Friday Update February 4th, 2022
264 existing single family homes on the market this morning, in line with what we've seen the last few weeks. January saw 1109 units sold in the Pikes Peak MLS with a median sold price of $433,000. That is below our peak median price from last year of $450,000 but in line with seasonality. Is the market crashing? I don't think so.
Rates. Remember how I said rates may go up short term but long term we can't sustain it? Rates are going up. The 10 year treasury today has touched 1.93% which makes it a full point higher than this time a year ago and about .6% higher than 2 months ago. Mortgage rates have correlated with 30 year conventional loans today averaging around 3.85%. There's gonna be a bunch of lenders that are like naaaah, call me, I'm special and my rates are better than EVERYONE'S. I can do like 2.5% all day except like 3 days before closing when suddenly and unexpectedly your rate will be the same if not worse than par. I don't work with any douchebag lenders like this but they are indeed out there. Be aware. Some of them are on TV wearing suits that look like an optical illusion.
Rates are important. Rates are a key reason for markets heating up or cooling down. Rates are often times the main reason that markets crash. The massive drop in interest rates in 2020 sparked what became the fastest and largest appreciation in home values in at least several decades, maybe ever, depending which data set you use. The rise in interest rates in 2006 and 2007 was enough to force a bunch of homeowners with teaser rates on their ARM loans to learn a valuable lesson about the foreclosure process. Check out the graph below showing the last 30 years of price growth or declines and notice the massive run up in 2020.
My best guess right now is that for 2022 we will see much slower price appreciation than we saw in the last 2 years. Zillow predicts a 19.3% increase year over year in 2022 so I'm going to go with like 5%. I've never lost 520 million dollars flipping houses though so that's just my guess. I think that housing this year will underperform inflation. Why?
Because I saw our local market bumping its head month after month against the $450,000 median price that we could not break. Because I know that while people's wages are going up slightly their utility bills are going up much more. Taxes are going up, the cost of groceries has gone up, fuel prices are reaching for 15 year highs and so on. People can only afford to pay so much and in our market with current incomes $450,000 on the median seems to be hard to break through. Also what I mentioned about rates going up a full point in the last year means that borrowers have lost 10% of their buying power, most of it in just the last 2 months.
If we had 2007-2008 inventory on the market right now my opinion of housing would be roughly the same as people's opinions of this moment.
But that is not what I think is about to happen and here is a list of reasons why I don't think the housing market is set up for a crash.
1. Low inventory does not only mean a limited supply for buyers, it means a limited supply for sellers which prevents them from selling, and in turn keeps supply low. It's like a catch 22, I want to move but there's nowhere to move to, so I won't move, and so there's no homes opening up to move to, so I won't be moving. Ya dig?
2. 2008 onwards saw plummetting interest rates and a surplus of inventory. We have climbing rates and an inventory crisis. The rising rates have created something of a trap even for people that just bought a house 2 years ago. Yea you've got equity, yea your interest rate is dope AF and yea you're not moving now because these prices are ridiculous right? Meanwhile our population is still growing and people legit have no better option than bite the bullet and pay up. I know this is true because our trend is still to pay over list price on most properties. And rent has grown proportionally so what options does that really leave people with? Van down by the river? Have you seen used car prices? Good Lord I'd rather buy a house!
3. Distressed inventory like short sales and foreclosures basically don't exist. People either have too much equity to actually go through a foreclosure or there are institutional buyers behind the scenes snagging up foreclosures without them ever hitting the market. You know like dudes that sip Blantons whiskey and smoke cigars while making multi million dollars deals and stuff. Things like that are real.
