1) Silicon Valley Billionaires are Secretly Trying to Build a Utopian City

A mysterious group of “Silicon Valley Elites”, under the name Flannery Associates, have acquired 52,000 acres of land, piece by piece, spending $800M! Members reportedly include the likes of famed investor Marc Andreessen and Linkedin co-founder Reid Hoffman.

Believe it or not, billionaires dreaming of building their own city is actually not a new idea.

Here are some examples of the wealthy trying to start their own utopian cities:

• Bill Gates dreams of a smart city.

• Elon Musk is planning a Texas Utopia.

• Billionaire Marc Lore plans a $400B Utopian desert city.

• Silicon Valley tech bros fail to build a Utopian ski town.

It seems that the right mix of money, power, and arrogance will ultimately drive rich people to want to create their own city.

And so far, we have yet to see one of these Billionaire Utopias succeed.

Here’s the problem with the Flannery Associates plan:

This land is zoned for agricultural use, and they will require residential zoning. Further complicating the plan, the land surrounds an Air Force base, which will further restrict potential development.

Off to a great start, the group has already sued the local farmers. What better way to start a new city than sue the locals.

Key Insight →

It takes a village to build a city. It takes more than money to build a city. A city requires infrastructure, jobs, resources, and people that want to be there! So far, the billionaire Utopian city has yet to come to fruition. The Flannery Associates group recently released a website that provides few details, so the jury is still out on whether they will be able to turn this into a thriving community.

2) Zillow is Luring Home Buyers With 1% Down Payments

As mortgage rates hit 22-year highs, Zillow and its home lending group is trying to entice buyers by offering down payments as low as 1%. 

That means, if Freddie Mac requires 3% down, Zillow will come up with the other 2%.

Here’s the Zillow math for helping buyers get into homes faster:

• Home Purchase Price: $275k

• Estimated months of saving for 3% down payment: 31 months

• Estimated months of saving for 1% down payment: 11 months

Sounds great, right?

Not so fast. Remember, the buyer is now going to have a higher loan, with greater monthly payments, and they must pay for private mortgage insurance.

While this is cloaked as an affordability play, it doesn’t actually help that problem and may burden homeowners down the line.

Is this a good move for Zillow that may lead to greater transaction volume? Most likely. Zillow makes money from providing services such as brokering and lending, so more transaction volume is good for the bottom line.

Key Insight→

Extending more debt to buyers may help them in the short term, but will likely be harmful in the long term. We’ve seen this story before. 0% down. 1% down. Consumers love delaying payment in the short term to get something right now! But remember, this leads to a greater loan and higher mortgage, plus additional private mortgage insurance. Sure, the buyer may be able to make that down payment, but the real question is whether they can sustain the high ongoing monthly cost.

3) How Treasury Yields Impact Cap Rates and Property Valuations

10-Year treasury yields are at the highest levels seen in years, recently as high as 4.35%.

For context, the 10-year treasury has averaged 2.24% over the last 10 years!

Because the 10-year treasury is hitting its highest level in years, so are mortgage rates.

Capitalization rates are also expanding. Research shows that every 100 basis point increase in interest rates results in a 60 basis point rise in cap rates.

Here’s what that means for real estate valuations (based on cap rates):

Let’s say you bought a building:

• Acquisition price: $2M

• NOI: $100k

• 10-year Treasury: 2.2%

• Cap Rate: 5%

Now let’s look at the same building, after a 230 basis point increase in the 10-year treasury:

• Original Acquisition Price: $2M

• NOI: $100k

• 10-Year Treasury: 4.5%

• New Cap Rate: 6.4%

• New Valuation: $1.56M

Based on this cap rate math, your building just lost roughly 25% of its value.

Key Insight →

Buy when rates are high, sell when they are low. This is a clear illustration of how investors coming out of the low interest rate environment are now getting squeezed. It should also serve as an illustration of how the opposite is great for investors. Lowering interest rates will have the opposite effect and raise valuations.