First Friday Update April 7, 2023

Alright you guys.  First and foremost thank you all for the positive feedback on these updates over the last 4 years.  That's like close to 200 something updates that I've written and I truly appreciate that some of you actually look forward to reading them.  Honestly I often look forward to writing them.  I'm excited about writing this one.  But doing it every single Friday to me has become very redundant because it's rare that the market really changes all that much in 7 days.  And looking for things to fill these updates with sends me down the rabit hole of fiat financial system economics which honestly is just a fucking enraging and deeply depressing topic to me.  I'll elaborate on that and won't shy away from it on a once a month basis, just looking at the macro picture every single Friday and writing it out is honestly depressing AF.

So, locally, right now.  755 single family existing homes are available for us to go look at today.  This is right in line with like the last 2 months with basically no deviation in the inventory to the up or the down.  I still think that the high prices and more so the higher rates are causing people to stay put and are keeping our inventory levels suppressed.  I do think we will reach a point where that balance flips and I think that will happen as the yield curve uninverts and we face the reality of the financial crisis we've been kicking down the road since 2019.  When exactly that happens and what exactly will cause it I have no idea.  I'll tell you shortly what I'm doing to position myself in what I feel is the best possible way.

March of 2023 brought us 936 total sales in the PPMLS at a median price of $450,000.  Sold to original price ratio rebounded since early 2023 to just over 98% with days on market coming down slightly to 19.  Last year same time frame we had 1,213 closings at a median sold price of $470,000.  The median days on market was 4 and houses were selling at almost 104% of their listing price.  Curious to pull stats through end of April and May but I think that somehwhere in these two months of 2022 is where we have our peak in all of these stats.

A couple weeks ago as the banks failing was front page news we had rates on the 10 year notes drop to 3.4%.  I mentioned at that point that the 3.4% level has acted as support multiple times.  The market now seems to think that we have worse news ahead and is betting against the Fed raising rates much further if at all.  This week we had the 10 year break down below 3.3% and finish the week at 3.41%.  Let's see if that 3.4% level now offers support again or if we drop down and it becomes resistance.  More interestingly than the movement on the 10 year bonds the 2 year bonds repriced aggressively to the downside.  (the bonds repriced up but the yields came down, and yields drive rates so that's the focus here)  One month ago the 2 year bonds were yielding over 5%, today is 3.99%.  I know its super easy to look at this and be like 1%, what's the big deal dude.  But you gotta understand that's not 1%, that's a 20% difference.  And when you're talking about a 20% difference in the cost of borrowing short term that becomes obvious in every day life.  I'm gonna back to yields in a bit and we will have number pictures, but first an anecdote from my actual life.

I sit down at the beginning of March with some people.  We sit at their dining room table and talk about selling the condo I helped them buy in 2019 and replacing it with a single family home.  We've worked together before, we kind of know each other, and it's an easy conversation.  I tell them hey the market is kind of slower than a year ago, probably don't want to shoot for the moon on your pricing here, maybe use these highest comps we have and fall in line with those or maybe even slightly below that.  On the flipside I told them that buying a house has become drastically easier, with days on market going up substantially and sellers being generally more willing to offer concessions to get their houses sold.  I was telling them all these things because they we're true.  Within 2 days of our conversation Silicon Valley Bank collapsed and the whole shenanigans since kicked off.

Now a few days after the SVB collapse and right around the time that the Fed bought up 300 Billion in bonds in an emergency action we started to go look at houses.  And to my immediate dismay it became very obvious that the Fed's actions at the high level had what I consider to be an undesirable consequence here locally.  That consequence is that basically every house we've looked at since has either been a seriously overpriced turd or has received multiple offers immediately.  There are generally buyers in front and behind us at almost every showing in the mid 400s price range.  Builders went from being overly accomodating and nice to slammed busy.  I asked some builders hey when did this change for you, and unanimously they say since the start of March.

So on that specific example from a month ago the market literally did flip on a dime.  And it kind of scares me.  It scares me because of that graph I shared with you guys on how bubbles work where we have a return to normal phase.  Here I'm gonna share it again.

Why do I say it's disheartening to see the multiple offers and the shit show kick off again?  Shouldn't I be stoked about being able to make that sweet super duper easy money?  Well, a couple reasons.  First and foremost being one of 30 offers on a house sucks.  Instead of being able to do our jobs and negotiate a fair deal for a buyer we as agents end up finding new and creative ways to beg and sacrifice way more than we probably should to get deals done.  That's on the buyer side.  The seller side was much easier and I'm glad I found myself more often on that end than on the buyside.  But either way the market we had 2020-2022 was just pure chaos at best, extremely demanding, extremely exhausting, saturated with greed, fraud, and douchebaggery.  The last 9 or so months of a relative slowdown have not been enough of a break for me to get stoked about getting my teeth kicked in like most busy agents did in 2020.  That's reason 1.

Reason 2 and this one is just as important to me as reason 1 if not more so.  I truly believe we are in the return to normal phase on the graph above.  I feel like we have a lot of serious economic and social fallout in the near future and I feel like we have extended real estate pricing beyond the logical limit as compared to people's incomes.  I feel like we are due for a serious correction and I will elaborate with some economic data here in a sec.  Now the people I mentioned earlier, they have a place to sell and want to buy a place.  I do not feel bad whatsoever going shopping with these folks because they are in an apples to apples situation.  Whatever their market on the sell side is will be very similar to their market on the buy side.  They get to take advantage of this recent pop as they sell while they will have to feel the pressure on the buy side again.  It's a break even.

