Welcome back to the Theopetra Testament. Subscribe now so you don’t miss our weekly educational posts bridging the gap between cryptocurrency and real estate. This post, composed by our Self-Repaying Home team, will give you a brief update of financial markets in relation to housing before diving into the fifth part of our series on purchasing a home. Alpha galore.

Weekly Market Update:

Current Mortgage Rate: 4.55%, another new 12-month high (Bankrate.com) ... noticing a pattern?

After a hawkish FOMC which saw the Fed raise rates for the first time since 2018, fixed income markets took a jolt as several Fed speakers (including Jay Powell himself) called for 50 basis point rate hikes in the future to stem a ‘much too high inflation’; this differs drastically from the last Fed hiking cycle in 2017/2018 which was 1) often telegraphed with little volatility and 2) moved in small 25 basis point increments.

The above hawkishness has repriced the entire rate market again, with ~8 hikes now priced in over the next year and yields across the rate markets making multi year highs and wiping out most of the COVID 2020 rate move (which saw yields drop to near zero). Below is an illustration of the expected Federal Reserve Rate policy in the future (Atlanta Fed).

Since our last piece, 2 year Treasury bonds are now 40 basis points cheaper on the week, rising from 1.75% to 2.15%, while 10 year yields sit north of 2.25%!

The move in rates is so large that by some measures, it is now the worst performing fixed income market in the last 30 years. Said another way, the drastic and more notably, persistent, move in yields is truly historic. Remember, 2y yields were only ~0.70% as recent as 3 months ago.

Amid all this, risk markets ironically had their best two-day span in months after last Wednesday’s Fed’s hike, with S&P up nearly 5% in a 2 day span. Positive geopolitical headlines, energy stock strength off the heels of increasing oil prices, and an old-fashioned ‘dead cat bounce/relief rally’ all contributing to the broad-based rally. With that said, the Nasdaq remains ~15% off the all-time highs and risk appetite will most likely remain choppy given the aforementioned volatility and moves in the rate and macro markets.

Interesting Housing Headlines

“Foreclosures are on the rise [...] in January a seven-fold increase in foreclosure starts [...] an early signal that many of the regulatory protections implemented during the pandemic to help Americans stay in their homes are starting to wear off.” (Market Watch)

“Something new everyday [...] what used to be outrageous is now the norm in Utah’s housing market [...] people are putting down non-refundable deposits, offering many thousands above the asking price, waving inspections and ignoring the appraised value of the house [...] Those kinds of offers were almost unthinkable just a few years ago.” (HousingWire)

Lesson Five: “Gotta Go Where Puck is Going, Not Where Puck Is”

In real estate one doesn’t generate wealth by buying it, but rather stealing it. Identifying housing opportunities in areas that have not yet been fully developed is the first key to this mantra, offering the best upside and HPA (Home Price Appreciation) compared to their more established brethren. A quick glance at the last 12 months only reinforces this notion – the top five states in HPA growth since early 2021 have been Utah, Arizona, Washington, Florida, and Nevada – not exactly ‘established’ communities, while Maryland, Pennsylvania, and Washington, DC. are in the bottom five of growth over this same time span (BankRate). Why is this?

Markets are in a constant state of change and flux. Top performing markets generally have a longer runway to appreciate from – think about a low cap alt coin vs bitcoin during alt season - and as macro trends develop these markets have a much easier time appreciating at a rapid pace. From the list above, a state such as Utah has seen ~30% appreciation compared to Maryland, which has ‘only’ seen 12% growth over the same time. This rate of HPA makes a massive difference on the average $400K house; a homeowner in Utah has pocketed $120K in gains vs just $48K for the same house in Maryland!

If those gains are now invested in the market over ten years at 6%, the Utah owner comes out with ~$215K while the Maryland owner has ~$85K – the Maryland owner hasn’t even cracked the initial profit that the homeowner in Utah made in year one, and the Maryland owner had ten years to do it!

Choosing where you make the biggest purchase of your life is a huge variable and cheat code!

Factors To Consider In Buying The Up-and-Comer

Let’s go over the two big macro forces at play in the changing real estate market the United States currently faces:

Taxes. Let’s just get this one out of the way first. What we refer to as the “Amtrak Corridor” – stretching from Boston to Washington, DC, is rife with high state income and property taxes. New Jersey has the highest property taxes in the nation at 2.38%, while much of the south in states such as Arizona, Louisiana, and South Carolina are all sub 1%. On the average $400K house, this is a difference of $5K+ per year in taxes! Given the average salary in America is ~50K, this is 10% of gross income! The resounding difference in taxes across the nation has no real catalyst to slow down and only compounds the migration.

