Friday Update January 13, 2023

It's Friday the 13th and its scary how shitty some of these offers are that I'm submitting and that I'm receiving.  Where as last year we we're talking about appraisal gaps of 15-50k with escalation clauses today we're seeing seller concessions maxing out the loan limits and price reductions in the 10s of thousands.  True story, earlier this week I fired a buyer after getting him 40k off the list price because he felt like the contract was just the beggining of him crushing the seller for more.  I have a buyer lead for anyone desperate, it won't be worth your time.

The vultures are already out and I've got wholesaler outfits from Texas and other states submitting offers at half price on active MLS listings.  This reminds me a lot of what agents were doing back in 2012 to stay sharp I guess.  Just writing funny offers with the logic that maybe one in several hundred might stick.  Highly annoying conversations being had with below amateur fuckwits thinking that they're somehow gaming the system.

Let me kind of dive into wholesaling real quick because it's going to become more relevant than before.  Wholesalers have always been around even in the last couple years.  Basically a real estate wholesaler reaches an agreement with a seller to buy a property for a sum of money.  The wholesaler then finds another buyer for the property that is willing to pay more, assigns the original contract to them and takes the difference as an assigment fee.  There is some value in this business model as it allows people that either don't trust agents or just don't want to deal with agents another way to market their property.  It almost always comes at a significant loss to the seller but hey at least the wholesaler gets to make some money, and the investor gets a property that may not have ever hit the MLS.

And while you can probably sense in reading the above that I struggle to say nice things about wholesalers there are a few that are legitimate, above board and honest business people.  The vast majority are broke dickheads with 0 actual knowledge or integrity that are looking to make a quick buck.  These are the ones that are going to be saturating the marketplace as the market softens further.

First and foremost your friendly or grumpy local real estate agent will always have a further reach through the MLS than any wholesaler.  So if you get approached by someone looking to buy your house for fast cash do yourself a favor and talk to an agent first.  I know there are a lot of agents that walk into distressed properties and don't know what to do but there are plenty of experienced solid agents that see the value in any property and can help you get the most out of it.  Keep in mind our exposure as Realtors is to the whole world, while most wholesalers at best have an email list of potentially interested investors.  Those same investors all look for properties online, so we by default have every wholesalers list matched and beat hands down each and every single time.

Also something that most wholesalers don't disclose to the public is how much they're skimming.  In the last few years I've seen wholesalers ripping 30-50k out of deals, sometimes more.  Meanwhile these guys will tell you all about how stupid it is to pay a realtor 4-6% or so.  You see as Realtors when we take a commission at least we're super clear about how much, why, and who its going to.  Wholesalers just rip whatever they can out of the deal because they don't have anything on the line, like a reputation, or a real estate license.

Bottom line guys is it doesn't cost you anything to get a second or third or even a fourth opinion from a real estate agent.  If you get the feeling that the agent you're talking to is in a tigher pinch than you are and needs to take the listing more than you need to sell it call another agent.  Not every one of us is desperate for money and quite a few agents run their business with integrity and the long term in mind.  Just find the right one.  And if the wholesaler is offering you something better than an agent can do they will tell you, I had a situation like this a couple years ago where a wholesaler was willing to overpay for a house and I told my neighbor they should go with that.  It's rare, but it happens.

With that rant out of the way how about some stats?  

1,014 single family existing homes on the market today.  Roughly 4x as many as a year ago.  Sales volume is dropping like a bag of bricks.  Last year month to date we had 441 units close out at a median price of $440,000.  This year we're at less than half, 213 units closed, with a surpisingly resilient median price of $455,000.

The price resilience really is surpising me.  Keep in mind May of 2022 our median briefly broke 500k, and so we are still a solid 10% off our peak and in some areas and price points its significantly more than that.  Honestly it feels worse than the numbers reflect.  Yet year over year we still show a small amount of appreciation which is tripping me out, man.

Interest rates continue to be somewhat volatile rising last week and then dropping somewhat into today.  The yield on the 10 year treasury is 3.51% and was touching 3.4% yesterday.  A couple weeks ago it was at 3.9%.

The problem we have right now is the historic yield curve inversion.  While the 10 year yield is at 3.51% the short term bonds are yielding much higher.  The 2 year is at 4.24%, the 3 month is at 4.64% and the 6 month is at 4.79%.  The dilemma this creates, as many of you have asked me on Facebook, is for lenders.  Common misconception is that lenders just have unlimited money to lend.  The reality is that lenders borrow money short term and package it up into long term loans like mortgages or car loans.  So if your borrowing cost for the short term is higher than for the long term it throws a wrench in the business model.  And this sounds weird and crazy because it is, normally the yield curve looks like a series of sexy curvy lines with the shortest term yielding the lowest amount and up and up and up through the longest terms yielding the highest.  Today that's not true and it's fucking up the market.

So lenders aren't a charity right?  They run for profit businesses.  And since they have to make money while borrowing at these elevated short term rates they have to push the rates on their loans up.  Which is why our mortgage rates today correlate more to the 3 month bonds than they do to the 10 year bonds that they normally correlate with.  Same with car loans.  It's not fun for the consumer.

The good news is this will blow up at some point and correct itself.  As of last two quarters Americans are opening more and more credit cards, carrying higher and higher balances, paying some of the highest rates on credit cards in the last 50 years.  This is happening while the savings rate has dropped to a record low of 2.4% and also while bank deposits by private citizens are falling into the red.  In lamens people are swiping their credit cards a lot because they've cashed out their savings and don't have shit to put in the bank.

Not surpisingly we have defaults starting to tick up.  I only have this for credit cards and auto loans but mortgages are following a very similar curve.  Check this out.

Chart: Delinquency Rates Creep Up—Especially in Lower Income Areas; Credit Card and Auto Loan Flow into Delinquency by Zip Code Income Quartile.

It's not 2008, it's not even 2017 or 2018 but this is the reversal of a trend and we will see more loans default than we have since 2020.

What this means is that we will have less qualified buyers, likely more distressed inventory than we;ve gotten used to, and much less if any appreciation until the Fed steps in with the next round of money printing.

What is holding this whole shit show up for the time being is the historically low unemployment rate of under 4%.  But think about it for a second.  People are fully employed yet they have nothing to put in savings, barely have anything to put in their checking accounts and are racking up credit card debt at an alarming clip.  Does that sound like a boom to you?  Or is the inflation catching up finally?  I think it's the latter.

Yesterday we had CPI numbers come out showing that the rate of inflation has slowed, and that is technically true.  However the only number in the CPI report that came in below 0, showing price reductions is an 8.8% drop in the price of used cars.  Rememember those went to the moon and are now reversing to the mean.  However the price of maintenance on cars is up about 13%, the cost of energy is about 15% higher than a year ago, the cost of housing including rents is up about 8% and the cost of groceries is such that I'm starting an only fans page where I'm going to charge a membership fee to show people what I do with eggs.  Stay tuned.

Long story short when the government says we're not in a recession its a good bet that we are.  It's just that people don't tend to think that sub 3% GDP growth in a over 6% inflation rate is still a contraction.  Next up folks stay tuned for the next crisis and be ready for the Fed to save the day yet again by flooding the world with dollars.

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