Morning Report: Investor Property Demand Declines

Vital Statistics:

S&P futures3,977 19.25
Oil (WTI)81.3 1.26
10 year government bond yield 3.80%
30 year fixed rate mortgage 6.61%

Slow news day. Stocks are flattish this morning on no real news. Bonds and MBS are flat.

Investor activity activity in the real estate market is declining, according to new research from Redfin. Investor purchases of homes fell 26% in the third quarter, as higher interest rates discouraged activity. That said, this is a decline from record levels, so investor demand still remains healthy.

This is probably good news for the first time homebuyer, who will face less competition from cash-rich investors. The biggest declines were in the hottest markets of the past couple of years, such as Phoenix, Portland or Las Vegas. In Phoenix, investor purchase activity was cut in half. Interestingly, we saw investors increase share in the Northeast including Philly and New York City.

18 months ago, investors were looking at mid-single digit cap rates with high teens price appreciation. Compared to every other asset out there, SFR rentals were a lay-up. Now that home price appreciation is returning to historical levels we should see investors exit the space and go into fixed income assets which are much more attractive today than they were 18 months ago.

I haven’t had much to say about the FTX scandal, but one question that comes up is whether this could lead to another 2008. IMO, the chance of that happening is pretty much close to zero. 2008 was the aftermath of a burst residential real estate bubble, which are the Hurricane Katrinas of banking and economics.

Crypto is a much smaller market – most people don’t own it, and those that do have it as a part of their overall investment portfolio. It isn’t like a primary residence, which makes up the bulk of someone’s net worth. FTX will be more like an Enron than a burst real estate bubble – a cautionary tale.

The government will undoubtedly seize on FTX to introduce their own digital dollar and to drive out competitors. The problem for the government is people like crypto precisely because it is not controlled by the government. It can’t be inflated away via monetary or fiscal policy. And people nervous about potential “social credit” schemes taking place in the US will also find the asset attractive.

FTX was an ESG darling, which shows the pitfalls of investing with people who speak the right lingo but can’t run a business.

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