as consumer sentiment goes, but the last time we saw consumer confidence reach the point that it's at now was when we had 9% inflation. When we were at our worst inflation point, consumers felt just like they do today. So what does that tell us?

People aren't feeling really good about the economy. They're not feeling any better.

And there's no proclamation of defeat from the FOMC that's made anybody go, ah, I feel better now, except for your local realtor who probably thought that rates were going to go down in the mortgage market. And we're going to talk about why that didn't happen and why we really don't see that happening in a meaningful way.

But yet you're still getting some great rates. And this is not all negative, but we'll cover that later.

oints, the lowest level since: 2021

Americans expressed the most concern about the job market due to fewer working hours and job openings, as well as slower payroll raises. Us consumers feel like we are in a recession. So there you go.

There's two very clear indications of consumer sentiment, and you even heard the FOMC in the meeting.

If you didn't hear it in September, I do recommend you go back and listen to Jerome Powell's press conference if you're not going to read the summary of economic projections. And I recognize that not everybody's going to go back and read the summary of economic projections.

So the FOMC's press conference is a great way for you to kind of get a feel for what their perspective was as communicated by Jerome Powell himself. And I tend to watch every single one of them. I do recommend, if you're listening to the show, you find us interesting.

That's a good way to get some insight into the economy.

But nothing that they have said at the FOMC has, has resonated more with me recently than they've shown a lack of confidence in the job numbers and in the housing numbers. And that's important for two meaningful reasons. Number one, the jobs report. Jobs are part of the dual mandate.

It's the second part of the dual mandate for the FOMC. Right. And because the shelter component has been the leading drag on inflation, staying above the Fed's target 2%.

And we all know, I don't have to say it to you, you're listening to this show. You know, home affordability is a problem. You know, it's an issue.

And every realtor who listens to the show is being told by the National association of Realtors that the solution to the affordability crisis is always rates that go down. Can they really go down? Should they really go down? We'll cover that shortly.

But for now, you need to know that it is widely accepted that most consumers feel like we are in a recessionary economy. Like it's just as bad when we had 9%, like this soft landing is not attainable, and that some even believe that we are already in a recession.

And I am amongst that crowd.

of: 2020

So let's talk about the last FOMC meeting, and let's talk about something very interesting that happened. This. According to CNBC, Fed governor Bowman explains dissent on a rate vote, says she's worried about inflation.

Well, yeah, most american consumers are. But her dissent was unique. And I know just because she has a difference of opinion, you're thinking, well, Chris, what does that matter?

Well, let me explain. It's more than just somebody saying, you know what, I don't think we should cut 50 basis points. We should cut 25.

It's actually very meaningful because it doesn't happen that often. Generally speaking, the voting members of the FOMC, they all kind of agree. It's like a gang, blood in, blood out. You guys are all in together.

You guys are all out together. Well, not in the case of Michelle Bowman.

Fed Governor Michelle Bowman said Tuesday she thought her colleagues should have taken a more measured approach to last week's half a percentage point interest rate reduction. Wow.

The jumbo cut would and could be interpreted as a premature declaration of victory on our price stability mandate, she said in remarks to a banker's group in Kentucky. Now that's an interesting fact in and of itself, but the dissension here is actually pretty unique as well. Bowman was the lone dissenter.

interest rate decision since: 2005

Bowman said the half percentage point or 50 basis points reduction posed a number of risks to the Fed's twin goals of achieving low inflation and full employment. So that's going to be interesting to see play out.

Obviously, the consumers tend to agree with her here, and they send they seem to have a sentiment that if they feel like we're in a recessionary economy already, yes, this may or may not help the job market, which is again part of that dual mandate, but is it going to cause inflation to go back up? Time will tell, but shelter clearly is having a bit of a renaissance housing rental market.

It's responding in a really weird way, in a way that it really hasn't responded before, and the headlines are being wildly manipulated. By now you've probably seen headlines saying mortgage applications are surging. I will tell you right now, they are not surging.

That is an absolute misrepresentation of the data. And that's, that's a good point for us to pause on. Data is an interesting thing.

It's supposed to be black and white, and I tend to cite it like it is that. Hold on a second for a rune. We're going to pay homage. Ah, the can pop.

I tend to pay a little bit of respect to the data because I understand that it should not be manipulated to form an opinion one way or the other. It should be expressed as this is just factually what it is. You draw your own conclusion.

And a lot of times when I post stuff to social media, which I think is a good litmus test for how society at large responds, and I try to parse through the bots and, you know, the troll comments and stuff like that, but generally speaking, people want to tweak the narrative to fit how they feel. That's okay. I get it. I mean, sometimes you can do that, but sometimes the data just is what it is.

But even if you don't believe my take, you know, that's fine. You don't have to believe me. When you respond back, it should be a collegial debate with you supplying your own data or your own evidence.

And that so rarely happens on social media.

It so rarely happens where somebody says, hey, chris, I disagree with your tact because this data set over here says x, y and z, or you're interpreting this a different way than I would because of x, y and z. That so rarely happens. But you know what? You don't have to listen to me. You don't.

I just realized that if I drink monster on the show without said here, it's literally a pause, which I gotta tell you, I don't think I ever drank a beverage when I was recording in the garage back in the day. So I apologize, kinda, I guess, for the pauses. You don't have to listen to me when it comes to the data.

