They caused this

They kept rates too low all through 2021 when everyone else in the world saw asset prices soaring 20+%.??

The Fed pumps trillions into the economy through money printing/infrastructure bill/etc…

Congress spends like drunken sailors…

We have increased the money supply approx 40% in just the last few years.

For over a year and a half the FED said critics were wrong and that inflation was “transitory”.? Even modest brains like myself saw how misguided they were in real time (we thought “maybe there is something they know that we don’t”)

A year later in 22’ they admit they were wrong.? The damage was done.

Fed jacks rates a whopping 500 basis points within a year (mortgage rates from 2.5% to 8%), unprecedented in multiple decades, to combat inflation.? A market shock.?

Yet the organic shortage/demand for housing was so strong it couldn’t be derailed.??Columbus prices still appreciated 4-5% in to 2024.

What can be derailed with higher rates?

-Commercial real estate loans.

-Small Business Admin loans.

-Small and medium size business loans/credit lines.

-Consumer credit cards…

All variable/short term in nature and are priced with a wide spread above the fed funds rate.? (SBA loans-3 year ARM written 3 years ago at 5% might be resetting to 12% today).?

These credit lines/adjustable rate loans are re-setting and that monthly interest payment will go straight to the bottomline.?

Some will be upside down, some won’t.

Some will have equity/cash to lever up again and wait it out, some won’t.

Public companies are fine.?

The little guy feels their discretionary income slip away.

Tik tok... for some.?

I have many other clients with jobs in healthcare, finance, education, govt, and tech couldn’t feel wealthier…

A tale of 2 markets. The low inventory residential real estate market will be plenty fine with enough of these “haves” to keep it rising for the foreseeable future.

The catch 22

The Fed said rates stay high until inflation comes down.

The Fed ties their inflation goal to lower CPI/inflation rate.

Ironically, the largest component (1/3 of the measurement) of CPI/inflation is average $rent(shelter).?

To make it worse, this is a lagging indicator often seen 1 year in the rear view, not real time. Shelter cost isn’t going down as they thought.

First time home buyers are crushed with high rates. They can’t buy a home so they are forced to rent.??

Those lucky enough to have owned pre-pandemic (over 40 yrs old with 3% mortgage) sit in place with drastically different discretionary income than non-owners (37 yrs old and younger)

Fact: America is way under supplied in housing (short millions of units)…

Supply squeeze: Apartment/home building was cut off cold turkey in 2022 due to sky high rates not allowing new development to pencil…at the exact same time we saw the largest generation (millennials/echo boomers) all reach prime home buying age/household formation. High demand/lower supply.

What is happening

1. 90% of the largest generation ever created (28-40 years old) can’t afford to buy and are forced to rent instead.
2. Rents ARE NOT going down due to constant/increased rental demand.
3. Since rents don’t won’t go down, Fed’s CPI/inflation # doesn’t go down.
4. Since CPI doesn’t go down, rates stay high.

A vicious cycle the Fed created that they don’t know how to get out of.?

They will keep it up until something breaks. It won’t be the residential real estate market that breaks.

The result

A tale of 2 groups.??

1. Those that have assets that have generously benefited and locked in 2-3% rates on their homes.? They feel extremely strong financially.? They emotionally feel like they want to make a housing change but don’t feel they can afford to give up their lower rate.? Mentally locked in, but restless, and often living under their means.?
2. Those, typically younger, that don’t have the market comparison bias that #1 has but…

These two cohorts look the same when you see them walking down the street. They wear the same clothes, they may work in the same industry, and have the same decent jobs yet under the surface they are the new “haves'“ and “have nots” for the time being.