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’ key economic growth indicators, inflation looks about over, and how to build more housing and keep rental growth down.

Let’s get into it.

I’m out in Big Sky country skiing for a few days, so today will be a quick take. But we’ll see how ranty I feel like getting by coffee #3.

But that said, there was a lot of housing and economic data released last week.

Let’s dig through some of it.

Rates dipped down to 5.9% this week!

…continuing their slide downward over the 12 months.

Yeeeeeeee.

Again, I am holding on to my prediction of lower rates in the 5s by year's end. I expect this stair step down in mortgage rates to continue, approaching 5.5%.

Anecdote: at our real estate brokerage, incoming interest in real estate investment property purchases has jumped ~33% over the last 7 days.

Folks are taking notice.

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Gross domestic product (GDP) rose an anemic 1.4%, in the 4th quarter last year, well below Wall Street estimates for a 2.5% gain (BEA).

The department estimated that the government shutdown last fall subtracted a full 1% from economic growth. The shutdown’s drag was underestimated (and, fun fact, occurred after many forecasts were finalized) and was compounded by federal spending dropping significantly, 16.6% (although lower federal spending should result in future GDP growth).

On the flip side, the main contributors to that smaller GDP growth were increases in consumer spending and investment.

Real final sales to private domestic purchasers, the sum of consumer spending and gross private fixed investment, increased 2.4% in the fourth quarter, compared with an increase of 2.9% in the third quarter. And accelerations in private investment were up, such as in AI infrastructure and intellectual property products (up 7.4%).

The consumer is still feeling quite spendy. Personal consumption expenditures were up 3.7% in the fourth quarter, compared with an increase of 3.4% in the third quarter.

Economic Anecdote: Heavy Trucking Freight is UP

Flatbed rejection rates have surged to 40%, above 2021 COVD extremes. A bullish signal for heavy industrial manufacturing activity ramping up.

Flatbed rejection rates measure the % of contracted freight loads offered by shippers to carriers using flatbed trailers that are rejected by the carriers. High rates indicate tight capacity and rising spot market prices, often driven by supply-demand imbalances in sectors like construction or manufacturing.

“This sharp increase signals booming demand for industrial freight — steel, lumber, and machinery — as carriers reject contract loads for higher-paying spot shipments…pointing to accelerating activity in manufacturing, construction, and heavy industry across the U.S (FA).”

Bullish.

The personal consumption expenditures (PCE) price index (also a key measure of inflation tracked by the Fed) increased 2.9%, compared with an increase of 2.8%. But, excluding those more volatile food and energy prices, the core PCE price index increased just 2.7%, compared with an increase of 2.9% last quarter.

These inflation numbers were as expected.

We don’t have January data yet because of the lingering data hangover from the government shutdown last fall.

Frankly, this growth was disappointing, even with the 1% mulligan from the government shutdown. I was expecting closer to 3.5-4%.

However, come April-July, I expect a much more robust rebound number, driven by tailwinds from the estimated 22% boost in tax return cash from last year’s tax returns.

Trueflation numbers - a measure I prefer for its far more accurate shelter cost data - for January were far lower at 1.68%. This index uses millions of actual price points at the point of purchase, sourced from multiple providers, to calculate the most current, comprehensive, and unbiased US inflation indexes.

If you care about or track inflation or mortgage rates. Bookmark their posts: here.

This PCE rate has been cooling through January, dropping below the Federal Reserve’s 2% target. So far in February, it’s edging back up, but still below 2%.

Of note: The official BEA government PCE inflation is hot (above 2%) because their rent/shelter data SUCK and lag 12+ months, making it highly inaccurate in times when the market is shifting. I wrote a long piece on how bad the government data is when it comes to all shelter-type housing data. Hence, private sources like Truflation are quite valuable for us investors to track.

Truflation rent index actually shows DEFLATION, and we in the industry all see this. From large institutional investors to mom and pops, rents are flat to slightly down over the trailing 12 months. Neither the BEA nor the BLS household surveys have yet registered new shelter numbers.

The Atlanta Fed is one of the only government institutions signaling a slowdown in inflation: their expectations measure just now crossed 2% to 1.9%, the lowest meausre since 2019.

This acknowledgement is a big deal, and I expect it to lead to continued lower inflation numbers.

Take notice.

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Ok, back to business.

Real estate is still moving, even if slower than pre-COVID. And there are some new green shoots.

Since falling off a cliff, new homes are selling like check out counter candy, popping up to nearly ~750k, a multi-year high.

Progress.

Active listings on the market for sale are more plentiful than this time last year, although still in a normalizing pattern below pre-COVID levels.

But, all real estate is local.

In my home market of Nashville, things are a little different. New listings are down a whopping 35% (likely because of the crazy cold snap we had last month) but all other metrics - from prices to total inventory - are up.

Here is a full metric snapshot from the MLS in Nashville.

Bullish.

All housing is local.

And the real crisis is not so much because of high mortgage rates, which targeted policies and Fed rate cuts will lower.

The real crisis is in the supply of homes.

This has the most outsized, long-term effect on home price growth.

We have to tackle local building, zoning, over-engineered codes, impact fees and permitting regulations.

These are what’re strangling homebuilding.

According to the National Association of Homebuilders, regulatory policy accounts for….

…checks notes…

25% of homebuilding and 40% of multi-family development costs (NAHB)!

Ask any homebuilder.

Ask your local contractor.

Ask your neighbor, who can’t add 2 beds and baths over their garage for their expanding family because the permitting and time make it cost-prohibitive, or, even worse, the city planning official is having a bad day and just wants to tell everyone “no” (I’ve experienced this firsthand; it’s bullshit).

They’ll all tell you.

Just look at the rental rates vs housing building permits:

More housing built = lower rents & slower home price growth.

We need to build more housing

How did we get here?

The problem emerged out of the 2008 Great Financial Crisis, where developers and banks didn’t build and fund enough housing, leading to a lost 2 decades of limited housing supply coming on market, then following that with too much stimulus to restart things, spiking inflation and high prices mixed, then pouring more gasoline on the fire by accelerating demand via the Fed’s zero interest rate policy in reaction to the COVID pandemic scare.

Ahhhhh oh the humanity! (Seriously, please stop this seesaw @TheFED).

So, how do we alter the supply of homes?

Not with hollow policies and unfounded feel-good politics, like, for example, banning institutional investors from owning single-family real estate, of which both political parties are bandwagon jumping.

We will know that the Administration and Congress are serious about tackling housing affordability ONLY when they do one thing:

They threaten states and localities by withholding federal dollars until they change these insanely restrictive rat’s nest of home and housing building policies.

This is the cornerstone to fixing housing affordability.

And it will take years to implement.

I hope the Administration takes this step, and utilizes it as the cornerstone of an “emergency declaration on housing.”

Options from this Administration could include:

In short, we need a Manhattan Project for Housing.

A plan that is big and audacious.

Hell, we built the Hoover Dam and Golden Gate Bridge in ~5 years, at the same time, during the Great Depression, with 1930s technology!

Why aren’t we still doing this?!

It’s time to get building in America.

Until next time. Stay Curious. Stay Skeptical.

Herzliche Grüße,

-The Skeptical Investor

—

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