You can listen to someone like, you know, Jamie Dimon, for example. Jamie Dimon happens to be probably the most recognizable face in banking across the world.

He is the CEO of the largest bank in the world and he has an opinion. And, well, this, according to Bloomberg Economics, is in fact his opinion.

JP Morgan CEO Jamie Dimon says he remains skeptical about a soft landing, just like most Americans, by the way, in the US, following the Fed's first rate cut in more than four years, he says it wouldn't, and he would not count my eggs on that outcome. That's pretty ominous.

When, when the guy who runs the largest bank, who is essentially a banking slash politician celebrity, says, I wouldn't count my eggs on the outcome of a soft landing, that's telling you something. He makes money. His bank makes more money. As these rate cuts come down.

He should be as chipper as I was on episode 248 when I said it was rate cut day. He should be that enthusiastic.

Instead, he's pumping the brakes and all the press that he's done and the reason why is he legitimately feels this way. And I think he's Brian Moynihan, bank of America. CEO, in my mind, tends to be very disconnected and has a tendency to not read the room well.

When he talks about what he sees, he tends to report on lagging data that in my mind is stale and it makes him sound out of touch. Jamie diamond, on the other hand, has always been a bit different. He's always seemed really, really in tune with what's going on in the economy.

And I've seen multiple articles talk about his daily routine. He constantly is reading economic data from news sources, and it's a lot of the reason that I do it to this day.

Now, I read from social media in places that I think are more accessible to someone my age and demographic.

But, you know, he's reading financial Times and New York Post, and he has a different hierarchy of what he thinks is more important based on their bias and their historical reporting because he's read them for so long.

But if you ever get a chance to Google that, search that to see what his morning routine is, I'm sorry to say he's not cold plunging in the mornings, he's not getting a lift in, but he has a morning routine with which he. He reads a lot on the economy. And I think it, think it shows in his statements.

But let's jump into the housing market, because I think housing is where most consumers are seeing this really weird set of data, and they're confused about the market because they're being told on social media that these rate cuts will drop mortgage rates. And now's a great time to buy. I do think if you're going to buy in the next couple of years, now's a great time.

The average interest rate historically for a 30 year mortgage has been closer to high sevens and 8%. Somewhere in there, my buddy just got one in the high 5%. That's a fantastic rate. I know it's not 2%. I know it's not 3%. But that's a fantastic rate.

And you should not be upset. If you get a rate like that on a 30 year fixed right now, you should feel like you're winning. People are waiting. And I get it. Home prices are high.

They're not coming down. But if you can afford it and you have the money to put down, I don't think buying now is a bad time. But let's talk about Lance Lambert's post here.

% between June of: 2024

month over month window since: 1990

It's almost always been a half a percentage point increase. Does it mean something? Is it the data? I don't know. To me, it means it's a very soft economy.

But let's look at some of the data here that I think is more compelling and how strong the housing market has been. Despite all the things going on year over year. Us home prices up 5% year to date, January 1 to now, plus 4.8%.

% since March of: 2020

Since March of: 2020

I don't know very many investments that you can make and just let sit, that could increase at that cadence over the course of four years. That is a fantastic return. It also means that homes are increasingly impossible people to buy unless you've got a lump sum of money to put down.

ery confusing time. Since the: 2022

As we reported on previous shows, home prices in certain markets, like San Francisco, like Austin, they have come down, but on average across the country, those are the numbers. But I'm going to go into a little bit of detail here that I think is important.

I think it's important and meaningful because it tells you that despite all this seeming strength, there may in fact be underlying issues. The housing crash thesis continues to be a tough sell with mortgage delinquencies at rock bottom. A site is covered on multiple shows.

Mortgage delinquencies, people who have fallen behind on paying their mortgage are damn near at historical low numbers. So how can the housing market crash? I'm not sure that it's going to. And a crash, just so you know, is defined by a change in value.

20% down or more in home equity extraction. This cycle is somewhat miniscule compared to the prior cycle.

So what that essentially is saying is that people aren't tapping into this massive amount of equity from this home price appreciation we just talked about at a massive clip.

Most people haven't gotten home equity lines of credit yet, haven't tapped into that equity to do anything like pay credit cards down, even though we're at an all time record for credit card debt north of $1.14 trillion. So if delinquencies are rock bottom, people aren't tapping into their equity.

That means they've got that parachute, that golden equity parachute, to pull on if they have financial trouble. And that may hold off massive change in the markets.

There were just 128 short sales in Q two, because even if you fall behind and must sell, the average LTV is about 30%.

.: 2828

That's an incredibly low number. Sold below the value they owed on the mortgage short. Sold. They sold the property short of what they owed on the mortgage. That is.

That is an insanely low number. And the average LTV across America is about 30%. So the average loan to value is 30%. Why?

Because people who bought a home had such a huge increase in value of the last four years. So unless you bought a home in the last two, three years, you probably got a pretty healthy amount of equity.

Now, sure, if you bought a home at 80% loan to value, you're probably not sitting at 30% loan to value, but that's also the average. And the reason why the average is like that. Well, those of you saying that 40% of homeowners in the US have no mortgage, that was per Bloomberg.

