The numbers don’t pencil any more
Mind the bid/ask gap.
“We are on the cusp of a material wave of distressed debt. It’s baked into the cake and cannot be avoided by any combination of monetary and fiscal policy, insouciant disregard or magic dust…If you think you see a bridge returning to the zero bound, it’s a pier; it’s an illusion. It’s time to embrace the fact that we are confronting a substantial volume of mortgage debt across the CRE space that neither works nor will work for a very considerable period of time. It’s time to adjust strategies and think hard about finding the pony in that manure-filled stall. That is our reality.”
- Rick Jones, Dechert
If you want a very simple crash course of what's wrong with the Fed, here are a couple suggestions you could easily read in an hour:
Just as an aside to my last post, here’s how gold did during the last two rate cut cycles - up about 16% and 29% (as the SPX fell 42% and 27%).
“Question for our appraiser friends: Why are appraised values 20%+ higher than public market indications?”
“More than $800 billion of apartments have been purchased since 2020, often by syndicators. Common threads: Very low cap rates (3.5%), high LTVs (70%+), low debt yields (<6%), low DSCRs (<1.2x), floating rate debt, and short-term maturities.”
“Don’t you love it when people want to make bad investment decisions to save paying a few bucks to the government?”
Top Multifamily Investors’ Advice for Buyers in 2023? DON’T Do It! w/Brian Burke and Matt Faircloth Note that this is from a very pro real-estate investing podcast.
“My company hasn’t bought a deal in a year and a half…the numbers don’t pencil any more. There’s the widest gap that I’ve ever seen between bid and ask.”
- Matt Faircloth (the optimistic one!)
An informative, amusing podcast.
Matt:
I’m starting to see broken down Corvettes on the side of the road. And also I’ll give you one more. We don’t invest in top tier markets and that’s something you and I have always differed on that one, Brian. We invest in sub-tier tertiary markets like the Piedmont Triad in North Carolina is one of our markets. I have a joke, if the city has a major league anything, I won’t invest there, major league football, baseball, maybe hockey, but not baseball or football…I’ll go for where a minor league team is because the cap rates didn’t push down as far as they did in say Greensboro as they did in Raleigh or in Charlotte or something like that.
Brian:
Yes, I call those high barrier to exit markets.
Mortgage Defaults Expected In The Housing Market With Melody Wright
“If you saw some of these loans that I’m now seeing, because I’m having to pay attention because the delinquency is starting to creep up, this isn’t a first-time homebuyer - these are investors that have used the FHA program and said that they’re owner-occupied. The Philly Fed came out with a great paper saying about 30% of all investor loans are fraud…”
The timing of this news is interesting:
In a significant policy change, Fannie Mae has announced that, starting from the weekend after November 18, 2023, it will accept 5% down payments for owner-occupied 2-, 3-, and 4-unit homes. This marks a departure from the previous multifamily financing requirement of 15-25% down payments for duplexes, triplexes, and four-plexes.
Some have talked about the grade inflation of credit ratings post 2008. I saw this comment in a post:
And:
And this from the WSJ:
Credit scores of home buyers have generally improved since the 2000 bubble years thanks in part to changes in FICO’s calculations that reduced penalties for unpaid medical debt. A decade of historically low interest rates also made it easier for buyers to finance debt.
Yet perhaps the biggest credit boost came from Obama-era income-based student-loan repayment plans, which capped monthly payments at 10% of discretionary income. Many student borrowers consequently aren’t paying down their debt, but it isn’t counted against them when they attempt to buy homes. While credit scores are improving, it isn’t clear borrowers have become more credit-worthy.
A blast from the past: “Home prices can and do go down. Here's what declines have looked like in the past.” (CNN, 2005)
The Real Estate Market - an Interview With Tim Wallen
The host kept asking the guest about refinancing (or financing) multifamily with rates so much higher than a couple years ago, and this kept getting brushed off with ‘well, the government can’t afford these rates, so something will happen, and inflation will go down, and rates will go down.”
I don’t know. Just because an outcome is very bad doesn't mean it won't happen.
Denver-based vacation rental management company Evolve is laying off 20 per cent of its workforce [175 employees] – its second round of job cuts this year – as first reported by Skift.
In May, the firm reduced the size of its team by 164 employees [14 per cent of the company], despite raising $100 million in growth funding just last February. At the time, Evolve co-founder and CEO, Brian Egan, attributed the layoffs to an “increasingly dynamic and volatile” market, with supply growth outpacing demand growth and subsequently leading to average daily rates [ADRs], bookings and revenue per property “coming in below our expectations”.
Again, I’m drawn to the comments:
Broward County, Florida Airbnb’s: 15,054 entire homes/apartments (84%)
Much of this supply would've previously gone to long-term renters, and owners. Instead, ZIRP and QE drove investors to scramble for yield in real estate.
Jeremy Grantham, September 12, 2023 I know Grantham is regarded by some as a permabear, but I think he’s worth listening to, particularly this quote of his I jotted down years ago:
“The only thing that really matters in asset allocation is sidestepping some of the pain when the rare, great bubbles break.”
Demetri Kofinas speaks with Henry Olsen, author of “Working Class Republican” and “The Four Faces of the Republican Party” Very good as usual. We need accountability and introspection in both parties, and the media.
James Davolos of Horizon Kinetics, Adam Rozencwajg of Goehring & Rozencwajg and Dave Iben of Kopernik Global Investors with Grant Williams and Stephanie Pomboy (subscription) If you don’t subscribe, at least check out the links for each of the guests - their websites have a lot of free, very insightful commentary. (I have a little money in a G&R fund.)
VALUE: After Hours (S05 E36): Zach Abraham on Markets in Turmoil, Recessions, Crashes and Yield Curves One of my favorite podcasts and Zach is a good guy too.
Since we were talking Austrian bonds the other day:
“What is your idea of reality? That's the question. You see that the DOD and NASA - they're all hiring physicists to work on this UFO issue, and that's not where the truth of this lies. This lies more within the realm of the humanities, within the real of psychology, philosophy, religious studies. That's where you're gonna find the truth of this. No physicist is going to be able to tell you what this is, because the physicist maybe can tell you how physical matter might behave, but the humanities will tell you why. It's not a Department of Defense issue. It's a human issue is what it is.”
"You know, if baseball umpires were on the front page of the sports section every week, you'd know something was desperately wrong with the game."
- Jim Grant, on Central Bankers
Re Grantham “permabear”. I was sitting at a table next to him at Cafe Fleuri
In Boston in March 2009 (a true bottom)when I overheard him say “we bought in last week. Perfect luck”(modesty here). Pretty good call. And his letter which followed “Reinvesting while terrified” is worth re-reading, again and again.
Excellent! I can feel things breaking....thank you.