Friday Update July 1, 2022
1296 active single family homes going into the weekend. 20 more than last week. A lot of people don't list houses going into holiday weekends so it would not surprise me to see a bit of a rush onto the market next week.
Keep in mind this is over 300% more inventory than we had mid April.
The last 7 days saw 444 price reductions across our MLS, a slight tick up from last week.
June unofficially finished with the median sold price of $497,773. I fully expect this number to soften as we move through July. Median sold to list price is now barely over 100% and falling. This metric is a bit deceiving too because it measures the price the house was listed for at time of contract, not its original listing price. So any price cuts before contract aren't accounted for here.
I'm seeing this in real life with my own eyes as I have buyers under contract below list price and getting their closing costs covered. Suddenly that's a thing again.
I don't know if anyone has told you this but we're in a recession. Not like facing a recession, but we have been in a technical recession since the start of this year. The economy shrank by about 1.5% in the first quarter and it seems like the second quarter numbers are not looking much better. 2 consecutive quarters of contraction is the textbook definition of recession.
Life goes on, houses will keep selling albeit slower and probably for a little bit less money. Kids will go to school, parents will bicker, companies will hire and fire people and the widget production will go on. A recession is not the end of the world. But it is, thank God, the end of the FOMO. Well, at least on the buyer's side, our sellers have a bit of coming down to Earth to do still.
Let's talk about everyone's favorite metric of the economy. For sure Don Trump's favorite measure of the economy. The stock market.
Year to date the DJIA is down just under 15%, the Nasdaq is down over 28% and the SP500 is down almost 20%. That's not the lows of the market so far this year but pretty close to it. The SP500 had it's worst first half of the year since 1970. And we blame inflation for that, and it's probably true.
But here is another way to look at it. We hit highs in the stock market that were completely unfounded in fundamentals. We hit highs in the real estate market that were fueled by low rates and buyer FOMO. I'm sorry to say this but just like Roku shares should have never been worth $495, or Zillow shares worth $217, some houses should not have fetched the amount they went for. And shit, I sold quite a few of them, a lot of them on the listing side. Sorry I'm not sorry that the market as a whole is just as dumb as us individuals that make it up. The market is a reflection of human nature, and if I know anything about human nature is that it can be irrational and cyclical.
So why bring up the stock market and reason? Because of the wealth effect I talked about a few weeks ago and people's perception of reality. Just in January of this year we had the stock market at it's peak and real estate selling over list price left and right. People paying 30,40,80k or more over list price and offering up appraisal gaps of similar amounts like it's no problem.
Fast forward just 6 months and we have price reductions across the board, across the nation. I'm already seeing some sellers panic selling for losses. And I'm also seeing a lot of sellers saying they're in no rush, they can wait this out, they're not desperate to sell. What I'm not seeing a whole lot of now as compared to 3 months ago is buyer FOMO. I'm seeing a lot more caution and a lot more news articles talking about a weakening real estate market.
One would think that buyers who just 3 months ago had a bunch of money set aside for appraisal gaps might now take an opportunity in a market with growing inventory and I'm going to say this, falling prices. You would think that maybe some of that appraisal gap money could be used to buy down the rate or even to supplement a downpayment to make the monthly mortgage more affordable. But that's not really what buyers are doing. So where did all that appraisal gap money go? Was that all in Gamestop stock?
I don't know. What I do know is that markets tend to over react. The real estate market way over reacted to the 2020 and 2021 stimulus and ran up historic gains in 2 years. Now we get to give some back. And as we give it back there will be, already are, people who will over react to the downside. There is this portion of the population that genuinely feels that home prices can go to like next to 0, and I love those people because their loss is everyone else's gain.
To sum up and to repeat myself again the time to be greedy is when others are fearful. That time seems to be setting in on us now.
For investors, people looking for long term holdings of real estate and people looking to get real creative holler at me. I've been waiting for this market to cycle since like 2016 and I'm excited to work from a different angle than just strapping on my knee pads and asking how the seller would like it. Jaw so tired.
