It's Interest Rates, Stupid.

Welcome to the Skeptical Investor Newsletter. A frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

This week, we’re talkin’ home and rent growth forecasts, how healthy is the housing market, what to expect from the economy, I share a contrarian’s take to my own point of view and does Wall Street really crowd out homebuyers?

Let’s get into it.

We are in year 3 of a housing activity slowdown.

Why?

It’s the interest rate, stupid! (That’s a reference, for the Gen Zers out there).

As a result, home-price growth has slowed down Year-on-Year.

But guess what?

Home prices still reached another all-time high this week. That may surprise you, but it’s true.

Let’s go deeper.

According to the National Association of Realtors (NAR) the median existing-home sales price just reached $435,300, an all-time high, and a 2% increase from last month. Additionally:

What do all these things have in common? They're driven by 3+ years of high interest rates, which is increasingly affecting the housing market (keep reading).

But, a reminder. While rates may be staying elevated, we are still in the down part of the cycle. They will come down in the medium term, especially as the Campaign to Cut continues. And as interest rates do their best itsy bitsy spider impression, the 18-month forecast is looking quite positive.

IMO - I still hold that we will see rates with a 5-handle sooner than we think, within 12 months. Right around the time Fed Chair Powell becomes a lame duck. It could even happen this year. Look out for high-fives! 😆

Higher home values combined with interest rates double that of 3 years ago is an evil witch’s concoction for potential homebuyers and sellers alike. High interest rates mean an estimated 160,000 renters are stuck, unable to buy (NAR). And sellers with a 4% mortgage (or less) don’t want to trade that out. No way Jose.

Rates are lingering longer than the Reaper pepper hot sauce I’m fermenting. Obligatory pict:👇

It doesn’t mess around.

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The Atlanta Fed is out this week with a new GDP growth forecast, now 2.4%. Robust but lower than they previously estimated in June. But be Skeptical of this number, the same Atlanta Fed was projecting negative -1.5% GDP earlier this year for Q1 2025. A crazy number. This was after first projecting +2.3%. The result for Q1 ended up in the middle of both, and was skewed by one-time increases in imports.

What are they putting in their coffee down there in Atlanta?

IMO - I am skeptical of this number. This is low. And I think the Atlanta Fed knows it. I would not be surprised if their forecast starts to levitate starting in August to closer to 3% for this quarter.

Why?

Well, they are notoriously inaccurate.

Also, for Q3 on, we are about to get a big economic boost. The recent federal budget, a.k.a. the Big Beautiful Bill that just passed, and will add an estimated 1.2% boost to the US economy (TaxFoundation). And while I've been critical in the past over its deficit-inducing size (still feel strongly on this), the labor market is holding and inflation does seem to be abating. I think we may be past much of the reinflation risk, with current data.

What does the same Atlanta Fed think about inflation risks?

Glad you asked, they are out with their year-ahead inflation expectations and a survey of businesses on their projections. The result, folks expect a decline in inflation, a sharp reversal in sentiment over the last 6 months. The expectation is now 2.25%.

Why?

We will have federal spending + a much lower tax policy.

But won’t more government spending lead to inflation?

In the long term yes. yes. yes. We still need to get our debt under control or we will spin off the track (more on this in a future newsletter). This is my #1 concern for our economy long term.

But, in the short-medium term, let the good times roll. Inflation is ticking down and, importantly, the labor market is staying strong. Initial claims for jobless benefits fell last week, running at trend and below 2024.

Ironically, it may be housing inventory levels that are keeping home prices under control. Inventory is steadily normalizing. We aren’t at pre-2019 levels yet, but we’re getting there. And we need more of this to get back to “normal.”

June 2025 -> 1,082,520 (Lambert/Realtor).

In a way, the inventory backstop is giving federal lawmakers the leeway to turn the economic spigot back on. Good for homebuyers. The growing supply is welcome news, offering more choices and softer price growth. Don’t forget that a broader housing shortage persists—estimated at 4 to 7 million units nationwide—due to years of underbuilding, making terms like "housing shortage" or "low inventory" still relevant in many markets. Homebuyers are still on the sidelines, and we won’t have enough homes for them once rates drop.

