Friday Update June 3, 2022

927 is the number today folks.  That's 170 more than last week.  Inventory is rising steadily and quickly and the fresh air of rising inventory means that the smoke from sellers' crack pipes is quickly leaving the room.  The days of overpricing homes to shit and actually selling them are, at least for now, behind us!

For reference this week last year we had a standing inventory of 478 homes so we are talking about inventory almost doubling year over year.  That is not insignificant.

This is largely due to interest rates almost doubling as well.  The rate on a 30 year fixed conventional loan a year ago was roughly 3%, and today it's closer to 5.5%.  Funny how these things go hand in hand like peanut butter and jelly.  If you're a lender and you're thinking about calling me because your rates are lower than my ball park figure, it's a ball park figure.  Meant to show a trend rather than solicit coffee.

We finished May with 1,610 total sales MLS wide with a median sold price of $490,000.  So less than one month supply still as it stands.  For reference May 2021 saw 1,535 sales with a median sold price of $440,000.  This time last year houses we're selling for roughly 4% over list on the median, this year it's slightly over 2%.  

Do not mistake what I'm saying in today's rant for a market crash.  The real estate market is not crashing, if I thought it was I would tell you, but the massive run up is done for now.  The last time the real estate market legitimately crashed out going into 2008 we had over 7 months of standing inventory.  Today we barely have a month worth.  However the price gains of 15-20% year over year will not persist.  And that reality may force people to hold their real estate for the long haul, what a concept!

Last week I put up a post on my Facebook saying that it might of been a good time to lock interest rates.  Since then rates have bounced roughly .25% to the up with the yield on 10 year treasury yields today just under 3%.  This indicator peaked early May which at least partially contributed to the sold prices dropping from a high of $500,000 mid May to $490,000 at the end of May.  Market softened slightly as buyers got squeezed tightly.  I will write the rest of this in rhyming sentences because it's not just content but also eloquence.  I'm not really gonna do that because now it's on to Zillow, who I'd like to smother with a pillow.

When I talk massive shit about Zillow, which I'm going to, please keep in mind I'm talking about the unlicensed side of their business.  Zillow as a brokerage I'm sure is great and I have no issue with them.  It's just the rest of their business model that is a total piece of shit.  Why do I bring this up?  Because I'm so tired of talking to people about what Zillow thinks their home is worth like it's some sort of fact.

To begin let me show you a picture of a company using their own data aka the Zestimate to get the shit kicked out of them.  In one of the hottest seller's markets in the history of America.

Here is a little gem of an excerpt from the Bloomberg article that I stole this graph from.  This is how Zillow ran their home buying business.  It's one of the funnier things I've recently read:

"Zillow told its pricing experts to stop questioning the algorithms, according to people familiar with the process. It also raised its bids, sometimes bumping the numbers its pricing software spit out by tens of thousands of dollars as part of a process known internally as “offer calibration.” The company embraced “auto evaluations,” effectively allowing customers to inspect their own homes, and lowered convenience fees. In the summer of 2021, when Opendoor was charging a flat fee of 5%, Zillow was charging some customers less than 1%. “People would be so happy when we showed up at their door,” says a former employee in the real estate operation. “I could tell them, ‘Hey, I’m going to start a small fire in your yard just to see if it burns well.’ They’d be like, ‘Cool, you’re paying me $50,000 over the value of my home.’ ” When staffers raised concerns with their superiors, management reassured them it was all part of the plan, former employees say."

Thanks again Bloomberg for the well written article.  If you'd like to read the whole thing here you go:

https://www.bloomberg.com/news/features/2022-05-05/zillow-home-flipping-app-was-big-idea-gone-wrong

So just imagine you have a real estate market from 2020-2022 that has 15-20% gains year over year, over 1% a month.  And Zillow loses money in this market!!!  Now imagine this scenario.  Iggy the Realtor fucks up 25-60% of the deals he touches.  Would you still trust me with that track record?  Then why do you trust a dumb ass website with a provenly bad algorithm.  Fuck Zillow and thanks for the money on the puts. 

In the last 18 months I've had at least half a dozen conversations with sellers where they told me that Zillow was willing to pay them like 10-15% over what I honestly thought I could sell the house for.  I told all of those people to take Zillows money.  They did, they're good, and Zillow lost as much as 20% on some of those houses.  So I did not have to go work, the sellers got what they wanted, and a shitty company got what was coming to it.  That's called a win win win.

The whole purpose of the above rant is to drive home the point that Zillow is not the authority on real estate valuations.  You know who is the authority on real estate valuations?  Buyers.  If they're not willing or able to pay then prices drop regardless of what Zillow's graphs may be telling you.  Fun fact for a market projection for Colorado Springs from Zillow for next year.  They dont have one, says "no data".  Seems legit.

The problem with websites such as their's and the problem with following algorithms in general is that they take trailing indicators such as sold prices and then project it into the future.  They do this without really taking into account any macro or microeconomic factors.  It's just sales history forecast into the future.  Well the reality in markets is that the trend is your friend, until the end.  And trends do end.  

So what's next in the opinion of just some guy that makes his living daily selling houses?  A much softer housing market that provides no real relief in monthly payments to buyers.  Basically that's it but I will HELLA elaborate.

A quick reminder.  1% increase in mortgage rate equals a 10% decrease in buying power.  We have seen roughly 25% loss in buying power year over year, with prices still rising.  That is not sustainable and that should become obvious sooner than later.

