Skip to content
Buying & Selling Real Estate

User Stats

14
Posts
43
Votes
Logan Causey
  • Specialist
  • Wilmington, NC
43
Votes |
14
Posts

Yield Curve Inversion, Buyers market around the corner?

Logan Causey
  • Specialist
  • Wilmington, NC
Posted Aug 15 2019, 05:28

I'm curious to know how many investors have been waiting and preparing for this time to come, I personally believe what's coming is going to be worse than '08 and would like to know the thoughts of more experienced investors. 

User Stats

144
Posts
171
Votes
Joshua Myers
Pro Member
  • Rental Property Investor
  • Columbus, OH
171
Votes |
144
Posts
Joshua Myers
Pro Member
  • Rental Property Investor
  • Columbus, OH
Replied Aug 16 2019, 16:21

Obviously something is going on in the economy that is leading to the yield inversion, but I don't think it's as simplistic as everyone getting drunk and over leveraging on low interest rates. Household debt is a little high, but debt service costs aren't that much of a worry right now. The student loan "crisis" is an issue, but the media are making it seem like a bigger drag on the economy than it is in reality.

The more likely answer is that the aggressive measures from the ECB, Japan and, to a lesser extent, Swizterland are behind the recent price movements. These central banks are creating money to buy government (and corporate) debt faster than it can be issued. This is pushing private capital out of these markets. That capital needs somewhere to go, preferably risk free, positive yield government debt denominated in a stable currency......AKA 10 and 30 year US treasuries. It's a supply and demand issue. 

The thing to look for is how the yield curve responds to:

1. The next ECB shock and awe program in September

2. The deficit induced trillion dollar US bond sales about to hit the market 

User Stats

147
Posts
54
Votes
Robert Arquilla
  • Contractor
  • Warren, OH
54
Votes |
147
Posts
Robert Arquilla
  • Contractor
  • Warren, OH
Replied Aug 16 2019, 16:44

There’s a pretty good episode (#1145) on the Joe Rogan podcast on this topic with Peter Schiff. Very interesting and worth the listen!

BiggerPockets logo
Meet Investor-Friendly Agents
|
BiggerPockets
Network with top investor-friendly agents who can help you find, analyze, and close your next deal.

User Stats

174
Posts
249
Votes
George Gammon
  • Flipper/Rehabber
  • Las Vegas, NV
249
Votes |
174
Posts
George Gammon
  • Flipper/Rehabber
  • Las Vegas, NV
Replied Aug 16 2019, 17:20

@Logan Causey I'd strongly encourage you to read @Calvin Lin post on this thread.  He obviously has a much more comprehensive understanding of the current macro environment than most.   

Anyone who tells you the RE market is insulated because lending standards are tighter doesn't know what they're talking about.  Ignore them.  Additionally ignore anyone who tells you anything along the lines of "don't wait to buy real estate, buy real estate and wait." 

Most RE investors just don't understand macro risk and rationalize it away because they're emotionally and financially invested.

Calvins outline of current conditions was excellent, I can't improve on what he said but I might be able to expand on it to give you an even clearer picture, and some actionable advice.  

Many reference news headlines over the past few years claiming we're in another housing bubble.  Their point is everyones been saying it and it hasn't happened so the yield curve inverting is just another doom and gloom predictor that will come and go.  

Comparing the yield curve inverting to other news headlines is like comparing advice given by a homeless person and advice given by Warren Buffett.  FYI, the yield curve is Warren.  Let's look at a chart to put things in perspective.   

Please note: the current yield on a 1 year is 1.72 and the current yield on a 10 year is 1.52.  This has literally predicted every recession since 1953.  

Nothing is ever certain, we have to look at probabilities.  Based on the chart above the probability of the US going into recession is extremely high.  But so what.  The US has been through recessions before w/o real estate prices being affected.  

We need to first understand what 3 things now drive the US economy:

1.  Debt

2.  Confidence 

3.  Asset prices

Just picture a US economy with half the debt.  What is the USD backed by other than confidence?  Consumer spending (70% of economy) driven by confidence.  How about asset prices?  What does the US economy look like if housing, stocks, bonds all take a 50% haircut?  

