Friday Update February 24, 2023

Well shit guys I was pretty wrong about the trend.  I'll admit it.  Normally this time of year we see inventory climb as sellers put their homes on the market more and more into spring.  This year, at least so far, it's different.  We had 1,228 listings on the market 3 weeks ago.  We have 754 today. 

This is for sure in part due to the fact that interest rates found a bottom at the beginning of the month and we saw a wave of buyers come through the market.  Interest rates bounced significantly since then and that is being reflected by 2 consecutive weeks of falling mortgage applications.  Last week we saw a 7% drop and this week a further 13.3% drop in mortgage demand. 

First I'm going to summarize and then I'm going to elaborate.  In a nutshell this drop in inventory doesn't feel anything like it did 3 years ago.  The lack of supply comes with a much bigger drop in demand.  So while there are the one off cases where there are several offers on a property it isn't the norm.  I believe the reason we're seeing inventory dry up is due mostly to the fact that sellers realize that with today's pricing and today's interest rates it makes no sense for them to move.  And so we get stagnation in the market.

Now to elaborate.  If this drop in inventory was due to a spike in demand that would be pretty obvious.  However nationally home sales volume is at October 2010 levels.  That's not great.  Here locally month to date we have 419 units closed out for a median price of $440,000.  This time last year we had 639 sales for a median price of $462,000.  The volume shows us roughly a 35% drop, all but the most ignorant agents have noticed this.

Striking difference between this year and last year is buyers' willingness to pay over list.  That's gone. Median sold to original list price ratio last year was over 102%!  This year it's 97% which actually rebounded a bit over the last couple of weeks.  But again in summary last year most houses had multiple offers and sold over list price with appraisal gaps and such.  This year most houses sit on the market for a while before taking an offer below list price and often with seller paying a significant chunk towards buyer's closing costs and rate buydowns.  Night and day.  This year median days on market is 46, last year it was 4.  I mean, percentages don't do great in reflecting how different that feels, and 46 doesn't seem like a lot, but technically the market is 1,150% slower.  This is the kind of cheesy dumbass math that CNBC makes headlines out of but it's also numbers, which only lie as much as the person putting them together does.  Honestly though, night and day in our market.

Let's nerd out fully.  Interest rates matter a lot because the vast majority of Americans finance their real estate purchases.  The question of how much is that a month is directly impacted by rates and rates aren't great when compared to last year.  Rates are great compared to 1981, but not great compared to last year.  

That spike in rates doesn't fully capture this week which saw interest rates jump quite a bit.  And again I know how many people are like "well Johnny, it's not that bad, when Reagan was President our rates were almost 20% and we made it through ok".  Yea Boomer, and your total fucking payment was like 300 bucks.  And a dime bag cost a dime.  And today's weed will kill you boomer.  So calmate.

Last week PPI numbers came out bad showing that producer side inflation is lingering.  Today the personal spending numbers came out significantly higher than expected because you all know why.  Like if you've opened your wallet in 2023 you'll notice much more coming out of it than you'd like, and statistics reflect that.  Today PCE numbers came out and missed expectation to the upside by 50%.  This is all bad news for the rate outlook and the bond market took notice immediately.  The yield on the 10 year t notes is 3.96%, where as 3 weeks ago it was below 3.4%.  Again it's easy to say that's only a .6% difference.  But it's more like a 17% difference in borrowing costs just over the last 3 weeks.

I'm gonna sneak this in here if you're still reading.  I did a video a few weeks ago shitting on 2/1 buydowns.  I then did another video with a lender kind of elaborating on why I think they're risky.  Let me say this.  I still think they're a huge gamble and with the numbers I'm going over so far you can see how 

a.  median price is lower than last year meaning refinancing is going to be a problem

b.  rates dropped briefly and are now again climbing, which takes all the fun out of refinancing

c.  the economy as a whole has all kinds of blinking red lights that imply further price declines, further reducing the chances of succesful refis.

So if you're buying a house on 2/1 or 3/2/1 buydown right now you're gambling your fucking ass off amigo.  And I hope it works out for you.  But there are better ways to go about long term investing than gambling.

Ok now for full blown nerdery.  The housing market is a huge part of the economy, something like close to 20% of it.  But the housing market isn't a stand alone thing because it takes money, and money makes it's way through all the markets, and so it's all interconnected, man, like really blows your mind, bro.

So look.  Here is a graph of the SP500 over the last 25 years.  Notice the drop in 2008.  We were all here for that shitshow and let's remind ourselves of what housing did.

