Posted 15 days ago

Breaking: GDP to hit 4.6% in Q2, per Atlanta Fed

Welcome to the Skeptical Investor blog right here on BP. A frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

Today’s Read Time: 10 minutes

--------

Today’s Interest Rate: 6.96%

(👇.01% from this time last week, 30-yr mortgage)

--------

Today, we’re talkin’ fresh economic data points (what are they signaling?), the economic soft data (aka the vibes), GDP is about to explode, and I do a dive into the real estate provisions in the current “Big Beautiful” budget bill being debated in Congress. It’s a big June party.

Let’s get into it.

--------

The Weekly 3 in News:

- It’s rooftop pool season! But where to go? An insider’s guide to the best rooftop pools in Nashville (SB).
- Nashville’s country music festival is here, with dozens of simultaneous concerts and events. Don’t miss out (CMA).
- In a world of trade uncertainty, Nashville has a rock-solid real estate advantage: it’s got loads of concrete. The volatility of the price of steel has made concrete much more competitive. And with recent advances in formwork systems, a concrete structure can be built just as fast — or faster (NBJ).

Economic Data Signaling (Mostly) Bullish

Last week, we had a deluge of important economic news/data, most all of which was positive. I wonder why it wasn’t reported much?… Probably a distraction from the endless political doom loop on the tele.

Is this a sign of the positive economic zeitgeist, or just a ghost?

Let’s take a look, I promise it’s worth your time.

PCE Inflation - The personal consumption expenditures price index, the Federal Reserve’s key inflation measure, increased just 0.1% for the month, putting the annual inflation rate at 2.1% (bea). Lowest in 4 years. This was huge, we are now almost at the Fed’s 2% inflation target. I’m not going full George W. Bush Mission Accomplished, but it sure feels like it. Very encouraging. The only hanging chad is trade/tariff policy. And so far, it is not coming through in the data. If we didn’t have it I would be satisfied that inflation is crushed. Stay tuned.
Pending home sales - Still suppressed, down 6.8% MoM. In April, all four U.S. regions had fewer transactions than in March. Homeowners don’t want to leave that 3% mortgage and sell only to buy again at 7%.
Federal Reserve meeting minutes - This I found interesting. Federal Reserve staff are increasingly more pessimistic than other market participants. As others, like JP Morgan, are backing off recession calls, the Fed folks now view a recession as “almost as likely” as their baseline forecast, according to minutes from the Fed’s May meeting (Barrons). To me, the minutes showed a clear concern internally over trade policy, including risks of inflation, weakening labor market, and slowing economic growth. So far, I’m skeptical of the inflation call, I don’t see it in the data. This smells to me more like politics and vibes/feelings, not rigor.
Consumer sentiment - Speaking of the zeitgeist (literally spirit/ghost of the time in German), and you all know I am not a fan of sentiment surveys one bit, both Conference Board and UMich consumer sentiment data were released for the month, and guess what? They reversed their 5-month negative march downward. All readings were much higher and better than expected. Count me surprised. If you ask me, my vibe on the vibes is that this is likely what we get when the economy is good, but uncertainty (trade) and politics (divisive headlines) create social consternation.

Politics in the Sentiment Figures - Case in point, while consumer confidence is still at one of the lowest levels in 3 years….It’s mostly Democrats. There is a 50-point gap in the confidence level between Democrats and Republicans. Further, the sentiment breakdown for inflation expectations is wild. Dems are predicting 7% inflation (which is insane), GOP folks think it will be -1% or deflation (equally insane). It’s a tale of two cities: GOP is elated, Dems are upset. Another reason why sentiment may be a useless economic indicator. Too political.

Last Sentiment Anecdote: True, sentiment is still low, but so far it’s not coming through in the data. Here is an example: American Express CEO, Stephen Squeri, said at a conference that "consumer sentiment is in the toilet, but yet they're just complaining as they go spend."
Jobless claims - Up slightly in May, rising by 14,000 to 240,000 for the week ending May 24. While this number is also slightly up YoY, this is still low. Count me on level 1 (low) alert. However, we should always have this as a perennial data point to watch. The labor market looks healthy. So far.