 So why are the risks so great? What are most investors missing as they whistle past the graveyard?  

First and foremost corporate debt.  

Artificially low interest rates create mal investment.  Everyone knows this.  After the dot com bust artificially low rates were vital to creating the housing bubble, which was a credit bubble (mal investment.)  

While it is true, we don't have a consumer debt bubble like we did in 2007, although there's a strong argument for auto/student loan debt being the next consumer shoe to drop.  But this isn't likely systemic like the housing debt bubble was in 2007.  

The big problem is, all that consumer debt we had in 07 has moved to corporate balance sheets.  see chart

So what's the big deal?  The reason this is such a problem is what the corporations used the debt to purchase.  see chart

Corporations didn't use the money to build more factories or become more competitive, they used the debt to buy back their own shares.  Also note: institutional buying, where did the institutions go?  Into the corporate bond market in search of yield because the Fed dropped rates to zero.  

Are you starting to see the iceberg in front of the titanic? ;) 

So corporations borrowed a ton of artificially cheap money (more debt) to buy back shares and artificially increase their share price (higher asset prices) making the stock market go up and give the illusion of prosperity (public confidence).

Remember, the economy is driven by 1. Debt 2. asset prices and 3. confidence.

What happens if stocks go down for more than 6 months?  

Step 1 - Corporate balance sheets deteriorate because so much of their balance sheets consist of their own stock.

Step 2 - The corporate debt gets downgraded because of deteriorating balance sheets.

Step 3 - Institutions have to sell the downgraded corp debt because by law they can't own "junk" or high yield debt.

Step 4 - No buyers for stocks or corporate debt.

Step 5 - A massive negative feedback loop where lower stock prices create lower debt prices and lower debt prices create lower stock prices.

Then debt seizes, stocks get cut in half (which is where they would likely be without the corp buy backs), and confidence goes to 2009 levels if not worse.  Also, think about what happens to retiree's pensions, if stocks and bonds go down by 50%...pensions go bust.  It gets ugly fast.

What are the likely side effects for RE investors?  

1.  Much higher interest rates on the 10 year, so mortgages.  If you can get a loan which will be tough because the credit markets will be near frozen.  That means lower home prices.  

2.  Unemployment will skyrocket putting downward pressure on rents.  Usually higher unemployment would mean more renters, but not if unemployment goes into double digits and people are struggling to find work.  

3.  Rolling debt over at much higher interest rates so positive cash flow props will go negative.  

I could go on but you can see how we don't need a consumer credit bust or housing centric problem to create a massive housing problem.  

Please note:  These are probable outcomes, not certain outcomes.  As an example, the Fed would possibly drop the fed funds rate into negative territory and do a massive round of QE 4 to bail out the corporate bond market.  An MMT democrat could take the white house and print trillions to bail out consumers.  But something has to give, there has to be some release valve.  That release valve would most likely be the USD.  Which in turn means 1970's 2.0, high inflation, high unemployment and high long term interest rates.  

I'd encourage everyone reading this to stress test your RE portfolio using the 1970's metrics... 9%+ unemployment, 10% inflation, and double digit interest rates on the 10 year. How would it do?  My guess is not well.  

My point is, anyone brushing off the yield curve doesn't know what they don't know.  Don't fall into this trap and ignore the fact if we have even a small recession the US has HUGE problems, far greater than 2007. 

I'm not saying US RE prices won't go up.  US could be the next Japan and have ZIRP for years.  What I am saying is it's less probable.  Use the info in this post and a few other very astute posts on this thread to make a decision based on facts and economic reality, not emotion and ignorance.  

Actionable takeaways:

1.  If you buy now, use 30 year fixed rate debt <60% LTV. If the USD is the release valve you'll make a fortune. If it's not you can refi at lower rates, there's almost no downside.

2.  Buy starter homes under the cost of construction with 1% R/V ratios in great neighborhoods.  It's the most you can do to limit your downside.  

3.  5%-10% of your portfolio in gold

4.  Consider investing in RE outside the US in markets where theres very little debt in the RE market.  The world is drowning in debt, this will have to be written off or inflated away.  Both scenarios favor non leveraged RE markets.

