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We are so independent

Like no other

Fireworks over Austin at Dusk

America stands out in so many ways


The 4th of July seemed like a good day to write an ode to America. We are so independent we almost don't need the rest of the world at all. Don't worry - it will get around to real estate. If you look at the origins of all major civilizations they all start around a river basin. There are about a dozen of them in the world (depending on how big they have to be to be considered major that number changes). Think Tigris, Danube, Yangtze, Ganges, Mississippi, etc. The top 5 largest - and very importantly - most navigable of these are in North America. Four are in the US, and one is in Canada. The real kicker that makes America so OP is that they are all under the same political umbrella, and, without getting into too much detail, they are essentially impossible to invade. All of the other fertile navigable river systems that gave birth to large civilizations are singular and competitive. In other words, the first group to industrialize the US (or what we know today as the US) was bound to win. Oh, and we are also a net exporter of petroleum products since 2011, which gives the US some of the cheapest energy at scale in the world, so no need to get involved in the Middle East anymore if we don't want to. Handy! I can't believe I made that paragraph so small! If you want to go all Sid Meier on it with me, I would be happy to hang out and talk geopolitics over a few cups of coffee... because just one won't cut it. The icing on America's cake (at least at this time) has to do with demographics. Most developed countries all over the world are very top heavy, meaning they have more retirees than children. This is especially bad in China (yay unintended consequences of the one child policy!), Japan, and Germany. It's less bad in other European nations, except France (very generous incentives to have more kiddos). Still, most of the developed world is going to be dealing with fewer people to support more non-workers, which is going to squeeze them very hard economically in the coming decades. The US suffers from this problem as well with its boomer generation - but with a silver lining. Gen X is much smaller, but it is only temporary. Gen Y is bigger than Gen X. The boomers will vote to increase/maintain as many benefits as they can until they "retire" from this statistic - which will be around 2041 (End of Baby Boomer generation plus the average American life expectancy). After that, every year the US budget will get easier and easier to maintain as the ratio of income producing (working) to benefit receiving (retired) people shifts in an easier direction. This won't be the case for those aforementioned countries unless we can develop fully autonomous AI robot workers that are also consumers before then. Pause and think for a moment about the idea of building robot consumers - ones that create new/larger markets for products that these struggling economies could create... I just died a little inside. Some ideas are not worth sharing. Sorry.

What does this have to do with real estate?

Alright - this newsletter is about Real Estate right? Yes, here you go! The ability to buy houses is all about jobs. So let's look at the state of work in America. The pandemic was certainly a turning point. Work is now different, and the pandemic was a catalyst for many boomers to retire. "The world is ending, might as well do it from the beach... right?" Here is a chart of retired workers as a portion of the population:


Retired workers as a share of the population

If you look closely at 2020, you can see a distinct shift in the trend. Every year we are now going to have more and more experienced older workers leave the workforce. They will take their money with them and spend a lot less (read less economic activity) in retirement. They will also likely leave the stock market for less volatile investments like debt and annuities - especially now that bonds are starting to pay something again. That downward slope up until 2020 was inflationary. Those decades were the high-spending-and-high-investing portions of that generation, which is now shifting gears. I expect this to continue up until around 2040 for the aforementioned reasons.


All of these workers leaving are making labor pools tight - to the point that, despite the massive and very speedy increase in the Fed Funds rate, unemployment is still impressively low.


Civilian unemp[loyment rate reasonally adjusted

Despite the layoff headlines at the tech companies, the US is largely well employed. This is going to continue to drive wages up - which is good news! We simply aren't going to get new workers fast enough to change this until successive generations are larger than the previous. Since all of that retiree money will be leaving the markets for safer shores, it could also mean higher rates for lending for quite some time - or at least until 2040-ish. So it's a double edged sword. On one hand we have better employment and increasing worker wages especially at the low end. On the other we will have capital flight and increasing borrowing costs. Those 3% mortgages aren't coming back any time soon. I can't tell you which force is going to be greater, but this is the tug of war I am watching.

Long term


This month is a macro letter, since it is America's birthday. In the long run I am not worried. As humans, we are over focused on the short term. The real estate market has gone through an expansion phase for sure, but we haven't gotten to hyper supply yet. After that point, there is a recession, then recovery, and the cycle repeats. It feels like we skipped hyper supply and are maybe going into a small recession, but that has been turned on its side because of the irregular change in labor mentioned above. So I will fall back on the plan that has always worked for me, which is to simply buy with long term fixed debt without over leveraging... and wait. If you can safely afford the property when you buy it, you can weather whatever comes at you and take advantage of good weather when it shows. America is still one of the very few countries in the world where you can actually own property and build equity. For all of its ills, I love the opportunities it presents and the dynamism of its people and economy. Its worst enemy is only itself. So I invite you to celebrate this country in your own way. Thank you for being a part of it with me.

HAPPY BIRTHDAY AMERICA!

As always, question everything and don't take suggestions as absolutes. These are written from a perspective of our experience and offering our insight, however limited. We're not perfect and get things wrong... but not on purpose.

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