This Déjà vu Income Play Packs a Punch of 14%
Passive income for true Wealth Builders ...
“When you get to a fork in the road … take it.” Hall of Fame Catcher Yogi Berra
I’d just got myself moving early Wednesday when I saw my lovely wife Robin drifting over – laptop in hand.
I had a pretty good idea what was coming – and I was right.
“I found a house we need to look at … it’s perfect,” she said.
With apologies to the late Bronx Bombers C Yogi Berra, this early morning house-hunting chat was “déjà vu all over again” for Good Ol’ Bill.
Robin, Joey and I have had this “I found a house, it’s perfect” discussion dozens and dozens and dozens of times over the last five years. And I’ll bet we’ve looked at a hundred houses over the last six to eight years.
Robin was absolutely right about this house: It was up in Hanover, Pa., just over the Mason-Dixon Line. It had a huge garage/workshop outbuilding for my drill press, hot rod projects and old Model A. It checked all the boxes for Robin. In short, she “hit the ammo dump.”
I gave her a “well-done hug” (a spousal version of the “high five”) … and we agreed we’d ride up, look and go from there Saturday – the first day they were allowing “lookers” (and the first day we could go anyway, since my CPA-wielding wife was knee-deep in tax season).
I’d just got myself moving early Thursday when I saw my lovely wife Robin drifting over – laptop in hand.
I had a pretty good idea what was coming – and I was right.
“That perfect house I found that we need to look at … is already sold,” she said.
With apologies to the late Bronx Bombers C Yogi Berra, this early morning house-hunting chat was “déjà vu all over again” for Good Ol’ Bill.
I’d just got myself moving early Friday when I saw my lovely wife Robin drifting over – laptop in hand.
I had a pretty good idea what was coming – and I was right.
I’d just got myself moving early Friday when I saw my lovely wife Robin drifting over – laptop in hand.
I had a pretty good idea what was coming – and I was right.
“As soon as tax season is over, I’m going to get the office cleared out … we’ll put stuff in storage and get the upstairs redone … we’ll get an estimate to put up your building on the back of the driveway … we’ll turn this into the perfect house … and stay here,” she said.
With apologies to the late Bronx Bombers catcher Yogi Berra, this early morning house-hunting chat brought Robin and Good Ol’ Bill to that proverbial “fork in the road.”
And I believe we’re going to “take it.”
And go with “Plan B.”
I’ve got good cause to share this personal “Groundhog Day” tale. It’s only been a few weeks since I published the Patalon Family House-Hunting Saga.
And yet – despite a relatively short time span – there’s already some new stuff to talk about.
For instance:
New economic data may have shifted the number and timing of the hoped-for U.S. Federal Reserve interest-rate cuts.
That Fed story has likely shifted the outlook for mortgage rates.
And possibly for stocks.
But it hasn’t meaningfully changed what I see for the housing market. In fact, a new report from Bankrate.com reinforces what I told you.
And that actually bolsters the case I’ve made for a passive-income play whose yield right now sits above 14%.
So let’s talk …
And let’s start with the latest economic reports …
The Economy Muscles Up
Let’s start with the latest economic reports.
Back on April 5 (in a report that was said to leave Wall Street “borderline speechless”) the U.S. Bureau of Labor Statistics (BLS) said employers added 303,000 jobs in March – way more than the 205,000 analysts expected. The BLS also said the unemployment rate fell from 3.9% in February to 3.8% in March.
Then, last Wednesday, the BLS followed up with a report showing that the Consumer Price Index (CPI) surged to a 3.5% annual rate in March. That was a significant jump from the 3.2% rate for February; in fact, it was the highest annual gain in six months.
Economists were looking for an annual inflation rate of 3.4%, according to FactSet consensus estimates.
It’s the fifth month in a row that inflation came in higher than expected.
The real problem is that so-called “core” inflation – which excludes more volatile food and energy prices – was hotter than expected, too. It came in at 3.8% for March, up from 3.7% in February and higher than the 3.7% forecast. And on a three-month annualized basis, core inflation was running at 4.5%, Sarah House, a Wells Fargo managing director and senior economist, told CNN.
The takeaway: The U.S. economy still has a full head of steam. Prices are high and are likely to stay high. Wage gains are slowing. And those Fed rate cuts everyone’s been pining for? Don’t expect as many - or as soon - as the forecasters were saying late last year.
The odds that the Fed will keep rates unchanged at its next policy meeting stand at 97.4%, says the CMEGroup FedWatch tool.
That also means mortgage rates will stay “higher for longer” – a bummer for folks hoping for a “rate reprieve.”
The Housing Market Sits on a Strong Foundation
In that Patalon Family House-Hunting story I posted here on April 5, I said all the predictions of a U.S. housing crash – a 20% or 30% plunge in sales – is way overblown.
