Q3 Economic Update & Recasting Debt

release edition [042]

read time [7 minutes]

Welcome to The Multifamily Download, a weekly newsletter where I provide institutional insights to help you build an exceptional Multifamily career.

Today at a Glance:

Q3 2025: Economic Update
Debt: Recasting A Loan
Weekly Listen: Tom Lee

Economic Update

As Q3 data continues to trickle in, I thought it might be worthwhile to examine some of the economic trends that are playing out through Q3 2025.

This section is full of data points & graphs/charts that I thought are both interesting and meaningful.

Lastly, I will continue to monitor Q3 data and will be sure to share more Multifamily specific insights as they come in. Enjoy.

Big Picture Themes:

1. Consumers are challenged but resilient.

2. Businesses are cautious but should be optimistic.

3. Inflation is stable and improving.

4. The future looks bright.

Consumers

Despite all odds, consumers are hanging in there across middle- and lower-class America. I don't know if this can hang on into perpetuity, or if wages will continue to rise on a real basis (i.e. outpacing inflation), but I'm hopeful they will because the charts & graphs below are concerning.

According to BlackKnight, foreclosure starts are increasing meaningfully both MoM and YoY (see below).

Also, credit card debt continues to put downward pressure on consumers, especially those carrying a revolving balance at 20%+ APR.

What's surprising is that consumers have been able to hold it together given how strained real wage growth has been in the post-pandemic era. The graph below evaluates wage growth against both CPI and TLC (learn more about TLC here).

Home prices could continue to soften, as there have never been more sellers than buyers than there are today (see below), and sales are at the same level as the S&L and GFC eras (despite more total housing stock today).

A negative change in home values would negatively impact or impair everyday Americans that are reliant upon their untapped home equity to finance their future lifestyle or retirement.

Also, if there are fewer foreign buyers establishing permanent residency in the United States then that will be long-term deflationary for housing prices (see below).

Caveat: The consensus view that "there's a housing shortage" should be evaluated carefully given the unfavorable demographic shift that will be occurring over the next 10-15 years.

In short, the aging American population has benefited mightily from real wealth growth (falling interest rates since 1980s, M2 expansion, productivity gains, rising costs), while the younger generations have not yet seen this same wealth benefit.

So, given this reality, who is going to buy these sky-high priced primary or secondary homes that eventual heirs will inevitably choose to sell using their tax free stepped-up basis?

Consumers are hanging in there, but I don't think they're in the clear yet.

Interest rates are still restrictive, consumers are cautious, and demographics are not favorable for sustained home price growth (which is where much of everyday America has their wealth parked).

Businesses

The ISM has been at or below 50 for 3+ years, which is generally accepted as one measure of business confidence.

With an increasingly dovish Fed, I expect lower rates to create more business activity, which will improve the rapidly deteriorating job/employment data. (We saw this in Q3 with more PE and M&A investment amid a Fed rate cut, or a "cyclical updraft", as Jon Gray at Blackstone called it here).

Lower rates means cheaper borrowing costs, better operating leverage, the ability to pay existing human capital higher wages, the ability to hire additional human capital, the ability to invest more in CapEx / R&D and overall expansion. Conversely, restrictive rate policy hinders each of these variables. (Footnote: This is why the stock market's resilience has surprised many since the "Liberation Day" events from April 2025).

The media narrative points to the Mag 7 as the primary growth drivers of the broader stock market.

While this does have some validity, the market caps of other S&P companies have grown meaningfully, too, in aggregate.

This breadth is encouraging and not what one would expect to see in a "bubble" environment.

As the below graph shows, the AAII survey has flipped to net-bearish the past few weeks. Again, this measure of sentiment is not representative of a utopian "bubble" sentiment among investors.

Inflation

Tariffs have not proven to be inflationary, and in some cases, are actually proving to be deflationary.

Additionally, oil is down to $61 per barrel, or nearly half of the $116 per barrel seen in mid-2022. Lower oil prices bode well for electricity and fuel costs going forward.

Corporate profit margins are still healthy (see below) and Q3 earnings continue to outperform estimates across a majority of the S&P.

Scott Bessent recently shared the graphic below, which demonstrates progress towards reversing the perpetual budget deficit.

Following the September budget surplus that I wrote about last week in TMD 041, Treasuries rallied with T-Bills and T-Notes all at or below 4% more recently.

Additionally, the Government is currently shutdown, which may lead to further shakeup (on the heels of DOGE efforts) with respect to tightening Government employment for positions that are ultimately deemed non-essential. Government employment (both Federally and locally) is clearly something worth focusing on from a fiscal perspective (see below).

Lastly, and most recently, the September CPI print came in under expectations (see below or read more here).

Future

If consumers can make it out of this restrictive rate environment relatively unscathed, and enter into a lower rate, lower inflation environment (like we experienced in the post-GFC era) with better job and wage growth opportunities, then I think the future will be extremely bright for America.

After all, when's the last time that all of the below factors were true simultaneously?

The U.S. border is secure, illegal immigrants are self-deporting in masse, China is effectively uninvestible, $10T+ in foreign-direct investment commitments are coming to the United States, a technological boom is beginning (A.I. / data centers / infrastructure), the ultra-Keynesian Fed chair is <6 months from being replaced, the three letter agencies seem to be on the same page working to defend American interests, fiscal policy is a focal point by the Government (DOGE, tariffs, spending), deregulation is occurring, tax cuts have been extended, and peace deals are being reached in the Middle East.

In short, I'm sanguine on the next few years (thanks to Rick Rieder for adding this word to my vocabulary).

What about you? How do you see the next 3-5 years playing out?

Recasting Debt

I've had a number of conversations recently with bank and non-bank lenders alike that both want the same thing: to keep their existing loan dollars deployed.

My hunch is that there are a two key variables driving this: (1) payoffs, and (2) uncertainty.

If borrowers are paying off loans faster than a lender can write new loans then that makes the institution less profitable, all else equal. So, keeping loan dollars out in the market on healthy, well-performing assets is a good strategy, especially given the uncertainty of how other loans on their books may unravel in the next 12-24 months.

Recently, several lenders have approached me about recasting our existing debt in what is effectively a same-bank refinance.

Mechanically, this looks like restarting the base term time period and modifying the business items (spread, minimum interest, floor, etc.) to reflect today's market based terms.

The benefit to doing this is relationship continuity, as well as cost savings. Avoiding legal costs, third party reports, and performance commissions (loan origination fees, broker fees, etc) can equate to saving meaningful dollars that would otherwise be added to the total cost basis.

If you have an asset that isn't quite ready for an Agency takeout or sale, and the asset is performing well, consider approaching your lender to discuss recasting the existing loans to get more term on the loans.

They could be more open to this idea than you think.

Weekly Listen

This week's listen is a presentation given by Tom Lee of Fundstrat in early September.

Tom has quickly become one of my favorite economic voices in 2025, and given the economic-centric update above, I thought this presentation would be appropriate. Enjoy.

You can listen to the full episode here.