Investment News for the week of March 18, 2024
Breaking news stories and analysis that will impact the markets in the months ahead.
“There are decades where nothing happens and there are weeks where decades happen.” - Vladimir Lenin
This week there was a slate of news that will impact the markets over the coming few months.
The biggest news events of the week where 1)Jerome Powell waives the white flag on the inflation war. 2) The national Association of Realtors settled a lawsuit that will change realtor commissions. 3) World War 3 tensions become even hotter.
Jerome Powell gives up the inflation fight
The most surprising of the big news events that occurred this week happened on Wednesday during the Federal Open Market Committee press conference held by Jerome Powell. In this speech Powell came out as the “ultra-dove”, continuing to hold a forecast that there will be three rate CUTS in 2024, regardless of the inflation numbers creeping up again. From his speech it seems likely that the Fed feels that they have to disregard inflation in favor of helping the US government relieve some of the debt burden currently experienced by the US government’s $34 trillion in debt and the interest payments that accompany that. Powell also hinted, but not outright stated, that the inflation target of 2% is generally more of an ideal as opposed to a hard target and that the Fed is willing to tolerate higher than 2% inflation for a prolonged period. Jerome Powell also stated that the Fed would reduce the pace of their balance sheet runoff, which will further spur equity market speculation and inflation.
I would like to say I am in shock by this press conference as it is very clear to anyone that inflation is still much too high. However, in an election year, and with the potential national security risk of the US interest payments spiraling further out of control, it is not surprising. The markets have already anticipated this news and front-ran it with speculative assets at all time highs. We are currently in a situation where the stock market is at all time highs, home prices are near all time highs, bitcoin and gold are at all time highs, but the prices of goods and services are also at all time highs. Unfortunately, the average American is not any better off than they were before COVID, actually, most are worse off and that is reflected in poll after poll. After Powell basically waved the white flag on the inflation war, risk assets and inflation hedges immediately took off, with bitcoin shooting back up to near $70k and gold hitting record highs at $2200+ /oz. It seems as if the only way to avoid the diminished purchasing power of the US dollar is to own assets. It seems likely my prediction of precious metals, precious metals miners, oil, productive land, and commodities having a boom period is likely commencing as the US dollar purchasing power will continue to decline against real assets.
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The National Association of Realtors (NAR) settled a lawsuit to prevent commission fee sharing on the MLS.
In a surprise victory, NAR settled their lawsuit with a sweeping change to realtor commissions. Here is the housingwire summary of the settlement
“In addition to the damages payment, the settlement also bans NAR from establishing any sort of rules that would allow a seller’s agent to set compensation for a buyer’s agent.
Additionally, all fields displaying broker compensation on the MLS must be eliminated and there is a blanket ban on the requirement that agents subscribe to the MLS in the first place in order to offer or accept compensation for their work.
The settlement agreement also mandates that MLS participants working with buyers must enter into a written buyer broker agreement. NAR said that these changes will go into effect in mid-July 2024.
“NAR has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers. It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals,” Nykia Wright, the interim CEO of NAR, said in a statement. “Ultimately, continuing to litigate would have hurt members and their small businesses. While there could be no perfect outcome, this agreement is the best outcome we could achieve in the circumstances. It provides a path forward for our industry, which makes up nearly one-fifth of the American economy, and NAR. For over a century, NAR has protected and advanced the right to real property ownership in this country, and we remain focused on delivering on that core mission.”
The trade group also noted that the settlement agreement is not an admission of guilt and that the practice of cooperative compensation is still allowed as long as it is pursued off-MLS.
https://www.housingwire.com/articles/nar-settles-commission-lawsuits-for-418-million
The current process of buying a house has been established over the past thirty years. When entering into a house search with a real estate agent or broker, the agent generally searches your criteria of homes on a database called the MLS. Up until this point, the MLS would state an agreed upon commission settlement that the selling agent is offering to the buyers agent, usually 3% to the buyer’s agent and 3% to the selling agent. This commission split would come at the end of the sale, during the closing and come off the sale price of the home. In this scenario the buyer’s agent would be compensated by the a fee taken off the seller’s home. This commission split will no longer be offered on an MLS and a seller will have a choice to offer any commission they want in order to entice a buyer’s agent to bring a buyer to their home to purchase. Instead of a buyer’s agent having knowledge of the commission percentage split beforehand, via the MLS, the buyer’s agent will now have to contact the seller’s agent directly and ask if their seller is offering a buyer’s agent commission.
Judging from the backlash against realtors I have seen all over social media, it seems that the average seller will likely refuse to offer any commission to the buyer’s agent and only pay the seller’s agent their negotiated fee. This will force home-buyers to either pay out of pocket for their own agent, or to forego an agent altogether and buy their home with an agent. Now, some sophisticated home buyers may be able to do this, however, I have been on both the real estate agent side and the attorney side long enough to know that real estate transactions are much more difficult than they seem on the surface. There is a lot that a first time home buyer does not know and there are so many places that a real estate transaction can go wrong. I think this ruling is a net negative for buyers.
It could turn out that this ruling does nothing more than change the way fees are settled and sellers will continue to compensate buyer’s agents. However, the backlash on social media made me take a step back and really observe how much vitriol the average person has towards residential real estate agents. I think the anger is amplified by the unaffordability of current homes, combined with the not so subtle style of real estate agent advertising with their flashy cars and silly videos.
My personal opinion is that commissions will lower for real estate agents generally, however speciality agents such as ranch brokers, high end homes, commercial realtors, etc., likely wont see much change in their comissions, because these are specialty services. It is unlikely these types of transactions will be able to be performed by unrepresented buyers alone or by technology anytime soon. I think the new model going forward will likely be unrepresented buyers using attorney’s to review or draft legal documents.
I think the effects of this will be more monumental than some real estate agents believe. People seem very angry at realtors and it is likely they will not want to pay out of pocket for a realtor. There are currently 2 million real estate agents in the United States and there are predictions that this lawsuit may cause up to a 50% decline in the amount of real estate agents. This is a drop of approximately 1mm real estate agents unemployed or at least losing income from being a part-time real estate agent. I also think the pace of home buying and selling will slow significantly as realtors generally do a good job of moving home sales forward and keeping a timeline. This will also be a net positive for real estate attorneys as buyers will have to seek out legal counsel to fill in the gaps of not having a real estate agent to complete their contracts.
Essentially, the buying process for a residential home will be as follows: buyer wants to buy a home so they do a search on a real estate website such as Zillow or Redfin. Buyer will reach out to sellers agent, then to a real estate attorney and submit a purchase agreement. If purchase agreement is accepted the attorney will reach out to the title company, consult with buyer, prepare closing documents, and provide guidance to buyer. This can either be an hourly fee or a “menu” of services.
At my law firm I am charging an hourly fee for real estate purchase consultation, document preparation and negotiation. Fortunately, I have experience as both a licensed real estate agent and an attorney. This allows me the requisite experience to negotiate, provide consultation with the buyer, and prepare legal documents. Most attorneys are not dual licensed.
Unfortunately, this ruling comes at precarious time for the economy, Powell signaled that inflation will basically be a permanent fixture of the economy and now we are set to add nearly 1mm people to the unemployment stats. This really is a recipe for stagflation.
This newsletter is getting a little long for a Friday, so I will hold off discussing the terrorist attack in Moscow and the admission by the United States that the US has troops stationed in Taiwan.
Until next time, have a great weekend and happy Friday.
-J.L.
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