Friday Update January 7, 2022
287 is the number on this first Friday of 2022. That is the total available inventory of single family homes in El Paso County. We finished December with a median price that we've seen many times in 2021, $450,000. 5 of 12 months in 2021 saw our median price at 450k, never once did we break above it to close out a month. It seems that our humble county is having a hard time pushing above that median price likely because our incomes don't support it. That being said today in the city of Colorado Springs we have just 40 single family homes priced at 450k or less that have the popular 3/2/2 configuration or greater.
Nationwide housing starts have been steadily recovering since their bottom in 2008 to be at roughly the same levels we saw in the late 1990s. The population of the United States is currently about 50 million people larger than it was in the year 2000, yet our housing starts are matching the levels of the late 90s. This stat relates not only to single family homes that are to be sold but also includes all multi family and apartment units. By far the bulk of the new housing inventory is being built across the South of the US, with the mid west and north east seeing pitiful numbers which reflect the migration trends within the country.
In El Paso County we saw roughly 4,350 single family dwelling permits issued in 2021, down from about 4500 in 2020 but up from around 3500 in 2018 and 2019. For context in 2004 and 2005 El Paso County saw a building boom leading to a foreclosure boom that saw over 5,000 single family permits issued both years. Remember that a pulse got you a mortgage and somehow nobody saw an issue with it. By 2010 we saw less than 1,500 homes go up a year and it has taken until last year for us to see construction levels similar to the early 2000s. Our county wide population at that point was about 550,000 residents as compared to over 730,000 today.
Construction costs aren't coming down. Lumber is still trading around $1,200/1000 board feet (this means a 2 by 4 is $6.50) and according to the chief number manipulators we now have an unemployment rate of 3.9%. What that translates to is that getting people to show up for work is difficult and to get them to show up for cheap is impossible. For 2021 with the limited amount of new build inventory in the MLS (477 unit sample size) we see that our median sold price by square foot is $176. In 2016 that median number was $113. In 2006 it was $111 (bubble about to pop then) and in 2010 it was $94(bubble fully deflated). I don't think we're going to see this trend reverse quickly, I do think we're already seeing the new trend which will continue of generally smaller new builds being built.
Interest rates did get a tiny bit interesting in the last week. The Fed has been running its filthy mouth about how they will raise rates 3 times in 2022, maybe 3 times in 2023 and also work on reducing their balance sheet. This banter pushed our yield on the 10 year T notes to 1.77% at the moment of this writing. That takes us a solid 25 bps higher than a week ago which in super lamens terms means that today buyers can afford about 2.5% less house than a week ago. How long will this last and will this trend continue is kind of anyone's guess but I'm going to bet that it doesn't.
I think that a continuing push by interest rates much higher than let's say 2% on the 10 year notes is going to cause massive problems that the Fed will then once again have to react to. The best recent example of this was the rate spikes in 2018 and early 2019 that caused a correction in the stock market, a brief slow down in the housing market and ultimately led to a yield curve inversion that ushered in a pandemic. Well like one thing led to the other is all I'm saying. Let's just say that the financial worries of early 2020 were pretty obvious in 2018.
So now lets say the Fed does push hard on rates and we do start to see a steady climb in the cost of borrowing. Forget about the housing market, the stock market and cryptos for a minute. Those will all absolutely crash if rates go up steadily but think for a minute about this number. 30 trillion dollars. That is roughly our current national debt on which the US Treasury paid just shy of $600,000,000 in interest in 2021. Now imagine you actually control how much interest you pay on your own debt as the treasury does through their direct connection to the Fed. I'm pretty sure Powell actually came out of Yellen at some point, in whatever context you'd like to visualize that. But disgusting visuals aside imagine you can control how much you pay on your debt, now imagine that you are already in a deep, very deep financial hole. Do you then take your 30 trillion dollar credit card balance and roll it over onto higher interest cards? That would be kind of dumb wouldn't it?
For context the amount we spend on interest as a nation right now is roughly similar to what we spend to fund the entire Medicaid program. According the the CBO our payments on the national debt should push closer to a Trillion dollars a year by 2028 due in large part to the ever growing principal and also taking into account the assumption of higher interest rates.
Basically in a nutshell:
1. Take advantage of the cheap interest rates now to buy something that
2. You can live in, rent to others, or sell for more money down the road (infaltion hedge) so that you
3. Can protect the effort you put in today by having assets that appreciate with inflation rather than dollars rotting in your savings account BUT
4. Do have a few stale dollars in your savings account for those moments when the macro trends hit short term turbulence.