Housing in 2008 did this.  It did what no bank algo was ready for, it went down in value.  Now I always harp about how real estate is a long term investment and short term outlooks on it are pretty stupid and irrelevant, yet people get caught up in it.  Long term, great investment.  Short term, could lose your ass.

Get to the point Iggy.  Ok, gooooosh.  Look more graphs and these are screengrabs.

This mess shows the correlation between falling real estate sales volume and future perfomance of the SP500.  If you think about it it makes a ton of sense.  People go on Zillow, see that their house value has gone up, get a HELOC or sell it and pocket a ton of cash.  Then people take that cash and spend it as quickly as possible.  That spending goes into the accounts of companies that sell shit, which is reflected as increased revenue, increased earnings per share, increased stock valuations and a green colored ticker tape for the market as a whole.  But now as people open up Zillow and see down pointing red arrows they realize that they're not as rich as they thought.  And the spending slows, and the ticker turns red, and money is harder to come by.

Man with the numberpictures guy c'mon.  This one shows year over year forward looking earnings per share projections.  Earnings per share go up when people are balling out, earnings per share go down when people are stuggling.  The white line is forward looking EPS, the blue line is SP500 overall valuation.  Notice the divergence between the two.  I'll bet later this year the divergence resolves and stock valuations drop to meet the reality of the companies' performace.  And with that drop people will see a drop in their brokerage accounts and retirement accounts, meaning they'll have less money to throw at appraisal gaps and downpayments.  You see my point here right?

But one more chingas for clarity ok?  Inflation isn't transitory and the Federal Reserve is neither Federal nor a reserve.  The Fed is a money printing machine that is staffed by lizard people who run on adrenachrome.  I'm joking, but these fools couldn't possibly give a single shit less about normal people. 

Check it out.  All the shit you don't really super need on a daily basis has gotten cheaper and therefore you're told your quality of life has gone up.  But then all that pesky daily shit like housing, medical care, food and all that stupid bulllshit has gotten drastically more expensive.  All the while these critters at the Fed talk about employment targets and inflation targets.  And transitory patterns and oh goodness the economy is so robust that's why inflation just won't subside.  I feel like it's just because we printed something close to 8 trillion dollars real quick, but I'm just a dumb dumb RE LA TOR.

Now, we found this super strong correlation a while back between home pricing and M2 money supply.  Here is a picture showing M2 money supply being diminished by the tightening actions the Fed is taking.

Fewer dollars in the system chasing at least for now roughly the same amount of goods and services.  That means money velocity has to go up to supplement.  And look at this, money velocity is going up!

Which means that people are spending money faster, which is also confirmed by the historically low savings rate.  And also confirmed by today's personal spending numbers and the PCE.  Long nerdy story short this inflation thing is going to remain a problem.  And that isn't to say that real estate prices are going to continue to shoot up, it's to say that the cost of everyday goods is going to cause so much pain to the American consumer, and the global consumer, that there's not going to be a whole lot left to ball out on.  Real estate valuations will have to adjust to the financial reality of the very people that need it.

Now another thing.  This one also has a graph.  

I'd like to personally welcome lumber back to it's natural trading range.  Welcome back, wood.  Yesterday I went to Lowe's and 2x4s were $2.98.  That's a lot less than $8 as math shows us.  And while not all materials are dropping this way we saw copper come off a high, we saw steel come off its high, and we've definitely seen demand for building materials come off its high.  And unless you're high you'll realize that builders can now build homes for less than they could build them at any point over the last 2 years.  Which means builders will be able to compete on price with the very people they sold homes to over the last 2 years.  Guess who's gonna win?  

And so the good news guys is we will, just like every other time because this time isn't different, see a shit ton of debt go sideways.  We will absolutely see the stock market probably eat like another 20-30% drop, if not more, before finally finding a bottom.  We're going to see more foreclosures than we've seen at any point in the last 10 years and we will absolutely see real estate valuations go down in the short term.  How is this good news?  Well it's because with a long enough time horizon on your investment none of this short term stuff should matter to you.  And it will give people and opportunity to buy in at NOT record highs for once.  And the market will find equlibrium and all things will be good again.  But for the short term guys be extra careful and make sure you're buying something you can afford comfortably without relying on tomorrow to be better than today.

The yield curve is still inverted by almost 90 basis points but seems to be heading back towards 0.  When we get to 0 and above I bet I have some fascianting macro stuff to discuss with you, like historic, but we're not there yet!

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