Two Chicks and a Hammer. Flip or Flop?

Las Vegas Flip.  Fix it and Flip It. 

​There is no end to the television shows about buying a rundown house, repairing it, and selling it for a profit.  It’s like day trading internet stocks in 1999, everyone is quitting their day jobs to get into the racket. 
 
And just like in 1999, these people do not understand about the risk they are taking, where the trouble might come from, and what reward they should expect for taking these risks.
 
Real estate is doing well, but not all parts of the sector.  In the commercial space, offices and retail are getting hammered while warehouse, distribution and logistics centers are trending higher. 
 
The genuine star of real estate, however, is the residential group, specifically single-family homes.  Large rental divisions are not keeping up because of COVID-19 related moratoriums on rental collection.  It is the American dream to own a home, and that dream is reflecting one of the hottest markets in the global economy today.
 
Possibly from the beginning of human economic activity until recently, real estate went up during inflationary times.  Inflation simply means rising prices, which can take place in specific pockets as well as the big picture. 
 
Internet stocks experienced inflation in 1999 while everything else was deflating.  The last time the US economy saw broad based inflation was the 1970’s as oil prices shot up and everything else from food to real estate pushed up.  Real estate has always been a way to protect and profit during periods of inflation. 
 
Well, not anymore.
 
As long as America avoids a full-scale war with China or seeing it’s dollar crash, we will not likely see another period of rapidly rising prices in the stuff we buy to survive.  I realize this is a shocking statement to some of you, especially if you worked during the 1970s. 
 
But carve my words in stone, bury them in a time capsule, dig it up every 10 years for a century and I will still be proven correct. 
 
If inflation is dead (for the time being), why are residential real estate prices going up so much lately?  Interest rates.  The market is being entirely driven by the all-time low interest rate environment we have been in since March.  I know a lot of people attribute it to COVID. 
 
Work from home is spiking home related projects.  Lower spending on entertainment and other areas is increasing spending power for the house.  None of that matters nearly as much as interest rates. 
 
If 15-year mortgages were five percent instead of half that amount, the residential market wouldn’t be this crazy. 
 
I think it might be all about the low interest rates. 
 
Don’t believe me? Here is the proof.
 
Global interest rates are primarily set by the US government 10-year bond.  The 10-year is the benchmark that everything else pings off.  America was paying just under two percent in January to borrow money for 10 years.  That rate crashed to less than a half a percent in early March as world economies came to a stop. 
 
Interest rates then began to fall in every corner until a few months ago when people could get a 15-year mortgage at less than three percent.  Free money to buy a house, and that is exactly what people have been doing.
 
Housing related stocks have soared since March as the tide has lifted every boat in the group.  Home Depot stock has doubled.  ITB, a basket of home building companies, is up 130%.  PKB, a basket of construction related firms, has advanced 150%, and PFSI, a mortgage service provider, has screamed ahead by 350%!  It has been 15 years since this group did this well.
 
Here is the thing.  The US 10-year plodded along near those low levels from late March to early June, when a spike took it to 95 basis points (just under one percent, or 100 basis points). 
 
All housing related stocks immediately pulled back.  The 10-year receded until the middle of August and guess what?  All housing related stocks went back up.  As the 10-year jumped in August, housing stocks fell again. 
The correlation between interest rates and the housing market will stay in place for quite a while.  It is unlikely that America will ever see a crash in the housing market was like 2008, when prices in some areas like San Diego and Las Vegas dropped by 60% or more. 
 
If interest rates keep rising, however, home prices will stop rising as fast and may even go slightly negative.  That will be enough to put the Two Chicks and a Hammer back in the toolbox for a bit. 
The federal reserve still has enough ammunition and a conducive environment to maintain their agenda of steady, but somewhat low interest rates for a few years at least.  The 10-year is likely locked in a trading range of 65 to 140 basis points for, well, 10 years. 
 
The aforementioned are some of the best tools you need to keep your investing house in tip-top shape.
 
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Bottom Line
 
There are several internal stock market indicators that have exceeded their September 2nd levels, while stock market prices have yet to do so.  The 80-year history of these indicators suggests prices will follow over coming months. 
 
I fully appreciate that many of you are nervous, anxious, and concerned.  I am not.  And when it comes to your investments, I suggest you should not be either.  Besides, the government stimulus packages will continue to be rolled out in 2021.
 
Stocks may continue the recent turbulent behavior for another few weeks, but the best probability outcome between now and February is a resumption of the intermediate uptrend which should take stocks to new highs and beyond.

Continued success,
d-seven

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What are your thoughts? Comment below.

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