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Market Maker Event Recap | Keynote Address From UBS

By RSIR Staff |

On January 22nd, more than 100 Realogics Sotheby’s International Realty brokers and staff members participated in an all-company meeting in the Kirkland branch to kick off 2025 operations for the RSIR Nation. A keynote address was provided by Kurt Owen, Sr. Vice President & Portfolio Manager at UBS Financial Service to review the Trump Administration policies and potential implications for residential and commercial real estate in the United States.

Owen draws upon more than four decades of experience including eight presidential inaugurations and six US recessions. He invited two key guests to opine on the topic, including Kurt Reiman, Head of Fixed Income, CIO Americas at UBS Financial Services, and an encore presentation by Jonathan Woloshin, Head Real Estate & Lodging Research at UBS Wealth Management Chief Investment Office. The conversation was moderated by Dean Jones, President & CEO of Realogics Sotheby’s International Realty.

The Market Maker event took place just 48 hours after President Donald J. Trump returned to the White House amidst a record number of Executive Orders and provocative statements spurring global media attention. During his address, President Trump referred to a “Golden Age” of America ahead, which may prove challenging to deliver given that Oxford Dictionary describes such as: “an idyllic, often imaginary past time of peace, prosperity, and happiness.” While it’s true that the stock market is on a roll, and the S&P 500 is setting new record highs, the US remains a very divided society and certain campaign promises, especially for undocumented workers and those dependent on foreign trade, including the new home building industry.

Reiman was quick to comment: “Policy matters but it’s not everything,” reminding the audience that podium statements and even Executive Orders are often the beginning of processes and not the final result. In many cases directives need to work through the House and Senate, which Reiman noted is held by the slightest of advantages for the Republican Party.  

Overall, Reiman agreed the US economy is doing well, citing, “The consumer is in pretty decent shape. Real incomes are growing, leverage among households is not particularly alarming, consumers have money, and they are out spending it.”  He added, “Inflation is coming down, but stubbornly, not moving as quickly as it has been. Labor markets are still very strong.”

UBS’s initial framing of their asset allocation still favors risk assets, like corporate bonds and stocks, over cash.

Woloshin and Reiman articulated why the US inflation rate remained elevated, resulting in a Fed that is less likely to pursue aggressive rate cuts with perhaps “cut a couple of times, but likely short of the full percentage point – more likely half a point in 2025”, they confirmed. For much of 2024, 10-year treasury yields were falling, but mortgage rates didn’t really follow suit. Reiman doesn’t rule out the possibility that 10-year rates could top 5 percent this year on inflationary tariff concerns before falling back closer to 4 percent by the end of the year. “All else being equal, this should have beneficial effect on mortgage rates,” he added.  “But the path may not be a straight line.”

Woloshin added the long-term average spread between 30-year fixed mortgages and the ten-year treasury rate was 175 basis points, but the US hit a peak of approximately 330 basis points in 2024 and now it’s closer to 225 or 230 basis points. “There’s a lot of reasons for that,” he added. “But do ten-year rates have to fall for mortgage rates to fall? The answer is not necessarily until the markets normalize – until we get clarity on policy, there’s going to be more volatility in the rate market, and so that’s likely to keep that spread wider.”

To be sure, shelter, as measured by Owners’ Equivalent Rent (OER), is a major component (26 percent) in the Consumer Price Index, and if the Federal Reserve utilized actual rents on single-family homes and apartments as opposed to their current methodology, UBS believes the US inflation rate would closer to the Fed’s 2 percent target. “The methodology used is suboptimal,” said Woloshin. So essentially, a primary contributor to the Fed not dropping its policy rate further is due to higher-than-target inflation rates, which is spiked by their measurement of shelter costs. A lower mortgage rate could encourage more sellers to let go of the locked-in effect and increase inventory levels.

Artificial intelligence is a major contributor to the US economy and especially significant for the Pacific Northwest. “It’s not going away and is unlikely to be influenced by political outcomes,” said Reiman. “It’s bedrock for the US economy.” Albeit more recent news about the Chinese-based app DeepSeek, has entered the space causing concern for US-based AI companies and even further concerns about national security. Even President Trump noted the US better observe the competition and be prepared to “win” in the AI race.

