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Welcome to Deerwood Realty YouTube channel. I'm John Schink. You know, the weird thing about economics is that it kind of depends on where you sit, right? So if you're at work and you're getting raises and you're moving up the company ladder, life is pretty good, right? And then if you're not, say your business is going south, say you've lost your job in a competitive industry and have not been able to get another one, well, you probably think the economy is terrible, right? That's just kind of how we are as human nature.

And so I'm in this situation where my business has fallen off dramatically since last year, and I know that the Fed and everyone else wants that to happen because housing is such a large part of the economy. Now, there has been strength in new home sales, but it's relative strength, and there's reasons for that. There are incentives that they can do that regular homes can't. But maybe, maybe I've been too harsh. Maybe the economy is wonderful, maybe things are great, and maybe things will continue to do well up into the future. I mean, why should we be concerned about housing? We can be concerned about other things, right? There's no point.

So, to try to keep myself sharp, I saw an article today, and I wanted to share it with you. I thought it was kind of fascinating. Here it is. It's off of CNBC, and it's from the bottom line. Let's go over just the headline: "As the market enters correction territory, don't blame the American Consumer." So the question one asks is, is consumer spending the bellwether for the economy? Does that make everything go? I remember during the Iraq War, the second one, Bush just said, "Go spend, pretend that the war is not even happening." That was something.

But let's go through this and just see. You know, maybe I'm wrong, maybe things are great and I just don't realize it because housing is down. It says the initial third-quarter report on the gross domestic product showed consumer spending zooming higher by 4% a year after inflation, the best in almost two years. September's retail sales report showed spending climbing almost twice as fast as the average for last year. And yet, bears like hedge fund trader Bill Amon argued that a recession is coming as soon as this quarter, and the market has entered correction territory. So I think that there are so many data points that you can show that say things are good or things are bad that people, I mean once there's consensus of things being awful, I guess look out at that point, right? Or will things never be awful depending on your political beliefs or depending on, well, just your political beliefs?

It says, "For an economy that rises or falls on the state of the consumer, third-quarter earnings data supports a view of spending that remains mostly good." So that's the statement by the author, that the state of the consumer and their spending is the most important part of the economy, the most important way to look at how things are going. It says people are kind of scratching their heads and saying, "The consumer is holding up far better than expected," said CFR research strategist Sam Stovall. "Consumers are employed, they continue to buy goods as well as pursue experiences, and they don't seem to worry about debt levels, their own debt levels."

And that's the other thing that I've been wrestling with myself is, look, are people just going to spend until they can't spend anymore? Has it gotten to that point? How is this possible with interest rates on everything from credit cards to cars and homes soaring? How is this possible, like, what is going on? It's the does from bellwether companies across key industries that tell the real story. So there's a real story, and we just don't know it. Delta Airlines and United Airlines sharing how their most expensive seats are selling fastest, homeowners using high interest rate fighting mortgage buydowns. Amazon saying it's hiring 250,000 seasonal workers. So, the real story is homeowners are using high interest rate fighting mortgage buydowns. See, to me, like they almost have to use buydowns because they can't afford a home any other way. Like, that's not a good thing to me. So see how it's just all in how you look at things. The author looks at this as saying that's a wonderful thing, that they can buy down the mortgage, and I'm sitting there going, if you got to buy down the mortgage rate, something's not right.

It says, "The picture they paint largely matches the economic data, generally positive but with some warts." So, things are great, right? Like you feel it, things are good. It's so strange. No, so then this is what caught my eye because it was about housing, and as a real estate broker, I kind of pay attention to these things. It says, "How home builders are solving for mortgage rates." Well, okay, let's go. It says, "No industry is more central to the market's notion that the consumer is falling from the sky than housing because the number of existing home sales have dropped almost 40% from pre-COVID era peaks." Now, I'm going to get shadowbanned because I said the word COVID in the real estate space, but while Coldwell Banker owner, Anywhere Real Estate, saw a profit fall by half, news from builders of new homes has been pretty good. It's like the whole residential market is cratering, but new home builders are doing okay, and therefore it's great. It says, "Most consumers have mortgages below 5%, but for new home buyers, one reason that rates are not biting quite as sharply as they should is that builders have figured out ways around the 8% interest rates that are beving existing home sellers." That helps explain why new home sales are up this year. Home builders are dipping into money that previously paid for other incentives to pay for offering mortgages at 5.75% rather than the 8% level other mortgages have hit.

Now see, to me, this is a joke. The mortgage buydown that they're offering is like one or two years, and you still have to qualify for the overall payment before you can get the home. It says at PulteGroup, the nation's third-biggest builder, that helped drive an 8% third-quarter profit jump and 43% climb in new home orders for delivery later, much better than the government-reported 4.5% gain in new home sales year to date. "What we've done is simply redistribute the incentives we've already historically offered towards cabinets and countertops and redirected those to interest rate incentives, and that has been the most powerful thing." Now, to me, for me, the sign that things are very bad in the housing market is when home new home builders start lowering their prices. That's when it's really bad. Right now, they're getting by on incentives, not on lowering prices. And I'll be honest with you, like, to me, buying a new home and having crappy countertops and all that stuff, I mean, I see it. I see it a lot now, is somebody will buy a big house, and they'll have the worst fixtures in it, okay? And then somebody else will buy the same house in the same neighborhood or the same style and put everything in it, like granite countertops and just a great home. And the person that put nothing in their house is like, they think that it's worth the same amount as the other house that has everything in it. And it's a very bizarre thing. I've seen that more, and I think that's a sign of how home builders have kind of learned to not have to offer the greatest things for people to move into the homes.

It says the mechanics are complex. They're not, but work out to this: PulteGroup sets aside around $35,000 for incentives to get each home to sell, or around 6% of its price. The company said on its earnings conference call, part of that is paying for a mortgage buydown, about 80 to 85% of buyers are taking advantage of the buydown offer, but many are splitting the funds, including mixing a smaller rate buydown and keeping some goodies for the house. So, can you imagine, 80 to 85% of buyers taking advantage of the buydown offer, and somehow this is a positive thing?

Wells Fargo Economist Jackie Benson said in a report that builders may struggle to keep this strategy going if mortgage rates still stay near 8%, but new home prices have dropped 12% in the last year. See, they haven't dropped that much where I'm at. It could be true in other places. In her view, incentives plus bigger price cuts than most existing homeowners will offer are giving builders an edge. Well, that's right. That's absolutely right. The problem that I see is the homes, the new homes, are so much more expensive for what you're getting. It's like, you know, half a million dollars for a 1,200 square foot house in St Louis, with no yard, and it just seems kind of not good. But you know, in other places, I mean, if it was a house in California, it's supposed to be wonderful.

So, with that, I'm going to head on out. Thank you for watching. Thank you for listening, and I'll catch you on the next one.