Friday August 21, 2020

Happy Friday once again!  Last week I showed off a few houses, today there basically aren't any left and I'm going to have to go down the rabbit hole with you again.

687 single family homes on the market in El Paso County.  This is like really, really low.  In the two plus years of tracking this number every Friday this is the first time it's dipped into the 600s.  This means there is one existing home for sale for every roughly 1,067 residents.  This also means there is one home for sale for every roughly 8 agents in our market.  Sincerely THANK YOU guys for trusting me with your real estate needs and thank you for keeping food on our table.  

So 687 single family homes up for sale right now, 896 sales already closed since the start of August.  For this stat I include patio homes just because the MLS includes them for their historic median price metric.  What do you know, median price is still at $380,000 and the average price is over $433,000.  Median price is up $30,000 since it's little Covid induced down-tick in May.  

Interest rates are for sure a large part of the story but they're not the whole story.  They're like a double edged sword.  Even a single edged sword is kind of like a double edged sword because on the one hand you just have the one edge to worry about, but on the other hand it sure would be nice to have another edge...but I digress.  Rates have been low since the last recession 11 years ago.  Every year they test new lows and every year thirsty lenders and Realtors make a huge deal out of it.  Low rates continue to pull people into the market but in my opinion they are also keeping sellers from selling.  

Think about it, let's say you bought a house in 2007 and you got a smoking good deal on your rate at like 6.75%.  And your house was one of the nicer ones so you paid like 325k for it you big big baller you!  Then 2009 rolled around and your probably shit your shorts a bit as your house lost like 15-20% of it's value on paper but then breathed a sigh of relief by 2013 when you were back to even.  In 2012 interest rates dropped significantly and haven't ever recovered from that so at some point between then and now you've surely refinanced out of that cherry 6.75% into a rate that might even start with a 2!

I know its a lot of numbers and nerd shit but tag along please.  So let's say that 325k house you bought 13 years ago is worth like 500k now.  Unfortunately so is every other house like it.  So now that you've refinanced what's left of your very modest mortgage looking for a similar replacement home is going to come with some serious sticker shock.  

Numbers.  In 2007 you buy this house with no money down and your monthly principal and interest payment is about $2100.  You're doing good making micro chips or like setting up the first fiber optic internet or developing the first Iphone or something and you can afford it!  Then the market dumps and so do interest rates and you refinance at let's say 3.5% in 2016.  You've been paying your bills on time and your 325k loan is down to like 283k.  You roll in your refi costs and your new loan is at 287k.  

So now your principal and interest monthly payment drops by like over 800 bucks into the $1200 range.  This is perfect because as you're getting older you're not really in the mood to work a whole lot harder and the lower payment frees up a substantial amount in your budget!  Plus if you wanted to you could just keep paying the 2100 a month you're used to and pay the loan off in half the time or even faster.

This is the part that's keeping our listing number at record lows.  If you wanted to move into a similar house, or even a smaller house at this point, even with rates being as low as they are there is no way you're going to get something comparable for $1200 a month.  So people stay put, they remodel their houses, and upgrade whatever else because making a lateral move in town makes little financial sense unless of course the need is sufficient for it.

That's how low interest rates are a double edged sword, they push buyers into the market and some sellers out of it.

Now for the other piece of the puzzle, the Fed.  

The graph above shows US M2 money supply since the start of the Covid pandemic here in our country.  All politics, all debate aside you can see the Fed's response has been to dump a shit ton of money into the system.  Here is another visual that's even more striking.

This the Fed's balance sheet, at least the one we're allowed to see, ballooning to over 7 trillion dollars.  I know this is some conspiracy level hyper nerd shit but think for a second what it means when a privately controlled central bank is holding on to 7 trillion dollars worth of public and corporate debt.  And notice the correlation between the money creation in the previous graph and the total assets held in this one.  Around 3 trillion created out of nothing and snatched up during the course of this pandemic while we all bicker about masks and social distancing and shit.  Here is your first wave on a graph, and the second wave I fear is going to crush what's left of the middle class.  But let's not focus on that, let's just focus on the differences between the left and right wings of the bird while its drops a deuce on all of us.

But Iggy the market will crash any minute now, and then I'll buy

(because I'm smarter than everyone else)

Don't hold your breath.  This question especially when asked by renters is honestly so exhausting to answer.  Rent has been going up every single year in every desirable market since the beginning of time.  Rents drop when people leave undesirable areas and they grow as people flock to more desirable ones.  Colorado Springs happens to be one of the most desirable parts of the country for a multitude of reasons that I'll discuss in another rant.  So rents are not dropping because there are not enough housing units for all the people that want to live here.  Also rents are not dropping because inflation is real and on purpose.