Back to the macroeconomy, UBS affirmed that nobody expected over 20 percent returns in the S&P 500 with reasonably low volatility, which followed 2023 as another banner year. The year 2025 is still expected to see more measured growth of this index, with perhaps 8-10 percent. Yet Reiman cautioned, “In 2025, there will be news headlines that will make it feel at times like things are going off the rails, but for now we think the year is going to be reasonably strong.” He admitted the outlook for rates is a little tricky. For instance, the bond market could be taken by surprise if investors worry that proposed tariffs will spark inflation. Again, UBS reminded the audience that President Trump’s threats to international imports may be more about getting the parties to the negotiating table on other policies, albeit the technique appears to be working.

For example, within President Trump’s first week in office, the promise to start mass deportations has resulted in thousands of arrests. When Colombia resisted the return of its citizens, the threats of tariffs were tabled and the Colombian government quickly relented. Woloshin added, “Until there is more clarity in the government policies, there could be volatility in the bond rate, leading to higher mortgage rates.”

In a more recent and significant example, President Trump’s immediate tariffs of 10-25% on primary trading partners China, Canada, and Mexico, caused a global media storm to kickoff February 2025 and rattled investors with steep index corrections, only to quickly recover. Concerns over these tariffs being passed along to US consumers would only make inflationary pressures greater and potentially moving off their “higher for longer” position with the bank rate.

Regarding taxes, Reiman believes the year ahead tax cuts are only being extended – not falling like they did in 2017, when corporate rates were reduced from 35 percent to 21 percent and income tax rates across the board came down, providing a “really nice tailwind for the economy, which lasted for several years,” he said. “The risk is that they don’t get extended because Congress can’t come to some agreement over what is the magical deficit figure or there are holdouts because spending is too high or there isn’t necessary relief on SALT (State and Local Taxes) deductions. The debt ceiling wasn’t addressed. There’s a lot of negotiations in Congress to get tax cuts. All of these campaign promises are probably a bridge too far. Interest expense on the US deficit is now greater than defense spending. There’s really not a lot of movement on capital gains.”

Committee for a Responsible Federal Budget’s 10-year Estimated Fiscal Impact of President Trump’s Proposals in Billions of US dollars. Sourced from crfb.com.

Woloshin thinks the SALT deduction could increase from $10,000 to perhaps $20,000 or $30,000, but unlikely back to unlimited. That would be helpful to residential ownership benefits.

UBS believes it’s going to take some time to get the necessary votes to corral members of Congress around what’s going to be a very difficult deficit number to accept, so there will be a lot of “horse trading” on fiscal tightening. Reiman cautioned, “This is not a windfall. This is not 2017 when tax rates were cut. There are constraints. Additional tax rate relief for either corporations or individuals is pretty unlikely. The only way we’re going to get there is offsetting spending cuts or a lot of revenue coming in from tariffs, which is its own potential threat.”

Jones summarized the 2017 tax cuts is “already priced into the housing market” but SALT deductions are encouraging but not as likely a make-me-move moment for luxury consumers. A more significant move would be increasing the capital gain allowance of single seller $250,000 or married couple $500,000, as hinted by President Trump, but Woloshin agrees that pressure on Congress will be to resist the loss of revenues. He said, “The Trump Administration is going to have to pick their spots, and maintaining the 2017 tax cuts, I think, is going to be a higher priority than expanding some of these things, especially that will benefit the wealthy.”

The SALT deduction limits were especially punitive to wealth in pricey markets like California or New York State. This in part motivates buyers to seek out lower tax environments, like Washington State, which also doesn’t have a state income tax.

There could be some incentive for sellers to sell to first-time buyers. Such a tax credit could exacerbate the problem to create more demand for the same supply. Woloshin looked at the distribution of mortgages and wondered what incentives could be for people to sell.