For the lowest-income renters, it's even worse: a shortage of 7.1 million affordable and available rental homes. This isn't just a today problem; we're millions short of current demand, and the younger generations coming up who want to buy or rent without getting crushed.

Again, for emphasis, the increase in housing inventory available for sale is:

Why?

It’s interest rates, stupid.

And it may not be until the Fed Chair retires in May that we get to a sub-6% rate (again, I think sooner). But when we do, it‘s going to be game on. You will want to own real estate before then. Here is the infographic from the NAR.

Some positive signs in activity.

As rates stay range bound at 6.8% (+/- .5%), folks are dipping their toes back in. Mortgage purchase applications are up 3% this week, and fun fact, that is 12 consecutive weeks of double-digit YoY growth (Mohtashami).

And new home purchase cancellations are low, as we tend to see during times of pocketbook distress and forward-looking frustration. For example, during the ‘08 housing crash, homebuilder PulteGroup had a cancellation rate of 44% in Q3 2007.

Today, despite the housing market “softening,” the cancellation rate is only at 15%. Normal.

But interest rates are still taking their pound of flesh.

On a $500,000 home sale, during “normal times,” PulteGroup would spend $15,000 to $17,500 on sales incentives. Currently, it’s spending around $43,50 (ResiClub).

Housing affordability in the doldrums has an effect on rents. Rents too are making all-time highs.

But don’t get sucked into the narrative that “Wall Street is crowding out homebuyers and contributing to affordability.”

This is just not the case.

Contrary to popular belief, dumb politics and salacious headlines, Wall Street institutions are not driving rents up. Most renters rent from regular people, and it’s not even close. Most landlords are mom and pops with 10 or fewer rentals. And large institutions own fewer today, just 2.2% of the housing stock, down from of 3.2% in 2021 (Parsons).

“The investors who dominate the single-family rental market are and always have been small investors. Most institutional investors and REITs haven't been bulk buyers of individual homes in many years -- long before the jump in rates and home prices (Parsons).”

In fact, it’s the housing markets with fewer institutions active in the market that have the highest rent growth. Chart on! 👇

The South is building.

More housing units built and owned by large institutions is a positive for the housing market. Shocker, supply and demand is actually a thing.

What market grew rents at the fastest clip over the last year?

Boston.

And guess what, institutional investors comprise <1% of Boston's single-family rental market, and yet Boston led the nation in SFR rent growth.

“Boston single-family rents are running at +4.7% YOY…Ironically, many of the markets with larger institutional ownership are experiencing flat to falling rents (JBREC).”

Or, as another housing analyst put it, “The top rent growth markets are basically all ~non-institutional markets (Parsons).”

Another positive economic reminder, wages are up.

Something else that may seem shocking, wage growth is still outpacing rent growth for 31 consecutive months. I know it doesn’t feel like it, but it’s true.

Why? That darn supply and demand, is once again the culprit.

Rent growth slowed from all the construction we started when interest rates were near zero back in 2020-2021; this is a supply-induced rent slowdown story, driven by the largest wave of new apartment supply in 40+ years, which came on the market in 2024 and the beginning of 2025.

But this supply has just peaked and is about to plummet.

We won’t have the new units in the pipeline to keep this going. New housing starts are way down.

Why?

Don’t make me say it again….

The cliff is coming. Especially in apartments and cheaper single-family homes, which are sorely needed to suppress rent and home price growth. This chart is scary.

Kudos to analyst Jay Parsons for continuing to put this chart out. Multifamily construction starts trailed completions by 223k units over the last 12 months (Parsons).

We have officially stepped off the cliff and are in supply freefall.

Burn this into your brain, this is coming and you will want to be a landlord/homeowner before the effects slam the marketplace.

We are about to…