Real Estate: The Unstoppable Force
Today’s Read Time: 11 minutes
The Weekly 3 in News:
Nashville News - Nashville could see a surge in data center development amid AI boom (Tennessean).
More Nashville News - The developers behind downtown’s Peabody Union are reinventing Nashville’s riverfront greenway to display the Cumberland River in a way the city has never seen (NBJ).
Nearly all US landlords are mom and pops, not large real estate companies. “The biggest owners of U.S. apartments and single-family rentals would be rounding errors in any other industry. See chart below. ‘Big’ is relative. There are no real behemoths in rental housing, contrary to narratives” (Parsons).
Today’s Interest Rate: 6.77%
(👇 0.03% from this time last week, 30-yr mortgage)
Today, we’re talkin’ recession talk, tariffs, future expectations and …. home remodeling costs! (it’s related, go with me here).
Let’s get into it.
Super quick: there’s a lot of doomer talk out there right now. It gets clicks, I can’t really blame them…Actually, I can. Sell-outs! 😝 So, if sentiment got you down? Read last week’s article: Pessimistic Economic Sentiment. Ignore the noise. This is when opportunity knocks.
And now, back to our regularly scheduled program…
Real estate: the unstoppable force
Let’s dig into real estate numbers, as it relates to inflation and tariff threats.
Inventory for homes is steadily rising (normalizing to historic levels)
And high interest rates have stagnated existing home sales for ~2 years.
And when accounting for population growth (households), existing home sales are quite low, historically (ResiClub).
But looking forward, home sales could be ticking up. Mortgage application data was up 6% YoY. “Growing inventories of homes on the market and steadier mortgage rates are supporting homebuying activity thus far this spring” (MBA).
A positive adjustment for homebuyers.
Tariffs: Is there a true cause for concern?
What about tariffs? Is this a “canary in the coal mine” for recession?…
I can hear your brain’s hamster wheel spinning from here.
Let’s all calm down and look at some data, and let my punchy commentary cheer you up.
Stuff and Information.
Material prices for homebuilding, like all the stuff, have been inflating. But so far, I am aware, but not concerned. In fact, the opposite. Let’s take lumber for instance.
Lumber prices are up from this time last year, 7.92%. AH!
But wait, there’s more…
This is up from multi-year decreases. Last year lumber was down -6.39% and in Jan 2023 was down -34.8%.
Remember the last few years real estate has been in an interest-rate-led sales recession. Last month was 18% below average (Lambert). (Remember, real estate is highly cyclical. We are about to Spring. Literally.)
Fewer homes sold (and fewer construction permits) mean less lumber, materials and labor needed.
Case in point, overall construction materials are down. Wow, look at that wild supply chain shock from shutting everything down during COVID.
This is good. Good for affordability. And it looks to me like we are normalizing material prices after COVID, near the historical average.
Let’s do another: industry labor demand.
Construction job openings, absolutely cratering, YoY. AH!
Oh wait. This is year-on-year percentage change for new construction jobs.
So, before you get all nihilist on me, overall residential construction employment is still very strong. Phew….(always scrutinize the chart + what is being proclaimed at you by the author). Here is total employed residential construction workers:
And this nominal value is not as high as it looks, as the 10-yr chart may infer.
Let’s zoom out.
Chart context: We have the same number of folks employed in the residential construction industry that we had 20 years ago, but with +40 million US population since that time.
The takeaway for me is:…
…housing material/construction and labor are moderating, yes, with fewer homes being built, bought, and bestowed. But the overall industry is healthy.
A fantastic time to build a home or start a remodel.
Material prices down and less work for workers = time to shimmy in a remodel before judgment day.
Here’s an anecdote: I’m doing a little asset management this spring on a few of my Nashville rentals, which any good operator/landlord should do IMO.
Below, I’m soon putting in a lovely front deck, 16’x10’, with a new staircase and railing. First quote from a contractor (who I use often): nearly $8k. Ouch, I had a little sticker shock (I was thinking $6k). His excuse: “lumber prices are up.”
Hmmm… my skeptical ears perked.
I went for a second quote (also from someone I use often): $6.5k.
Mmmm, the porridge was just right. No excuse for lumber prices. I cut the check.
The lesson here kids is always get 2+ quotes. And material suppliers to contractors can be all over the place, it’s not their fault. The savvy investor must shop around and be aware of what is happening writ large in construction materials.
But Skeptical Investor, what about tariffs?!
