Now both the Fed and Bank of America are reversing their forecast for a new recession. What does it mean for real estate investors? What if they are wrong?

Which Way Is The Economy Headed?

In spite of projecting a $50B loss just a few weeks ago, Bank of America has now joined the Federal Reserve’s messaging that we no longer need to worry about a looming recession.

Recent GDP data suggests that the economy is growing well again. Though other data compilers suggest business tenants are falling delinquent at high rates, and foreclosures are rising again.

Some may say that this disparity is due to misleading averages. With a small percentage of people and companies making outsized profits, and the majority seeing their finances contract.

Of course, while fundamentals are the reality we have to build with, as we’ve experienced in the past, sentiment alone can drive or crash economies and individual market sectors.

What New Optimism Means For The Real Estate Market

New optimism in the economy, especially driven by the Fed and major banks is likely to lead to more interest rate hikes, as well as an easing of lending. With more private capital flowing as well.

In the current environment, this would also mean fueling inflation. As well as the potential for more hiring and salvaging jobs that may have been in question a few weeks ago.

This would support more confidence in buying and leasing both residential and commercial real estate. In turn, driving up prices even further.

What Happens If The Experts Are Wrong?

Of course, those top headline news stories are not always something you can rely on. No one gets it right 100% of the time. Especially when it comes to pinpointing turns in economic and market cycles.

If this rebound does not appear, then we could see even more layoffs, loan defaults, and bankruptcies.

Perhaps what is most important as an investor is to remember that every segment of the market, and every location is on its own timing in the cycle. It’s about finding the gaps, and bringing together the distressed opportunities and motivated sellers, with motivated buyers who see the value in paying more. Focus on this, and the fluctuating forecasts don’t have to impact you and your income or wealth. Decide to control your own destiny.

The president has been making a big and very vocal push to end ‘junk fees’, and to pressure companies into providing all in upfront pricing quotes. How is this being applied in the real estate and finance space? What may it mean for investors?

The Push To End Junk Fees

A recent press conference led by the president heralded some of the brands that have reportedly been shifting away from layers of fragmented fees, to single pricing models. Also called ‘all in upfront pricing’.

There are certainly some sneaky fees and charges that should be done away with, and which really seem to be predatory and victimize those that can least afford it.

Of course, the claim that this change will save American consumers $5B in spending, may be a huge stretch. It is more likely that in many cases fees are just lumped together, and prices may even go up.

The Irony

There appears to be one huge hole and ironic exception to this plan. Which is not including taxes in these so called all in upfront price quotes.

This really destroys the whole concept. It’s an American quirk that you don’t have in other countries, and which may well have inspired all of these other junk fees and fragmented pricing, due to top down leadership examples.

Until this is fixed we won’t have real upfront pricing, all in pricing, or a good customer experience.

We’ve already seen some industries being disrupted by innovative companies that did this on their own, and actually provided less expensive options, for superior customer service and deals. Like MetroPCS in the mobile phone service space. It may be this street level peer pressure which is really most effective in bringing change, and reshaping the players in all industries.

How It’s Being Applied

Some examples of how this trend is showing up may include:

Airbnb’s shift to offering all in nightly pricing options

Banks eliminating overdraft and service fees (though not on mortgages yet)

Simplified pricing on event tickets

Elimination of renter security deposits in favor of monthly fees or higher rents

Summary

Simplified pricing is just common sense. It provides a better user experience, and a more efficient experience, with higher lead conversion potential for businesses. It can also be a fantastic way to disrupt your space, and stand out from the competition. It would just be nice if this also applied to taxes.

This is changing the competitive landscape, and you should be considering your pricing strategy and revenue streams to stay ahead of it.

The latest economic forecast from mortgage giant Fannie Mae predicts house prices will fall by over 6% over the next two years. That doesn’t sound like much, but investors, and consumers also need to understand what they are heralding as loudly.

Home Prices Are Already Down 4x More Than They Predicted

Fannie Mae previously predicted that house prices would only fall 1.5% this year, and 1.4% next year. So, we are already talking about 2-4x deeper price drops, and many might argue it hasn’t even really started yet.

Or course this is in direct contrast to Goldman Sachs’ forecast, which says we’ve already seen those levels of drops and should bottom out this summer.

Many property owners, and recent sellers may also tell you that prices are already down even double, triple, or more than this forecast.

They Can Revise Back Data

Just as the Realtor’s Association back revised four years of data to show much lower numbers after 2008, any of these report publishers could go back later and say the cuts have already been 50% or greater more than they announced.

It’s All Local

This 6% number from Fannie Mae is a national ‘average’. Which really means that in some areas prices may still be going up by 30%, and they could be going down by 36% in others.

Make sure you have your own intelligence and pulse on the local market.

Low Interest Rates Are Irrelevant In many Cases

Fannie Mae is using the fact that interest rates have been low to claim there won’t be rate shock like in 2006 to 2008, and in turn no major crisis.

However, in the past year mortgage rates seem to have more than doubled. A much bigger increase than in 2008. Buyers were also paying 125% or more of actual values among the fierce competition. Many will still walk away. Many won’t be able to refinance. Many will fall behind and into default for other reasons.

Defaults Are Already Up

The latest bank data published by DistressedPro shows that defaults on both residential and commercial mortgage loans reverse course and started increasing again in the last three months of 2022.

While there haven’t been a tsunami of REOs yet, expect more defaults and foreclosures coming.

It’s a great time to be wholesaling houses on the way down this ladder, and making substantial profits. With both discounts available, and those buying into these forecasts expecting the market to rebound soon.

New data suggests that the shift to the new remote work economy has been responsible for the bulk of house price appreciation.

How much can investors expect this to continue to add to home values? What else may compound this shift in equity and wealth?

60% Of House Price Growth Linked To Going Remote

Moving to remote work has created hundreds of billions in wealth over the past few years.

According to data from San Francisco’s Federal Reserve Bank, 60% of house price appreciation is directly tied to the move to remote working.

Even though we have already seen the majority of workers go remote, some still haven’t made the switch yet. Others are remote, but haven’t yet relocated. Leaving more room for this transformation to drive wealth creation.

The 1% Rule

Coverage of the data by Bloomberg shows a direct correlation between more workers going remote, and house prices. Saying that for every 1% that switch to remote work, house prices go up by 0.9%.

With 20% to 40% of the workforce still left to make the shift, there could be a lot more fuel for house prices left in the tank.

Where The Money Is Going

Of course, these house price increases do vary greatly depending on where remote workers are moving.

Where they are relocating to is seeing substantial house price growth. While the areas that they are snubbing and leaving behind are suffering equal losses.

This is clearly likely to be compounded by the need for affordable housing, and a desire for a better quality of life, less crime, and more enjoyable places to live.

It is true that a huge effort is being made to promote a return to the office. Mostly by those that don’t know how to operate and stay competitive in the new economy, or who have made misguided investments in office buildings which are no longer indeed. It is unlikely that is going to stick, even if they invest millions in hyping it up.

Investing

The big question for investors is whether they will be investing for the growth in the areas remote workers are flocking to. Or investing in the distressed areas where prices are going down, and negative equity is growing.