We read that to you on a show, I don't know, probably six months ago. And that's true. 40% of homeowners in the US have no mortgage.

That's why that average LTV is so low at 30%, because it has a huge portion, 40% of the population with zero debt owed on that property. That's crazy. And you're probably thinking like, holy shit, Chris, that's a lot. So the housing market can't correct.

Well, that just means we have an older population. Okay, so I'll explain that.

dest population in history in: 2008

But why is it so high? Well, I had a bit of a personal revelation not too long ago, and it's been kind of meaningful for me.

And I would implore all of you to think about people that you know in your life, people that around you, humans are living longer. And we figured out ways to improve the quality of our life.

And for those of you listening to the show and you want to find a way to support us, go to transcendcompany.com thspe. That's where I get my peptides, where I work on my longevity. They're a fantastic sponsor and partner for the show.

And if you go to that link, transcendcompany.com thsp, you click on it, you can get a blood test done, you have no commitments. You can get a full breakdown of your panel. One of their people will talk to you. And if you need something great, and if you don't, you don't.

But that also supports the show and gives you some data on your own personal health. That being said, humans are living longer, and because they're living longer, they're also not retiring at the cadence they once did.

People feel like they still have active, aggressive years still in them, in their sixties, in their seventies, and you know what? Good for them.

But that also means that the generation below them, which in fact, in fact is my generation, Saeed's generation, Saruna's generation, we're not getting the opportunities to grow into certain positions at the frequency that we probably would have just two decades ago, because we've got a healthier, better quality of life and we're living longer. So people are retiring later. So yeah, we do have an aging, older population because there's just people living longer.

And that does have impacts to the housing market. That's part of why you're seeing that number. 40% of Americans have homes that are paid off because guess what?

There's a lot more Americans living longer. It's really simple. But we tend to, we tend to find a way to say, oh my God, people are so rich. We try to find this narrative.

o owned their home in cash in: 2008

7% over the course of. What is that? Six years? Six to 26 years or something like that. Or 16 years. That's not a big deal. My math skills are also off tonight.

This from the Kobesi letter. I think this is another important fact on homes, which I think will probably resonate with a lot of you listening.

And again, so I'm going to pause here and say, look, I know I'm throwing out a lot of data. This might be one of those shows you want to come back to and listen.

There's a lot here that I'm trying to pump in as much as possible, and it's because I want to give you tangible, meaningful information that you can use to tell yourself, okay, what I'm seeing is disinformation in the media, or this person representing that on social media is speaking, you know, with just half the facts. I want to arm you, if for nothing else, to have a wonderful cocktail party.

But more importantly, so you make the right decisions for you when it comes to your finances. And don't think that you're alone in parsing through this. And thinking like this is confusing, dude. Like, is it good? Is it bad? Nobody really knows.

Okay. The judge, the jury's still out. Even JP Morgan saying things that are somewhat cryptic.

And Jamie diamond himself, I wouldn't count my, my chickens before they hatch on that. You know, I get it. Nobody really knows. But people feel a type of way. Feelings matter, too. So this.

largest decline since May of: 2020

Was that because housing prices went down? We know it's not because the housing prices went down. So it's largely because of mortgage rates, right.

Since the April peak, the median payment is now down to about $300 a month. So is now down about $300 a month. I apologize. This comes after mortgage rates declined to 6.2%, their lowest level in 20 months. So there you go.

It's rate driven. Obviously not home price driven, but is that really the solution to affordability? How far down does the rate have to go?

Even if home prices stayed flat and didn't go up from here, they'd have to go back to two to 3% to even get remotely close to a normalized affordability. And that's just not realistic given where the bond market is at once again foreshadowing to the later bond conversation we're going to have.

% above: 2022

argest drops since October of: 2023

And a fun fact about averages, if you look at the transactional volume of homes being sold, this is saying that it's down. Sales continue to deteriorate, declining 6.9% year over year. Almost 7% less sales. So of the less sales happening, yeah, values are still holding.

But as more and more sales happen at lower, slower, lower cadences. Slower and lower. Yeah, it less and less of a cadence. Guess what? You're taking a smaller pool of properties to average.

So it's more and more impactful that one property sold above or at value as opposed to coming down. This, to me, signals what happens before values go the other way or start to stay flat or until something breaks.

Because this cannot continue at this pace. You cannot have this happen. And we just had a pretty massive rate cut. The bond market priced this in. You're getting mortgage rates north of 5%.

Like I talked, talked to you about my friend getting one at the top of the show. So there, there is all the right reasons for the mortgage market to light back up. And it's not despite the headlines, it is not.

So, Lance Lambert, I'm going to go jump back over to him once again from his X account. If you could magically conjure up 1.5 million housing units. Okay, if you just, poof, whammy. 1.5 million housing units on the market, all for sale.

Have at it, kids. 750,000 of them for sale and 750,000 of them for rent. So you split it right out of the middle and say, you know what? Some for you, some for you.

And they stayed vacant.

That 1.5 million housing units, half of which for rent, half of which for sale on the market and completely vacant, you bring housing vacancy rates back to their historic normal rates. That would be normalized economy. That's how far off we are. That's according to an analysis from Freddie Mac economist, which I follow quite a bit.

And the chart that Arun hopefully will pull up here. And if he doesn't, it's okay, I'll explain it to you.