Admittedly, this is difficult to know. And anyone who says they know is lying or trying to sell you something.
But I’m going to try. (Not to sell you anything. Unless you are buying real estate in Nashville, then reach out to us 😁).
We should be concerned about potential tariffs. We have to be; it’s a risk. But not because of the direct impact of a particular tariff on a particular item (tariffs are fairly targeted) but because it creates general market uncertainty, which can drive overall short-term prices, at least until the effects play out. That could be several months of doubt. I still predict, as I have written about previously, that these tariffs are for negotiation purposes and will not cause broad inflation. But you never know, especially with a negotiator that is quite… mercurial.
The market needs to be comforted, it’s sensitive and hates uncertainty. We don’t know how the cost of one thing will actually affect the supply chain, and as it works its way through the economy. There are so many variables it’s impossible to really tell what the effect will be. This is not stopping many pundits/economists from guessing.
In my opinion, it’s the Butterfly Effect (throwback/underrated movie). The market is girding for potential inflation. But this broad hedging/defense will be temporary.
So let’s look at something more plainly apparent to understand potential effects, using our construction material example from above. And guess what, the downside risk to construction/real estate may not be as bad as folks are saying.
Most Construction Materials are domestic
Wells Fargo is out with a new report, and guess what, less than 10% of total materials used in residential construction come via imports (Wells/Lambert). (Important caveat: for some reason, the latest import data is from 2017…hey government, can you get better data please?).
Import dependence is highest for engineered wood products like veneer and plywood, of which 14.7% were produced abroad, but still. It appears that tariffs will not have an outsized effect on home construction/renovation/goods prices.
Recession Concerns?
I was feeling all gravy this AM. The market was up, and some of the larger tariff threats may be rolled back (supporting our negotiation call), but then I saw this post…Acclaimed economist Mark Zandi (and I do like him, well used to…) believes there may be a recession on the horizon, writing, “Back on recession watch, Leading Indicator #2 – the FHA mortgage delinquency rate.”
Now, this sounds intelligent and gets your attention with pessimistic predictions, but the diligence is missing.
You know when you watch the news and they plaster oblivion on the bottom of the screen…
ALERT!
RECESSION!
NEW VARIANT FOUND, MORE CONTAGIOUS!
ECONOMIC COLLAPSE?
(Unintelligible) something something FEAR!
ATMOSPHERIC RIVER! (what the hell is that anyway?)
This boy has cried wolf too many times.
And I don’t see this as any different. I would have expected some form of analysis from a leading economist, not vapid rhetoric devoid of rigor.
The leading indicator for housing industry troubles is more likely residential construction jobs, which are not falling (see above chart), not FHA delinquency rates caused by high interest rates (which are coming down) and FHA borrowers’ “gamble” on lower future rates, which can only be referencing a small number of loans made in the last 2-3 years. Rates were dirt cheap before that, sub 3%.
Sorry Mark, I’m gonna have to Taleb ya.
Hey Nassim Taleb, what do you think about economists?
“Those with brains no balls become mathematicians, those with balls no brains join the mafia, those w no balls no brains become economists.”
— Nassim Nicholas Taleb
Burn delivered.
My Skeptical Take:
There are many Cassandras on TV predicting the next calamity.
I’m paying attention and looking for opportunities in the noise, keeping my head down, and doing the work. So far, this doesn’t look like a Greek tragedy.
There is great opportunity today.
Are you a real estate investor? Do you want to be? Spring/Summer could be the greatest opportunity in real estate for the next 10 years.
Interest rates? Ticking down every week.
Housing inventory? Up. More choices.
Demand? Still depressed. Less competition.
Stock market? Volatile and down ~10%+ in the last 30 days.
The concerns? Potential recession or re-inflation.
Recession - What if these economic signals are not a sign of a normalizing economy, but of one that may be approaching recession….
Good for real estate seekers. Interest rates will plummet. The Fed is addicted to “saving” the economy.
Re-inflation - What if inflation does rear its ugly head?
Hope you already own real estate. No worry here. Property values go up.
Interest Rates 2025
Be greedy when others are fearful.
Spring is here.
Ok gotta run, the pup is giving me his evil ‘I need a walk’ eye. Hard to resist.
Until next time. Stay Curious. Stay Skeptical.
Herzliche Grüße,
P.S. Want to protect yourself from stock market volatility? Buy a rental property, buy real estate. Don’t know where to start? Give us a call! We got you.