But am I going out of my way to find a bunch of buyers to put in houses right now?  No.  Like honestly my follow up game has been the worst its ever been in 10 years.  I tell people to wait to buy if they can.  I tell people not to rush it, I tell people to watch the market.  Obviouly there are times where life situations come up that are more important than timing the market and I'm not here to judge that or comment on it.  I'm just saying that as a real estate agent right now, in April of 2023, I feel like we're on the edge of a downturn.  (I felt this way in 2016 and in 2019 and I was super wrong both times.)  And I feel like patience in this situation makes a lot more sense than FOMO.  I feel like the value of a real estate commission to me is lower than the value of sharing my truth with people, even if it comes at a financial detriment to me.  I read this book by Ray Dalio a while back called "Principles", and one of mine is not to adjust my view on the world based on my bank account balance.  I hope to never feel so desperate financially that I encourage people to do something that will knowingly hurt them, just to get a paycheck.  It feels like kicking water uphill and I can't make it make sense to me.

In one of the updates I wrote a couple weeks ago I said there is gonna be a sweet spot in the market.  The last time we had a sweet spot like that was probably like 2011-2014.  It lasted a good while where we had a combination of high inventory, low pricing, and relatively low rates.  This took place several years after the bottom fell out of the stock market and was a good 6 years after the foreclosure crisis was truly ramping up.  We have some time to go and some damage to do before we get to the sweet spot.

Let me tell you about some financial indicators that I track that make me think the worst isn't behind us.  The first one and kind of a great catch all is the yield curve.  

I know I've beat the yield curve topic to death and that is because it's a crucial one.  This is the deepest yield curve inversion we have on record with the difference today between yields on the 10 year and 3 month notes at negative 152bps (1.52%).  That means that to borrow money for 3 months costs almost 50% more than it does to borrow it for 10 years.  This is the bond market screaming about short term risk, like screaming about it.  The resolution of this short term risk, whatever event it takes to flush this perceived risk out of the system, is not going to be pretty.  We have a national debt of almost 32 trillion dollars and growing and we have a corporate debt load of almost 24 trillion dollars.  A lot of this debt was taken on at historically low rates and will now have to be refinanced at substantially higher rates.  Again this is where 1% isn't really 1%, it's like 20% or whatever proportion we're looking at.  It's serious.  And not every company is going to be able to pull off the refis or afford the new debt service.

Historically the shit hits the fan as the yield curve uninverts, which we have to look forward to.

In practical terms we are already seeing the impact of the higher cost of debt service in corporate America.  We have something like a 350% increase in layoffs this year over last year.  It can be argued that's still a drop in the bucket as our unemployment rate remains near historic lows.  But the problem is that for every job lost there are other jobs at risk.  Like for example there have been numerous studies done on the impact of high paying tech jobs on their surrounding communities.  I don't have the article handy but its something like every 100k plus a year tech job creates something like 3 or 4 service sector jobs around it.  The techies love their oat milk vegan fairly sourced lates and 25 dollar brekkie platters.  But now with 100s of thousands of them moving into their parents basements the people making those yummy yummies are going to feel the pinch too.  

The above is just a very surface level, short term cycle, quick snippit about a single issue facing us.  

Here's another good catchall called the leading economic index.  Some nerds came up with a fancy formula that I won't be nerding out on today, but the jist of it is pretty simple.  It's called a leading economic index because it's forward looking.  Like for example yea your parents bought a house for 30k in 1981, but did they know enough to hold onto it?  Probably not because they we're looking at their current situation and making decisions off that.  That's how most people live is day to day, week to week, paycheck to paycheck.  But these leading indicators allow us a look into the future.  And it's not great!  Short term at least.  Lookie.

The blue line dawg.  The blue line.  Honestly we should have had the gray line (recession) around 20 go much wider, blow out the bad debt and rip the band aids off.  Have ourselves a nice deleveraging and start a new short term economic cycle.  But you guys were all there for what happened instead.  We booted the can down the road while blaming every single financial, economic or societal problem on the rona.  Well now the rona policies are coming home to roost and we get to deal with the same problem we had in 2019 except on a balooned and much more serious scale.  Can we kick the can down the road again?  Maybe.  Will delaying the inevitable make it any better?  Just worse.

We can argue about the merits of our current financial system and we can discuss the role that central banking has on economies.  We can talk about who should be responsible for what and how lever a impacts widget production in region b.  That's all good and great and if you're buying the beers I will hear out your entire argument and do my best to offer valid and valuable feedback to it.  Theory is great and it's fascinating, but it does not translate directly to real life and action cleanly.

So let me tell you what I'm doing to position myself for what I think is upcoming and why.  I'm going to go against my own normal line of thinking and sell one of my rentals.  Why?  Shouldn't I keep it forever?  Well it's not the easiest decision for me to make and I've fought it for a while but here is the thinking.  I've got a property that I've owned since 2010.  It is completely maxed out.  It can not legally become an airbnb due to permitting issues.  The cottage that is currently on it can probably never be rebuilt without some serious dancing around lot coverage variances.  Aside from cosmetic updates the property will never be more than it is.  And my mortgage on it now is so low that in the best case scenario I can yield $500 additional/month out of it without a mortgage.

So i'm thinking I sell the first house I ever owned, wash myself of all the memories both good and bad from that time of my life, take the money and run.  Just kidding about the running part.  To circle back to that sweet spot I've mentioned a few times I'd like to have some more capital to take advtantage of it.  So by selling a maxed out piece of real estate the goal is to then turn another piece of real estate into a second airbnb, supplement the monthly income by doing that, and then keep the rest to make a play on another property that can offer value add plays down the road.  

Basically strike while the iron is hot on the selling side and then do my best to strike the shit out of the iron on the buying side while most others won't want to.  That's the logic.  Maybe I'll be wrong again.  You guys tell me what you think, I'm super open to ideas and perspective.