A WEEKLY GLIMPSE OF REAL ESTATE NEW
9/7/26
What Are the Odds: Upon the announcement that our deficit had reached the historic $40 trillion the odds that the Federal Reserve would raise interest rates rose from 35% to over 60%. Adding to the pro interest rate hike proponents was FED chairman, Kevin Warsh’s comments at a recent symposium seemingly supporting a possible rate increase. Although inflation has proven to be much more stubborn than anticipated, my personal opinion is that the FED will hold the line at their upcoming mid-month meeting. Raising rates will seem like a surrender to an out of control economy and Warsh ( and the bulk of the Board) will likely “hope” that some near future economic news will reverse inflation without requiring FED intervention. I’m not convinced that the economy will tame itself, but I do think that the FED will wait as long as possible before taking direct action.
Different Perspectives: The housing market can appear very different depending upon which lens we use to view homeowners. Different homeowners, different needs! Most owners are facing increasing costs as taxes and insurance fees escalate and are being constantly approached to use their home equity via refinancing to provide beathing room. Others more recently purchased with leveraged (small down payment) loans and don’t have enough equity to even consider refinancing. Seniors often have plenty of equity but are unable to qualify for financing to assist in fix-up or cash flow deficiencies. Seniors do have an option that others do not, the reverse mortgage. The resistance to obtaining additional debt, especially in this high interest rate environment, is pretty universal. For some, selling the home may be their only option. Refinance options might be available to those with insufficient equity or for seniors who find it difficult to qualify. Seniors might discover that the reverse mortgage is actually a pretty good option. Every person’s situation is unique and will require a different potential solution. Everyone might profit by meeting with their preferred lender to discuss their specific situation. One doesn’t have to act on the information but it can be useful to know one’s options when it becomes the right time to act. There is usually no cost to such meetings & determining potential options prior to needing is be a great relief.
Growing Our Way Out of our Deficit: The announcement that we had reached a historic $40 trillion in budget debt was absorbed with a level of shock and dread. For some, it is unsustainable while others, Treasury Secretary Bessent among them, merely shrugged and said, “we can grow our way out of this deficit hole”. A little context is necessary before we explore this concept that higher market growth is the solution. Most businesses adopt the economic philosophy that to cure a deficit one must raise income or reduce expenses or some combination of the two. The grow our way-out pundits believe that the gap between government spending and revenue is bridged merely by having the economy grow (with increased tax revenue) faster than debt continues to accumulate. Some would say that this is a simple answer to a complex problem and a method that generally does not work.
Economists are mostly skeptical that even strong growth alone, without structural reforms, can resolve our spending crises. Structural economic changes would likely include tax reform, healthcare cost control, reviews of the safety net programs, including Medicare and also likely defense spending. Making the necessary decisions needed to manage debt while being politically palatable is difficult and maybe unrealistic. One fiscal lab on Capitol Hill estimated that to eliminate the federal deficit by 2035 would require real Gross Domestic Pruduct (GDP) to grow by about 4.31annually – more than twice the current growth estimate. We are all for fiscal responsibility until a program that we personally prefer is on the chopping block. Then we seek that dreaded word for nearly all politicians today – compromise!
This may sound pessimistic but I am actually optimistic. At my advanced age, I have witnessed numerous tough times and we manage to come together (and actually compromise), reach consensus and move our nation and world forward.
PER THIS LAST COMMENT – VOTE – EXERCISE THE GIFT THAT MANY DO NOT HAVE!
The Data Center Controversy: The opposition to data center construction appears to be non-partisan but growing daily. As previously reported, it is difficult to discern if the resistance is a product of cooling on AI overall development or only a reaction of “don’t build a data center in my neighborhood”. It is difficult not to feel that AI is so far down the track that data centers will be built somewhere but continue to face serious opposition. While this opposition to construction of data centers seems to grow, economic reports continue to credit the centers (along with defense spending) with driving growth. It is confusing to merge the overall positive spending aspects vs the uncertainty of higher costs related to energy and the local negative politics. While the data center promoters emphasize the jobs and tax revenue to be generated by new construction and operation, communities object on the basis of the increase in heat, noise and water usage and he accompanying higher energy costs.
