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Real estate experts see ‘a big selloff coming’ as treasury yields close in on cap rate   

Real estate experts see ‘a big selloff coming’ as treasury yields close in on cap rate
Dino Kurbegovic

Real estate investors in the US may be creeping up on pretty big problems as the Federal Reserve (Fed) keeps on raising rates and promising more to come to tame inflation. The last Consumer Price Index (CPI) data released on September 13 showed that inflation is running hotter than expected and that analysts that predicted peak inflation were wrong. 

More importantly, home prices across the globe spiked during the Covid lockdowns; therefore, a correction has been in the making; however, according to Nick Gerli, the founder of Reventure Consulting and the owner of the number 1 YouTube channel on real estate investing, a big selloff is coming.

Namely, Gerli pointed to the fact that the 6-month US Treasury yield is almost the same as buying and renting out a house in America (Cap Rate), translating into little to no incentive for investors to be in these markets. 

Single-family house cap rate vs. 6-month US treasury yield. Source: Twitter 

Margin calls

Furthermore, Gerli claims that Wall Street real estate investing was not built to last, as investors are stopping purchases, banks will make margin calls to investors to sell their property and reduce assets on books. 

These margin calls will be based on the Floating Rate Credit Facilities the investors used, which get more expensive with increasing rates. 

Breaking the markets hard

Meanwhile, Barry Sternlicht, billionaire and co-founder of Starwood Capital Group, joined CNBC’s Squawk Box to discuss the economy, where he touched on the real estate market’s troubles. 

“You’re going to see the rent component of CPI continue to rise since it’s such old data they have. But they call us, or they call CoStar, or they call anyone in real estate, you can get real-time data, where it is rolling over. And look at the housing market; you caused a crash of unprecedented proportions in the housing market. The economy is breaking hard!”

He also added:

“500,000 single-family homes new sales is the lowest since 1952. And we’re going to see, you’re going to have a major crash in the housing market, and housing prices are going down. You are seeing housing prices correct? They’ve already taken $7 trillion of wealth out of the stock market.”     

It seems that Wall Street is looking for an exit from the real estate markets, which in turn will cause a market crash, and homeowners will be worse off along with potential home buyers. 

By the end of 2022, a clearer picture of the gravity of these warnings should emerge; for potential real estate investors, staying on the sidelines, for now, seems to be the most prudent thing to do. 

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