The Horizon
October 2043, a kitchen table, one sheet of paper. On it sit the two numbers that fund the next twenty years: the portfolio, and the house you are sitting in.
Only one of those two has been compounding. The other has moved backwards for thirteen consecutive months.
That is not a projection. It is the finding in a data release published Tuesday morning.
The Event
The S&P Cotality Case-Shiller index for June was published on August 25. The national home price index rose 1.5% over twelve months.
The 10-City Composite gained 2.9% and the 20-City Composite 2.1%. Month over month, the national index rose 0.1% seasonally adjusted.
Inflation across the same period ran 3.5%, from the June CPI report the Bureau of Labor Statistics released on July 14. Nominal price growth landed two full points below it.
Rebecca Kaufman of S&P Dow Jones Indices stated in the release that home prices continue to decline in real terms. June marked the thirteenth straight month of those real declines.
Dispersion was wide. Chicago led at 6.9% annual appreciation and Seattle fell 2.0%, part of what the release describes as a years-long pattern of Northeast and Midwest strength against softening Western and Sunbelt markets.
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The Path
For most builders the primary residence is the largest single line on the balance sheet. At 1.5% nominal against 3.5% inflation, that line is surrendering roughly two points of purchasing power a year.
Thirteen months of that adds up to something measurable. The house gave back real value across the same stretch in which a three-month Treasury bill paid 3.87%.
The mortgage reverses the sign, and this is the part the coverage leaves out. A fixed-rate nominal loan loses real value at the rate of inflation, so the debt is shrinking at 3.5% while the asset shrinks at 2.0%.
Equity is the difference between those two motions. The crossover sits near a 57% loan-to-value ratio: above that level the house and its mortgage together gain real value even as the house alone loses it.
That threshold assumes prices hold June's pace, inflation holds June's rate, and it ignores amortization. It is arithmetic on stated assumptions, not a recommendation.
The consequence reaches past the retirement account. A builder carrying home equity as part of his funding plan is carrying an asset that is not currently compounding, which shifts the weight onto the portfolio, the business, or the income streams.
The national figure also describes almost nobody. A Chicago at 6.9% and a Seattle at negative 2.0% came out of the same release, and only one of them cleared inflation.
New leverage is priced against that backdrop. The Freddie Mac survey of August 20 showed a thirty-year fixed averaging 6.65%, more than four points clear of the national appreciation rate.
Carrying costs move with the nominal number rather than the real one. Assessments in most jurisdictions track nominal prices, which are still climbing, so the holding cost rises against an asset losing purchasing power.
Anyone intending to convert equity into portfolio capital later is planning against a drifting exchange rate. That rate has moved two points a year in the portfolio's favor for thirteen months running.
So the case for adding property today does not rest on price gains. It rests on rental income and on the erosion of a nominal loan, which are separate mechanisms carrying separate risks.
Existing owners hold the mirror image. A mortgage written at 3% is a below-market liability, and the reluctance to surrender one is what the release cites as a constraint on supply.
That lock-in is a portfolio fact rather than a housing curiosity. It holds the largest asset illiquid at the same moment it holds the cheapest liability in place.
The Watch
Freddie Mac publishes its next mortgage survey on Thursday, August 27, and August CPI arrives September 11. Those two figures plus the next Case-Shiller print, due at the end of September, determine whether the real decline reaches fourteen months.
The next FOMC meeting falls on September 15 and 16, with policy currently set in a 3.50% to 3.75% band. Mortgage pricing tracks the ten-year Treasury rather than the funds rate, and the ten-year stood at 4.69% on August 20.
What is new this week is a measured number for something usually assumed: the largest asset most builders own is a negative real holding right now, and the loan against it decides the sign. The productive question from here is the loan-to-value ratio, because it is the one term in that equation a builder sets himself.
*Disclaimer: This is a paid advertisement for Frontieras's Regulation A offering. Please read the offering circular at https://invest.frontieras.com/. Investments in private placements, and start-up investments in particular, are long-term, illiquid, speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest in start-ups.
Reservation of the ticker symbol is not a guarantee that we will be listed on the NASDAQ. Listing on the NASDAQ is subject to approvals.
Under Regulation A+, a company has the ability to change its share price by up to 20%, without requalifying the offering with the SEC.