Comes from residential club, basically showing you that the us housing market is 1.5 million housing units below a balanced or normalized market. Freddie Mac, to bring the vacancy back like we talked about, would require these things to happen.

And like I got to tell you, that is a long way away to get here, to get to that spot that that's a lot of housing units to bring online, especially when there's less and less transactional volume. And part of the problem here is if you sell, where are you going to buy?

If you sell a home with massive equity and you want to buy a smaller home, I guess that that kind of makes sense. You buy a home. If you're buying a larger home, you're going into a bigger home.

Do you really want to do that if the values are super high or do you want to stay where you're at? Well, more and more Americans are choosing to stay where they're at.

And this is why that kind of inflection point of decision making, even if you've got a ton of equity in your property, is part of the reason you're seeing a massive slowdown in cadence. That's a warning sign to me that tells me that there's a fundamental breakage in the market happening. There's something clearly wrong.

And after 14 years of artificial intraday deflation, after the bond market being inverted for both the three month ten year and the two year, ten year treasuries being inverted for as long as they have, now that we're finally out of the inversion, and it's literally happening exactly like we talked about in the show, and we'll get there, I promise. I think you're seeing the market saying there's a problem.

And just for those of you who are new, coming out of a yield curve inversion typically means a recession follows. That's yet another of a multitude of indicators that we're talking about here of a recessionary economy.

So not only do Americans feel this way, not only are there other indicators out there, but when you come out of yield curve inversion, that typically precedes recessionary economies too. Guess what? 50 base point rate cut to start a rate cutting cycle that also typically precedes recessionary economies.

he two times we did it before: 2001

And as much as I feel good about the rate cut, just like Jamie Dimon should feel good about the rate cut, there's still a lot of things that I'm seeing that give me a great deal of pause and as much as said and rune and I want to be happy about this stuff. Therein lies the problem. We can't come to you and not sound like a doomsdayer, if that's what you want to call us, because these things are real.

They're tangible. Sorry. I took a sip of the beverage.

So I go down this rabbit hole a lot on property, because I think it is the farthest and biggest problem that we have right now. I think the stock market will correct. I think corrections like this would not be uncommon.

For example, in: 2001

, the tech bubble bursting in: 2001

If you remove them, the S P 500 performance has been not great. So the 500 best companies in the country would not be so great if it were not for seven massive tech companies, led largely by AI rhetoric.

So.com bubble versus AI rhetoric. There's a lot that could be there. There's a lot that that could happen.

Not saying it's absolutely going to, but it would be very much in line with historic trends and data that we've talked about so far from Nick Gurley. He's a CEO at Reventure. One of my favorite. Well, not really just housing, but really housing data sources that I rely on him for.

I should say buying a rental property in America is no longer profitable. If you listen to the show, I want to say it was episode 247, maybe it's 246, probably 247.

I talked about how I have sold a property for the first time in a very, very long time. I've only sold one before, the second one I've ever sold. And it broke my heart doing it. It really. It really disappointed me.

And this was the reason why the rate on that property was like sub 4%. I don't remember exactly what it was.

I made a ton of money in equity, obviously, because, you know, you heard already about how much home prices went up, but it killed me to sell it because I knew it was somewhat irreplaceable and all properties unique. But this is the reason why buying a rental property in America is no longer profitable.

Because the current mortgage rate of 6.1% on average is significantly higher than the profit cap rate of 4.4% of rentals. For those of you listening to the show, you don't know what cap rate is. We've covered that on previous shows.

But what I will tell you, it's a capitalization rate. It's a way to compare like investments to like investments. I'm not a fan of it.

I like getting, getting to look at properties from a cash on cash return. How much money am I putting in? How much money is it giving me back every single year?

But a lot of people use the capitalization rate as a way to do that. And you know what? That's totally fine. A lot of real estate investors, that's just a preferred metric. All good.

What they're basically saying is you're going to get, on average, about a 4.4% return on most rentals that you buy. You can get more than that if you put a more money down in theory, but incrementally more. And that's kind of where you're going to wind up.

It's just how much cash you're going to put into it to get a return, and that's what you're probably going to get.

So if the average mortgage rate is 6.1% and you're getting a 4.4% cap rate on a property, that means the bank is making 1.7% more on that property every single month than you are owning it.

And I had this conversation multiple times with investors over the years where I would call somebody up and say, hey, man, the cap rate on this property is 2% and your rate is 4%. They go, yeah.

And I go, okay, just to be clear here, I want you to understand, if you have a cap rate of 2%, your return on this property is 2% a month. But you're paying me interest of 4% a month. If you're okay making 2% a month on this, that's all good.

But I want you to know, you buying this property with our loan is paying me twice as much as it's paying you to own it. Think that through. It's more profitable for you to own that property for the bank than it is for you as the owner. Now, that doesn't include interest.

That doesn't include, I'm sorry, it doesn't include equity increase over time if you ever sold it. But most property owners aren't going to sell it.

They're going to keep it and, you know, keep it for as long as it can, particularly in California, we have Prop 13, which keeps your taxes down so long as you don't change titles. So there's a lot of reasons why that's a strange set of circumstances. But avid die hard real estate investors, they don't care.

