Navigating Uncertain Times
These are extraordinary times. Regardless of your political views, it’s undeniable that significant changes are underway, changes that will shape real estate and mortgage markets for years to come.
Economy and Interest Rates
It will be interesting to see how current fiscal economic policy will impact mortgage rates, both in the short and long-term. From a fundamental standpoint, it only stands to reason that if the cost of supplies and labor increase, this will produce more inflation and thus, higher rates. With the widespread proposed tariffs and “reciprocity” agreements, you would have to think this will cause the price of just about all goods to go up. Furthermore, if there is less migration into the country and perhaps foreign workers leaving the country, this will probably lead to the cost of labor going up, also inflationary in the short-term.
Taking a longer-term approach, with DOGE and the current administration hell-bent on reducing the footprint of government and eliminating wasteful spending, perhaps this could lead to sustainable productivity gains, the only real way to combat higher material and labor costs. With a $36.2 trillion deficit and adding almost $2 trillion every year lately to this deficit, we need to reduce this debt or it will eventually lead to a slow downfall as we will have to print more money to pay our debts. It also helps that the current admin wants to create a lower interest rate environment to spur investments, both on a macro and micro level.
I’m fascinated to hear clients’ viewpoint on the subject, but either way, real estate fares well both in inflationary and target inflation (1.5-2%) environments. With the tremendous investment and advances being made in AI, which should permeate all industries, I think we are safe from a deflationary environment for at least the next couple of years.
Student Loan Debt
A big issue facing our country is how existing student loan debt will be handled. Currently, it is estimated that there is $1.77 trillion in student loan debt. An estimated 42.7 million Americans have some student loan debt, which is astronomical as this is 12.5% of the entire US population.
During the early Covid period, Biden put in motion a plan to eliminate much student loan debt, including putting in place the SAVE plan, a program that restructures or eliminates debt based upon a borrower’s income. Currently, the Federal courts are trying to block or eliminate some of these proposals.
This can be a very polarizing issue and one where I can see the merits of both sides. On the one hand, you can argue that borrowers knew what they were doing when they took out this debt and like any contract, should honor it. On the other hand, there are many borrowers that want to pay the debt, but they have a current income or perhaps medical situation that does not afford them enough money to pay the debt.
This puts a lot of the American population in limbo as to what is the fate of their student loan debt. The best advice for those holding this debt is to work with your loan servicer to make sure your payments are affordable based upon your income. All loan servicers should work with you on this as ultimately, they want to collect the debt and better to collect less now, which the hopes of getting repaid later. Secondarily, if you can afford it, I would strongly advise to make payments (even if they are minimal payments) so you do not screw up your credit, which can take years to fix and will materially cost you whenever you try to buy a car, house, or even open up a credit card.
The Canary in the Coal Mine
If recent natural disaster events across the country have taught us anything, it is the unpredictability of where and when a disaster will occur. In Florida and contiguous states, every fall we hold our breaths as to where the next hurricane will hit. In the mountain and coastal West, we worry about water accessibility, fires, mudslides, and of course, the next big earthquake. In the heartland, we worry about the impact of tornadoes. The reality is that a natural disaster can hit and hit hard anywhere. Look at Asheville, NC, which prior to getting devastated by Hurricane Helene, boasted that in addition to being a vibrant city, had one of the most risk-free locations in the country when it came to natural disasters.
We have seen insurance companies pulling out en masse in many markets across the country, whereby often the only insurance option is a state-funded insurance plan. It is clear that insurance companies are struggling to assess their risk and when you add onerous governmental regulations on top of this, insurance companies capitulate.
Fed Chair Jerome Powell recently predicted that in “10 or 15 years, there are going to be regions of the country where you can’t get a mortgage” (because of the underlying insurance requirement). He even went on to say that vast parts of our economy are becoming uninsurable as insurance companies are underfunded to deal with “unforeseen catastrophic events.”
While I think it will be a a few years before we see a major change in risk assessment and how we protect our personal property, I believe that day is coming whereby insurance as we know it today will be a thing of the past.
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