New Appraisal Process Underway: The new appraisal form that we mentioned several months ago is now in use. Although it is not mandatory until November, many lenders have introduced the new form now. Appraisers on the whole are not excited about the new process but some of the resistance might be the typical concern about anything new. In addition to having to invest in software and the acquisition of required tablets (computers), there is an estimated time extension for the completion of every appraisal report. Appraisers anticipate at least a 2-3 hour additional time on site as well as additional time for preparation of the actual written report. Appraisal costs will definitely increase, although new rate sheets have not yet been introduced. Acquisition time from ordering to obtaining the completed report is likely to increase as much as two weeks. Most purchase offers are urged to be written for a 60-day escrow period to allow for the extra time. Proponents of this new system believe that both the timeline and costs will decline as appraisers adjust to the new format and process. Our concern is that prices generally go up quicky but tend to decline slowly, if at all. If you are initiating a new home purchase, talk to your lender regarding how you might be affected. Sellers will also be affected as they will be required to supply additional information to the appraiser. This information will likely be acquired by a listing real estate licensee using a newly designed questionnaire. The final appraisal will be longer and contain more information than previous reports but the question remains for many “to whose benefit”?
Importance of Government Sponsored Enterprises (GSEs): Our two major GSEs, Fannie Mae and Freddie Mac, are critical to the credit liquidity of our housing market and conventional loan financing. It works this way. A conventional loan is originated and then funded via a lender’s available funds. Upon closing escrow, the loan is quickly transferred (sold) to one of the GSEs and the lender recoups the funds with which to make another loan. Without this process, lenders would soon run out of funds for additional loans The GSEs do not lend directly to consumers but provide a stabilizing influence via this liquidity process. The industry refers to loans being underwritten to Fannie of Freddie guidelines to guarantee that the agencies will purchase the loans and enhance liquidity and the credit flow. The agencies repackage the purchased loans into bond products which are sold to investors. Although the GSEs are not government agencies, they enjoy the implicit guarantee of the Federal Government, which offers a measure of security to offset the investment risk.
Recent administration conversations regarding privatizing the GSEs has met considerable resistance. Although the idea of transferring the risk of defaults from the GSEs to private entities is enticing, the GSEs relationship in the market is way too big to allow it to fail. Critics suggest that the government would remain responsible if the market faltered but be in a weakened position wherein the investors would ultimately be protected and consumers paying the bill (Remember the too big to fail bank bailout – this could be bigger). Others suggest that privatization would likely mean higher interest rates and tougher credit requirements. Another one of those situations in which we need to be careful of what we wish for.
Until next week, be good to yourself and kind to others.
8/31/26
Market Movement Unpredictable: The prevailing expectation has been that the Federal Reserve is likely to keep their short-term interest rate unchanged, perhaps through this year. With the data ever-changing, the sense has been that the FED would gather data in preparation for next year. The fly in the ointment (as my grandmother used to say) is that the market is not cooperating. The Personal Consumption Expenditure (PCE) price index, the FED’s preferred inflation measurement, which after declining slightly in June, accelerated again in July. The annual inflationary gauge, at 3.7% is well ahead of the FED’s target of 2%. The combined poor July jobs report, the ongoing mid-East war, a record budget deficit and questionably over-invested AI industry might make it impossible for the FED to postpone a rate increase at their mid-September meeting. For these reasons, everyone was fixated on what FED Chair, Kevin Warsh would say at the annual Jackson Home Economic Policy Symposium (see below).
FED Chairman Speaks: Amid last week’s noted bond buyback program economist were eager to hear FED Chairman, Kevin Warsh’s comments at the annual Jackson Hole Economic Policy Symposium last Friday.(Spoiler alert – he made no comment regarding bonds) To set the stage, we are reminded that Warsh had declared his vision regarding modernizing the FED. His first revision was to trim the Chair’s after meetings forward looking comments. Believing that the markets, rather than the FED, should drive financial direction and decisions, the FED’s future projections will no longer be shared. Business leaders, trying to push back, indicated that without the FED’s projections, even if they change later as conditions change, they are left somewhat rudderless in their decision-making process. So, it was with considerable expectation that business leaders and economists awaited Warsh’s comments at the symposium.
Chairman Warsh first addressed artificial intelligence and its future role in the economy. While recognizing the huge potential, he noted that he has appointed a task force to address the future impact upon both capital and finance elements of the economy. Recognizing AI as a new variable in FED future decisions, he did devote a few comments to his concern regarding “who will make the money” (supposedly questioning whether profits will flow only to the top or will they be more equally distributed) and how will employee questions and concerns be resolved. He noted the markets’ reliance on the massive investment in AI as something that the FED must monitor.
