Friday Update February 19, 2021

The big guns are coming out in our market.

I remember like 2017 when escalation clauses started to become a thing here locally.  We would talk about how crazy it is that in Denver they were getting multiple bids and some people were writing into the contract that they will beat other offers by like $1000 up to say $10,000 over their initial offer amount.  Then it became a thing here for the last several years and now its becoming a whole new thing.

People are submitting offers with unlimited escalation clauses meaning they agree to pay more than anyone else, regardless of the amount.

Now most people are still taking out loans although there are a ton of cash buyers in our market.  So an unlimited escalation really is meaningless because the final word on value rests with the appraiser.  This is a gamble that agents took for the last several years until we started to wisen up and buyers would start to offer appraisal coverage.  Meaning you agreed to pay $350,000 for a house, appraisal came in at $340,000 but you wrote into your offer that you would cover appraisal deficiency up to $10,000 so everyone is whole.  You get your loan for 340k, sucks you had to pony up 10k in cash but hey at least you got the house you wanted.  That's kind of how it has been and still is largely but now people are taking it up a notch and offering unlimited appraisal deficiency coverage.  They will pay as much as it takes and cover any short fall with cash.  This is a terrific example of FOMO in the real estate market.

Now inventory and stats.  224 existing single family homes on the market today.  Month to date for February we've closed 511 units with a median sales price of $402,500.  Congratulations Springsbridge!!!!  We are now moving towards half a milli and I would sincerely like to thank Cali and Texas money for not helping with our housing crisis at all.  But hey when it gets cold we still have water and electricity and the ground doesn't shake so I get why you're moving here.

This time last year we had roughly triple the inventory and our median price was about 60k lower.  That represents a roughly 15% jump in our median price YOY.

Now macro.  Interest rates on 10 year bonds started 2021 right at 1%.  In the midst of the panic in March 2020 rates sank as low as .3% on the 10 year bond.  Keep in mind here I'm not talking about mortgages, and for the love of God please shake the ridiculous idea that at some point someone will pay you to borrow money.  Today the 10 year bond is coming in above 1.3% and seems to be tracking upwards.  This caused a pretty noticeable bump in the cost of mortgages with rates jumping around .5% just this week, depending on the day and the time of day that you locked.  Change brings fear, fear brings volatility, volatility creates a fun environment to play in.

Nationally as well as locally the inventory shortage persists.  In the US as a whole market invenory is down roughly 26% year over year and prices on the median are up about 14%.   You can see our local market is following the pricing trend pretty accurately, although our inventory crunch is even tighter.

FML on the cost of lumber and building materials.  Lumber hit another record level yesterday at over $1,000 per 1000 board feet.  This same amount of lumber 2 years ago cost about $400, and in March cost about $270.  So let's be optimists here and say that the cost of lumber only went up 250% recently.  What this looks like on the ground level is that 8 by 4 sheets of decking that used to cost $11 now cost $37 and a 2 by 4 by 96 which isn't even a real effin 2 by 4 costs 7 dollars.  According to my plumber all plastic materials are up about 20-30%.  This is due in large part to the fact that the supply side of building materials is still somewhat disrupted by covid and probably in larger part due to the fact that suppliers are able to sell for this much.  As long as people pay these prices I doubt they will drop a whole lot.

In the near future here is my personal forecast.  The setup.

The stock market has been testing record high after record high.  Meanwhile we have roughly 800k Americans applying for new unemployment benefits weekly.  We have the highest level of unemployment in over a decade and we have an administration that at its core is all about easy money.  Janet Yellen is out on every news outlet foaming at the mouth urging for more and more stimulus saying that too much is better than not enough.  We now have a national debt of close to 28 Trillion dollars and an M2 money supply pushing 20 Trillion, 4 times more money out there than in 2000 adjusted for inflation.  Meanwhile though according to the statisticians with the Federal Reserve there is absolutely no inflation.  Sure housing costs 15% more than a year ago, sure your trip to the grocery store is noticeably more expensive, sure cars are more expensive and of course most services are too.  But according to the Fed and the financial channels that spread their propaganda we don't have any real inflation here at all.

The response

Since people with money tend to be relatively smart they aren't really buying this bullshit line from CNBC that there is no inflation.  The rising rates on the 10 year yield signify a market expectation of rising inflation.  And the easiest way to protect yourself from the negative effects of inflation is to hold tangible assets.  If those assets create a positive return like lets say rent for example then even better.  For the last 12 years we've seen institutional investors buying up single family homes in bulk and this isn't changing.

My expectation is that in the near future the stock market will hit a correction.  The Fed will respond by printing off another few trillion dollars which will cause interest rates in the short term to drop.  This will trigger yet another wave of buyers to enter the market along with a wave or people refinancing their homes at the lower rate.  Understand that in the last year we've seen record amount of refinances, people cashing out their equity that they've been spending though the pandemic.  This isn't economic growth, this is borrowing from your future self to feed your current self.  So we will likely see another round of this.  Then at some point the inflation will become so stupid obvious that even the assholes that run this country at the Central Bank level will have to admit it.  At that point we will have a different rant in my market update but for now I would expect the Fed in short time to respond to the rising rates with more money creation and another wave of stimulus before we have to face our underlying problems.  

In the time I wrote this blog rates went from 1.33% to 1.35%