Bond “Vigilantes” Hold Interest Rates Hostage as Rate Cut Hopes Shrink

Interest ratesWhy do treasury yields keep surging? How are homeowners ensuring against more and more extreme weather? Will 2025 be a pivotal year of recovery in commercial real estate? And what are new listings doing as we kick off 2025? Hey everyone, it’s Dave. Welcome to On the Market, the Real Estate News and Economic Show where we like to have fun while keeping you informed. And we’re starting our year off with our first headline show, which means that Henry, Kathy James are all here. Thanks all of you for joining. Henry, how was your holiday?It was really good, man. I got little kids deals, so the magic of Christmas is a real thing, so it’s super fun.Oh, nice. Glad to hear it. James, I know you just got back from Japan. How was it?It is amazing. Tokyo is a phenomenal city. I got to say, it blows my mind how clean that city is. You walk around, there’s no garbage cans, but there’s no garbage anywhere. And then we hit some of the best powder snow I’ve ever seen. So overall, Japan, 10 out of 10 for visitingKathy. Meanwhile, you were just looking at great snow because you were trying to ski, but the whole resort was on strike.Yeah, yeah, you could look at the snow by standing in a two hour long line.Lovely.So I was just looking at James photos instead of Japan and putting that on my bucket list.Well, I’m glad to have you all back. Hopefully everyone listening also had a nice holiday season and a happy new year. We have had a few episodes come out, but this is the first one we’re recording here in 2025. A lot has happened over the break, so we need to get on top of all of these headlines. So let’s jump into them. James, what headline did you bring for us today?So the articles from MarketWatch, and it’s titled Treasure Yield and 2024 with the biggest yearly surge since historic 22 route. So we ended 2024 with bonds kind of jumping in that last month, which isn’t great for what we’re forecasting rates for. And I think, Dave, you’ve been talking about this the last 30, 45 days, like, hey, that rates may not go down. And I think a lot of us, especially about this time last year, I thought rates were going to be a lot lower going into this year. I thought we were going to be in the low sixes, maybe even high fives by the middle part of 2025. But it is not looking so much that way. The bond markets jumping everywhere and they’re blaming the bond vigilantes, which I had to research a little bit. And basically they are financial bullies that seem to throw their weight around, they throw their money around and they can move the bond market around.
And so right now the bond vigilantes aren’t really happy with what they’re seeing. They’re bullying the market and that’s why we’re seeing this surge in bond rates. But as an investor, it tells us we got to kind of anticipate that rates may be a little bit higher for the next 12 months and we’re not going to see that rate relief. They’re saying that instead of interest rates being down a point, it could look like it’s just going to be a half point. And that makes a huge difference on performance, how you look at cashflow, how you look at deals, and it’s definitely something we all have to prepare for as investors.Being from California, I thought that if we all collectively put out intentions that rates would come downIf you would, just good vibesPutting it out in the universe as we all have. We were being bullies too. It didn’tWork. Were you reading that book The Secret over the holidays?No, I’m just from California. It’s how we think,James, by that definition, wouldn’t you be considered a Pacific Northwest flip vigilante just throwing your weight around, snagging all the deals, nobody else can get, any good ones?You know what, I just consider myself a contributor to the economy out not really bowling things around, but I will say after I was reading on these bond vigilantes, I’m kind of jealous if you have that much power. It’s like, wow, you really can move things.One of the first videos or blog posts I ever wrote for pickpockets a few years ago is just how bonds rule the world. It’s so boring because people don’t want to understand them. They’re not exciting, but they actually dictate so much of the entire economy. It’s really worth spending a little time understanding. And on that note, I should probably just explain a little bit about what’s going on here. As James said, most people were expecting mortgage rates to come down this year because the Fed is cutting rates. And a lot of times that does correlate to low mortgage rates. But as we’ve discussed many times on the show, mortgage rates are really tied to bond yields and bond yields go up when there is fear of inflation. And that’s what’s going on over the last couple of months. People are fearful that a lot of the things that president-elect Trump is planning to implement will create at least short-term inflation.
