Friday Update March 25 2022

What's up besides interest rates and gas prices?  The sky.  But not our inventory.

We have 285 single family existing homes for sale, down from 329 last week.  Month to date we have 913 closed transactions MLS wide so this inventory level once again is less than 10 days worth.  

Our median sold price month to date is breaking records some more as we are now at $474,900.  Average sold price is close to $540,000.

How about some good news for a change?  Lumber futures prices are dropping.  Today we are at a magically arbitrary number of $1,000/1,000 board feet.  Keep in mind these are futures contracts so the price of lumber at stores isn't reflecting this yet, and depending on what next week brings may not.  Today one sheet of subfloor is $76.  2 by 4s are eight bucks.

I saw a guy the other day checking out with like 100 2 by 4s at home depot and asked if he had security.  We both laughed.  Then I sold his lumber on FB marketplace.  Just kidding, but builder's offer financial rewards for catching thieves these days because people are shady.

Why is lumber dropping?  It's because traders think that demand for new built houses is going to drop due to rising interest rates.  So the same speculators that brought us the $8 two by four are now speculating a slow down in the real estate market.  And they have like half a point.

Pending home sales, as in number of contracts waiting to close out, has fallen four months in a row nationally.  We're down something like 5% year over year in contracts which obviously leads to less closings down the road.  Locally this isn't true as our numbers year over year are up slightly.  This mostly applies to resales. 

Builders however have been abundantly cautious since having learned some painful lessons last year and are building much slower than before.  So the half point award to financial media and traders goes for recognizing that sales are indeed slower, but the missed half a point is why.

Why.  If sales slump because supply exceeds demand then the market tends to correct and prices drop until demand increases.  We have a shortage of supply now combining with serious affordability issues that are not fueled purely by gouging, greed or speculation but by systemic inflation problems.  Every part of the complex puzzle of building a house has gotten substantially more expensive than it was 18 months ago.  Like very substantially so.  And even if lumber comes crashing down that still leaves the other roughly 75-80% of the material costs which are all up.

Bottom line is sales figures are down slightly because nationwide the supply of homes is at record lows, builders' output is slower and lower than normal AND the lower end home buyers are being priced out of the market.

Here is a little anecdote about waiting this out.

Imagine you call your boy Iggy last spring and you say "my dude, how is the market?".  And I tell you honestly "bro, it's a total shit show but rates are so low and rents are so high that it still makes sense to buy my dude".  But then instead of listening to the guy moving like 20 mil a year in houses you decide to wait.  One opportunity passes after the other and we see roughly 18% price growth in a year.  Then interest rates go from ridiculous to still great, but you lose roughly 12-15% of your buying power to the rate increases anyway.  Over the last year the cost of doing nothing is somewhere between 30-35%.  Rents will reflect this too.

But Iggy dude, the market will crash one day and then I'm gonna play fat cat capitalist and take over the world.  Only if you have cash player, only with cash.  Compete with corporate interests type cash.  Or be guerilla nimble, but still with a ton of cash type cash.

Because let's say the Federal Reserve isn't bluffing this time.  There is roughly a 73% chance historically that they are full of shit, but let's say they're not.  Let's imagine that the Fed funds rate goes from .25-.5% of today to the 1.9% they are calling for by the end of 2022.  This will probably drive the yield on 10 year T notes to something around 4% from the 2.5% it's at today.  That will mean that mortgages will be somewhere around 5.5%.

Lots of numbers.  Bottom line is if the Fed does what it says it's going to do buyers will lose about 15-20% of their buying power in the next 9 months, or closer to 25-30% of their buying power  in the last 18 months.  (not accounting for price increases)

In my opinion this can certainly slow the market, slow price appreciation, but probably do nothing to solve the inventory problem in the short term.  I've beaten the subject of people being stuck in their houses due to having low payments to death.  This will be even more true if rates go up further, people will be even more stuck, and even more reluctant to sell.  So while demand may drop due to people being priced out, supply will likely stay low, and people will still need a place to live.  How does this play out long term?  Apparently today 1/3 of American adults live with their parents.  Maybe we get generational housing out of this?  I don't know.

But here is why I think the Fed is full of shit.  You may recall in 2019 in August I was like code red, the yield curve is inverting, chicken little realty was in full effect calling for some kind of major crisis based solely on the actions of the debt market.  Bang.  We all know how early 2020 went and onward.

So now, the yield curve is already partially inverted.  I usually refer to the difference between the 10 year yield and the 2 year yield on US treasuries.  Right now that difference is a positive .18%.  The trend on this looks like this numberpicture.

So this in itself is still right side up but sections of the curve have flipped.  For example yields on 3 year, 5 year and 7 year treasury notes exceed the yield on the 10.  The yield on 20 year notes is higher than on the 30.  This shows doubt about the short term prospects of an economy and generally signals a recession.

We are also running a massive federal budget deficit.  The government is insolvent and needs to borrow money from the Central Bank to operate.  The deficit spending is by definition inflationary.

So now imagine this.  Some bullshit that we're not expecting today happens abruptly.  It causes a panic in the markets.  Short term liquidity starts to dry up and the interest rates shoot up naturally, rather than being pushed by the Fed.  And we're suddenly staring at the same crisis as 2020, a worse crisis than 2008 and it's bad.  How do you think the Fed will deal with this?  Do you allow the United States to default on it's 30 plus Trillion in debt, shut down the government and allow for complete chaos?

Or do you print more money to fund the shitshow and lower rates back down to prop up the house of cards you've been building for decades?

I'm going with option 2.  I'm going with spend today's dollars on assets that pay you tomorrow's dollars and next year's dollars and so on.  I'm going long on real estate, as I have been because real estate is Real and Fiat money is not.  If i'm wrong at least I'll have a place to live.