Hope that helps,

User Stats

16
Posts
6
Votes
Rich Hanlin
Pro Member
  • Real Estate Broker
  • Suwanee GA
6
Votes |
16
Posts
Rich Hanlin
Pro Member
  • Real Estate Broker
  • Suwanee GA
Replied Aug 16 2019, 17:28

@Logan Causey

Back in 2008 I was doing 100 percent loan to value , stated income, investment and owner occupied purchase and refinance loans. We are no where near that today. People still spend more than they bring home, and people still use their equity as a cash register. But nothing like back in 2008. I don’t see a correction of that magnitude in today’s market.

User Stats

39,727
Posts
58,395
Votes
Jay Hinrichs#1 All Forums Contributor
  • Real Estate Broker
  • Lake Oswego OR Summerlin, NV
58,395
Votes |
39,727
Posts
Jay Hinrichs#1 All Forums Contributor
  • Real Estate Broker
  • Lake Oswego OR Summerlin, NV
Replied Aug 16 2019, 17:30

@George Gammon   seems to me that consumer confidence and media hype and internet stories really can affect what people do.. and they just stop spending .. 

Also not being a student of economics I just get a feeling.. and last year I had the feeling.  so when I give my little talks at some of the REIAS etc my talk this year is what I call pivoting.. and in our business world we try to limit debt.. not juice paper returns based on leverage.. So if we do have to go into hold mode  we have little to no debt. 

User Stats

174
Posts
249
Votes
George Gammon
  • Flipper/Rehabber
  • Las Vegas, NV
249
Votes |
174
Posts
George Gammon
  • Flipper/Rehabber
  • Las Vegas, NV
Replied Aug 16 2019, 18:04
Originally posted by @Jay Hinrichs:

@George Gammon   seems to me that consumer confidence and media hype and internet stories really can affect what people do.. and they just stop spending .. 

Also not being a student of economics I just get a feeling.. and last year I had the feeling.  so when I give my little talks at some of the REIAS etc my talk this year is what I call pivoting.. and in our business world we try to limit debt.. not juice paper returns based on leverage.. So if we do have to go into hold mode  we have little to no debt. 

 Great points Jay.  It's why the Fed will never predict a recession because they know it'll be a self fulfilling prophecy.  And I want to emphasize what probably wasn't clear in my above post.  I'm not saying people should run into caves and buy canned goods.  

I'm saying it's very prudent to prioritize capital preservation, then yields, when you see a yield curve inversion and most investors would be wise to study macro as much as they study micro.

User Stats

39,727
Posts
58,395
Votes
Jay Hinrichs#1 All Forums Contributor
  • Real Estate Broker
  • Lake Oswego OR Summerlin, NV
58,395
Votes |
39,727
Posts
Jay Hinrichs#1 All Forums Contributor
  • Real Estate Broker
  • Lake Oswego OR Summerlin, NV
Replied Aug 16 2019, 18:07
Originally posted by @George Gammon:
Originally posted by @Jay Hinrichs:

@George Gammon   seems to me that consumer confidence and media hype and internet stories really can affect what people do.. and they just stop spending .. 

Also not being a student of economics I just get a feeling.. and last year I had the feeling.  so when I give my little talks at some of the REIAS etc my talk this year is what I call pivoting.. and in our business world we try to limit debt.. not juice paper returns based on leverage.. So if we do have to go into hold mode  we have little to no debt. 

 Great points Jay.  It's why the Fed will never predict a recession because they know it'll be a self fulfilling prophecy.  And I want to emphasize what probably wasn't clear in my above post.  I'm not saying people should run into caves and buy canned goods.  

I'm saying it's very prudent to prioritize capital preservation, then yields, when you see a yield curve inversion and most investors would be wise to study macro as much as they study micro.

When I get back to Summerlin for my 6.5 months of the year lets do lunch !!!  :)

User Stats

5
Posts
0
Votes
Shawn Gwaltney
  • Chesterfield, MO
0
Votes |
5
Posts
Shawn Gwaltney
  • Chesterfield, MO
Replied Aug 16 2019, 18:12

The market is always cyclical and there will be a correction.  In my opinion were already seeing the signs, but the consumers are slow to get the memo.  There are so many factors and moving levers that of course it's difficult to predict the intensity of a correction.  It is however inevitable, but I do not believe we will see the extent of 2008 as others have mentioned based on the new lending laws.