And a brand-new report published by Bankrate.com, backs me up.
Homebuilding didn’t fully bounce back from the mid-2000s housing crash that triggered the Great Recession. Lots of folks who did buy are now afflicted with “mortgage lock” – and are loath to trade out of the loans they procured at super-low rates and move into the mortgages of 7%+ they’d face in buying a new house.
That combination – low construction and low turnover – is a one-two punch that’s responsible for the déjà vu reality that continues to blunt my family’s search for that “special house.”
That’s right … low supply. The inventory of unsold existing homes stood at a 2.9-month supply in February – about half the five-month to six-month supply that denotes a “balanced market.”
“A housing crash happens with oversupply,” says National Association of Realtors (NAR) Chief Economist Lawrence Yun. “A 30% decrease will not happen … because there isn’t enough inventory.”
And it’ll take five years to get back into balance, Yun says.
In the meantime, there’s a lot to like about the U.S. housing market’s underlying health, the Bankrate.com report shows.
Because lending standards have remained super strict since the housing crash that triggered the Great Recession, consumers aren’t getting into homes they can’t afford – meaning foreclosure rates remain low. And those who do borrow have superb credit – the median credit score is a pristine 770, says the Federal Reserve Bank of New York.
Net homeowner equity was up around $16.6 billion near the end of last year – and the $298,000 per average borrower was near all-time highs, CoreLogic said.
According to Yun, mortgage rates have probably created – and could remain at a general level of about 7% for most of the rest of this year. But we could see borrowing costs for housing get up to 6% before the end of 2025, he said at an NAR convention in November.
Here’s the U.S. housing market overview that Bankrate included in its report:
Housing Prices: The NAR says that America’s median sales price for existing homes came in at $384,500 in February – and the year-over-year increase of 5.7% substantially exceeded the general inflation rate. For newly built homes, that median sales price for February was an even higher $420,500, says the National Association of Home Builders (NAHB).
Housing Inventory: There’s just not much to choose from. The NAR says inventory stood at 2.9 months in February – well below the five months to six months it would take to view the market as “balanced” between buyers and sellers.
Housing Turnover: Thanks to the higher rates, the NAR says homes can take longer to sell – a median “time on market” of 38 days in February, a slight increase from the 34 days a year earlier.
Housing Sales: Nationwide, sales of newly built single-family homes rose 1.5% in January, a slight increase from the year before, says the NAHB. Sales of existing homes increased 9.5% percent in February, says the NAR. Meanwhile, the pace of new single-family home sales rose 1.5 percent in January 2024, up 1.8 percent from a year earlier, per data from the NAHB.
Housing Rates: According to a Bankrate survey of large lenders, the average 30-year mortgage rate stood at 7.08% on April 10.
That’s a snapshot of a market that’s pretty healthy. And the NAR’s Yun sees no major surprises. If housing prices fluctuate over the next year, it’ll be no more than 5% in either direction, Yun says. In five years, prices could surge as much as 15% to 25%, he says.
The bottom line: No housing crash. That and the underlying health support the “investment case” I’ve made for this passive income play.
Income for Wealth Builders
There are really just two types of investors – Wealth Builders and Wealth Killers.
If you’re a Wealth Builder, you value “passive income.”
And you embrace a unique view: You’ll think about income as a type of “cash flow” – meaning you’ll outpace inflation, market interest rates and even the tax bite.
And one housing-related income play that can do that for you is Annaly Capital Management Inc. NLY 0.00%↑, a New York-based mortgage REIT that’s got a track record of being well-managed.
Annaly invests in such securities as:
Agency mortgage-backed securities collateralized by residential mortgages.
Non-agency residential whole loans and securitized products within the residential and commercial markets.
Mortgage servicing rights … and more.
Now, I’m intentionally oversimplifying this – make sure you do your own research before you invest. As a residential mortgage REIT, Annaly invests in the loans that finance the properties, versus the physical homes themselves.
And as a mortgage REIT, Annaly has to pay out 90% of its taxable income to shareholders. At a recent share price of about $18.45, Annaly’s projected forward dividend of $2.60 a share equates to a yield of 14.2%.
There are risks, of course – there always are. A recession would be an intermediate-term wild card – but one that rate cuts would soften or reverse outright. And any erosion of the financial strength of the American consumer would inflict damage, too.
But at a point when credit quality is high, home equity is strong, rates are expected to fall and loan demand is projected to rise, Annaly is an income play that’s worth a closer (and careful) look.
If you’re experiencing a déjà vu episode right now … that’s okay.
I made this same “investment case” earlier this month.
Thanks, Yogi …
I’ll see you next time …
