Home Radio Segments Real Estate Round-up Mastering Real Estate’s Big Picture Will Help You Gain The Edge

Mastering Real Estate’s Big Picture Will Help You Gain The Edge

Real Estate, Terry Story, Real Estate Trends

With Terry Story, a 30-year veteran with Keller Williams located in Boca Raton, FL

This week Steve spoke with Terry Story, a 30-year veteran at Keller Williams, about the nature of and occurrences of negative interest rates and inverted yield curves. They also spoke about recessions and how a recession needn’t necessarily worry anyone looking to buy or sell a home.

Negative Interest Rates

Negative interest rates began during the Great Depression of the 1930s. Today, once again, we’re seeing more instances of negative interest rates, especially in Europe; in fact, something like $15 trillion worth of bonds sport negative interest rates.

If you put your money in a bank or better yet buy a CD, you’re lending money to the bank and the bank, in turn, pays, for example, 2% back for the year in interest. This is a positive interest rate. CDs are backed by the Government, so there’s essentially no risk.

A negative interest rate has an unusual effect on borrowing money. Instead of paying an interest rate on the borrowed money, the bank actually pays you interest in order to help reduce your outstanding debt. In Denmark, there are actually mortgages where you “borrow” money to buy a house, but instead of paying the, let’s say,  3% or 5% interest on top of the principal each month, you pay the principal, and the bank credits you a percentage—the interest—which goes toward paying off the money you borrowed.

The question now is whether the U.S. is going to embrace negative interest rates. We’ve seen interest rates at an incredibly low ebb. If, for example, you buy a 10-year Treasury bond (meaning you’re lending the Government money for ten years) you won’t get your principal back for ten years. And the interest? It’s around 2%. Does anyone want to earn a mere 2% for the next ten years? This, accompanied by outside pressures from other economies, may just push the U.S. toward adopting negative interest rates.

Inverted Yield Curve

The inverted yield curve is an esoteric concept. Looking at the Treasury market, for example, treasury bills with maturities of a year or less. Treasury notes have maturities of one to ten years and bonds have maturities of ten years or more. Clearly, there is a wide difference of maturities. When plotting this on a graph, ordinarily, shorter maturities have lower yields, intermediate maturities have higher yields, and long-term maturities have the highest yields. On the graph, the slope would curve upward from the bottom left to the top right.

What’s happened now is that the Federal Reserve raised interest rates, then stopped. This caused a lot of worry about money floating around in the world’s economy, looking for a place to land. If risk is to be avoided, the money ends up in Treasuries, which pushes Treasury yields down. Now a 10-year Treasury has a lower yield than a 2-year Treasury. So, instead of the curve being bottom left up to top right, it’s starting higher on the left and dropping as we follow out the maturity scale. This is what’s known as an inverted yield curve.

Why is this important? In the past, inverted yield curves have been a signal that, in less than two years, a recession was on its way. We haven’t seen it yet; the Federal Reserve is slowing the money supply. Inflation has been very tame. The economy seems to be stable and doing rather well. But economists looking at the historical relationship between inverted yield curves and recessions are concerned.

Recessions And The Real Estate Market

The truth, however, is that recessions don’t seem to matter that much in real estate. For one thing, many recessions are brief: they happen fast and are over quickly. The average recession lasts, usually, for about 14 months. The max time for a recession is typically less than two years (around 20 months). Home sales might slow a bit and prices might stagnate or drop a bit. But, eventually, the recession will end.

Real estate is really a different asset class. People are living in their homes. A huge part of their lives occurs wherever they live. Sure, when a recession hits, real estate will get a little soft, especially if the recession is deep and people begin to lose their jobs. But that would be more of a crash rather than a recession. What happened in 2007–2008 was a crash because the mortgage situation literally blew up the economy. But that isn’t the case here. And it won’t likely be the case anytime soon. What we’re seeing now in the real estate market is just a typical, cyclical downturn.

If you’d like to learn more about buying a home or selling your home, check out Keller Williams!

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: It’s time for Real Estate Roundup. This is the time every single week we get together with noted real estate agent, Terry Story. Terry is a 30-year veteran with Keller Williams located in Boca Raton, Florida. Welcome back to the show, Terry.

Terry Story: Thanks for having me, Steve.

Steve Pomeranz: So you’ve heard the term, inverted yield curve.

Terry Story: Yeah, I sure have.

Steve Pomeranz: And you may have heard the term, negative interest rates-

Terry Story: Yeah.

Steve Pomeranz: … negative interest rate mortgages, and people ask me, “Steve, what the heck is that?”

Terry Story: Yes, Steve. Please explain because I’ve never actually seen it.

Steve Pomeranz: Well, you know I started with negative interest rates. I understand that there was a very brief period of time during the depths of the 1930s-

Terry Story: That’s why I didn’t see it.

Steve Pomeranz: … was the depression where rates went negative, but this is something that’s actually very common now in the developed countries in Europe, especially. What we’re basically seeing … Actually $15 trillion worth of bonds now sport negative interest rates.

Now, what is a negative interest rate? So we all know that if we put our money in a bank or we buy a CD tha in fac we’re lending money to the bank and they’re paying us, let’s say, 2% for a year. That’s a positive interest rate. Now when you lend money, you’re taking a risk and you’re supposed to be paid according to the level of that risk. So when you have a CD, there’s really no risk. It’s backed by the US Government, so the rates are very low. If you’re lending to kind of a middle-sized company or a small company or a startup, you know, you’d expect to earn a higher rate of interest because you have more of a risk of losing your money and you need to be compensated for it. That’s normal. What’s not normal is if you lend money and you … Let me get it straight. If you borrow money, that’s what I meant to say.

