Friday Update January 20, 2023

Today's headline on CNBC read that nationally home sales are at their lowest level since 2010.  2010 was a dismal year for real estate.  It was also the year I bought my first house and in retrospect that timing was pretty amazing.  Not saying that's true for today, just saying hindsight is 20/20.

In our market today we have 975 homes for sale which historically speaking is super low.  This time last year we had 273 which historically speaking was fucking absurd.  Demand however has slowed down substantially.  And while it is much easier to buy a house today and likely get it for under list price with closing costs paid affordability remains a problem.  Rates are basically double what they were last year.  Today the payment on a 450k house with no downpayment and not including escrow would be around $2,850 the same house at the same purchase price last year would run about $1,950 a month.  That difference is something that most of us feel especially when the trending topics are gas and grocery prices.  

Good news for sellers is this.  Prices are not plummetting like one would think they should be at this point.  Part of the reason for this is because so many people can not afford to move so they're staying put and keeping inventory levels suppressed.  This is also translating to much lower sales levels with this year starting with roughly half the sales volume of last year.

No joke guys a few anecdotes from our business.  Your's truly, I've been selling real estate for 10 years now.  Thanks to all of you I continue to remain relatively busy but in an effort to make sure food remains on our table and to add to my real estate bag of tricks I'm getting a builders license.  I figure while we all hunker down at least I can help with some small construction and remodel jobs.  The slowdown in the second half of 2022 cost me roughly 25% of my 2021 income...good fun.

One of my clients owns several rentals in Tennessee.  One of their long term tenants just stopped paying his rent.  He's an agent there and sales have stopped for him, he literally had to abandon his home and move in with room mates or something.

Others are picking up second jobs.

And many, many more have always sucked at selling real estate so they're not even really seeing any change in the market because 0% of zero is 0.

The above is not me complaining or begging you for business.  I'm just sharing with you how quickly our industry went from being over run with demand to falling to the lowest sales levels since the financial crisis.  This is important because in 2021 almost 17% of America's GDP was somehow tied to the sale of homes.

Think about all the jobs involved here.  You have your knucklehead agent, your alcoholic lender, your chill home inspector, all the admin and processing people including insurance, title, HOA people and so on.  Then you have your HVAC guys that come to basically every sale, your plumbers, your carpet cleaners, your painters, your housekeepers and your roofers.

Then of course you have your movers and the thirsty vivint sales people.

Think about all the stuff people spend money on when they move aside from what I just mentioned.  New TV for new living room?  New flooring?  New furniture!  Gotta have it.

Almost 17% of America's economy is tied in some way to a house being sold.  That is around 4 trillion dollars a year.  The slowdown we're feeling as agents is something that will be felt across the economy and already is by many.

Tech companies seem to be feeling it faster than the rest.  We've got Amazon announcing like their third round of layoffs, 18,000 people.  Microsoft is cutting 10,000.  Wayfair is cutting jobs and Google is cutting like 11,000.  This is now just kind of the mainstream news is companies cutting jobs to protect their profitability as we move through the first earnings season of 2023.  I anticipate we will see more of this before we see things get better.

Interest rates in general have dropped somewhat over the last couple of weeks but like I mentioned earlier are not at a level that makes buying a house "affordable" for many.  Hence the 50% drop in demand.  And while many agents will say things like "oh historically these rates are super low" they're not taking into account the amounts financed.

I talked to a buddy of mine that's looking at buying this cool mid century modern home in some nice part of Pueblo.  I don't know where that part is or that Pueblo has a nice part but he claims there is one.  I'm just fucking with you Pueblo, I've got love for you and especially your food, just your east side scares me.  But anyway this house the payment on it would be like $2,800 monthly.  And the median household income in Pueblo for 2021 was under $47,000, and per capita under $25,000.  So um yea, mortgage payments are $33,000 a year, utilities aren't included and the fridge doesn't stock itself.  Ineteresting dilemma.  The Springs median household income is around $72,000 a year but you can see how with those numbers paying 40-45% of it for a mortgage is painful.

Hence something has to break yea?

Part of the reason mortgage rates are so high as compared to the 10 year treasury notes is the continued yield curve inversion.  We dipped negative in August and as of today are something like 120 bps upside down between 10 year and 3 month yields.  I've talked about this a lot and if you're unsure what this all means just holler at me on Faacebook or shoot me a text at 719-233-2410 and I'll gladly elaborate.

