Friday Update January 6, 2023

1,031 single family existing homes on the market today!  A year ago we were at 287.  With demand halved and supply quadrupled we still have agents talking about how it's a seller's market.  Not sure what I'm missing but I know my buyers are enjoying some serious price reductions across the board.  Sellers, the world has not ended but the tomfoolery has, so now its time to be strategic and realistic.

A year ago lumber was trading at $1,200 per thousand board feet.  Today it's back near its pre pandemic normal of $350.  Labor costs however have gone up dramatically and builders are struggling to convey to trades that the madness of 2021 is not sustainable.  Guys are trying to push similar margins and markups in a relatively normalized supply chain and its just no vibing with the people writing the checks.  Something is going to break there and my guess is it will be the pen writing the checks.

We have an interesting situation happening now with multi family construction.  For the first time in my life Colorado Springs is starting to get overbuilt with apartments.  If you've been downtown or anywhere on the north end you know what I'm talking about.  The interesting thing is that all of this new construction, close to 6,000 total units that are currently in various stages of construction, are going to land into a softening market.  My property management friends tell me that what Memorial Day was to sales Labor Day was to rentals.  Memorial day ended the seller's market.  They're having to reduce rents substantially, like 10-20% from what they originally listed it for and probably 20-10,000,000% lower than what landlords wanted.

So then we're going to add to this environment another 6,000 rental units as apartments are already beginning to offer up incentives.  People that are much smarter than me are calling for another 15-20% drop in rents and that is being somewhat conservative.  So not great news if you're an out of state investor trying to milk every last penny out of Colorado Springs tenants.  But then again, when you play stupid games you win stupid prizes.

Here is the upside to all this.  Colorado Springs has historically been a town that is more affordable than the average.  We fell out of this trend over the last few years and became expensive.  A lack of affordable housing creates serious problems for the demographics of a city essentially preventing young talent from being able to move or stay here.  A correction in rents and relatively affordable new apartment buildings will allow for talent to flow into Colorado Springs which will benefit our entire community over the long haul.  If some investors have to take an L for a few years so be  it.  No sweat off my back.  They'll be ok.

That being said it's important to consider what makes real estate a good investment.  What makes it a good investment is the long term income from rents, tax benefits, and potential appreciation over time.  What makes real estate a scary investment has nothing to do with the real estate and everything to do with debt.  The amount of leverage that investors take on in the hopes of an ever appreciating market is staggering and at some point the market does not always go up.  It's going to be interesting to watch the deleveraging and see how much of it is voluntary and how much of it will be seen at 10am on Wednesdays at the County Services building off Garden of the Gods.  That's the time and place for the trustee's sales.

On the macro front we have the 10 year yield that fell from 3.9% last week to 3.58% right now and that will soften up mortgage rates too.  That is a result of some economic indicators showing significant contraction in the economy which contrasts with the still very positive jobs numbers.

The yield between the 10 year and 2 year notes is inverted by 70 basis points and the 10 year and 3 month are inverted by I almost just spit up 1.06%.  This is fucked.  Wow.  This is the worst inversion I think in American history maybe.  At least in the recent past.

This means that banks borrowing money for the short term and lending it for the long term are dealing with a total quagmire.  How do you make money lending something for a long time that costs more to borrow for the short term?  Well you have to artificially push up mortgage rates to compensate.  That reduces demand while costs stay elevated.  Not a good recipe for anything but staglation or "slowcession" as our cater to the lowest common denominator media has rebranded it.

This is fucking scary guys.  This signals a massive issue in our financial system that will unravel in some spectacular way in the not too distant future.  Yet the rent will be due on the 1st, and people will need a roof over their heads.  Be smart and look for ways to capitalize.  Maybe buy some gold.

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