Absurd-onomics #2

Sailing the Turbulent Waters of American Real Estate

7 min readOct 16, 2023

Welcome to a turbulent voyage through the complex and ever-changing waters of American real estate! 🌆

From white picket fences to skyscrapers that touch the sky 🏙️, the waters of American real estate is as diverse as the nation itself 🇺🇸.

The housing market, long considered a cornerstone of financial security, is facing a perfect storm of challenges 🌪️.

In this edition, we’ll set sail to explore:

1️⃣ Rising tides in The American Dream 📈🇺🇸📈

2️⃣ The Mysterious Depths of Commercial Real Estate 🏙️⚠️

3️⃣ Taming the Inflation Kraken 🦑💰

4️⃣ Exploring Enigmatic “Creative Solutions” 🏴‍☠️💡

5️⃣ Political Pressures and Federal Waves 🏛️🌊

Beneath the shiny floors and glassy windows of this world lies a whirlwind of influences, from interest rates to economic trends, and political dynamics.🌪️📊

So, hold onto your life jackets as we set sail on this thrilling voyage 🚢! ⚓🌊

Setting Sail with The American Dream 🏴‍☠️

Our voyage begins on the calm sea of Homeownership. But oh, the storms ⛈️ of interest rates are rising.

Ah, yes!! homeownership — The Quintessential American dream! 🇺🇸

For many, it’s a symbol of stability, security, and a stake in the future. 🚀

But then, the winds of change struck.

Interest rates, once calm as a summer breeze 🌞, turn into a storm, and the American dream sails into uncharted waters. 🌊

📊 According to the latest data —

30-year fixed-rate mortgages are hitting 7.83%, soaring past a 22-year high! 😱
In places like Florida, mortgage rates even dared to flirt with 8%. 😮
Mortgage applications are dwindling, and housing inventory is vanishing like buried treasure.🪝

Gone are the days of 3% rates! now, many are marooned on the distant shores of affordability. 🏖️

Prospective buyers? They’re at a cross sea, torn between the charms of homeownership and the weight of monstrous mortgage rates. ⚖️

All this translates to fewer transactions in residential real estate.

And these are just the tip of the iceberg.🏔️

The Troubled waters of Commercial Real Estate

Leaving the residential shores behind, let’s dive into the wild waters of Commercial Real Estate — —

In the world of towering skyscrapers and fancy apartments, there’s a dark cloud looming. 🏙️☁️

A whopping $1.2 trillion of debt on U.S. commercial real estate is currently labeled as “potentially troubled.” ⚠️

All thanks to those pesky rising interest rates. ☠️

Once upon a time, office spaces were the shining stars 🌟 of commercial real estate. Now, thanks to the work-from-home started by the pandemic 🏡💼, they’re struggling to keep their desks filled 🪑👻.

But guess what? Even the ‘safe’ multifamily properties are getting their reality check! 🔥🏢

Over half of the troubled debt is tied to offices, which have plummeted by 31% since 2022.📉
Default fears are rising as property values sink and landlords struggle to keep their ships afloat.😬
Property values are sinking, costs are surging, and landlords are scrambling to refinance at higher rates.🏠
Over half of the $626 billion in debt facing danger by 2025’s end.🏢

Why, you ask?

Complicated money stuff and too much borrowing are painting a gloomy picture for real estate developers.

Even big names like Blackstone, Brookfield, and Goldman Sachs are waving the white flag and facing potential shipwrecks! 🚢🌊💥

It’s a situation that brings a sense of déjà vu from the 2008 financial crisis.

Taming the Inflation Kraken

As we venture deeper into these treacherous waters, a daunting Inflation Kraken haunts our voyage. 🌊

Inflation? More like “In-flation!” 🤑

Home prices are shooting up faster than a seagull on a sugar high — they’ve climbed 20% above the 2008 peak and a jaw-dropping 55% above the historical norm! 🏡💸

In just a decade, median home values have gone from a humble $161,000 to a whopping $350,000 — that’s a crazy 117% jump, or 4.5 times the median income. 📈

And if you’re eyeing a new nest, the median sales price for homes is now $416,000, which is a whopping 530% the median income. 🏠💰

And guess what? all these figures are inflation adjusted.📈💥

Who knew buying a house would be the new luxury sport?🏌️

As the chaos unfolds, with recent inflation rates around 3%, the bet is that it might simmer down to a more reasonable 2.5% by year-end.