Numbers.  Let's say you chickened out on buying a house in 2010 because everyone was selling and you're no sucker!  Let's say you're a frugal type and you paid $800 a month for rent that year.  That's $9600 in 2010.  Then in 2011 you thought the market would test new lows and it did!  But you're no dummy so you waited and paid another $9600 in rent.  Then 2012 rolled around, an election year, certainly the market would take an epic shit allowing you to finally buy.  But it didn't, and rent went up $100 a month so you spent $10800 that year.  2013 comes around and the market starts to recover in earnest, you don't trust this recovery because you don't understand economics so you keep renting.  Rent goes up another 100 bucks.  You spent $12000.  2014, 2015, 2016, 2017, 2018, 2019, 2020 all these years go by, rent keeps rising, and you still can't seem to time the market just right!  And now your rent for that same space is like $1500 a month!  So here you are 10 years later, roughly $130,000 in the hole paying rent still waiting for the market to crash.  I'm not making fun of you, I'm trying to paint the picture of how shitty our ability to predict the future is.

On a hypothetical let's say the real estate market crashes after the election.  How will that benefit you?  Real estate markets crash when there is an exodus of buyers and a flood of sellers.  The exodus of buyers can be caused by steeply rising interest rates, restrictive lending policies, or a substantial lack of employment.  I know unemployment numbers are testing record highs which is already keeping people from buying.  So if that's the case why are we still seeing multiple offers on damn near everything?  It should have crashed out already but it didn't because the demand outweighs supply by a large factor.

There is for sure a spike in mortgage delinquencies.  A substantial spike really so simple logic would say we're going to see a wave of foreclosures because 2008 or whatever.  No.  Because in 2008 we had 11 times the level of inventory for about 40% less demand ok?  So right now the people who have fallen behind on their bills are most likely still sitting on a growing pile of equity.  So even if they are forced to sell their house because they are having a hard time paying the mortgage in the short term they will then enter the rental market with a chunk of change most renters have never seen in their bank account.  And some happy buyer will grab their pre foreclosure home at market value because inventory levels are too tight for even distressed properties to sell for less.

The sellers of these distressed properties will need places to live just like they did in the last recession.  Their demand on the rental market will serve as an anchor if not a catalyst for rental rates.  Stable or rising rental rates generally lead to stable or rising housing pricing because the cost of rent is directly tied to how much investors are willing to purchase homes for.  And keep in mind in the background the sound of the Fed making it rain money the whole time to keep this debt fueled party going!  

When the real estate market does crash, which at some point it will, most of the people trying to time the market are going to get crushed even more.  Markets crash due to a lack of liquidity and demand, which are highly correlated.  Unless you're diligently stacking up a pile of cash into the 100s of thousands while paying rent I would be extremely weary of praying for a crash in housing.   If it happens and you're not prepared to make a move you will have a flood of renters competing for a finite amount of space and likely no ability to capitalize on whatever price drops there could be short term in sales.

Slow and steady for the win.

I'm pretty sure I'm coming off as a real asshole writing this.  But I've just kind of embraced the fact that life is unfair and learned to deal with it.  If you're stuck in a rental right now and it's sucking up like 35-40% of your monthly income, and you want to get out of that, you need to take action.  Nobody will do this for you as it's no one else's responsibility to take care of you and your family.

Step 1

You figure out your credit situation, what needs work and what's good.  You talk to a few lenders and get an idea of what you can qualify for and what it would take for you to be able to qualify for what you actually want.

Step 2

You do the work to get yourself in position to actually secure that loan.  Get you shit together, your tax docs, your employment history, your liabilities squared away and all that.  This is on you to do, and with a good lender you will have a very clear step by step plan on how and exactly what to do.  A good agent can help you understand it too.

Step 3

You figure out your current living situation and then find yourself a decent agent that knows their job well enough to help you.  What I mean is don't call an agent 10 days before you're homeless, we can't help you at that point.  Call an agent maybe 4 months before your lease is up, have your ducks in a row, and start looking for a permanent home for yourself and your family.  If you can't get your poop in a group with about 4 months left on your lease then talk to your landlord about either going month to month or maybe just sign another year lease with some sort of clause that allows you to break it with ample notice.  Everything is negotiable if you ask the right way.

Step 4

With all of your homework done, living situation steady, finances tidy you go shopping for a home.  Once you find the right one you do the due diligence, the inspections, the homework on your soon to be largest asset.  With the help of a good agent you make your way through closing and into your first ever inflation hedge.  Sure you're going to pay every single month just like you did to your landlord.  Sure, shit is going to break in your house and you'll have to fix it.  Sure it's not going to be easy all the time.  But that 130k you threw away over the last 10 years is going to get thrown into your own pocket instead of your landlord's.

Owning property is a privilege that many people around the globe do not have.  I understand the concept of housing being a right and the fact that nobody should be homeless.  Having seen communism at work I can visualize exactly how that works and the pros and cons of it.  But owning property is different from simply having shelter.  It allows you to control your own destiny, to pass on wealth to future generations and to paint the son of a bitch turquoise if you want.  

End of rant.