Roughly 40 percent of the homes in the US are mortgage free. Of the balance, about 21 percent of a rate below 3 percent; 55 percent have a rate below 4 percent and 73 percent have a rate below 5 percent. Current rates are over 7 percent.

Woloshin said timing the market is really difficult, and he reminded the audience of his five questions to ask when considering a purchase:

  1. Are you buying for long-term shelter, an investment, or a quick flip?
  2. What are your near-term, mid-term, and long-term liquidity needs?
  3. What is your anticipated time horizon, understanding that “life happens?”
  4. Is buying this house going to drastically change your lifestyle?
  5. Most importantly, if the house were to drop in value by 20 percent, would that change your lifestyle?

Jones agreed that if you’re confident in the responses to these questions, there’s not enough reason not to buy. Woloshin noted even in the depth of the Global Financial Crisis, prices dropped but came roaring back. Nowadays, only about 10 percent of mortgages are on a floating rate (on a dollar basis), with the balance being 15 or 30 years fixed; FICO scores are much higher now; and loan to value trends are 80 percent of homes have at least 20 percent equity in their homes. Homeowners are sitting on $35 trillion in equity today.

“This is not a repeat of the housing bubble,” Woloshin believes. “The quality of mortgage underwriting is better. The behavior of home builders is significantly better than it was during the housing boom. The behavior of lenders is better. The behavior of buyers is better.”

He notes some pullback is not unexpected, but short of a real downturn in the economy, which is not UBS’s call, as long as the wealth effect remains evident, luxury buyers will be strong. Unaffordability is the problem. There’s a lack of supply.

According to the latest S&P/Case-Shiller’s Home Price Index, as of November 2024, the national picture evidenced sustained growth in home prices with a slight acceleration in November—perhaps a bump of demand given the conclusion of the US Presidential Election and a stock market surge—as well as migration centered around a new administration in the White House. The report notes exceptionally strong results in New York and Washington DC, given the political migration.

The US is now in its 18th consecutive highpoint for median home prices on a seasonally adjusted basis with little indication of correction anytime soon. It’s a well-known fact that the US suffers from a lack of housing, especially for the “missing middle” and affordability is a major concern across the country. Unfortunately, it’s also known that demand can rise quicker than supply and the threats to the US housing industry amidst President Trump’s threatened tariffs and demonstrated deportation of undocumented residents will likely be felt in the cost to deliver new homes ahead. RSIR and UBS Wealth Management opined that approximately a third of new construction products are imported and it’s estimated that undocumented construction workers comprise a similar percentage of the overall workforce. It was also noted that there is very little distress in the housing market, unlike the last housing recession when price corrections caused owners to be underwater and a plethora of homes worked through foreclosure and short sales. This obvious dip in the system can be clearly seen in the center of the following graph in the years of 2008, 2009, and 2010.

While there was a similar correction in the years 2022 and 2023 amidst the 11 consecutive Fed rate hikes, home prices generally maintained value growth overall and homeowner equity is at an all-time high today with a fundamentally restructured mortgage system and thus, little duress. 

The S&P 500 Shiller CAPE Ratio (Cyclically Adjusted Price-Earnings ratio) can be found in the graph below. 

As a reminder of how much the US housing market has grown over the past 12 years from the 2012 trough through the current peak, savvy investors that bought the dip would generally find themselves with home price appreciation of 140-150%.

Looking at the trends over the last year, the Seattle metro area witnessed 5.41% median home price growth as of November 2024, which is an average of 45-basis points per month. 

During the Market Maker event, RSIR’s preferred lender, Movement Mortgage, discussed what’s more challenging between “FOMI” (Fear of Mortgage Interest) or “FOMO” (Fear of Missing Out). Consumers are reminded that not making a move is more likely to result in delaying equity gains and tax deductions while the competition is only increasing on a limited number of homes. Should mortgage rates drop in a meaningful way, homeowners can always reset their rate and lower a mortgage payment, but they can’t reset the strike price and lower the cost basis of the capital gain in the making. 