And the hope is that that short-term inflation is building a stronger long-term economy, but bond investors really hate inflation. It destroys their returns. And so they revolt against this and they do that by not buying bonds, which means that yields go up. It’s kind of a complicated thing, but we are probably going to see this until there is more clarity about which campaign policies that Trump has been talking about, he’s actually going to implement. Is he going to implement tariffs and if so, how big are they going to be? Is he going to deport a lot of labor from the United States and if so, how dramatic is that going to be? Right now there’s just so much uncertainty that bond investors don’t want to buy government bonds, and that means the government has to pay higher to entice them to buy those bonds which pushes up mortgage rates. So as James said for now, we are probably going to see mortgage rates stay higher than I think anyone was hoping they would.Yeah, I mean I am sure the bond investors obviously had a lot to do with this, but I think the person who holds and wields the most power is Jerome Powell. And in December he made some comments that had the bond market react. I really see the bond market as more like a lot of chickens that just react to every sound that the Fed makes. And in this case, Jerome Powell said they might not be doing more rate cuts, and if there are, it’ll be very few. It’s on hold. So the bond market reacted to that because as you recall, it was, I don’t know, six months ago or so, maybe more that the Fed said there would be six cuts or four to six cuts, but the bond market and the stock market interpreted it as six cuts in 2025. And that’s clearly not the case. And that has again, a lot to do with the job market being so strong. So I don’t know, it’s so much that the bond investors are bullies, but that the Fed has so much power in every word that they sayThe market, they had confidence it was like 17% that the rates would cut and the next fed meeting,ButAfter the bond market jumped like this and what he said, now it’s at 11.2% that we’re going to see another quarter point cut. And so he may not be doing more cuts in the beginning part of the year. And so the thing is, as investors, we just have to now anticipate that not go into this, oh, the rates are now going to stay high, don’t buy.It’sGoing, okay, well this is what we see and if we think rates could be a half point lower by the end of the year, then that’s what we should look at at the cashflow. And so it’s really important to pay attention to all that because it tells you how to forecast.Well, I’m not happy about this. I don’t want to be right about rates staying higher, but I would like to now take my victory lapWhenI railed against the date the rate marry the house. People who have been saying this for years, like, oh, just go buy stuff refinance in a year. No one knows what’s going to happen. This is just a very uncertain time, particularly with markets no one knows. And so yes, you should be buying real estate. I’m still buying real estate, but you should buy it assuming that rates are going to stay relatively high for the next few years, and if it goes down, that’s a bonus. That’s a cherry on top of any deal that you’re going to get. It probably will happen, but don’t count onIt. You deserve that victory lap. Yeah, you deserve it. Thank you. ThankYou. So said differently. It sounds like the advice for investors here is you need to buy a good deal based on how it underwrites now and not try to predict future performance based on what we think rates might or might not do. We clearly don’t know. We’ve been saying this for the past year consistently, is that the key to being a successful investor now more so than ever is you have to be very tight in your underwriting, you’ve got to be conservative and you have to bank on what you see happening now and not what’s happening in the future.Yeah, that’s perfectly said, and I still think the long-term trend of rates is down, but I think the timing of that is going to be super hard to, alright, well James, you just brought everyone down to start the new year. Thanks a lot. We at BiggerPockets are actually launching something really cool I want to tell you all about. It’s called Momentum 2025, and it’s an eight week virtual series that helps you prepare to succeed in 2025. So we have two basically different things that are going on with this. First, you’re going to get eight weeks of content every Tuesday from two to three 30 Eastern Standard. We have amazing different experts and hosts. I’ll obviously be there, so James and Kathy and Henry, but tons of other real estate educators are going to be sharing their insights and expertise eight weeks in a row. And on top of those educational courses, you’re also going to get paired with other investors in small mastermind groups, which it’s just this great opportunity to share ideas, get feedback, have some accountability.
