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It Makes More Sense to Rent

If Gary Vee and Grant Cordone believe it, it must be true.  I ended Thursday’s Market Trends on this note but as time got short, I wanted to ramble a bit more here.  Because the concept of your primary home being your worst investment is not one I disagree with.  Dave Ramsey could jump in here too saying … yes… no debt!  Okay, let’s tear this apart a bit. Your primary home is your worst investment.  It is.  The asset is growing, no income is coming from it and your return is the interest rate you locked in, which in this market there is a 75% chance the rate is under 4%.   If we stop there Cardone is spot on… in an article with CNBC published Aug 12th, he stated “do not buy a home unless you have money to waste”.  His example below shows expenses eating up the profit.

Mind you, Grant owns three homes.  The 3rd is a mega mansion purchased from Tommy Hilfiger.  But then again, he has money to waste.  Gary Vanderchuck has been quoted as saying 30 and 40 year olds are wasting their money by buying when they should be putting it to use starting a business or investing.  Gary Vee is a serial entrepreneur having started and continues to start many businesses.  He also owns a mega home…I guess it’s do as I say not as I do.

Here’s what I believe and not that it’s true or not true, but maybe it’s more relatable.  A house is your worst investment, however, for 80% of Americans, 64% of their wealth pre-pandemic was in their singular home, their primary home. I’m suspect that number is in the 70’s today.  The most recent homeownership rate is 65.8%; and I’d put money on the fact that a majority of the 34.2% renters are not replacing that wealth but are void of it.  The average savings rate today is 5.1% which is no surprise with a 8.5% CPI. The average 65 year old renter is worth $6,710. They are not able to keep up.

Back to Mr. Cardone… The person who bought that house with $5,000 down had $100,000 in equity at the end of 10 years.  Along the way they maintained the home and paid the mortgage (which includes the property taxes and interest).  Everyone needs a roof over their head, and unless they are squatting  in Mom and Dad’s basement, that roof costs something.  So the buyer has $100,000 after paying the mortgage.  A renter starting the 10 year trek with a $1,500 a month rent and getting hit with 6% rent increases would have spent $237,000 with nothing but a cleaning bill.   

The $100,000 is options.  It’s not about the money.  Rental properties, Cardone’s apartment buildings and Vanderchuck’s businesses are making more money.  BUT, that equity means not only do I have a roof over my head, but a tax free bucket I can draw from to buy a 2nd one and a 3rd one or start a business or pay off debt.

Peter and I bought our first home together at age 27 for $100,000.  It was my first home since I was 11.  That first home grew to $200,000 in 5 years.  We used the equity to buy a $300,000 home to raise our kids in and have money in savings so I could leave my full time job and start in mortgage lending.  Then we sold that home for $600,000 and bought our DU home and two more quads.  Options.

If you want to learn more about how to create options for yourself and your clients, join us at our monthly Building an Investment Empire every second Thursday of the month.

Housing is in a Recession

It’s official.. or at least CNBC is making it official.  We talked about this on Thursday’s Market Update; but wanted to line it out here, because your clients are seeing it too! This week we saw weakening July Existing Home Sales, Builder Confidence, and Mortgage Applications.  Let’s go through the recessionary markers then why I am still so bullish on housing!

  • Existing home sales fell 6%, marking the 6th month in a row this has been going down YET home prices are still up by 10.8% marking the 125th month in a row of year over year gains.
  • Home builders are not feeling the love as Builder Confidence dropped 6 points to 49.. recession zone.
  • Completions are up, but permits and starts are down, way down as builders aim to run off their 8 months of supply. Permits are down 1.3% and starts down 9.6% month over month.  What bothers me more are the SFR numbers.  SFR permits are down 4.3% month over month and 12% year over year.  Starts down 10.1% month over month and 18.5% year over year.
  • Builders are reducing prices on average 5%, we are seeing the same thing in existing home sellers… looks like prices are dropping.
  • Mortgage applications were down to levels last seen in 2000.  Purchase applications lowest since 2015.  Down 1% week over week; 18% year over year.

Weak.. that’s how this sounds.  Very weak.  Enough to make me pause as a buyer? By checking the  “Housing Recession” checkbox, more buyers will sit on the sidelines waiting for the bubble to burst.

YET…

  • Bidding wars in Denver have dropped from 51% to 37% of homes in one month; showing a weaking demand.  Yet in 2019 19% of homes in Denver were multiple bids.  This is just getting more normalized.
  • Nationwide we have 3.3 months of inventory; in Denver 1.7.  Well below a balanced or buyers market.
  • Builders and existing home sellers are having to discount on average 5% to sell; after a 40%+ gain in the last two years, this is not losing money, it’s an adjustment
  • Home prices continue to go up.  11% in Denver, 10.8% nationwide.
  • Builders are turning to multi-units to generate revenue and pulling away from building single families, which reduces inventory
  • July new home completions were up 1.1% month over month to a seasonally adjusted 1.4 million on an annual basis.  Household formation is 1.7 million annually.  Still not enough.
  • Inventory nationwide still has NOT hit 2019 levels.  Denver Metro only just hit it in July.
  • Inventory will continue to be limited due to owners locked into low rates, baby boomers aging in place, and Gen Z and Millennials buying investments.
  • Demand will come back as rates settle in again.  Birth rates 30-33 years ago tell you that.

Housing might clinically be in a recession but with inventory shortages, twice the equity of 2006, the strongest buyer credit profile in 20 years, less than 1% of mortgages in forbearance, less than 2% of homes in foreclosure, 37% of all homes owned free and clear, a 3.5% unemployment rate, and $2 trillion in savings… my bet is still squarely on real estate!

Rates Moved In a Big Way

We all vividly remember when the 10-year yield hit just over 3.5% in June because the 30-year fixed mortgage rates jumped to 6.25%. I’ve been highlighting the 10-year treasury trendline for the last three weeks as it pulled back from the high’s and has formed a much tighter narrow channel.

On Wednesday the UK inflation numbers were released at a 40 year high of 10.1 as food and energy prices continue to surge.  With that the 10yr yields were willing to temporarily test a break above the 2.91% ceiling.  Lower jobless claims, supporting employment, weak existing home sales, and a slowing Philly Manufacturing report didn’t move the needle at all on Thursday speaking to an extreme sense of indecision and/or an absence of directional momentum.  This kept 30 year mortgages in their 5-5.5% range.

This morning the German PPI (Producers Price Index) came out materially much higher than expected breaking records with a 5.3% m/m and a 37.2% y/y increase.  The US economy continues to show it’s global dependance as our yields broke out from their comfortable margins jumping to 2.983 on Friday.  This break out could continue into next week. Hitting almost 3% equates to national average rates of 5.6% for a 30 year fixed.  My team continues to fight for your clients both in service and rate!  4.99% with 1% discount on a $600,000 purchase price, 15% down, 740 FICO.

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