Friday Update August 7, 2020
Happy Friday to anyone out there that lives that TGIF lifestyle!
I've been doing these Friday updates on Facebook for like the last 2 years now and thanks to some valuable input decided to do it in the form of a blog instead. Truth of the matter is all that stuff we put on Facebook belongs to Facebook and we can bitch and gripe about it forever but we give them the data willingly. So I'm gonna do my part to own the rights to my writing efforts.
Inventory is basically flat over last week at 750 existing single family homes.
Interest rates are hovering around the lowest in history.
Not seeing any breakouts in inventory and you can definitely feel the squeeze on the front range as a buyer. Multiple offers still the norm, cash offers over list price still normal, buyers waiving inspection and appraisal rights, offering appraisal gap coverages and things of that nature are still fully in play.
It's too easy to only focus on one set of numbers and miss the whole picture. You know if we had the above number of homes for sale in a population of 50,000 people it would be a complete buyers market. But we have 732,000 people living in El Paso County. So the best way to measure inventory is in months. If we stop listing homes today then how long will it take to sell out. Most seasoned real estate professionals say 5-6 months of inventory is a balanced market. Look where we sit right now
That's around a month of inventory total. And these stats are full MLS wide so they include all the listings in BFE that never sell. There are pockets in Colorado Springs where we have less than 1 week of inventory. So I hope this shows that making lowball offers in this market isn't going to work out 99.9% of the time. Do look out for the mislisted properties, the ones with awful photos, the ones that are 2000 square feet that accidentally got listed as 1000 square feet. Look out for those and maybe swing on those super hard but on the average good and professional listing please understand that in this current market the buyer is one of many and the seller is one of very few.
A little too often I hear some really dated and at this point invalid opinions about the market. There are people out there that bought a house like 9 years ago and for some reason think that time froze around them. Here is a really nice visual representation of the lack of supply and surging demand in our area.
Notice how over the last 5 years it takes less and less time to sell houses for more and more money. The upwards waves on the graph represent late fall into early winter. The dips are mid summer when more people are moving. Notice the bigger crest in late 2018 early 2019, that's the last time the Fed raised rates. Notice the steep drop into today, that's the Fed taking the bank rate to 0%.
How long can this continue?
The simple answer is until it can't. A question I get super often is "how long can this market keep going up? Like its been up, up, up for 9 years now Iggy this shit has to crash out soon, right?" And trust me on this when I say I give this a lot more thought than the average thirsty agent chasing a commission check, although I am still out here working for commission checks.
My answer is crash in relation to what? The dollar? That's going to be kind of hard to do when money creation is breaking all records and norms while construction is moving relatively slowly. Maybe this "tsunami of evictions" will wreck the market and rents will go down together with property valuations because now 40% of the country is homeless? Maybe, but I doubt it. It doesn't benefit the landlords at all to kick out good tenants in emergency situations and most people will figure out a way to work together, some won't. But crashing values in relation to the dollar seems almost laughbale even if you just read this one article:
So the spin is that inflation is a positive thing. The article like most CNBC articles is pretty dull and boring unless you take a second to think about what they're saying. The Fed has not been able to hit their 2% inflation target since 2010. And now they are making it public knowledge that they will do whatever is in their power to not only hit but temporarily surpass that target. Their target is based on the CPI metric which in technical economic terms is complete dog shit. Some things the Fed can do is keep the overnight rate low which they've committed to for a minimum of 2 years, they can also drive rates negative but they can not raise rates in order to hit their inflation target. That means lots and lots of cheap money is coming our way. This doesn't necessarily mean to all of us or equally but the money is and will continue to be out there. That money needs a home just like people do and it will be one of multiple causes for hard assets such as real estate to rise in price. But the mainstream will have you thinking inflation isn't something to worry about. That is not by accident folks.
Now think about what inflation has really done in the last 10 years. Housing prices for sales and rentals have roughly doubled nationwide and greatly exceed the pre 2008 meltdown levels in most of the nation. US median rent in 2010 was $855, in 2018 it was $1500 and 2020 data isn't available but I'm going to guess its around $1650-1700. So double. The median cost to buy a house follows the same trajectory.
Average car price is up about 45% in 10 years.
I don't know if you've been through a drive through lately but damn, that garbage costs a lot of money!
Stuff at home depot and lowe's especially the stuff subject to the new tariffs, oh boy, you can see inflation there very clearly.
And guys the last 10 years have seen historically low inflation rates. Yet these numbers don't lie.
