Rents, Rates, and Real Estate
With less than 24 hours before the latest rate proclamation from the magic money wizards, one wonders when low rate cake will flow from the windows of the ivory tower.
There has been a boom in multi-family units under construction. It takes years to build many of these larger projects. And so there will be pressure on rents, I think, to the downside rather than the upside when all of these units come online. - Jeffrey Gundlach, CEO of Doubleline Capital
This quote is from Jeffrey Gundlach’s latest Macro and Market update from Thursday. The entire presentation is, frankly, terrific and I think anyone who is in the “looming recession/slowdown” camp (as I obviously am) should watch it as it may serve as perhaps a guide for determining the timing of such things. Take for instance the inverted yield curve:
Yield curve inversion has generally been viewed as one of the most bulletproof signals of a recession. The duration of the current inversion is presently 20 months and counting… according to Jim Grant, this is a record. Per Jeff, you’re not in trouble until the curve un-inverts.
Here’s the full video:
Jeff, apparently a man of the people, gives this research away for free. If you’ve been following my work for any length of time, you’ve likely noticed I reference his commentary occasionally. He’s certainly one of many influences in what forms my macro thinking. His point on lower rents actually spawned a bit of a rabbit hole in my own mind that I’m now happy to share in a fairly raw format.
Lets think a bit deeper on what the ramifications could be from Jeff’s quote in the opening of this post. Lower rents would no doubt be welcomed by renters. And in theory declining rents would free up some cash to put into other things - like buying crap on Amazon AMZN 0.00%↑ or paying down all of the debt that consumers have amassed on credit cards and through “buy now, pay later” (BNPL) deals.
Paying down debt is good in my view. Buying crap? Less so. But a more direct potential consequence of lower rents would be declining values of rental properties. The more a property yields through normal renting or STRs (short term rentals like Airbnb ABNB 0.00%↑ ), the more a speculator buyer may be willing to pay for said property. And we just saw this go bonkers when debt was cheap during COVID lockdowns.
This dynamic works in the opposite direction as well. And since so many recent “homebuyers” have been committing fraud secretly of the investor variety, the declines in rents probably won’t be reflected in the woefully awful owner’s equivalent rent data until well after the AirBnBust bubble has intensified:
If those rent declines don’t actually show up in our clown show official data sets, the occasionally “data-dependent” Federal Reserve may punt on the pivot. Or in plain English, Jerome and Co may feel compelled to keep rates higher for longer even as asset prices fall.
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