One last data point for you before we get into our Big Beautiful main story.

And it certainly is a big one.

GDP to Grow at 4.6%

The Atlanta Fed released its economic model predictions yesterday, and guess what, it goes from Q1 -.2% to next quarter…+4.6%!

WOW! I don’t know how much more bilish one can get.

GDP above 4% has me loading the cannons with gunpowder. Pessimistic sentiment in an otherwise healthy economy with uncertainty in trade that doesn’t affect my core real estate investing thesis at all is exactly the setup I want to see to start deploying capital.

And guess what, there are some other reasons for optimism.

Some more big reasons…

The Big Beautiful Budget Debate (just the Real Estate part)

If you haven’t heard, Congress is working on a budget and spending package for next year, and it’s big. The official name of the bill, and this is true, is called “One Big Beautiful Bill Act.”

Reality is far more fun than fiction.

There is so much in it, Congress can’t pass it through the regular process (although in reality, the “regular order” process never happens, really since the 90s. Definitely not when I was working in Congress 15 years ago). They will use a parliamentary (aka the rules of Congress) rule known as budget reconciliation, allowing the bill to pass based on a simple majority vote and not the 60 votes normally needed in the Senate, when the minority party opposes it. This is used when trying to reduce the deficit. But using the reconciliation process is far less often used, for certain. Since its first use in 1980, reconciliation has been used to enact 23 budget and tax bills (This is the same process used to pass “Obamacare” back in 2010).

Now, I am not a fan of the overall legislation, as I have written about recently. Why? It continues borrowing to spend more and more money we just don’t have, instead of getting us back to normal, just back to 2019 spending levels. Higher deficits and debt = higher mortgage rates. IMO, if you are a real estate investor, you should be in favor of getting the federal budget under control.

The Bill Can’t be Both Big and Beautiful.

Treasury Secretary Bessent - and I must admit I have been an eager follower thus far - asserts that the bean counters who are scoring the bill (aka calculating its total cost) will be wrong. Current Congressional Budget Office (CBO) scoring predicts it will increase the deficit by $3.8 trillion, over 10 years.

Bessent asserts this is because the economy will grow faster than deficits, which their models aren’t permitted to include, and thus, the bill’s provisions will allow the US to “grow its way out” of the debt and deficit problems we face.

Speaking on CNBC he asserted that “The deficit this year is going to be lower than the deficit last year and in two years, it will be lower again….”

I’m skeptical.

And while I do agree the bill will boost economic growth, it will be trumped (pun intended) by the even larger deficit spending, money printing and interest rate ballooning that will occur. I.e. higher mortgage rates for longer and longer.

Also, don’t underestimate Congress in it’s amazing ability to fuck things up. The bill passed through the House by 1 vote and in the Senate, Senator Johnson has publicly stated that the bill is "immoral" and will "bankrupt America," claiming he has enough votes to derail it.

But I digress….let’s get back to real estate.

Real Estate Changes in the Budget You Need to Know

That being said, there are some very favorable provisions for investors, particularly us real estate folks. And we, as investors, need to know this stuff. There are policies aplenty in the bill that are pro-economic growth and pro-housing (and some not so great).

