Greetings from 36,000 feet as I make a quick trip to Florida to visit clients and a few new prospective clients. As I sit here my thinking on the markets is not any different from what I have been writing about so I decided to pivot to a totally different topic, interest rates. I am always interested in your feedback, positive or negative, so feel free to share.
The worst kept secret of all-time is that interest rates have soared since their pandemic lows. The Federal Reserve has hiked short-term rates from near 0% to more than 5%. Market-driven long-term rates have jumped from roughly 0.50% to north of 4%. While the world was acutely focused in inflation and the consumer-felt impacts, the cousin of inflation, rising rates, is now being seen in various parts of the economy.
I had lunch with a realtor the other day. She has been a rainmaker for almost 5 decades. She said she has never seen a market like this. There is simply no inventory. What little comes on the market is immediately swooped up, oftentimes north of asking price. Inventory is the lifeblood of realtors as they are transactionally compensated. High prices are one thing, but very low inventory is an absolute income killer.
Think about it. Who didn’t lock in 2-3% mortgages if and when they were able? Since my wife and became homeowners in 2001, every time we refinanced, I told her it was probably the last refi for us. How much lower could rates really go? Towards the end of 2020, I said, “this is REALLY the last refi for us” as the 15-year fixed rate mortgage was 2.125%.
Since then we have often discussed buying another property, more she than me. But I push back that we should wait and see where our three kids end up. My real reason is that there is no way I am giving up a 2.125% mortgage. With inflation peaking at 9% last year, the interest pays for itself and then some as current rates are more than double my mortgage rate. Additionally, as most of you know, I am not a big holder of long-term cash. I prefer to invest as much as I can in our investment strategies. So buying another property for cash is a non-starter for me.
Now extrapolate my thinking and behavior across the country. Of course, some people have to sell because of economic reasons or a job or even downsizing. But the vast majority of people are just sitting tight with their low mortgage rates. Some do not want to give that up while others cannot afford to give that up. New entrants into the home buying market who once budgeted for a 3% or 4% 30-year fixed mortgage are now faced with 7%. That effectively forces a continued rental or a cheaper or smaller property.
None of this is permanent. Boomers are still in motion and will continue to be in motion. Gen Z’ers will increasingly seek home ownership. Its just that soaring mortgage rates need time to settle down. Consumers need time to adjust, adapt and accept. And mortgage rates will come down at some point. I promise you that. However, the economy will need to significantly slow down and then teeter on recession or transition into outright recession. Be careful what you wish for.
After planning on writing about interest rates and pulling down a number of charts, I haven’t even started that topic yet. So, I guess I have something all teed up for Friday or next week.
On Friday we sold WBD, levered inverse S&P 500, some levered Russ 2K and some levered NDX. On Tuesday we bought levered S&P 500 and more DXHYX. We sold PCY, EMB, some levered NDX and some mid cap value.