Get cash flowing property as long as it pays for everything, as long as it's cash flow positive, you're building that equity, do it. Rents tend to go up over time. You're going to make more money, you're going to improve on that cap rate. It's a starting point.

Get your foot in the door. And most real estate investors feel that way. You know what, I kind of in that, am in that camp. I don't disagree with it.

But I knew the property that I sold had a 12% return cash on cash for me, and I know I'll never get that anytime soon. This means that any investor who uses debt to finance their purchase is likely losing money on cash from day one.

rful statement. Note how from: 2012

Cap rates were higher than mortgage interest, which is why so many people piled in the single family rentals. This is no longer the case. So on one hand, single family rentals wound up being wildly profitable for a ten year period.

I bought a lot in that same period myself. They are no longer profitable.

For those of you saying, oh, institutional investors are carrying the market, you're not going to see that anymore, okay. They're not going to be buying in your market being competitive. So what does that mean for the housing market?

This is one of those proof of concept things. This is one of those proof of theory things, right?

We've often talked about how institutional investors owning significant chunks of real estate in the market was actually somewhat overblown.

And we talked about the data and how it was really such a small sliver of the american single family home market was owned by institutional investors, and most of it was owned by mom and pop rental owners or owner occupied properties. Right? Well, if those transactions are now out of the market because it's no longer economically viable, because guess what?

The rates just don't make sense. Like I just read to you, that means institutional investors are out of the market.

Which does explain why you're seeing transactional volume falling off a cliff at near 7% year over year. Because guess what? The institutional investors are now out of the market. It's just the consumers that are left. Is that a good thing?

Is it a bad thing? Well, those of you who say oh, these big companies are the worst. And, you know, they're, they're screwing up the market.

They're driving home values up. Well, here. Here's your chance. Has it impacted home values? Have they come down yet? Not really. Not yet. It's early. I'll give you that.

It's early, but, you know, it's a. It's not looking quite like that was the case based on the data.

So I am going to talk now, um, about breaking down interest rates in the mortgage market. We're going to talk about this bond conversation that I've been foreshadowing, too. And there's a lot here. Okay.

I'm going to try to cover as much of it as simply as possible. If there's anything here that you hear and you're confused about, or you want me to elaborate on, shoot me a DM.

I'll try to respond to everybody as much as I can. I've been a little slow on Instagram lately, but I will get back to you.

You can also find our media at higher standard podcast email address on our YouTube channel. And if said, we're here, he'd tell you to go on over there, click subscribe, like, share with your friends. If you don't follow us, follow us.

You haven't left us a review. Leave us an honest five star review, because those are the only honest ones. And as said would, say, do the moist, goody good, nasty sassafras stuff.

I hate saying that. Makes me sound gross. All right, let's talk about interest rates. They are actually up since the Fed cut rates last week. What? They're up?

Yeah, they went up, not down. But, Chris, they cut 50 basis points. What the hell happened?

Well, just like we told you on the show, for literally years, you have this inverted yield curve.

The two year treasuries, which is the near term treasury, because they come, they mature in two years versus the ten year treasuries, which mature over a longer period of time. Generally speaking, there's more confidence in the economy and long term than there is in the near term. So those rates are normally higher.

They yield better returns than the short term ones, the near term ones, the three month, and the two year. Well, for the last several trailing. Well, frankly, almost two years now, it's been an inverted yield curve.

And you've had the two year and the three year month treasuries paying more than the ten year did. We knew there was only a couple ways this could resolve itself.

The ten year treasury would rise above both the other ones would drop down be a combination of both. And you know what? In two of those three scenarios, that puts upward pressure on the ten year treasury.

Ten year treasury is the closest analog, the closest way we have of telling where mortgage rates are going to go, because it kind of tracks where mortgage rates are, are mortgage rates, trackups are where the ten year treasuries are. So we knew the ten year treasury is going to rise. An interesting phenomenon ahead of rate cuts. The bond market typically prices in a cut and.

Whoa, whoa, whoa. Hey. We got a 50 basis point rate cut, not a 25 basis point rate cut. Shouldn't, shouldn't have. Shouldn't have been somewhat surprised.

Well, guess what?

The market kind of knew, and it was all priced in, so there wasn't a lot of movement outside of the ten year going up, not down, because there's more confidence by the consumer in the long term, because the consumer is afraid in the near term of a recession. Even Jamie Dimon's fearful of a recession. I read you the consumer sentiment at the top of the show. Consumers are afraid of recession. So what happens?

Those near term treasuries go down. There's less confidence in them, but they have more confidence in, over the long run, in the course of ten years, that things will be better.

So that drives the ten year treasury up. It also drives mortgage rates up, not down. So interest rates are actually up.

Since the Fed cut rates last week, in fact, some products have seen interest rises, interest rate rises of 20 basis points, or 0.20% over the last week, even as the Fed cut rates by 50 basis points. How is this possible? Here's how we knew the move was coming and capitalized on it and was able to tell you about it.

The ten year note, if you want to look this up, you can look it up by the going to, I believe, dollar sign t as in Tom, n as in Nancy, X. So that's dollar sign T and X. That's the, the symbol, ticker symbol for it that has risen from 3.6% to 3.80% in just six days.

And for those of you saying, well, Chris, what day is it when you're recording this? I'm recording this on Thursday the 26 September, and I believe it's actually a little higher today.