Fortunately for you, I have read the bill for you. You’re welcome ;)

Here are the important highlights:

Extension of the 2017 Tax Cuts and Jobs Act (TCJA) - extends our current tax laws set to expire, which were reduced during Trump’s first term.
- Mortgage interest deduction - The TCJA reduced the cap on mortgage interest deduction from $1 million to $750,000 for new loans. The bill, unfortunately, extends this lower cap, meaning homeowners can continue to deduct interest only on the first $750,000 of mortgage debt. Of course, this mainly affects higher-value properties, particularly in expensive housing markets. Most homeowners weren’t affected. For a home purchase with a 20% down payment, this effectively begins limiting the mortgage interest deduction for purchases above $937,500.
- State and Local Tax (SALT) Deduction - The bill increases to SALT tax deduction by 4x to $40,000. The TCJA imposed a $10,000 cap on SALT deductions, which significantly impacted homeowners in high-tax states by limiting their ability to deduct property taxes and other local taxes. This was seen as targeting blue states with higher state taxes (here’s looking at you, California and New York). Fortunately, this cap will now be elevated.
- Capital Gains Tax Made Permanent and Indexed for Inflation - As we all hopefully know, capital gains taxes apply to profits from the sale of investments, including real estate. The bill extends and makes permanent today’s capital gains structure, which was not much affected back in 2017, but it does do something very cool: it indexes the tax brackets for inflation. A permanent and indexed capital gains rate provides certainty for homebuilders and should result in more capital being allocated to homebuilding, aka more homes being built, remodeled, bought etc….
- Solar Energy Tax Credits Removed - Go with me here. I see this as a big economic negative. It makes it more expensive to build your own power generation on site rather than being reliant / sucking from the over taxed (pun also intended) grid. And solar is one of the best and cheapest ways to do this. I see this as a negative for real estate values. Less solar generation on-site is a negative for property values and will mean the government has to spend more of our money on electric generation. Side note: Electricity capacity is a massive economic problem for the US long term. The US grid is woefully unprepared for the future of electricity needs. Why are we disincentivizing this? China is FAR outpacing us; in fact, China is adding an entire United States [of power capacity] every 18 months. This is additional. Solar, hydro, nuclear etc…. “We need every electron we can find if we are to achieve our goals in AI, manufacturing, transportation and everything in between.” We are on track to lose the war of electrons, which is likely the most important war of the future. This is dumb to cut.
- Opportunity Zones Bungled - The TCJA introduced Opportunity Zones (OZs) to encourage investment in economically distressed areas, as defined by state governors, by providing tax incentives to build in those areas. This was widely seen as a success, OZs delivered $84B in investment to 8,800 distressed communities. But the reconciliation bill may fumble the ball by disrupting/halting current and planned projects. This gets complex but in short, the bill would create a new set of zones (good) but some tracts currently eligible for the OZ tax break would not be included in the new round (bad). The wording of this provision has alarmed OZ real estate investors. OZ advocate Jimmy Atkinson of Opportunity Zone.com is concerned, saying “Congress has inadvertently engineered a 12-month (or longer) dead zone.” This seems to me like lazy language writing, and fortunately, there are reports of talks in the Senate to fix this. I do predict Congress will do so.
- Car loan interest deduction redo - Now you may be asking, “Hey, why is this on here?” I’ll tell you. I’m a landlord, and one major stumbling block I see for renters to both qualify for a rental unit and keep up with the rent is their debt-to-income ratio. ie, how much other stuff besides the rent they have to pay. And one large, if not the largest, obligation I see prospective tenants carrying is their car payment. The bill provides some relief for car loans, a $10,000 deduction on the interest being paid, a healthy discount. One stipulation: the vehicle has to be assembled in the U.S. I’d love to see this made for all car brands. Will creditors now ask people what brand of car they own to see if they should be considered at higher credit default risk? They may, which seems very unfair. Fun fact, if you were alive before 1986, you used to be able to do this (for all car brands).
- Bonus Depreciation extended through 2030 - This is big for real estate investors, especially those who take advantage of the cost segregation tax technique. The TCJA allowed businesses to deduct the full cost of eligible assets all at once, in the year they are placed in service, rather than spreading the depreciation expense over the many years of an asset's useful life. Or, if we put it in layman’s terms, imagine you buy a $1,000 bike for your newspaper delivery business. Normally, you’d have to spread out the tax deduction for the bike’s cost over a few years, maybe $200 a year off your taxes for 5 years. But with bonus depreciation, the government says, “Hey, you can take a huge chunk of that cost off your taxes right away—like $500 or even the whole $1,000 in the first year!” Now translate this to real estate. Put simply, you could deduct the whole cost of an improvement to the property, let’s say your HVAC system (which I just had to do on 2 properties 🤮), off your taxes all at once, the year you do the work. In other words, bonus depreciation is a meaningful way to help businesses save money on taxes faster when they spend money on certain renovation costs, equipment, machines, vehicles etc… they need for the business. This rule also encourages companies to make more business investments, which helps the economy grow (to Bessent’s point above). The bill extends bonus depreciation through 2030.
- Mortgage Interest Deduction for farms - excludes from taxation 25% of bank or insurance interest on real estate loans secured by farms and ranches. So if you are buying farmland (or what could be considered agricultural land, that’s an amazing benefit.
- Low-Income Housing Tax Credit - This is a federal program that provides tax incentives to developers who build / rehab affordable rental housing for low-income households. The bill increases state allocations for LIHTC by 12.5% and lowers the threshold for the tax credit that applies to buildings financed with tax-exempt bonds to drive more of these investments. Good. We need more of this.
- Honorable mentions: there are too many provisions in this massive bill that will indirectly affect real estate (mostly positive) but a few honorable mentions I recommend folks look into for further reading are:
  - -Restores full expensing for businesses’ domestic research and development (R&D) investments.
  - -Restores a more generous business interest deduction limit permanently, expanding it to 23%.
  - 100% immediate expensing of factory structures. Wow, this is big.
  - -Permanently extends the $2,000 per child credit amount from TCJA, currently scheduled to revert to $1,000 per child after 2025 (also good for renters/homebuyers).
  - -Increases small business expensing from a maximum of $1.25 million to $2.5 million.
  - -New/additional standard tax deduction for taxpayers over 65.
  - -Creates a new tax-advantaged savings account called a “Trump account” for children under 8 and provides a $1,000 credit (I have written about this before; getting folks into the investor-class at birth is a game-changing economic strategy and pro-financial literacy). More here at InvestAmerica.org.
  - -And of course, no tax on tips and no tax on overtime, for those making under $160k.
  - -Oh and it also eliminates the current $200 federal tax on firearm silencers…..so there’s that...