So these things together, it’s all designed to help you succeed as an investor in 2025. I wanted to share it with you today because it starts February 11th, but actually if you buy tickets now before January 11th, you get early bird pricing which gives you 30% off, so you definitely want to take advantage of that. On top of what I mentioned, you’ll also, if you do the early bird, you get bonus resources over $1,200 worth of goodies, like books, planners discounts on future events. All of it is available to you. So if you are interested in doing this, make sure to buy your ticket before January 11th so you get that big discount. We have more headlines that will impact your investing in 2025 right after the break. Hey friends, welcome back to On the Market. All right, let’s move on to our second headline. Kathy, what are you looking at these days?Well, my article is from housing wire in it. The title is California Will Require Home Insurers to Offer policies in high risk Wildfire areas. So this is just an issue across the country, a big issue in California in regards to fires, but we’re certainly not alone in that. What we’ve experienced, and I’m definitely ground zero for fires right here in Malibu, lots of neighbors have completely lost their insurance. Their insurance provider that maybe they’d been paying for 20, 30, 40 years just pulled out. They couldn’t get reinsured, it wasn’t renewed. And what do you do? What do you do when you can’t get insurance? It’s really scary. And so California does have a backup for that, but it’s not that great. You can get our coverage is up to 1.5 million and as you probably know, that’s pretty low for California. It’s not going to cover a rebuild.
So anyway, this article, I remember interviewing an advocate for homeowners in the insurance world and he said, don’t worry that this problem’s going to get fixed eventually, and it probably will come through regulation. So we’ll see how this goes. It’s basically, it says the California Department of Insurance unveiled a new regulation this week that aims to increase homeowner’s insurance coverage in areas prone to wildfire in response to the recent pullback in policies. So obviously that means that the costs are going to be passed on to the homeowner and Rich and I actually did find an insurer who would insure the full value of the house, but it was like $120,000 a year. We’re like, no, no thanks. Instead, rich just stayed here during this past Malibu fire and all the guys, all the husbands stayed at least on our street to fight the fire themselves. Like it’s crazy. We’re not insured, which probably isn’t great either. So what do you guys think? Do you think that more states are going to regulate and force insurance companies to provide coverage?Yes, banks will.I think so. Or states are going to have to create their own insurance policies, especially Florida, California, Colorado, these places. It’s just not economical for insurance companies to run a business there. Yeah,Yeah. I mean if you think about, we already have a home ownership conundrum where people can’t afford to buy homes, but now if people can’t get insurance for homes, banks are going to want obviously people to have insurance since they’re providing the loans. And then if people can’t either afford the insurance or can’t get insurance, they’re just probably not going to buy homes. They’re going to go rent where they can have renter’s insurance and that’s going to continue to exacerbate the problem. So I think there will be regulation at some point. There has to be,Yeah, so this is a start and it’s not that great, but it’s something it says the rule will require all insurers to do that do business in the state to begin increasing their policies in high risk wildfire areas by 5% every two years.I don’t even get it. They’re just basically saying they have to increase the replacement value of the houses.No, the number of policies. So this is going to be a slow spread, and I don’t think this particularly is going to make a big difference, but the California Fair plan, which is sort of the backup, which again isn’t that great, it has been completely overwhelmed and was never meant to be the insurance policy that everybody has. It’s what we have, but you can’t get through to them. You don’t even know if you’re covered. They’ve dropped us several times and Rich has been on the phone for hours trying to make sure the policy’s in place, but for me personally, we just had a fire outside our door. Everything’s kind of burned out there, so I got another five years before I have to worry about it.Yeah, because all the fuel is already gone. It’sAlready gone, and like I said, I’m ground zero, so we had firefighters all around the house and they’re like, you’ve done a really good job. You have no trees. So that’s the other thing is we can’t really plant trees by our house, so the price you pay,Well, and that’s the thing that you have to pay attention to as an investor is what’s the policies of the state that you’re going to be investing in? Because a lot of this is caused, as far as I know from the insurance commissioner in California, I think they tried to tell insurance companies that they had to standardize their insurance increases and they go, you’re not allowed to increase it more than what we are basically telling you we can do. As far as I know, and what that did is is it made all the major carriers leave California State Farm, Allstate, that the big hitters are not insuring there anymore, and it’s a massive problem because our project in Newport Beach, which hey, we’re in contract on.Oh, nice dude. Oh,That’s awesome. It’s set to close in nine days. Wow. I’m not going to say the number. That’s awesome. But it’s definitely the most expensive flip I’ve ever doneAbout to be the most profitable flip you’ve ever done. HopefullyProfit, yes. Return cash on cash. I’m going to break this down actually something to be said about smaller purchase prices.Amen, brother.Yeah, the returns are, I’ll break it down later, but I got canceled three times on that property for insurance, and it is a complete nightmare and the cost is super expensive. I think for my flip, I paid $42,000 for the year for insurance, and that was my third policy. And so as you start investing in, like Dave said, Florida, California states that are