I put that in the show notes a couple days ago, so it's probably in and around there, but trust me, that's where it was at whenever I wrote it down. So it's been kind of a wild time in the bond market.

And if you didn't listen to the show, I could see how social media may have convinced you that rates were going to go the other way. Well, they certainly didn't, and things have changed.

And because of this, I think it really says a lot about where the market's going and what you should do next.

But let me explain a little further and let's get into some of the details here and hopefully will give you some confidence in where the market may be going. So at least you feel confident in that.

Since the Fed announced a rate cut, bond prices have gotten crushed, particularly the shorter duration, because, again, confidence. This comes even as the Fed announced a larger than expected 50 basis point rate cut. But why? Why did this happen?

And I should point out, a potential 50 basis point cut in December was somewhat telegraphed in their conversations. I have a chart for this which Arun may or may not bring up here, but it's a candlestick chart. They're not my favorite charts for a lot of reasons.

So suffice it to say, it's basically a 45 degree angle, straight up showing the ten year has risen at a pretty healthy cadence when you draw a line from candlesticks all the way up to the top of where it currently sits today. Again, candlesticks are not my favorite way of representing data. I know that a lot of people on Wall street like them. I'm kind of like me.

They look pretty, I guess. Leading into the September 18 Fed decision, the market was fixated on what the Fed would do. Okay. The market was obsessed with trying to speculate.

And what was really interesting is we talked about the show, Bloomberg's world in straight probability, and we talked about Chicago Mercantile exchange. Usually the closer you get to a Fed rate cut, the more accurate those get. This time they really were kind of off.

They were both baking in at least a 25%. It was 100% probability of 25% in both cases.

But both of them were in and around the high mid 60% probability of an additional 25 basis points for 50 basis points. So nobody got the 200% probability or 100% probability of both rate cut or both a 50 basis point rate cut.

But everybody had a more likely than not scenario that we would get an additional 25 than we thought. So, total 50 basis points. So strange. The market has been strange. Nobody really knew what to expect.

And even the things that we use as probability indicators were kind of a little bit lower than they normally would have been. Statistically, they weren't wrong, but they were just a little off.

So trading was entirely about if the Fed would cut 25 or 50 basis points in the week leading up that 50 basis point rhetoric came out of nowhere. There was even people saying, oh, it should cut 75. And I thought they were crazy. Say that they were crazy. We thought 25 was the way to go.

If you're confident about where the market is and you're following a jewel mandate of controlling inflation in jobs, then you would cut 25 basis points if things were all good. If you cut 50 basis points, you're saying, oh my God, there's a problem here. Watch out, America, we got a, we're worried.

And then you come out and you even double down on that, saying you might get another 50 basis points in December. That's a full percentage point when we were expecting maybe 50 basis points at best in prior conversations.

So in my mind, that signals something is wrong and they know it. So in reality, we knew it wouldn't matter much for price action on the mortgage market in particular. But you're saying, Chris, how did you know?

In just about every Fed meeting this year, the Fed's decision has been priced in days before it happened, right? The market priced in what they thought the Fed was going to do. The bond market.

When I refer to the market, that's what I'm talking about, the bond market. And the bond market is really, again, a proxy for the mortgage market.

So when I talk to you about bonds and I'm talking to you about the market and I'm saying it's priced in, that means that the mortgage market has already moved. And you say, Chris, why would this phenomenon happen?

Because what's going to happen is lenders are going to try to capture as much business as they can ahead of what's going to happen.

So if you're a lender and you're saying, okay, rates today are at 5%, but we have a more probable than not chance the Fed's going to cut 50 basis points in a couple of weeks.

Let's get out ahead of that and offer lower mortgage rates today because we know that we can sell these rates with lower than market rates today in the future, after they cut rates as par. Why would a mortgage lender want to sell rates?

Well, most people other than banks, if you're a non bank lender, banks will take their loans and they'll hold them in portfolio. They can sell them like this, too. But most non bank lenders are going to sell them to the secondary market.

And the largest buyer in the secondary market are your GSEs, your Freddie Mac and Fannie May, the government sponsor enterprises, and their job is literally to buy those on the secondary market to create liquidity, create more mortgages.

It's kind of like this cyclical pattern of behavior, and we should probably spend some time on a show in the future explaining why that exists, why they're government sponsored enterprises as opposed to actually government entities. And the back and forth they've had over history. It's a really fascinating thing to kind of unpack.

But suffice it to say that people will lower their rates ahead of the rate cut to try to capture more business in the days and weeks following, following the rate cut, because they know if today's mortgage market is 5%, but they know they're going to cut it 50 basis points. They can originate a 4.5% loan today and sell it at normal current market values in the secondary market and make good money on it.

Whereas if it was an interest rate increasing environment, and I make a loan today in a 5% market, but rates go up to 5.5%, I'm now selling on the secondary market alone that is undervalued because loans today now get 5.5%. I hope that makes sense. I kind of went through it fast.

It's not really the point of this conversation, but I hope it adds a little bit of clarity as we go through this, particularly so as seen below. And there's another chart here. Hopefully a room will pull up.

The ten year note yield fell over 30 basis points just days prior the decision, which is a fascinating data point. Okay. We thought they were going to cut 25 basis points, at least that was the only guaranteed portion of it.