My Skeptical Take:

My posture is positive. With a skeptical eye on the political and media noise.

As we navigate this flood of economic data and policy shifts, the outlook for real estate investors remains optimistic. PCE inflation appears tamed at 2.1%, GDP growth is projected to roar at 4.6%, and pro-housing provisions like bonus depreciation and SALT deduction hikes signal opportunity abound for real estate in 2025+ (if they can get it over the finish line).

Yet, my skeptical mind is always tracking potential headwinds, which could swing the sails in the opposite direction. The labor market is holding steady, but sentiment’s political noise and Congress’s knack for non-action remind us to stay vigilant. True, trade and tariffs do bring some risk of inflation and continued uncertainty, but I see this as low risk. Much more consequential is getting our Federal deficits under control. If we don’t, mortgage rates will not cool. Hell, if we continue these spending levels, it could be a decade before we get rates in the 5s%.

This is why Treasury Secretary Bessent is so hyper-focused on Treasury bond rates. And when he was in the private sector, this was his specialty.

Yes, the economy seems set to start roaring for the next 3+ months. This is the opposite prediction many folks, including the Atlanta Fed itself, had last quarter (mostly based on trade uncertainty, which seems to be evaporating). Perhaps the bad vibes are shaking out of the system, and we can all just get back to working, building, creating, and loving our families.

But probably not.

Until next time. Stay Curious. Stay Skeptical.

Herzliche Grüße,

-The Skeptical Investor

P.S. Want to talk real estate? Yes Im a real person, send me a DM. That's what Bigger Pockets is all about.