The corrections are the greatest opportunity for wealth, question is, are you prepared?

User Stats

16,524
Posts
28,434
Votes
Russell Brazil
  • Real Estate Agent
  • Washington, D.C.
28,434
Votes |
16,524
Posts
Russell Brazil
  • Real Estate Agent
  • Washington, D.C.
ModeratorReplied Aug 16 2019, 18:28

Its nice to throw all the macro economic information out there, but it does no good if it is not complete.

The 10 year to 2 year treasury yield curve inversion has preceded every recession of the last 50 years or so. But the yield curve in those instances has remained inverted for roughly 90 days. We had an inversion yesterday that lasted less than 24 hours.  

Also, while every recession of recent history has been preceeded by the inversion, not all inversions have been followed by a recession. 

You say anyone brushing off the yield curve doesn't know what they dont know....but why do you feel a a few hours of an inversion are significant when not once in modern financial history has it been significant? 

All of your info sounds laced more with conspiracy theories as it is picked and chosen to support confirmation bias as opposed to real analysis. 

Are we heading into a recession at some point in the near future? Yes, because that is statistically likely since we are in the 2nd longest expansion on record already. A recession could start tomorrow, and if it did, that would remove the 90 day yield inversion as a failed predictor, or we could expand past the next 2 years and become the longest expansion then in history.  No one know. But what we do know is there is always a recession on the near horizon because the average length of a growth period is just over 3 years.

District Invest Group Logo

User Stats

174
Posts
249
Votes
George Gammon
  • Flipper/Rehabber
  • Las Vegas, NV
249
Votes |
174
Posts
George Gammon
  • Flipper/Rehabber
  • Las Vegas, NV
Replied Aug 16 2019, 19:13
Originally posted by @Jay Hinrichs:
Originally posted by @George Gammon:
Originally posted by @Jay Hinrichs:

@George Gammon   seems to me that consumer confidence and media hype and internet stories really can affect what people do.. and they just stop spending .. 

Also not being a student of economics I just get a feeling.. and last year I had the feeling.  so when I give my little talks at some of the REIAS etc my talk this year is what I call pivoting.. and in our business world we try to limit debt.. not juice paper returns based on leverage.. So if we do have to go into hold mode  we have little to no debt. 

 Great points Jay.  It's why the Fed will never predict a recession because they know it'll be a self fulfilling prophecy.  And I want to emphasize what probably wasn't clear in my above post.  I'm not saying people should run into caves and buy canned goods.  

I'm saying it's very prudent to prioritize capital preservation, then yields, when you see a yield curve inversion and most investors would be wise to study macro as much as they study micro.

When I get back to Summerlin for my 6.5 months of the year lets do lunch !!!  :)

I'd love to Jay. I currently don't live there, I spend most of my time overseas, but I go back often to visit family.  Let me know when you're there and if our travel plans cross we'll make it happen.  

User Stats

165
Posts
88
Votes
Meir Greenblatt
  • Rental Property Investor
  • Houston TX / Tacoma WA.
88
Votes |
165
Posts
Meir Greenblatt
  • Rental Property Investor
  • Houston TX / Tacoma WA.
Replied Aug 16 2019, 20:43

@Logan Causey

They are only indicators, the thing is that most people can't predict the market crash, if it was so simple as this then we all would have been rich.

It is very hard to get lones compared to 08,

If I remember correctly the default rate went to 4% in 07 , we are not even close.

I started listening to the podcasts 1 to 50 in the last 2 months, and its fascinating to here how every month someone is trying to predict the Market crash since 2012-13.

Trust me it will not happen when we are prepared to it!

User Stats

15,114
Posts
11,158
Votes
Joel Owens
  • Real Estate Broker
  • Canton, GA
11,158
Votes |
15,114
Posts
Joel Owens
  • Real Estate Broker
  • Canton, GA
ModeratorReplied Aug 16 2019, 23:21

I think it can hit certain investors more than others.

