Friday Update January 28, 2022

262 is the number ladies and gents.  That is the total single family existing inventory currently listed as active on our local MLS.  So far in 2022 we have already clocked over 800 sales in our region with a median sold price of $445,000.  The pattern of people paying over list price continues.

Something I haven't talked about in quite a while is the yield curve.  Back in late summer of 2019 I was like sounding the alarm that something weird is going on.  That's because in August of 2019 for a brief moment the yield curve went negative.  What I'm talking about is the difference in yield between the 10 year treasury note and the 2 year notes.  The reason this is important is its a powerful signal that generally signals serious economic problems to come.  Simple way to think about it is you would expect a higher return on a loan if you let someone borrow money for a longer time rather than a shorter time.  This is why generally the interest rate on a 15 year mortgage is lower than the rates on a 30 year.  So if the market is saying hmmmmm, I'm gonna need you to pay me the same for a 2 year loan as for a 10 year loan it shows that the level of risk being priced in is extraordinary.

In August of 2019 as I was freestyle bitching about the yield curve and also about inflation people told me that inflation isn't even a real thing.  It's was barely touching 2% at that point and so my fears were out of context.  At the same time the Fed started the largest overnight repo operations in history which are continuing to this day.  And then we all know what happened towards the end of the year and the tremendous financial effects that fell out of the whole shabang.  And now inflation feels pretty real, doesn't it?

So why do I bring this up now?   Number picture time!

And a bigger time frame for context before I resume the rant.

Alright so the pattern here is yield curve inverts, recession follows.  The gray lines on the graphs mark recessions, and I strongly disagree with the way the Fed is marking the last recession as over because I don't really think we've found the bottom of it yet.  But that's just negativity and a hate filled bias talking.  Do notice the correlation between the inverted yield curve and the tough economic conditions right behind it.

Short term context let me go back to the last time that the Fed was gonna raise rates, and did.  The year was 2018.  We started here locally with a very active real estate market and the median price point was $295,000.  By mid summer we quickly ran up 10% to $325,000 but then the market began to price in the Fed rate increases which were promised and mortgage rates started to climb.  I bought a house in October of 2018 and my rate was 5.25%.  We finished 2018 with a median price of $300,855.  Basically no appreciation on the year because rates legitimately did bump up around 1.5% in a short time frame.  At that same time the S&P 500 took an over 20% correction.

Now because the feelings of rich people who hold financial assets are validated by the Fed while the feelings of the poor are not the following thing happened.  Rates peaked right around my closing on my loan in 2018 and by summer of 2019 mortgage rates were roughly 1% lower.  Let's not even talk about 2020 rates because those were just incredible.  By June of 2019 median price was over $330,000 and we resumed our gradual climb in prices, that is until 2020 when the climb was no longer gradual.

So here is kind of my prediction for the short to mid term.  Rates will climb with the Fed pressing their make believe hawkish position.  Yesterday they were profiting off insider trading, today they are inflation fighters doing everything in their power to save the world.  The market will take the Fed seriously and yields on treasury notes and correspondingly mortgages will rise.  This will cause the yield curve to tighten, liquidity will start to become an issue, and the stock market will start to waver.  Real estate wise I imagine we will start to see much slower price growth.  Maybe no price growth at some certain points in the near future at all.  However I do believe that inventory levels will remain near historic lows for the foreseeable future and that supply crunch will essentially protect prices from falling drastically.  2008 happened because of an artificial demand in a saturated market.  Today we have desperate people doing their best to secure shelter, and there just isn't enough out there.

Then something unexpected will happen like maybe a politician will tell the truth for once.  Or something will go boom off the east coast of China?  That will spark a shit show in the financial markets similar but probably worse to what we saw in March of 2020.  The sky will fall on everyone riding margin debt and on everyone else that has too much leverage, not enough liquidity.  The market will do what its meant to do which is purge out inefficiency, and reward efficiency.  And then the Fed will do what it does best which is become the buyer of last resort.  They will quicker than ever print an unGodly amount of money to monetize debts, lower interest rates back down and my bet is at some point the US treasury notes will trade in the negative.  I've been wrong on this, I though it would happen in 2021 and it did not.  But long term I stand by the thesis that in order to perpetuate this house of cards for the next decade or two the only way to do it will be with rates at 0 or lower.

This is getting all macro and nerdy.  I know I didn't talk nearly enough shit about the industry as a whole.  I will again soon I'm sure.  But for the big takeaway understand that there are short term cycles and long term cycles.  2020 should have been the beginning of a new short cycle but the Fed's action kicked the can down the road, the effect of that kick is already wearing off and they're going to need to act again soon as we face another recession/correction in the coming year or two.  Long term wise the way that cycle plays out is a huge question.  All I can say regarding that one is hope for the best and prepare for the unimaginable.