See below for full illustration of the United States’ property taxes (Tax Foundation):

Education. This is a legacy issue in housing but still important. Developed and mature residential areas typically have better public education systems than their still developing counterparts. With that said, homes in these zip codes often trade at a premium due to the schools they reside in; however, it is quite possible this can and should change in the future due to the simple fact that Americans are either 1) skipping having kids or 2) waiting longer in life to have smaller families. 44% of Americans aged 18-49 now claim it is ‘not likely’ they will have kids, up 7% from 2018 (Pew Research). This is a continuation of a near century long pattern that has seen average family size decrease from close to 4 individuals per family in the 1960s to now an average of just ~3.15 (Statista).

The “Miscellaneous” Section of Factors:

And a quick rundown of other important factors to consider when finding a hidden gem:

Infrastructure. This takes some digging (aka effort) but is all in the public domain – which municipalities are committed to providing and building new infrastructure that will further enable population growth? As the population grows, so will tax revenue (to then improve schooling and other quality of life), and the town will literally broadcast to the world (in the public eye!) what their plans are to achieve this.

Climate. We aren’t going to pretend to be far left, but it’s important to at least consider the long term impacts of climate change on a property and location. Oceanfront property or the property across the street in a coastal zip code below sea level? You make the call. Also consider the migration towards warmer climates that we’ve seen since the start of the pandemic, with housing in the ‘sun belt’ doing incredibly well.

Accessibility. How many direct flights are making the trek to a location? How easy and direct is the traffic to a downtown central location? Foot traffic is similar to population growth in that it is directly correlated and tied to an uptick in tax revenue.

Tourism. This is a double-edged sword; on one hand you don’t want a location to be solely dependent on tourism (labor force will most likely be below average, too much dependency on cyclicity of economic bull markets and discretionary spending, etc) but you also do want the backstop of rental income later in life from renters (and their money into the local economy).

Zoning. City planners will be the first to tell you – zoning can and does change all the time. If an area goes through a shift that transforms it from something such as ‘agricultural’ to ‘commercial’ or ‘residential’, you can expect an uptick in population and tax revenue. Harder to find (compared to infrastructure) but it is also out there in the public domain.

Note: We are leaving ‘jobs’ out of the above list. It is painfully obvious that good jobs matter, but in the future, it is likely that traditional workplace settings are replaced more and more by work from home set ups (see Theo 1 substack and Geo-Arbitrage).

Putting It All Together: A Few Places That Catch Our Eye

You can’t write 1,000+ words on finding hidden gems and not at least provide a few examples that may potentially match the above criteria. With that said, here’s a few ideas to get the creative juices flowing. Note: This is not financial advice and strictly meant to be debated and for fun.

Fort Washington, MD. Yes, it’s in Maryland which we just spent the last ten minutes dissing but let’s look at the positives. It’s possibly the last ‘affordable’ real estate in the Washington, DC metro area (20 minute drive to the monuments and Nationals Park) with a published plan on increasing tax revenue (National Harbor, MGM, etc) and direct access to downtown via local roads instead of beltway. The kicker? Has recently undergone zoning changes to bring in more commercial business. Flip side? Historically below average schools.

Kennebunkport, MA. Known as the “Hamptons of New England'' by some, with famous residents including the Bush family. How is this under the radar? Online government reports and voting of a new Amtrak station/train that would make direct access to Boston, MA accessible. Year round tourism and events (beach in summer, Christmas Prelude in winter) ensures rental income. Situated near Portland, ME and Acadia National Park. The kicker? The State of Maine sits on more fresh water than any other state in the country should h20 become a traded commodity in the future. Flip side? Already pretty expensive.

El Zonte, El Salvador. Boom! Hit you with an international spot! Let’s remove the stigma of the 1980s (after all, New York City wasn’t exactly a great place to be in the 80s either) and take a look at what is happening in El Salvador: 1) committed government initiative and funding to make this 13 mile stretch of beach ‘the next big thing’ 2) new roads and highways direct from airport to this beach strip, 3) largest hospital in Latin America to ensure prompt medical care, and 4) no taxes on crypto transactions, attracting a plethora of worldwide talent. The kicker? El Salvador is only a 4 hour and 40 minute flight direct from aforementioned New York City. Flip side? Stigma and historically high crime.

Wrapping It Up and Next Steps

In this fifth installment, we’ve gone in-depth on the macro forces at play in America’s changing housing market and illustrated the importance of finding ‘the next big’ housing markets, highlighting how information freely available in the public domain can help any home buyer make an educated purchase.

The Theopetra Testament

Where To Buy The Home?: Lesson Five