A big pool of investors might have 1 house as a rental investment. They look at 100 to 200 a month cash flow with building equity over time. In a down turn the tenants typically have job hours cut back or lose their jobs. Right now it seems there are more job openings and demand than people for them. I saw this last downturn where jobs were plentiful and then things dropped out and people were desperate for a job. The job market swung back into the employers favor.

So the investor with 1 house rental can really have a hard time hanging on in a downturn when they have to evict a tenant, take partial rents, reduce rents, etc. 

My commercial clients are on a different level. They can buy some now and then buy even more and more in a down turn. It's all about the equity multiples on the next upswing. The cash flow is just icing on the cake to them as they do not need the money. These investors typically have 8 to 9 figures of wealth and substantial cash flows already. 

Whatever you buy you have to be careful and cautious giving yourself plenty of room for error and adjustment for cycles. If as some other investors put it you have to (underwrite to perfection) to make a deal work you are asking for trouble. In the short term those deals might work but when little blips hit the markets the property can become a money loser and affect other positive properties of a portfolio. I saw that last downturn where investors with a portfolio bought some properties right and others they overpaid or used the wrong financing. So the great properties were now feeding the loser properties to keep them afloat in the portfolio and the investor was now experiencing overall breakeven to negative monthly returns.       

BiggerPockets logo
BiggerPockets
|
Sponsored
Find an investor-friendly agent in your market TODAY Get matched with our network of trusted, local, investor friendly agents in under 2 minutes

User Stats

1,246
Posts
331
Votes
Rich Hupper
  • Broker / Investor
  • Tewksbury, MA
331
Votes |
1,246
Posts
Rich Hupper
  • Broker / Investor
  • Tewksbury, MA
Replied Aug 17 2019, 08:45

Correct me if I am wrong but the "deals" of 08 were actually created years prior when owners gave up on their mortgage obligations due to the adjustable rate mortgages and let the properties go. Thus creating so many neglected properties that were worth far less than the balances on the mortgages. This probably was also compounded with decreasing real estate values in general. 

User Stats

102
Posts
95
Votes
Jim Chuong
  • Rental Property Investor
  • Toronto, Canada
95
Votes |
102
Posts
Jim Chuong
  • Rental Property Investor
  • Toronto, Canada
Replied Aug 17 2019, 09:14

@Logan Causey From my perspective as a Canadian, 2008 was the beginning of getting free US rentals. If you’re right and we’re going to experience something “worse”, then I’ll be extremely happy. But I’m doubtful that lightening will strike twice

User Stats

106
Posts
44
Votes
Justin Rank
  • Investor
  • Winhall, VT
44
Votes |
106
Posts
Justin Rank
  • Investor
  • Winhall, VT
Replied Aug 17 2019, 10:10

At the end of the day, we're closer to a top than a bottom. Don't be overly aggressive on deals. I don't think we will see anything like 08 as each recession is different. When I run numbers, I also run a second set of numbers saying if rents and property values went down x percent, would I be ok. If the answer is no, I move on.

User Stats

58
Posts
43
Votes
David Greiner
  • Rental Property Investor
  • Ann Arbor MI
43
Votes |
58
Posts
David Greiner
  • Rental Property Investor
  • Ann Arbor MI
Replied Aug 18 2019, 08:15

Two major differences from 08 for housing.

We have under built, this is actually bad. It means higher prices for existing.

Better underwriting for loans.

Where we are the same as 08 is the monetary policy. The two differences cancel out. Yes we have a housing bubble comparable to 08.

Account Closed
  • Investor
  • Vancouver, WA
63
Votes |
315
Posts
Account Closed
  • Investor
  • Vancouver, WA
Replied Aug 18 2019, 14:36

@George Gammon

Really appreciate your opinion on the subject and had one question.  How does a drop in the stock market lead to higher unemployment?  I see how higher unemployment would directly impact the stock market due to the lack of spending and confidence but it's not clear to me how it would work the other way around.  Probably would be a more long term impact I suppose.