And there was a 60% probability of more than that, an additional 25. And the ten year note fell 30 basis points leading up to that.

So they actually took a little bit more risk than just the 25 basis points based on the price action of the ten year treasury. This was textbook by the rumors sell the news event for bonds. And the rumor was a 50 basis points.

People were a little sheepish, so it didn't quite get there. Got to 30 basis points. But this is how behavioral economics play into the market.

It's not just enough to wait for the Fed to cut rates and make moves.

The behavioral economics, the consumer sentiment, the desire to get ahead and get a little bit more dollars, all these things play into the bond market. All these things play into the consumer's mindset. And all of this matters on how you and I and everybody gets price action.

So all the things you see on social media, as harmless as they might seem, actually can be impactful. It's no secret that GameStop and AMC and some of these retail trader led rallies were really impactful to stock prices.

And that's because it's a real problem. It's a real issue. I respect the retail trader.

I respect the gossip and stuff that happens on social media, because I've seen how impactful and real it can be firsthand. And I'll tell you, the bond market is no different sentiment. How people feel really can change the market.

And that to me is something that we don't really track enough and pay enough attention to. So even looking ahead to the November 6 and 7th and next FOMC meeting, bond markets are already pricing in a 100% chance of a cut.

That is a wildly different scenario than we just heard the FOMC say themselves. And that's compelling. The FOMC just came out and said, hey, 50 basis points is first cut. Everyone's like, oh my God.

Then they said, we expect up to another 50 basis points by December. And what does the market do?

They're already saying, hey, at the November 6 through 7th FOMC meeting, the next one, bond markets are already pricing in. 100% probability of a cut. Now it's probably 25 basis points, but it's already pricing that in right now.

In fact, the exact same debate is happening now as we saw before. What's that debate? Will the Fed cut 25 or 50 basis points? The same conversation is happening.

So it'll be interesting to see if Chicago Mercantile Exchange and or the world interest rate probability on Bloomberg show the same skepticism in that 50 basis point chance. I would expect that to be the exact same thing.

You're going to see 100% probability of 25 basis points, and then you may see an additional probability of an additional 25 basis points cut in there. I don't think we'll get 50 as of right now. But again, I was wrong on the last one. I thought we get 25.

So although I will say as much as said in Arun, and I say that we were wrong on the 50 basis points and we expected 25, we also were calling bullshit on a lot of the numbers that the FOMC was putting out there. So I want to say take it with a grain of salt. Right?

So in theory, we were saying if the data you're presenting is accurate and we believe that it's not, 25 basis points is fine, it's right, it's what you should do. But we knew the labor market numbers were bullshit.

The FOMC essentially said that we knew that housing was a lagging indicator, owner's rent equivalent, which nobody else uses. We're the last country, literally the last country to use it. It's just terrible data.

And we knew the Fed was relying on terrible data to make their decisions. So that being said, they weren't relying on good data. And we were somewhat right in saying that their data was wrong.

Well, we were right in saying that their data was wrong. And I think you're seeing that.

And the skepticism you see in the top of the show about consumer sentiment around jobs in particular is because job, the job market's way worse than we're being told. And we saw the numbers revised.

I'll give her, I'll give us 50% credit, I guess, for being kind of right, because we called bullshit in the numbers and we said at least 25 basis points and, you know, we got to where we are. So looking ahead, we have the next Fed meeting and the November 5 presidential election in the same week.

When I wrote this down, I thought, wow, wait a minute, that's actually pretty stunning. And I forgot how close we were to the election because all the rhetoric around the economy has been kind of front and center in my mind.

I know a lot of people watch the Kamala Harris and Trump debate, and I know just that's probably going to get this video flagged. But I didn't actually put two and two together with the November 6 through 7th FOMC meeting.

And literally the election results the day before the FOMC meeting meets. FOMC meeting takes place. That's a wild amount of just Monte Carlo like risk analysis. I mean, there's a lot there, a lot there to unpack.

So I thought, okay, let's look back historically. What happens in, around election time with rates. I mean, that, that's got to be a good proxy, right?

Like presidential election, what happens with rates? Historically, that happens every four years. So there's going to be a good data set on it. Well, there's some interesting data there.

So again, November 5 presidential election, the same week, historically speaking, volatility rises 25% from June through, I'm sorry, from July through November in an election year. So we see the volatility increase by 25% in the market with the July through November period of time. And we are deep in the middle of that right now.

So expect volatility in the markets. Combine this with another big fed decision, and we have tons of volatility on the way. Right.

I got a chart here to show you that if you're driving, don't worry about it. Lots of bar charts, but basically shows increasing volatility heading into the election, and December seems a whole hell of a lot more stable.

So think of July, August, September, October, November as bars on a bar chart. And they're increasingly increasing in volatility all the way to December, where it drops off to about even or just below or approximately with July.

So things tend to get back on track right after the election. So one of the things we said multiple times was, strap in. It's going to be a really volatile period.

Well, the data seems to suggest that the FOMC's 50 basis point rate cut certainly provokes that.

And you wind up in a set of circumstances that leads you to think that the future right now has a lot of crazy things that could and most likely will happen. One of the things I tell you will not happen is you're not going to see dramatic improvements in mortgage rates anytime soon.

