Friday Update July 22, 2022

1,645 is the number of single family homes on the market today.  It was 1,494 last week so we saw another significant bump in inventory putting us close to 400% higher than just 3 months ago.  Is 1,645 homes a lot historically speaking?  No, it really isn't.  But when you combine record high prices with a doubling of interest rates which knee caps demand something has to break.  And that something in the short term at least is pricing.

So far our median sold price does reflect a slight decline from our record of 500k.  Month to date our sold price is at $480,000 but what's more notable is the list to sold price ratio is now at 100%.  It peaked last year at 104%.  Again keep in mind this refers to the list price at time of contract, not the original list price.  So say you list a house at 600k, drop it to 550k, then drop it to 525k and get a contract at 525k that shows as 100% list to sold price ratio.  The price cuts aren't reflected in this metric.

The price cuts.  576 price reductions across our market in the last 7 days.  That's about 50 more than last week and I think if the trend is your friend we're gonna be following our friend downhill for a minute.  I could be wrong but that's my opinion for the short to mid term.

You know how the news is like interest rates are soaring again?  It's funny because the yield on 10 year notes peeled off like .25% since yesterday and mortgage rates repriced a bit better.  But they're still not "good" by comparisson to what we got used to over the last 2 years.  

Next week the overlords at the Fed are going to deliver their statement and raise the federal funds rate again.  A bunch of dickheads are going to post on Facebook that the Fed raised rates again!!!  Sky is falling you better buy a house right now before they raise rates yet again!!  Realtor and lender thirst is unquenchable.  

The reality is that the bond market prices the future into today's pricing.  That's because markets are forward looking where as our bank accounts are in hindsight.  So the market is anticipating a .75% increase from the Fed next week, we were anticipating a 1% increase but the economic data is coming in so bad that most people think .75% is adequate.

Then in September, get this, the Fed plans to hike rates another .75%.  And that too is already priced in.

The question of interest rates becomes more interesting a little later this year and into 2023.  How do I say this without sounding unpatriotic?  Well, all the leading economic indicators are really, really shitty.  Let's rattle off some things.

The 10 and 2 year treasury note yield curve has been inverted for like 2 weeks now.  Right now the yield on 2 year bonds is 2.97% and the yield on 10 year bonds is 2.75%.  The spread between the 3 month bond and the 10 year bond is just .31%.  In lamens terms its more expensive to borrow for the short term than for the long term because the market expects carnage in the short term.  Here is a graph of how these inversions relate to recessions.

So not inverted, but damn that's a steep line.  Now the 2 year and 10 year are also a good indicator of recessions to follow.  We had an inversion back in April that quickly corrected but now have a much deeper and longer lasting one.

So we have this pretty telling indicator of an economic downturn.

Next up is the University of Michigan consumer sentiment survey.  They've been tracking the money feelings of people since 1966 and July's reading is get this, the worst since 1966.  Lower than the bottom of the 2008 crash.  That's some real fear, yo.

Same source index of consumer expectations is just slightly higher than its 1979 bottom.  That bottom came right before Voelcker jacked rates up to 18% to stop inflation by basically throwing a durable stick into the spokes of the economy's wheels.

Philly Fed Index was expected to contract and come in at negative 1.2 this month.  It missed expecations by 1,000% and came in at like negative 12.3.  This means a severe decline in economic activity in that Fed region, which is indicative of a good chunk of the North East.  Interesting fact right now about the North East is that this housing correction basically hasn't hit there yet hardly at all.  Mountain West and south west led the country in gains over the last 2 years and now are leading the way in giving it back.

Here is the Philly Fed Index number picture.

Now the Atlanta Fed either knows something and is being remarkably honest about it or they are just massive debbie downers.  They're tracking currently a 1.6% contraction in GDP for the second quarter of 2022.  That mirrors the 1.6% contraction recorded for Q1.  2 quarters in a row is a recession by definition.  Don't wait for the recession and wonder when it's coming.  Embrace the fact it's here.

Unemployment numbers are starting to pick up gradually.

Housing starts, housing permits and existing home sales are all down slightly over the last few months.

Home builder sentiment took a nice drop which was almost instantly reflected in how nice their reps are to our agents.  By no means are these numbers terrible, just the rate of change is noteworthy.

Mortgage applications are at their lowest level since the year 2000.  "Smooth" by Santana was the #2 song on the Billboard charts that year, right behind "Breathe" by Faith Hill.  

I can go on and on with shitty metrics to paint a picture of a sky that is falling.  I do not believe that the sky is falling.  What I believe is that we have entered a long needed correction in the housing market.  A correction can shave 10% off values and be considered normal, healthy and needed.  A correction can allow for buyers who have hesitated to enter the market.  A correction brings balance to a market that went full FOMO for two years.

Can this be worse than a correction?  Sure it can be.  If the interest rates remain at today's levels for a prolonged time it would not be far fetched to see prices drop 25% or so from their peak to account for affordability.  BUT I think the Fed will pivot on rates sooner than later.

Why do I think so?  Because all the bad news I referenced above generally leads to deflationary recessions.  Contractions in production and consumption and overall economic activity.  And if there is one thing that the Fed worries about more than inflation its what set of golf clubs to take out next weekend.  Just kidding, its deflation.  We can not have deflation in a system that is designed to run on 2% inflation year after year.  Deflation fucks everything up and exposes this system for the fraud that it is.  So we can't have that.

And the minute the reality of these reports set in, the minute the layoffs start to become more prevalent, the minute that the housing market shows weakness across the board, the Fed will pivot.  Rates will drop again.

However, consumer sentiment is slower to change than interest rates are.  So what I'm saying is now is the time to start looking at sniping deals, more deals will be hitting in the coming months, and with a long term outlook this will be a good time to capitalize on falling market sentiment.

To wrap this up let me end with some good news.  For the first time in 3 years the amount of foreign buyers investing in US real estate is increasing.  Seems like maybe foreigners are seeing value opportunities here especially more so than at home.

Other good news our foreclosure numbers now are right on par with what we saw in 2017-2019 which I would argue was a relatively healthy market.  We're not seeing any waves of foreclosures hitting, at least not yet.

We don't have the shit loans being pushed through in bulk like was the norm in the early 2000s.  

We are seeing ARMs make a comeback with the higher rates but most of the loan products like these I've seen require a substantial down payment so you're not just bait and switching people into homes they can't afford.

And we still have Pikes Peak and the military.  So we should be good.