overregulating because overregulation is why they left not just the conditions because overall California, yes has fires, has other things going on, but it’s also the politics are not good and that’s why they all left. And so I think you really want to pay attention to it. It is expensive between the property taxes in California, the insurance cost and the housing costs, it makes it toughFor sure. Yeah, this is just one of those things where I feel like it’s going to backfire if you’re just increasing regulations where you’re already scaring companies away and then you’re adding regulations that’s going to make it even less profitable for them and they’ll just go somewhere else and then there’ll be even less competition. We’ll see, but I’m not sure this is the right solution. All right. Let’s move on to our third headline. Henry, tell us something.Well, this article is from the world economic form. It actually just released today and it’s titled, will 2025 be a Pivotal Year of Recovery in Commercial Real Estate? And it goes on to talk about essentially how many central banks have begun cutting interest rates, which are leading to improved fundamentals and increased capital inflows into the private markets. And that is creating a favorable environment with approximately 66% of global markets entering a buy cycle, which is the highest level since 2016, but it starts to go into specifics with commercial real estate saying why it might be a better year in 2025. Mainly saying that because of the housing shortage that residential commercial real estate will be on the rise. It also talks about how retail is doing really well, and I mean that’s very true. Industrial is also strong. Warehouses and industrial spaces have done really well in the commercial space even over the past couple of years as commercials been on the decline.
And a lot of that is because of lots of side hustle, people starting their own online businesses and needing warehouse spaces because of major companies expanding more into online sales and retail sales online. So they’re needing more warehouse space and industrial space. It’s moved into the food industry with ghost kitchens and people setting up kitchens and doing Uber Eats and DoorDash out of Ghost Kitchens where they don’t have a traditional brick and mortar. So those spaces have been doing very well. And then office spaces, there are a lot of companies that are asking people to come back to the office and realizing they weren’t getting the productivity that they thought they were when people were doing a lot of work from home. And so I think all of those things are good signs for the commercial real estate space. I don’t necessarily know that. I agree with this article at 2025 is going to be the year where things turn around for commercial, but I do think that some of the indicators are showing that there could be some positivity or things moving in a positive direction in commercial real estate. But it also does talk about there’s an increase in niche sectors of commercial real estate such as student housing, self storage, data centers, which is huge for a lot of companies. And so a lot of these type of niche commercial real estate sectors I think are great opportunities for investors within commercial real estate to diversify. What do you guys think?I don’t buy it.I don’t buy it either. Well, it depends on what you’re classifying as commercial. That’s the thing people make that mistake of it’s going to do bad or good. Well, what asset class are you talking about? There’s a very broad range. I think office is a disaster still.I want to buy office. I don’t know how, but I feel like there’s going to be just some absolute fire sales.The one thing I do know, the ones that are sitting vacant, I’ve actually been, we’re working on trying to find a new lease right now and get some more space and the thing that you’re always negotiating with is that are available and there’s a lot of subleases that are available and subleases are deals, and so as they’re trying to lock you into this long-term rate, you can use that to negotiate your own terms. But I will say a lot of the guys that did buy, they’re not as leveraged as the buildings I’m seeingBecauseThey did a lot of 10 31 exchanging or they were parking money and so they can kind of weather the storm. But for the mom and pops office buildings, yeah, I think there could be some pain there. But there is, like Henry said, industrial depends on the location of the retail. Those are great things to buy. If you can get the right buy on ’em and they’re in the right location and there’s the right tenant demand,It’s the tenant. IfThere’s no demand, don’t buy there. So it’s the path of progress. Where’s it growing? Focus on that and then look for the opportunity.It’s similar than with residential real estate and you have to underwrite well and you have to understand who your tenants are going to be and who they aren’t, and then what’s the demand for that product or service in your area. There are absolutely businesses who have to have a brick and mortar to be successful, but do those businesses need to be in the part of town where you’re looking to buy? What’s the competition of those businesses? You really have to underwrite and do a lot of research. Well, in the retail space for commercial, if you’re going to buy one of those assets, I think it can be super risky if the tenants you need already have competition are not wanting to be located in that part of town. You can be sitting on some vacancy.There’s going to definitely be opportunity out there because so many commercial real estate investors have had the motto survive till 25 and here we are in 25. And the belief was what I said earlier, it ties back to our first story on the bond market and rates. And a lot of people thought by now that the economy would’ve slowed down that there would be job losses, that all these rate hikes would bring us into a recession. The Fed even said that there would be pain in real estate and it would probably looking at a recession, and here we are moving into 2025 and bond yields have actually gone up and so have mortgage rates and the Fed is now saying they’re not going to probably cut for a little while, cut rates lower, and who knows if things continue to boom, they could even hike rates again, we don’t know.