Emphasizing that his focus is on price stability and that inflation, stubbornly remaining above the FED’s desired annual level, is the primary concern. He went on to say that the FED’s mission to promote stable employment is under control, allowing the focus to be mostly on inflation matters. Stating that one tool for reining in inflation is higher interest rates, it did not seem that he was ready yet to go that route while continuing to emphasize the need to gather market information. But waiting for the economy to correct itself may not be an option at the mid-September meeting. At the last meeting, four of the twelve FED Governors expressed their willingness to increase rates, if necessary, to tame inflation. Unless there is a clear trend that the economy is appropriately adjusting, it is becoming more of a 50-50 chance that rates could rise. The next two weeks will be critical as the economy adjusts amid the background of pending mid-year elections.
Having listened to Warsh’s speech several times, I had several takeaways. He appears undaunted in his desire to modernize (his phrase) the FED. He seems prepared to wait for his appointed ask forces to report their recommendations and seems quite methodical in his actions. Finally, I had the impression that he might have disappointed everyone (my opinion only) I suspect some wanted to hear that there was some path to lower rates while others anticipated a more decisive indication of the FED’s potential rate increase. His more non-committal comment “we must be confident that underlying inflation is moving to or objective, clearly and at sufficient speed. Otherwise, we have work to do” likely frustrated many. The markets are still without any forward-looking expectation from the FED, leaving it for many to “interpret” what they heard. I suspect that the chances of being wrong are fairly high.,
The Challenges When Buying a Fixer-Upper: The major incentive for purchasing a fixer-upper is the opportunity to acquire a property at a bargain price, whether to occupy or to renovate and flip in a resale for quick profit. Flipping has lost some of its luster as the cost of renovating (lumber and other construction materials have increased) has made it difficult to acquire sufficient profit. Additionally affecting both the investor and future home occupier is the ability to find an appropriate property at an affordable price. Even sellers of distressed properties can over exaggerate the property value and seldom consider the expense (supplies and labor) of repairs. If one overpays for the property, the venture is unlikely to represent economic success whether it is the investor unable to profit or the renovated home ultimately being over-priced for the neighborhood. Buyers can easily underestimate renovation costs and seldom consider the real cost of personal time &effort required to complete the project. Underestimating the completion time can result in a family living uncomfortably in an ongoing construction project for longer than expected.
And then there is the matter of financing a fixer-upper acquisition. The home is the lender’s collateral for their loan and expects it to be in a reasonable condition. Homes classified as in need of cosmetic upgrades are generally acceptable for financing. the agreed upon transaction price typically takes into consideration such expenses. When the property slips into “it might be better to tear it down” category, lenders are generally uninterested in financing. Without cash to purchase, a buyer can ask the seller to temporarily serve as the bank (carry the financing), for the renovation period after which lender financing can be acquired. Privat financing is another alternative, but either option increases both the expense and the risk of a successful project.
The idea of acquiring a bargain priced home, using sweat equity to improve it (and increase its value) is enticing. While lightening does strike occasionally, reality of accomplishing this is a long shot.
Bond Buyback Puzzles (a follow up from last week): Treasury Secretary, Scott Bessent, explained the reason for the bond buyback strategy as a “desire to provide greater liquidity support in longer-dated nominal sectors where there is high, consistent strong sponsorship from market participants, as evidenced by the significant volume of high-quality offers Treasury routinely receives in longer-dated buyback operations”.(I have provided the entire quote because I was unable to understand it but perhaps it makes sense to others) Critics of the strategy were numerous and also for numerous reasons but the majority seemed to be that this effort avoided the main issue, a $40 billion deficit. But proponents pointed out that this was merely a strategy designed to provide time to tackle the record budget deficit. Regardless of its purpose, it didn’t seem to work as bond prices initially declined only to immediately escalate again.
To reiterate from last week, bonds are an IOU from the government that the bearer will receive an established return (interest rate growth) over the bond term (3, 5, 10, even 30 years). The investment is considered safe as it is unthinkable that the government would default on said payments when they come due. The more unpredictable the market becomes the more inviting bonds are as a safer investment. But, the higher yield means a higher cost to the government, which, at this time, adds concern to the already rapidly growing deficit. One decision affects another, then another and so forth resulting in no easy answers. Bottom line, the current bond buyback effort had little effect on the market overall and I still don’t comprehend the ambiguous explanation provided by Secretary Bessent.
Over The Weekend: Odds for a .25% rate adjustment on September 16th have increased but it is still all speculation. Most media air time was given to the trade war with Canada and the upcoming mid-term elections.
Until next week, be good to yourself and kind to others.
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