Here's what I see happening.  I see a shitty real estate market persisiting until the yield curve corrects.  That correction will likely come in the form of a major blood bath across financial markets as we put a formal end to the previous financial cycle and start the new one.  This will likely be extremely ugly and could for sure bring in liquidity issues that will make the real estate market an even ghostier ghost town than the last go around in 2009.  Maybe, maybe not, I've heard good arguments for both sides.  My point is that once the yield curve corrects and shortly thereafter we should see mortgage rates stabilize and normalize.  It will be at the ugilest point in the news cycle that the new economic cycle is born.

One thing I do want to rant on is this.  And all the lenders reading this that take offense to what I'm about to say, you guys can go fuck yourselves.  2/1 and 3/1 rate buydowns are fucking garbage.  You guys are peddling fucking garbage and some of you know it while many of you are too stupid to understand what you're doing.  You guys are going to cause so much financial harm to people and you stand behind like "oh, well if the seller pays for it then who cares".  Right?

Listen.  To the non lenders.  A buydown is kind of like an adjustable rate mortgage that is set in stone and super predictable.  Let's say the rate on a mortgage today is 6.5%.  A 2/1 buydown allows you to have a 4.5% interest rate for year 1, a 5.5% for year 2 and then 6.5% going forward.  So let's say you finance 450k with a 2/1 buydown and not including escrow.  Year one you pay $2,280 a month, year 2 is $2,555 and then year 3 and onwards is $2,844.  These rate buydowns cost an absurd amount like in the $7,500-12,500 range per house roughly.  This is just a fee the lender charges the only benefit for which is the lower rate for the short time period.  Often that fee actually exceeds the amount of interest that you're saving.  But that's not the biggest issue I take with this FUCKING GARBAGE idea.  The fact that your payment is guaranteed to go up next year and even more the year after that isn't even the biggest issue either.

You know what is?  A bunch of assholes telling you to gamble on lower rates to refinance later.  Check this out for a nightmare scenario and follow me ok?  You buy a house today and dickhead mcgee at "Idrinktocope" mortgage pushes the 2/1 buydown idea your way because think of all the money you're gonna save on your first 11 mortgage payments!  Then it goes up a bit but who cares you got to ball out in your first year.  Then it goes up some more and at this point that's when according to your lender you're just going to refiance your house at a lower rate and win huge.  But 2 years from now lets say you decide to start your own business, or you quit your job, or you have some unexpected medical expenses, or something happens where your income and or credit are negatively impacted.  And all of a sudden you can't refinance and you're stuck with your full payment for the next 28 years.

Now let's say nothing bad happens to you and your life is awesome.  Let's just say that other people begin to suffer and the foreclosure rate goes up, which it will, because you can't go much lower than what we had the last 2 years.  Let's say the interest rates start to drop together with a slowing economy and rising inventory.  So now it makes sense to refi but the flood of new listings may have your house appraising at less than your loan amount.  Especially if you have close to or over 100% financing on the home.  Imagine seeing something like a 3.x% interest rate and not being able to capitalize because the value simply isn't there.

My point is this.  Lenders, just like Realtors, get paid a commission.  Right now the mortgage applications are at the lowest levels in something like 23 or 24 years.  And we're coming off a massive refi and purchase boom that led to a ton of hiring across the industry.  So we're fully staffed for a boom but are in a recession.  Lenders, like agents, are left with few options other than to push products that they probably shouldn't.  But hey dude, everybody has to eat.

So look.  Whaeter the rate is today or tomorrow just embrace it.  If you're ready to buy a house, and the home makes sense, and the payment makes sense, and you're ready to settle down a while then do it.  If you're able to take your time and see how this market plays out over the coming months then do that.  But DO NOT buy a house hoping or relying on refinancing it in 2 or 3 years.  I could be completely wrong about this and I hope I am, but it would be so much better to see refinancing as a cool possibility rather than something you need to be able to do in order to comfortably afford the home you've already bought.

And another thing.  If you can get the seller to pony up the kind of money that a 2/1 buydown costs then just buy the rate down permanently.  Or negotiate it as a straight price reduction.  The price reduction option doesn't seem so flashy at first when you realize each $10,000 you finance is only about $63 a month.  But hey, that's $756 a year and over $22,000 over 30 years.  More importantly though that little bit of difference on your loan amount might be all the difference you need to actually refinance later without having to bring cash to the table.  So talk to a good and competent lender and crunch some numbers to see how you can best capitalize on the seller concessions in this market because a short term rate buydown isn't it.

And hey.  Lenders and anyone else that may be reading this and disagrees completely.  I understand the argument that if someone only has a 2 or 3 year time horizon here in Colorado Springs that a short term rate buydown theoretically makes sense.  You know what else makes sense for that time horizon though?  Renting.  Renting makes a lot of sense rather than gambling on a half a million dollar investment.  Just because we don't get paid for that doesn't make it untrue.    


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