The rising inventory is a combination of several things.  More sellers are listing now because everyone thinks they can time the top top of the market.  It's basically seller FOMO.  This forces inventory higher at a time when buyers are squeezed by not only the high cost of housing but the high cost of everything else.  The rising rates mean that demand is reduced, so houses sit on market longer contributing to higher inventory levels.  And on a very small scale at the moment the financial distress of the last 2 years is turning into some, albeit very few, distressed listings hitting the market.  These 3 factors are independent of each other but the diminishing demand will absolutely lead to longer times on market, which will self reinforce into further rising inventory levels.  This can all be reversed by the Fed dropping rates, which at some point they'll have to do, but it probably won't be this year.  

So buyers are now much more cautious than they were a year or two ago.  Let's look at simple math as to why people feel the squeeze.

June 2020 median house costs $360,000 and interest rates are around 3%.  For these example I'm going to assume 20% down financing to avoid calculating MI, taxes of $1,500 a year and home owner's insurance at $1,800 a year.  The principal and interest portion will change, the taxes and insurance is a constant for our examples.  Closing costs or buydowns or anything like that is not accounted for at all.

So June 2020, you put your mask on, spray some hand sanny on your whole body and go house shopping with me.  You buy the median house like described above and end up with a monthly payment of $1,490.  Your downpayment is $72,000 meaning if you financed the whole thing it would add roughly $300/month to your payment.

Then June 2021, same set up except the median is now at $450,000.  Thanks to the Fed for printing off close to 7 trillion dollars in "help".  Rates for the sake of argument are still around 3% so you end up with a payment of $1,792 after a downpayment of $90,000.  If you financed the whole thing than the monthly would be about $400 a month higher.

Now welcome to June 2022.  Everyone is still getting Covid but nobody is really tripping about it.  Everything is now Russia's fault.  Median house is $490,000.  Rates closer to 5.5%.  Your monthly payment is $2,500 after a downpayment of $98,000.  If financed completely the mortgage on this median house would be very close to $3,000 a month.  So we're talking a $1,200 monthly difference in 2 years and about $800 a month just over the last 12 months.  

Let's add to that the rest of the shit humans need to get through the day.  Gas prices in 2020 were like $1.xx.  Today they are $4.xx.  I'm not blaming all inflation on the cost of gas but it certainly is a contributing factor.  According to the very rudimentary CPI calculator that the Bureau of Labor and Statistic provides $100 in April of 2020 is the same as $113 in April of 2022 when it comes to buying power.  I think we can all agree the reality is probably closer to $125-130 if you're buying anything outside the basket of goods they base this on.  Americans are getting squeezed extra hard, and Europeans are getting it even harder.

On the back end of the inflation in consumer prices is the trailing inflation in the cost of labor.  This is officially happening at a rate of under 4% a year but in my experience here locally it is much faster than that.  So yea it is absolutely a good thing that people are earning more money in a time when it costs more to survive, but just keep in mind that they're being paid that money by other people.  And with 61% of Americans living paycheck to paycheck, and over 30% of Americans earning over 250k/year living paycheck to paycheck, people will feel the squeeze even more as the cost of labor follows the cost of goods.

Meanwhile as of June 1 the Fed has began what they call Quantitative Tightening.  This is where they basically allow treasury debt to mature without replacing it with new purchases.  This by definition decreases the money supply, which decreases liquidity, which increases interest rates.  This is indeed how a central bank fights the very inflation it itself created.

You can actually see in this graph the amount of M2 money stock decreasing for the first time since ever?  I can't find another point on these charts where M2 money supply actually dropped.

Here is a close up showing 90 Billion dollars evaporating off the face of the earth.

Now I've been bitching about inflation for like the last 3 years non stop.  This monetary policy is absolutely the right thing to do in order to deal with inflation. The issue I take with it is that the Fed caused this, knowingly.  Now they will pull the rug out from under American families because they want to be the heroes that solved the problem they themselves created.   We could have just coasted through the last two years without this massive stimulus package, let some companies fail, let the market figure things out but no.  Since every situation we face is a crisis we will now have the next financial crisis to worry about as the Fed actually does taper off.

I've also said that this is all temporary.  And I truly believe that as this reminds me of 2018 through and through.  The Fed tapers off their balance sheet, rates rise, demand flails, home sales soften, demand across the economy softens, stock market corrects abruptly, people start to panic and ultimately the Fed reverses course.  The booms and busts as brought to you by a group of high school losers that found their niche in central banking.

As a friend of mine reminded me this stuff is all made up, but the rent is due on the 1st.

I'm going to wrap this up by quoting Jamie Dimon, the CEO of JPMorgan. 

This week he said:

"Right now, it's kind of sunny. Things are doing fine. Everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don't know if it's a minor one or superstorm Sandy... or Andrew or something like that."

And I completely agree.  I think in the short term we're in for some reckoning over the reckless financial policies of the Fed from March of 2020 through the end of 2021.  I do think we will see the squeeze get tighter on people and I do think we will see inventory continue to rise, giving buyers more selection if not more affordability.  I'm a negative Nancy and I do think we will see things get a lot more difficult before they get easier.

That being said I 100% believe in real estate as a long term holding.  I 100% believe that if you intend to live somewhere for a while you should own property there.  I 100% believe that buying a property for the long haul is a better use of your money than renting.  I 100% believe that the long term trend line for real estate pricing is going to continue upwards.

However in the short term I do think things will start to get a little weird as sellers expect what their friends got last year.  And buyers get more and more cautious as the price of all the shit around us keeps going up.  We're going to face a disconnect between seller expectations and buyer realities, which I'm already seeing in certain pockets of the city, in certain price ranges, with certain pricing strategies.

Long story short listen to Jamie Dimon on this one and be ready for a storm.  Storms pass.  We rebuild better.  But you must have the gusto to get through it.