Now for all the normal people that need a place to live and own a house. A smart lender friend of mine suggested something the other day that I agree with. If you have a good chunk of equity in your house, which you likely do, go to like Ent or Farmer's State Bank or like any other local bank around here and apply for a HELOC. Get a HELOC, have it, and don't use it! Why? Because if the shit really hits the fan for you and yours during this economic downturn at least you will be able to access the equity in your house at a reasonable rate, like lower that the rate of inflation, AND you'll still have a place to live.
The worst thing you can be in a recession or depression is house rich and cash poor. Having to sell a property under duress is the worst and a good way to avoid that is getting a HELOC. If you have equity get a HELOC. Get one. You won't regret the peace of mind you'll have as a result.
But don't use it like a fucking credit card to buy a bunch of stupid shit!!!!!! That defeats the point entirely.
Now what if you absolutely have to move? Family stuff, work stuff, personal mandatory stuff. Let's think about ways you can avoid getting your ass kicked by the real estate market.
1. We can accept the reality that prices today are not what they were 3 months ago, price the house aggressively, admit that we're not selling at the top of the market and move on. There may be capital gains tax advantages to selling a primary residence that could make going this route much more appealing than the following options. Bottom line is maybe taking a haircut on paper is worth it?
2. What if you just rent the house out? Does it pay it's own mortgage? Maybe you have to supplement a couple hundred bucks a month? But then you get to depreciate the asset and cancel out some income on your taxes. And someone else is paying off a property for you which you get to keep as long as you want. This takes work. This takes patience. But this is how wealth is built. Also if you have a tenant most lenders will take 75% of your rent to cancel out any existing mortgage payment, so this might not even keep you from buying another house elsewhere. It might even help you.
3. Do you know the going rate for a room in a house these days? Like if you just rent the house room by room? It's like $700 a month plus. So if you have a little bit of hustle in you and don't mind dealing with people you can turn your 4 bedroom house into $2,800 a month real quick as long as you're willing to deal with that many tenants. This maybe terrible advice when it comes to zoning violations, IDK, I'm not a lawyer. Just saying people do these things.
4. Corporate rentals/long term furnished rentals. Even if your area does not allow for STR/Airbnb type of situations nobody is stopping you from doing furnished rentals for 30 days or more. There are so many situations you can cater to like for example transitional housing for the clients of Realtors. You could literally go to every brokerage in town and offer them your furnished house for like 2.5x or more market rent and you would have takers. You could market to traveling nurses and other professionals who travel for work. This has been a good business model for years and continues to be.
5. Maybe you could run and Airbnb? There are now numerous management companies that would allow you to run one remotely. I have an Airbnb in town and I really love it. It's great. You could consider that.
6. You could do a rent to own or a lease with option to buy. You would enter into a lease agreement with a tenant for say 2 or 3 years which allows them to work on their credit and downpayment. You agree up front on a purchase price if you were to sell the house to them. 2 or 3 years later if they are willing and able to buy the house you sell it to them, and if they are not willing or able then generally whatever option money they paid for that right remains with the seller/owner. It's a little bit of a ruthless approach to property management but it can have upsides for both parties.
7. You could sell your house at a loss while everyone freaks out and blame your agent for it. Don't do this. Do the other stuff first.
The Fed is completely full of shit. We saw rates on the 10 year hit 3.5% 2 weeks ago and drop as low as 2.8% today. The Fed IS BUYING BONDS. The Fed will continue to pump money into the market because they know that without them acting as a level of support this whole house of cards is going to collapse.
Copper pricing is indicative of recessions and correlates strongly to interest rates. Copper is down over 20% in a month and doesn't seem to have support. Construction spending just contracted for the first time in years. We are absolutely in a recession. And you know how we deal with those? We print money, cut rates to 0 and flood the market with cheap cash. It's just really hard to say you're fighting inflation and let the money printer crank at the same time. Give it 6 months of manipulated data and falling asset prices, give it another newsworthy crisis, and watch the new inflationary cycle begin.
Do not panic. Drink till morale improves, but do not panic. You have options. We all do.
Have a safe and great 4th of July weekend!
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