So I think that covers the majority of what I wanted to talk about from a data perspective on the show. That's about an hour long of Chris is going ham at it with me, with you, solo dolo without the boys. And it would not be a show.

It would not be a show with me, at least, anyway, if we didn't cover a little pop pop culture.

And I got to tell you, I was scrolling the Internet today and I was trying to put together some of the data points on housing, particularly election stuff. I wanted to make sure because the date and time period came together in my head right before I left the office today.

And I thought to myself, so let's just see what's, what's going on in the news. And I saw that P. Diddy's attorney had come out and said, you know, there's a Costco down the street. My client likes to buy in bulk.

I don't see there's a big problem here. And it was so laissez faire slash confident, like, nonchalant about it, downplaying it. And I saw that in the morning. I thought it was hilarious.

And then I, you know, I'm scrolling through, looking at dates and times. The FOMC meeting, I go, I go to Instagram and there's a response. There's a response from Costco's pr person saying they don't sell baby oil.

I thought to myself, I haven't heard Costco make any press release statements outside of hot dogs and churros and pizza commentary about keeping the prices the same in the chicken bake, which, by the way, is probably 10,000 calories, but amazing. I haven't had one of those in probably five or six years. Outside of that, you don't really hear a whole lot of press release commentary from Costco.

And they felt the need of all things to clarify Diddy's attorney statement. And then I went down the rabbit hole. Cause I can't help myself. You know, I'm doing what everybody tells you that you're not supposed to talk about.

But I'm in the restroom at this point, and I'm scrolling through, taking a couple minutes to look deeper into what's, I guess, new on the ditty trial stuff. And I recognize that there is two really important facts about him being held in a prison cell right now.

Number one, his bunkie is one Sam Bankman freed. Talk about a bad roll of the dice.

You're, you're in prison with the guy who ran FTX and a guy we made fun of quite a bit on the show, but it's also the same prison that Jeffrey Epstein died in.

And I think to myself, like, oh, my God, like, this just is, it's just, it's such sensational, incredible news that you think to yourself, it couldn't possibly get any worse.

And literally tonight, when I get to get to the studio, I'm sitting in my car thinking for a little bit, and I was going to look up some, some things and make sure my show notes were tight for tonight because I'm going to be talking to the camera by myself for about an hour. And I, again, I go, I go to Instagram looking for updates, thinking like, oh, maybe I should, some pop culture stuff.

And there is a litany of photos of Ashton Kutcher with P. Diddy, who apparently, and I didn't know this, had partied with P. Diddy quite a bit, did a hot ones interview with P.

Diddy and, or Diddy, as he is known by now. And he said some pretty inflammatory things that now, in retrospect, seem kind of strange.

And the rumor is that even Mila Kunis's wife has now moved out of their shared home because she's just trying to distance herself from it. You never know if these things are true. But the more and more time goes by, the more stunning it is.

But I did think it was worthwhile, and hear me out, this is going to sound weird, but I did think it was worthwhile to say we all thought Kat Williams was crazy on the interview he did with Shannon Sharp. But I'll tell you right now, you know what? He doesn't seem so crazy now.

I mean, he seems a little zany, but you know, he's a tiny comedian who's made his career doing weird stuff, but he kind of seems like he may have been speaking some truth. I mean, he wasn't that wrong, right? I mean, you just. You just kind of look at it and you're like, man, he wasn't wrong.

And then the other one, I look at 50 cent and I'm sitting here thinking, like, he has been trolling this man openly, openly for years, saying, I don't go to ditty parties, and being very clear about it. Did everybody know this entire time? Did everybody kind of have, like, some insight into it? How many other people are wrapped up into this?

There's a ton of celebrities. You go back and look at some of the ditty parties from. From the late nineties, and this man has been doing this for literally 30 years. 30 years.

The major celebrities, from music to politicians, to television and film, major celebrities all in these photos. It's incredible. And I can't help but think to myself, like, how wild it must be. And then I think, oh, well, there it is.

And the rumors are that 50 cent had been cataloging and has already sold and starting production on a P. Diddy docu series or single film. Doesn't. Remains to be seen where he will be taking his trolling to new levels with Netflix support. Incredible.

I don't know if fifty cents a genius or not, but it certainly seems like a genius marketing move. 1 hour and five minutes solo episode. Tons of data for you. I hope you guys appreciated it. I hope it wasn't incredibly boring.

I know it's not as fun and as relaxed as we normally did. Try to give you as much as I could. Thank you so much for listening. I promise we'll get back to a normal show.

I wanted to ensure that we were consistent. Consistency for Syed, Arun and me, means a lot. Making sure we deliver at least once a week, as promised.

It's our commitment, and I wanted to honor that. And, you know, I know the guys are really sad about not being here, and I did have strong reservations about doing it without them.

I was trying to find a way, maybe bring some guests in, and I thought, you know what? I'd just do it this way. They were both on board with it. I want to be clear. No one thought that I was being the devil.

But I know it's not as fun as a normal show. So if you're listening all the way into the at very end here, thank you for listening. It means a lot.

And if you didn't like it, just go ahead and send me an email at Arun Haron@higherstandardpodcast.com. well, site you got anything else, Arun? You all right, then. Okay, bye.