Terry Story: Okay. So, you borrow money.

Steve Pomeranz: Instead of paying the interest rate, you are actually receiving money back that comes back to you in the terms of reducing your debt outstanding.

Terry Story: Okay. That just makes perfect sense.

Steve Pomeranz: There are mortgages in Denmark where you quote, borrow the money to buy your house, but instead of paying, you know, 5% or 3% in addition to your principal every month, you pay your principal and the bank credits you X number of dollars to reduce the amount of the outstanding principal.

Terry Story: I kind of like that. Can I move to Denmark? Although, wait. I forgot about the taxes. What is it, 90% of your taxes goes to the government?

Steve Pomeranz: Well, that is true. That is another thing. I was trying to look and I Googled this but, of course, I know it’s not possible. Can a US citizen borrow money out of Denmark? I mean, that makes perfect sense.

Steve Pomeranz: Of course, there’s the thing about the currency fluctuation. Someone’s going to have to protect themselves from that.

Terry Story: There’s a middle man in there, too.

Steve Pomeranz: Yeah. Yeah. So, it’s not gonna happen. But the big talk right now is the question of whether the US is, in fact, going to go down this path of negative interest rates because we have seen now interest rates at incredibly low ebb. I mean, if you were to buy a 10-year treasury bond, so that means you’re lending the government money for 10 years, you don’t get your principal back for 10 years.

Terry Story: 10 years, right?

Steve Pomeranz: It’s less than 2%, and it’s like, is that really possible? Would I really want to only earn 2% for the next 10 years? So 2% doesn’t seem that far away from a negative rate, especially if there’s outside pressures, you know, from other important economies in the world.

Steve Pomeranz: So when you get these negative interest rates also what is happening that is unusual and somewhat troubling to many is this thing called the inverted yield curve. Any idea what that is?

Terry Story: You know, I studied it when I studied my MBA in accounting, so I’m familiar with, but you know what? I’ve never actually even seen it, so in-

Steve Pomeranz: Okay. It’s an esoteric concept. So when you look at the treasury market, you’re looking at treasury bills, which are maturities of one year or less. You’re looking at notes, which are like one to 10 years, and then you’re looking at bonds, which are 10 years or more. So there’s different maturities, and when you plot this out, on the normal times, the shorter maturity should have a lower yield; intermediate, a higher; and then long-term, higher.

Steve Pomeranz: So if you plotted that out on a graph, you would have a curve that would slope from the bottom left up to the right. Okay?

Terry Story: Correct. Yeah.

Steve Pomeranz: Well, what’s happened is that the Fed raised interest rates but stopped, and because of all this worry about what’s going on in the world and on the fact that there’s an awful lot of money out there washing around and floating around and looking for a place to land and if that money doesn’t want to take risk, it goes to treasuries. That pushes down the treasury yields. Now the treasury yield of the 10-year bond is lower than the two-year, okay? So now instead of the curve going from the bottom left up to the right, it actually is higher up on the left and comes down as you go out the maturity scale. Inverted. Now, why do we care?

Steve Pomeranz: We care because in times past, whenever you saw an inverted yield curve, that was a signal, usually about 20 months later, that the economy would go into recession because it represented what is considered tight money. The Fed is tightening, is lowering the money supply because it’s afraid of a booming economy and high inflation, accelerating inflation. We’re not seeing any of that now. Inflation’s very tame. The economy is doing extremely well, but I wouldn’t say it’s getting ahead of itself. It’s crazy, crazy, you know, expanding and all of that. It’s just healthy. So I personally think it’s not that much of a big deal in the sense that it’s not because the Fed is pushing up interest rates to try to slow the economy down. I think it’s the fact that you’ve got all this money that’s chasing safety in the longer end of the market, pushing down the yields there.

So it’s this anomaly that doesn’t really feel like it’s necessarily going to lead to recession later down the road.

Terry Story: That makes sense. Now I’ve got a great education on inverted yields.

Steve Pomeranz: I’m exhausted.

Steve Pomeranz: Now getting back to real estate-

Terry Story: Oh, and now real estate. No, it’s important. That’s interesting.

Steve Pomeranz: Recessions don’t matter that much in real estate, though.

Terry Story: Yeah. We were talking about it off-air. I’ve been doing this for 30 years and I started in ’89. We were in a recession and then I saw maybe a couple of little ones. They were quick, short, swift, and we were in and out of them, so I didn’t really feel them in the real estate world. You know, my personal life maybe, but not with the sales.

Steve Pomeranz: I think the average recession lasts about 14 months, maybe the most is like 20 months.

Terry Story: Yeah. So it’s nothing to get scared about.

Steve Pomeranz: But I think real estate is a different asset class. I mean, people live in their homes and, yes, I think real estate is going to get soft if people really start losing their jobs, depending on how deep the recession is, and that’s where it starts to hurt.

Terry Story: Yeah. A crash.

Steve Pomeranz: ’08 was a crash because it was such a devastation. The economy was so devastated by all the mortgages that blew up and all of that.

Terry Story: And we’re not going to see that. That’s not what’s going on here. That’s just a typical cyclical turn-down.

Steve Pomeranz: That’s right. Very good.

Steve Pomeranz: My guest, as always, is Terry Story, a 30-year veteran with Keller Williams located in Boca Raton, Florida, and she can be found at terrystory.com. Thanks, Terry.

Terry Story: Thanks for having me, Steve.