A quick look at the subject area month-to-date in January 2025 suggests that more inventory and more buyers are indeed entering the market (graphic shows data through December 2024). 

So far in January 2025, both the inventory levels and pending sales are trending 30% higher than this time last year. With 1.6 months of inventory on the market, average prices sold are 5.4% higher. The incoming spring sales season is anticipated to exasperate the trends. As a reminder, the S&P/Case-Shiller Home Price Index measures the resale values of single-family homes in the King, Snohomish, Pierce, and Kitsap County (excluding new construction of any kind or condominiums).

“If you see something you like, you can make a move with confidence and simply refinance in the future if mortgage rates drop,” concluded Jones. “But you can’t recreate the strike price. You can always refi but you can’t rebuy.”

The Market Maker event closed out with Jones offering final comments, saying, “I feel we are greatly blessed to be in the right place at the right time with the right brand, with the right peer group to go and tackle the Great Wealth Migration that’s ahead of us. If tech is going to be a great generator of wealth and if taxation, climate, and other social influences means this going to be a great lifestyle in the Pacific Northwest. And we’re targeting luxury, there’s going to be a lot of homes that are going to be sold. These aren’t people that are rate dependent. Many of them are motivated to move out of Washington as they age, because of probate taxes.”

As always with real estate market cycles, time will tell. Those seeking a read of the tea leaves are encouraged to contact a Global Real Estate Advisor at Realogics Sotheby’s International Realty.

Market Maker Event

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Graphs sourced from S&P Global, Committee for a Responsible Federal Budget, and GuruFocus. 


Kurt Owen | Senior Vice President, Portfolio Manager, Wealth Advisor at UBS Financial Service

Kurt has been serving investors since 1983. His passion as a financial advisor and founding partner with the Owen Covey Wealth Management team at UBS stems from a lifelong interest in capital markets and his desire to help educate clients in reaching their investment goals and objectives. His disciplined approach to managing the investments of individuals, families, and businesses is enhanced by his comprehensive knowledge of asset allocation, Modern Portfolio Theory, technical analysis, and portfolio management. Kurt has extensive experience with fixed-income instruments, trust services, large-cap value equities, money manager due diligence, and alternative investment strategies. A Washington state native, Kurt is a professional ski instructor and avid photographer. He resides in Seattle’s Magnolia neighborhood with his wife, Mona, and their two children, Zaidee and Finley.

 

Kurt Reiman | Head of Fixed Income, CIO Americas at UBS Financial Services

Kurt rejoined UBS in June 2024 as Head of Fixed Income for CIO Americas based in New York after spending 10 years at BlackRock as a senior investment strategist for the BlackRock Investment Institute. Prior to joining BlackRock, Kurt was the Head of Thematic Research at UBS in New York and Zurich. He published innovative research on topics ranging from demographics to sustainability and geopolitics. Kurt joined PaineWebber in 1999 as a fixed-income strategist and later became the architect of the firm’s preferred stock research offering and the co-head of the UBS CIO fixed-income strategy team. Kurt discusses his research and investment views regularly in the financial news media, including CNBC, Yahoo! Finance, BNN Bloomberg, the Financial Post, and the Globe and Mail. Kurt earned his bachelor’s degree in business and economics from the State University of New York at Plattsburgh, and his master’s degree in international relations with a concentration in international economics from the Johns Hopkins University School of Advanced International Studies in Washington, DC.

 

Jonathan Woloshin | Head, Real Estate & Lodging Research at UBS Wealth Management Chief Investment Office

Experienced securities analyst, Director of Research, and portfolio manager. Specializes in public and private market commercial/residential real estate research, analysis, and valuation. Possesses a deep understanding of private real estate funds, structures, and investments. Breadth of experience includes broad analytical expertise across the equity GICS sectors, growth and GARP equity portfolio management, short selling, capital structure arbitrage, and the analysis of high yield/mezzanine debt, preferred stock, and derivatives. Highly effective marketer and well versed in counseling wealth advisors, ultra-high net worth/institutional clients, boards of directors, and consultants.