So a lot of commercial real estate investors who have been hoping that this was the year that they would see rates go down and that they could refi as their loans come due and they’re on short term notes where many, many, many commercial real estate investors are having to refi this year and they are not going to be refining into lower rates. They’re going to be refining into rates that are maybe two times what they currently have and that is really hard. So if you are a commercial real estate investor, there are deals to be made out there. I think this is the year that some property owners are going to realize they have to discount prices. I know last year we’re seeing that, but there have been holdouts, right? So if you know how to find the deals, I think this is a year you could do really well.I agree, Kathy. I think there are going to start to be opportunities. There’s also going to be a lot of garbage out there right now, which is kind of always the case, but the question to me is what’s going to be the catalyst? Because it feels like there’s this building distress and people are just kicking the can down the road, but there hasn’t been a catalyst yet to force people to sell at a lower rate. Whereas everyone, it seems to agree, every buyer at least I know agrees that prices have not yet corrected to the point where it’s attractive, but sellers have somehow managed to not discount to the rate where people think it’s appropriate to buy. And so something’s going to happen in my mind, I just don’t know if it will be in 2025. I think people have gotten pretty good at kicking the can down the road and maybe it will happen, but it could be 2026. Frankly, I’ve been surprised. I thought the distress would already have happened. I kind of thought we would’ve been in a buying zone now, but they’ve gotten good at avoiding installing, but eventually that’s going to dry up.I’m on the same boat as you, Dave. I’m still skeptical regardless of what this article is saying, especially when it talks about some of these alternative sectors when it looks like it mentioned student housing and self storage, and I think college is not on the rise right now. Less people are going to school than ever before for higher education. Self storage. I think self storage is getting overbuilt. I mean I think it’s a cycle where there’s just too much self storage and so I don’t know that that’s going to be the saving grace. I think data centers are a cool idea, but I mean how many across the country is really going to make a difference in this? I just don’t know that these alternative sectors are going to be the thing that turns around commercial real estate. But I have said, and I’ll continue to say, whoever figures out how to take commercial office and convert it to affordable housing is going to make a ton of money because that’s a problem that we have. There’s tons of vacant buildings all across the country. If somebody could solve the puzzle and get all the powers that be to work together with city and local government and with the federal government and with the builders and with the investors in order to turn commercial into residential affordable housing, they’re going to make a lot of money.You know what I don’t understand because the reason they can’t convert that is because of the cost of construction. You got to drill through concrete. I mean it is so expensive drill through, but why don’t they just make cubicles for housing? I mean it’s a little weird, but at the same time you just pop ’em in, zip ’em in. I mean that’s going to be the only way to do it because the cost is way too much to be drilling through. Yeah,I think the issue was the bathrooms and water andPlumbingAnd so you just have to share bathrooms I suppose,ButThey could float it. There’s always a way to float. ItSeems like there would be a way. Yeah,I’ve seen a couple of them pop up recently, but it really depends on the footprint of the original building. Some of them are prime for it, some of ’em are not. Personally, this whole commercial recovery I think is one of the more exciting opportunities in real estate on the horizon. I just don’t know. It’s hard to time and we’re not there yet, but when it happens, I think we’ll be a really good opportunity for people. Alright, time for one last word from our sponsors, but we’ll talk about some good news we’re seeing in terms of inventory right after this.
