Image Source: UnsplashHere are some things I think I am thinking about this weekend.1) Buy Versus RentI enjoyed this conversation between Ben Carlson and Duncan Hill about buying versus renting. I’m increasingly convinced that almost every asset purchase we ever make is just a temporal decision. How do your assets relate to your liabilities and expenses across time. In the case of shelter time is the most important aspect of any analysis. If you go online you’ll find a million buy/rent calculators and different things to consider when deciding to buy or rent. But time is the most important factor.In my Defined Duration model residential real estate comes out to about a 20 year instrument. That is, the probable worst case scenario you’ll encounter when buying a home is that you’ll be underwater for 20 years. For example, if you’d purchased a home in 2006 at the precise peak in home prices you’d go 15 years until you were even (using real returns). It was even worse if you purchased in the late 70’s. The odds of you losing money over a 15+ year period in real estate is extremely low, but the odds of losing money in the near-term are higher than many people might think. So it’s an inherently long-term asset.This is the key factor to consider when buying a home. If you plan on living somewhere for a long time then you should seriously consider buying. That not only aligns your assets to the proper time horizon of housing, but it also helps you better maintain some semblance of stability, which is probably what you’re looking for anyhow if you’re planning to be somewhere for a long time. So, as the old saying goes, it’s not about timing the market, but time in the market. This is nowhere more important than in long-term instruments like stocks and real estate.Obviously, there are personal and unique circumstances that will bring other factors into play, but in general if you’re planning to be somewhere for a brief period then rent and if you’re planning to be somewhere for a long time then buy (assuming you can afford to, of course). No need to give yourself brain damage overthinking and overanalyzing all this with cute buy/rent calculators that ultimately end up being market timing tools anyhow.
2) What’s Going on with Interest Rates?Interest rates have spiked over 1% in the last few months with the 10 year yield bottoming at 3.6% in September and finishing Friday at about 4.6%. If you follow the financial news you might think this is the second coming of the big inflation boom. Well, I hate to rain on the fear parade, but I don’t think that’s it. In my view what’s happened is pretty simple.I like to think of something like the 10 year yield as the future expected path of the Fed Funds Rate over ten years plus a premium. So, if the Fed Funds Rate is expected to be 3.5% for the next ten years then you might have a 4.5% ten year rate to account for the interest rate risk in the instrument (3.5% + 1%). And what happened to rates in the last few months is that expectations for Fed cuts got very, very low with the Fed forecasting a 2.5-3% FFR in the years ahead. So the 10 year shot down to 3.6% in anticipation of this, which was a bit overzealous as we now know. And then the Fed altered their expectations to 3.5% for the FFR and the stronger inflation and employment data confirmed that revision. And so interest rates are now correcting to better calibrate for a higher expected FFR over the next ten years.In short, rates got too low and now they’re much more aligned with the future path of the FFR. It doesn’t mean rates are about to spiral out of control or that big inflation is coming back. It just means that expectations for a very soft economy got too high and now the Fed is much more likely to hold rates where they’re at as the data shows that the economy isn’t as soft as expected.
3) The California Wildfires.There’s a lot of emotions about the wildfires in CA and I see that everyone on Twitter is now a wildfire expert. I especially enjoyed seeing Bill Ackman explain how we just needed drones to fly into the fires early on and pour water on them. Never mind the fact that the winds were 50-100 miles per hour that day and the jumbo tankers couldn’t even fly around the fire. Good luck to any lightweight drone trying to navigate that weather. The thing is, there’s this weird thing that seems to happen when people become rich where we then believe they know a lot about everything. Don’t get me wrong. Bill Ackman is a genius of an investor, but I have on idea why anyone would want his advice about fire fighting. No offense, Bill. I love that we’re all thinking of solutions so this doesn’t happen again, but instead of listening to armchair experts, maybe next time we should listen to experts like the fire chiefs in LA who said we shouldn’t cut their funding.Speaking of rich people – one of the worst narratives I’ve seen this past week is this idea that we shouldn’t care about the fires because they were all rich people. Of course, that’s not exactly true. There are lots of people who lost their homes who aren’t millionaire movie stars. But even if someone wealthy did lose their home then do they not deserve a little compassion? Are rich people emotionless? I get it – the assumption is that they’re rich so they can rebuild and move on. But if you worked your whole life to become rich and then poured, say, $5 million of that wealth into a house, built a life and family in that house and then watched it burn down I can guarantee you that person is emotionally devastated and perhaps even financially devastated. The top 10% of Americans hold 24% of their net worth in their real estate. So, imagine if your net worth took an immediate overnight 24% permanent loss. Sure, you’re not ruined financially, but you’re severely impaired. And that doesn’t even account for the other valuables or even just the memories and comfort that was stripped from you out of nowhere.I know this is an emotional issue and everyone’s got strong opinions, but let’s not forget the very real emotional (and financial) toll this would have on anyone.As always, thanks for reading, and stay disciplined!More By This Author:Three Things I Think – New Years EditionGlobal Diversification Is Still Working Strategic Reserves And Stuff