4. Institutional investors are heavy in the single family space. According to a recent statistic 1 in 7 American single family homes are now owned by a publicly traded company. Last year one fund, Invesco, on one trial occasion parted with 5 Billion USD to buy up 20,000 single family homes across the United States on behalf of pension funds. That is one fund, on a small scale, just testing out the water. The returns that their investors expect to see from buying into single family homes is on par with the best yielding dividend paying stocks such as AT&T or Exxon, and without the market volatility of stocks. Bottom line is if dumb money leaves the market smart money will fill the void. People need a place to live and our corporate landlords are only too happy to provide that.
5. The cost of construction has grown tremendously. That means that whatever new inventory is entering the market is doing so at a price point that pulls resale pricing up rather than pushing it down. Lumber prices remain high and the cost of building materials and labor across the board are substantially higher than 2 years ago. It is true that in 2021 and 2020 here in El Paso County we saw roughly 1,200 more homes built per year than in 2018 or 2019. In the big picture though we saw close to 20,000 sales in our local market if you factor in all the inventory that builders did not put into the MLS. So for a roughly 30% increase in the pace of new construction that contributes to roughly 6% of our total sales and in price points that many buyers can not afford.
6. Migration patterns. Colorado has been averaging about 53 people moving in to every 47 people moving out. Doesn't take a genius to see that this means our population is growing. When I talk about the housing market not crashing I'm talking about our housing market here on the front range of Colorado. Looking at migration data from states like California, Illinois, New Jersey and Michigan I don't know what their prognosis is. Illinois loses 69 people for every 31 that move in. I don't imagine their market dynamics are the same as our's but hey guess what, your loss is our gain guys. (Maybe not when it comes to the increase in homelessness, traffic and violent crime but thanks anyway, Illinois and others)
7. What am I forgetting? My dude Max got up super early today and my brain is pretty foggy. Please let me know what factors you think are keeping our local market from taking a precipitous drop towards 0.
Now let's talk about what would make me wrong. If interest rates continue to rip at this pace and we see mortgage rates over 5% then I think our market reality will be pretty different from today. I still think that higher rates will have a constricting impact on inventory but an even more constricting impact on demand. I think if we push up another 1-1.5% in rates quickly then I will change my opinion of 5% annual appreciation to more like a 5-10% loss in values. Please keep in mind that a quick run up in interest rates will have much broader implications than just a weakening housing market. Also if you've been waiting your whole life for the housing market to crash so that you can buy I sincerely hope you've been hoarding green backs because the higher rates would take all of your principal savings and just transfer them to the lender monthly.
Another thing that could make me wrong about our local market is if other states did super cool shit like drastically reduce income and property taxes. LMAO, imagine that! But since states with the highest tax rates tend to be the deepest in debt this is like never say never but never going to happen.
A greater than regional war or any other serious mass casualty event that can not be solved by printing infinite amounts of money. That would change my opinion of a lot of things including where I live, and maybe my identity since some of you are for sure narcs.
But here is what I think is going to happen. I think that at some point this year the rate on the 10 year yield breaks 2% (maybe Monday) and maybe pushes higher to like 2.5%. This is not the Fed Funds rate that you guys pay so much attention to, this is the yield on the treasury notes which super heavily correlates to mortgage rates. Did you know that the Fed could raise rates in March and the rate on the treasury bonds could drop? So let's say rates do run up and they start to squeeze the housing market just like at the end of 2018, let's say we see like a 20% plus correction in the stock market just like in 2018, let's say we have a bunch of margin calls and people losing their asses gambling with finance. Let's say all that happens and were staring at the financial crisis that we kicked down the road in late 2019/early 2020. What do you think is going to happen then? I bet you what happens will make the Covid era money creation look like a drop in the bucket, and hard asset prices such as real estate will benefit from it. I bet you the Fed monetizes this year's deficit, next year's deficit and accelerates their bond buying program which by the way never did stop. Just since November they bought 300 Billion dollars worth of assets. They may stop briefly, they may actually taper, but the shit show that will create will force them to 1. resume printing money and buying garbage bonds with it or 2. face the possibility that the Fed may cease to exist.
Play the long game guys. Don't be the stupid money.