User Stats

174
Posts
249
Votes
George Gammon
  • Flipper/Rehabber
  • Las Vegas, NV
249
Votes |
174
Posts
George Gammon
  • Flipper/Rehabber
  • Las Vegas, NV
Replied Aug 18 2019, 16:25
Originally posted by @Account Closed

 Hey Joe, great question. Before I answer let me remind everyone I speak, and think, in probabilities not possibilities or certainties.  That said, this scenario isn't certain, I only think it's most probable.

Referring back to my earlier post:

1.  Corporations have been the main buyer of equities in our current bull market via buy backs.

2.  Institutions (who invest most peoples retirement) divested themselves of equities in favor or the debt of the corporations that bought back all the shares that made the stock market go up.  Note:  These institutions, by law, can't own bonds below "investment grade" or BBB.  

3.  The more debt corporations take on to buy back their own shares, often, the lower credit rating they have.  But if the stock market goes down those same corporations exponentially suffer because so much of the asset side of their balance sheet is their own stock.  

4.  If the corporations balance sheets get worse, so does their credit rating.  So the a lower stock market would give the corporations a lower credit rating.  If this happens, the institutions will be forced to sell the debt they own if xyz corp is downgraded below BBB or investment grade.  Xyz corp's borrowing costs would increase dramatically making their share price go down further, making their credit rating go down further.  

You can see the negative feedback loop.  

Because of the fragility of the system the Fed has created by artificially low interest rates (solving the consumer credit bubble by replacing it with a corporate debt bubble) they've made matters far worse than 2007.  

The negative feedback loop outlined above will have several adverse effects.  Not least of which will freeze up credit markets.  This would devastate the economy because it's built on 1. debt 2. asset prices 3. confidence.  

But to get to your point, if stock prices go down, corps assets go down, increasing borrowing costs, the release valve would be jobs.  When ever a corporations are in trouble the first thing they usually do is cut workers.  see 2009.  This is how a lower stock market would most likely create higher unemployment and be potentially catastrophic to the economy.  

This is why you'll notice the Fed has desperately tried to keep the stock market high.  Every time the stock market shows signs of weakness the Powell will talk it back up with dovish fed speak or flat out cut rates and stop quantitative tightening, which was just done.  If the market continues going down, expect at least a 50 basis point cut next fed meeting or sooner.  

If we get to a point where the fed can no longer prop up the market by pulling financial rabbits out of their hat, that is when sh*t hits the fan.  But notice I said "IF", again, it's a game of probabilities.  It's up to us as astute investors to know and understand as much as possible so we can handicap the possible outcomes ourselves.  

But most on this thread are paying attention to what mattered in 2007 and ignoring what matters now.  Assuming the only way housing prices can crash, is if conditions mimic the past crisis, is very foolish and shows a lack of understanding of financial markets.  

The reason I post on BP is to give investors a greater understanding of macro economic conditions so they can make better informed decisions.  Hopefully I've done that by pointing out the risks in the corporate bond market.  

Good luck,

Account Closed
  • Investor
  • Vancouver, WA
63
Votes |
315
Posts
Account Closed
  • Investor
  • Vancouver, WA
Replied Aug 18 2019, 17:03

@George Gammon

Thant makes sense and thanks for clarifying.  Digging into your channel.  Good stuff!

User Stats

1,641
Posts
774
Votes
John D.
Pro Member
  • Rental Property Investor
  • La Quinta, CA
774
Votes |
1,641
Posts
John D.
Pro Member
  • Rental Property Investor
  • La Quinta, CA
Replied Aug 18 2019, 23:06

@George Gammon "Please note: the current yield on a 1 year is 1.72 and the current yield on a 10 year is 1.52. This has literally predicted every recession since 1953."

 Many of your thoughts I find insightful, but the phrase "literally predicted" above really throws me.  Both the implication of the word, and the extrapolation of the potential of a very brief inversion.

"

User Stats

1,195
Posts
1,013
Votes
Victor S.
  • Oklahoma City, OK
1,013
Votes |
1,195
Posts
Victor S.
  • Oklahoma City, OK
Replied Aug 19 2019, 13:14

@George Gammon Fed needs to chill out and not play into Mr. Market's (and Mr. President's) mood swings...

Looking at your yield inversion picture here:

To me, it appears recessionary periods follow the curve's recovery, so judging by prior periods, we're probably another year or so away from one, if it were to happen.