If it does, maybe your luxury sport could go back to being just surfing the waves of life! 🌊😄

Sail Smoothly with “Creative Solutions”

Ahoy, sailors! The storm’s upon us, and our ships are dancing on the waves! 🌊

When your once-steady ship starts to wobble, your property loan can feel like a leaky boat. 😓

But hang tight, cause we’ve got a financial lifesaver — Preferred Equity & Mezzanine Capital! 🦺

So, what’s the grand plan, you ask?

A crew of investors, including REITs, funds, and insurers. They bring the treasure chest, offering capital with their special life vests and fair terms to keep your ship from going down like the Titanic.

When traditional equity won’t cut it, let’s get a bit pirate-y! We’re talking about “creative solutions” like:

Equity Participation 🚀: Investors offer higher leverage (up to 90%) in exchange for a share of future gains.
Equity Recap 🔄: For properties at 100% LTV, fresh equity at current market value helps resize the loan, allowing profit-sharing above a set IRR threshold (e.g., 18% IRR)
Purchase + Hope Note 🗒️ : Investors buy the property, granting original owners a passive “hope note” for profits above a predetermined threshold.

And as you sail these real estate waters, keep an eye on two important markers:

1️⃣ Maximum leverage (75–85% LTV) — set your sails just right!

2️⃣ The Cash Flow test — it’s like making’ sure you’ve got enough provisions for the journey!

Now, lets set sail with confidence, savvy sailors! 🚢⚓ But watch for Political squalls and Fed dilemmas ahead! ⚓🌊🗺️

Political Pressures and Federal Waves

As we sail towards the finish line of our voyage, behold the intriguing specter of Political Pressure on the horizon. 🏛️

The surging tides of interest rates and the housing affordability storm have cast a shadow over our nation’s politics. 🌧️

Did you know?

Over 60% of Americans proudly own their own little castles 🏡, wielding a powerful voting voice! 🇺🇸

The housing market is like the compass for political fortunes, affecting how folks view their economic well-being and political leanings. 🧭💰

But here’s the kicker→

The Federal Reserve, usually as cautious as a sea turtle, now faces mounting political waves. The housing crisis, rocked by surging rates, strains policymakers like a ship caught in a storm.🌪️

So, what’s the Fed gonna do? 🏦

Will they cut rates to calm the housing storm, possibly by early 2024, risking an economic shipwreck?

Will they hold steady and face a political tsunami? 🌪️

This isn’t just about dollars; it’s about votes! 🗳️

The real estate market isn’t just about houses; it’s where dreams meet politics. 💭🏢

In the midst of it all, the dream of owning a home, a pillar of financial safety, is slipping away.

And only time will decide if the Fed steers this ship to calmer seas or uncharted waters. 🌊⛵️

Anchoring the Voyage

As we drop anchor on our voyage through the wild seas of American real estate, what pearls of wisdom have we uncovered? 🌊

Real estate, like the unpredictable ocean tides, can be as moody as a pirate with a broken compass. 🧭

From the stormy seas of mortgage rates to the Bermuda Triangle of commercial properties, we’ve sailed through it all. ☠️

Inflation, the mighty sea Kraken, threatens to sink our dreams of homeownership. 🏠

But fear not!

Preferred Equity & Mezzanine Capital be our trusty lifeboats, guiding us to safer shores. ⚓ 🦑🌊

However, the tale doesn’t end here.

Political pressures and Federal waves cast shadows on this narrative. The Federal Reserve, like a lost captain, steers the ship of the American Dream through political storms. ⛵🌩️

As we sail forward, the fate of the American Dream remains as uncertain as a ship lost in thick fog. 🌫

But remember, real estate isn’t just about properties and transactions. It’s a reflection of aspirations, challenges, stability and the grit of a nation.🇺🇸

Though the path forward may be foggy, it’s also a treasure map of buried opportunities. 🗺️💰

References