Friday Update December 16, 2022
Yo last week we took a trip to Austin, Texas and so I didn't write an update. If you think the Springs has expensive unaffordable overpriced real estate then you should check out Austin and feel better!
Today we have 1,296 single family existing homes that we can go look at. This is down substantially over the last few weeks as it should be in time for Xmas. I anticipate we will see inventory start to rebound and climb after new years and we will see how demand lines up with supply by Spring.
Mortgage rates have eased off from their pre mid term highs. Where as 6 weeks ago rates over 7% were common today rates in the mid 5s to low 6s are more common. Mortgage applications rebounded slightly this week for the first sign of positivity in the mortgage market in a few months. This is good news for buyers as lower rates obviously mean lower payments and especially good news during this holiday stretch as demand remains suppressed and buying a house right now is probably the easiest since at least 2017.
This week we had the FOMC meeting where Jerome Powell spoke in a robotic way about getting the job done, about how good the job market is and about how at this point the Fed feels that a "restrictive level" for the Fed Funds rate will be around 5.1%. That means roughly another .75% in increases for them to hit that goal. Jerome said that we should not anticipate any rate cuts in 2023 and that maybe in 2024 we will see some softening. This is in contrast to what Realtors on Facebook think and to the agents' credit its also in contrast with what the bond market seems to be pricing in.
The bond market suggests that we will see the Fed pivot on rates by summer. The Fed says that's not going to happen. Realtors say marry the house and date the rate. Somebody is going to end up being wrong.
Powell spoke a lot about how he would love for there to be a painless way to fight inflation but there isn't one. He said that he's glad the job market is as strong as it is because in order to fight inflation there is going to have to be some pain in the labor market. He says he hopes it's minor but also said that the amount that wages have been going up is contributing to inflation and that the Fed would love to see wages increasing at around 2% a year together with an inflation rate of around 2%. We're over 7%.
My takeaway from JP's speech is that he doesn't really give much of a shit about what the stock market or the labor market does in the short term. They want to see inflation come down, it's going to suck for us, they know that, but it is what it is.
If you've read my rants then you can kind of see one thing JP and I agree on. I don't much care about the short term in housing either. And if you focus too much on the short term as a real estate owner or investor then you might end up playing stupid games and winning stupid prizes.
Here locally month to date we have 361 closed units for a median sold price of $441,000. This is substantially lower than my May or June guestimates of ending the year at $480,000. Turns out that sometimes even grouchy and bearish agents are too optimistic. Chicken little realty was too optimistic yall. We're selling for 96% of original list price and the median house now sits on the market for 28 days.
Same time last year we had 704 units closed out, so almost double. Median sold price was 450k at 100% sold to list price ratio with median days on market at 5. If we assume that by the end of the month our sales will roughly double to around 700 then we can say that we have less than a 2 month supply of inventory. That would technically still leave us pretty deep in a seller's market. But I can tell you through the process of negotiating deals it's feeling more and more like a buyer's market by the week.
This week aside from the FOMC meeting we had quite a few data drops. Aside from the inflation number coming in slightly lower than expected I'd argue the rest of the data was pretty bad. For example retail sales, which are a massive indicator of how the consumer is doing, fell by .6%. That is a pretty significant drop that missed estimates by 600%. The Philly Fed Index and the Empire State Manufacturing index came in deeply negative, which means a contraction in manufacturing in those regions. Capacity utililization came in below expectations. Business inventories grew more than expected.
So what this is saying is that the Fed's rate increases are starting to genuinely slow inflation. People are spending less, buying less, using less. That results in less capacity utilized, less manufacturing, less sales and ultimately less jobs. The jobs part of it is key. Right now we're sitting at something like 3.7% official unemployment, although the real number is at least double that, but on paper it all looks good.
The coming year however seems to signal otherwise. Huge companies like Goldman Sachs for example are beginning to lay off workers. Goldman is looking to cut 8% of its workforce. Seems like a lot of overfunded and not so profitable tech companies, *cough* Zillow's bitch ass *cough*, are going to be laying off quite a few people too. Long story with higher interest rates for longer than most people and companies hope for there are going to be some consequences. That's part of the business cycle and it flushes out inefficinecies while making room for better businesses to prosper.
My opinion on 2023 is that we will likely see more of the excesses of the last 2 years begin to fail. I do think our foreclosure numbers will trend upwards and I don't think we're going to see a quick rebound in pricing. I do think that the more bad news comes out about the economy the more pressure there will be on the Fed to pivot. However I don't think that the Fed lowering rates will have an immediate positive impact on housing prices, to the up I mean.
I think we have a yield curve that is inverted to levels not seen since 1981. I think when that yield curve corrects it will be sudden and will shake up financial markets in ways that will likely be historic. Fear in the market is the only factor that is stronger than greed and when it hits we will all see it. And right around that time when everyone and their parents start telling you to sell everything and run for the hills, that will be the time to capitalize and pick up what others are dropping.
But that last statement is for those picking up their second, third, twenty fifth property. The opportunity cost of renting today should be enough for people to just consider buying a house regardless of the market. Let's do so simple math. Let's say today the median house costs $441,000. Let's say the median rent is about $1,580. That's roughly 19k a year guaranteed that tenants will never see again. You linger on the fence about buying for 5 years and you blew 100k. The counter argument is what happens if you buy a house like people did last year and earlier this year and then prices drop? That makes them losers right?
Well no. Because they're paying down a loan on an asset that they get to live in. Their payment is locked and their shelter is secure. They write off mortgage interest from their taxes. Nobody is going to force them to move, or raise their rent, or neglect their maintenance and so on. And sure being upside down on an investment sucks but the cool thing is no losses are real unless you sell. So the owners get to live in their homes and wait for a better market while the average tenant continues to piss away 100k every 5 years without any tax benefits.
It's kind of like that proverb about trees. Best time to plant one was a long time ago, second best time is now. I'm going to keep saying that about buying real estate until something extremely drastic happens. It's the slow grind upwards that matters, the short term fluctuations don't.
Holler at me if you have any questions. I'm done building my house. We moved in. I got a partner in the real estate broekrage. A lot of shit is off my plate and there is a good chance I can get back to being helpful Johhny on the spot Iggy for you like I used to.
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