Welcome back investors. Let’s pick up where we left off. Alright, let’s move on to our last story, which I brought, which is somewhat good news. It’s that new listings, which is just a measure of how many people in the residential market list their homes for sale are up 8%, which means that people are able for the first time in a long time to actually see more inventory. This is sort of the other side of the coin of higher interest rates. We don’t want lower affordability, but it is allowing inventory to recover. We’re not really at pre pandemic levels in most cities yet, but I think this is generally a positive for investors because it means that there’s going to be more deals out there and there’s going to be more opportunity to negotiate with sellers. We’re getting to a more balanced market, which hopefully will increase the number of transactions volume that will be music to the ears of our friends who are agents and lenders and hopefully we’ll just get a little bit less stuck than we are right now. So I don’t know about you guys, but I see this as a positive thing. I know some people see increasing inventory as signs that price appreciation might slow down, but I think more inventory is required for if we’re ever going to get back to a more normal market.And what we’re talking about is increasing inventory. I think the gap between what we have and what we need as a country is still so large. So it’s not that we’re going to be at a level where housing won’t be an issue anymore, but increasing inventory, I think’s healthy for the market. I think it’s healthy for investors because it’s going to continue to weed out a lot of the run of the mill investors who don’t do a good job, who are maybe not doing this for the right reasons, who don’t have a good business model, they’re not going to be able to survive because it’s going to be harder. If you’ve got competition, that means you’ve got to do a good job. It means you got to do a good job from start to finish, from how you buy it to what you do to it, to how you market it and put it out there on the market and sell. So I mean I think that’s a positive thing for buyers and sellers.From what I’ve seen, even though inventory has risen, it’s kind of just back to where it was pre pandemic almost, not quite. And that’s again looking at a national number, but when you really dive into different markets, it’s a different story. We’ve known for a couple of years now that Austin has too much inventory for example, and then you’ve got other markets that are still just, there’s just not enough and prices are going up. What’s interesting is that everybody comes out with their predictions this time of year and all the big data real estate companies have come out with theirs and Fannie Mae, all the mortgage companies, everybody comes out with their predictions and it’s kind of across the board that in spite of this rising inventory, they expect prices will continue to rise. Not at the same pace that it’s been, but it’s like two, I think I’ve seen two to 4% increase in prices in spite of rising inventory. So we’ll see, but not everywhere. Like I said in Austin, I think prices have gone down because there’s too much inventory.It just depends on what the inventory is too.
There’s so much junk in the market where it’s like really you want to charge that much for that house? I think this would be interesting if we had a broker from each state break down available inventory and then fully renovated property. What’s depending on that because we’ve sold after the election, we sold off everything that was renovated, but what’s remaining? There’s more inventory in the market, but I wouldn’t want to buy it not for that pricing. They got to put too much money into it afterwards. I don’t like the inventory stats because I don’t think it tells an accurate story as a flipper or developer, it’s about what transacts and a buyer is. If a buyer’s right now pricing’s at all time highs rates are high, it’s hard to afford a house. They do not want to put more money into a house right now,
And if they can find that house that makes sense inside their budget and they can buy it, turnkey people are still buying that and that’s what they want. We did something, I tested something and it worked very well. We were going in the holiday months, we know it’s slower that time. We listed a house for three days, canceled it, pulled it off market. We just did it to tease it. We listed the house for 50 grand higher than we wanted and then what happened? Foam was burning, Hey, what’s going on with the house? There’s nothing renovated. But we sold it three days later with a canceled listing because the demand, even though there’s more inventory in this area, the demand for a good product was there and it was a fairly expensive house is 1.55 million in an area where they usually are trading one three to one four. And so the right product moves and so that’s why I don’t like the inventory stats because there’s way more inventory in that neighborhood, but not good inventory.Alright, well those are our headlines for today. Thank you guys for bringing these. I think we have set it up for a very interesting year. Right now we’re seeing inventory start to climb. Interest rates are staying high. There could be some movement in commercial real estate and insurance costs just keep going up. So we have a lot of the things that we’ve been talking about for the last year still going on and that’s going to give us plenty to talk about over the course of 2025. Well, Henry, James, Kathy, thank you guys for being here today. We appreciate you and thank you all so much for listening. We’ll see you soon for another episode of On.