We have thousands of jobs coming to Colorado Springs in the next few years. Some of these jobs will be relatively high paying Space Force type jobs, most of these jobs are going to be lower end service type jobs. Amazon alone is going to employ over 1000 people at just one facility not including all the auxiliary businesses that come with it. I'm sorry to break this to all the Colorado natives but the population of this state is just going to continue to grow and get this, the amount of land isn't.
With a finite amount of land developers are able to sell lots for higher and higher prices. A few years ago it was pretty unheard of to pay a lot premium and being able to negotiate with a builder was common. Today 5 figure lot premiums are common and negotiating with builders is basically being able to pick your colors. This is not because I'm a bad agent that doesn't know how to haggle for his clients, this is because builders are selling their inventory like hot cakes and don't need to deal with any bullshit. In 2009 builders got to deal with all the bullshit and most of them have learned from it, this is why the number of new home permits nationally is less than 50% of what it was in 2006. Builders learned a hard lesson in the last recession and aren't in any hurry to overbuild to repeat it. Most of the new built houses you see going up have a buyer on them before ground is broken and so this type of flow does nothing to help ease our inventory problems. Also the cost of materials and labor is almost always going up driving the cost of new builds up with it.
Stock, Bonds and other nerd reasons real estate isn't crashing out
Without going too far back in time let's go back to March. Covid hit the US and regardless of which side of the mask debate you find yourself on the virus had a profound effect on many markets. The stock market took about a 40% drop, interest on US Treasury bonds went negative for a short time and remains insanely low and oil futures at one point traded at negative $37/barrel. Sellers were literally willing to pay you to get that oil off their hands because they didn't have room to store it. Talk about a buyer's market right there!
Usually when the stock market sells off you see a rush of money into bonds. Sometimes that same money may go into gold and other safe haven assets. In the case of March 2020 we saw what market experts call a "pan selloff" which is literally the dumping of everything in a rush for cash. Stocks dropped, bond yields cratered as investors sought whatever safety they could, gold dropped, silver dropped, bitcoin dropped, oil plummetted. You may remember we ran out of both paper money in ATMs as the banks shut down as well as toilet paper at Costco. People thought they sky was falling and were dumping everything EXCEPT THEIR HOMES.
So fast forward 5 months right. Covid hasn't gone anywhere and probably will linger for another year or so, that's like what viruses do. The Federal Reserve has taken unprecedented action that cannot be compared to anything else in it's 107 year history. While QE1 and so on made huge headlines during the Obama administration they honestly don't even count compared to the Fed action this year. We have 20% more money in existence today than we did January 1, 2020. One interesting thing is that the major stock indexes are either almost back to their record levels or in the case of the Nasdaq surpassed it AND bond yields remain insanely low. Where did the money come from to do both? Look at this graph below. Each gray line is a recession dating back to the early 1980s. The little blips in 2009 and 2011 are the big QEs. Look at the hockey stick at the far right, unreal.
Now if you create a whole lot of something, money in this instance, you make it less valuable by default. When money is less valuable that means the rate of interest on it is lower. When interest rates are low people borrow more which creates more money...this is very stupid but true thanks to the fractional reserve banking system. It's self reinforcing, low rates mean more borrowing, more borrowing means more money creation, and so on and so on and so on until the paradigm shifts. So when interest rates are low investors have to find places to put their money to get some sort of a yield. Look at this graph of 10 year treasury bond yields and tell me if you would invest your hard earned cash to get these returns. One half of one percent over 10 years. That's a hard no from me dawg.
The graph above shows another solid anchor of what's keeping real estate pricing up. Not only are the low interest rates making it easier to finance larger purchase prices but they also allow investors to make money with lower cap rates. There's a 1% a month rule in real estate investing that says you should get about 12% return on your money from your rentals a year. But that rule was invented when we had interest rates on mortgages in the 6-7% range. Now we have 3% or less and investors are making due with cap rates at 6% because they are still able to cash flow the same. And that 3% gap between the mortgage rates and the cap rates is enough to keep investors interested and keep owners in their properties. Because don't forget it not just a 3% return but its also tax benefits and potential appreciation in the market.
This is turning into an essay and I didn't mean for it to. I appreciate discussion, please feel free to comment on Facebook or on this post below. Please poke holes in my logic and I appreciate you taking the time to read my rant. If you can't tell I'm passionate about my craft, own multiple units myself and am buying more. I would not preach this logic just for a commission check. Probably...