Friday Update May 20, 2022

First of all sorry for not doing an update last week.  My wife and I traveled to a friend's wedding and for the sake of my mental health I decided to leave my computer at home for once.  The newlyweds are happy, the fun was had, and now I'm happy to present you with this week's update.

Inventory is way up to 720 existing single family homes on the market today in El Paso County.  That's an increase of roughly 24% in the last two weeks.  This level of inventory represents a roughly 3 to 4 week supply which is better than what we've had, but still quite short.  The increase in inventory is not insignificant but also timely as May really is the beginning of the busiest months, at least historically.  For reference this same time last year we had 465 single family homes on the market so inventory is definitely starting to loosen up a bit.  It's as if higher interest rates do indeed slow down the real estate market, weird.  Feels like Autumn of 2018 to me personally.

Interest rates hit a peak a few weeks ago with the 10 year treasury hitting 3.14%.  Since then we have seen rates pull back to 2.8% on the 10 year as I'm writing this, and mortgage rates pulled back similarly to roughly 5.25% on conventional 30 year loans with good credit.  This is about 2% higher than a year ago.  Buyers are for sure feeling it on their payments.  A word of advice to anyone going through this, your house is relatively permanent and interest rates are not.  Keep an eye on rates and refinance when it makes sense to do so.  Don't go fucking up your credit because you feel discouraged about today, worry about tomorrow.

Meanwhile month to date in May we have seen 729 sales close out in our local MLS with a median sold price of $500,000.  This is the highest our median price has ever been and most houses are selling over list price.  Will this be the peak of pricing for years to come, a level of resistance or just another notch as prices continue to climb?  I don't know, and anyone that tells you they know for sure is a liar.  My opinion, which has been wrong a lot, is that we see 5% total growth for the year.  Our median price in January was $445,000, now its $500,000.  If rates stay where they are or go slightly higher then I would not be surprised to see us finish out the year with a median price of like $480,000.  Stay tuned and we will see how wrong I am in December.

What I want to do with my rant today is kind of look at the big picture of money and investing and try put real estate in perspective.  Let's start with a simple scenario.

Let's say you rent a house or an apartment.  You are at the mercy of the rental market and never get the certainty of living in any one place for any longer than your lease term.  You are guaranteed to pay 100% of your rent to your landlord in return for having a place to live for a month.  On average renters' net worth is something like 40 times less than that of the average homeowner.  If you're in town for a year or two yea you should absolutely rent.  But if you intend to live somewhere for the long haul renting is one of the worst financial decisions that you can make.

Now let's assume you have bought or decide to buy a house.  The mistake that many people make is that they compare their mortgage payment to rent for a similar house.  While it's a good idea to understand rental market values comparing renting to owning is not comparing apples to apples.  Let's say that rent is $2,500 and the mortgage payment on the same house is also $2,500.  The renter's math is so easy because 100% of that payment is gone in exchange for a place to live.  The owner's math is much more complicated with a portion of the payment going to paying off principal.  That portion then lands into what people with money call "net worth".  Another portion of the payment is to cover interest, which is tax deductible.  So let's say that on a $2,500 payment, in the first few years of the loan, your interest is roughly $10,000 a year.  That's a pretty substantial tax write off EVEN IF THE REAL ESTATE MARKET TANKS.

Now let's say you own that house for a few years and then decide to buy another.  Once you turn the house into a rental you then collect 100% of your tenant's rent, pay your mortgage with it, and then also reap the benefit of depreciating the property on your taxes for something like the next 27 years.  Now I'm not a CPA, or particularly good with money, or smart, and I did not stay at a Holiday Inn last night.  BUT if you presented me with the option of taking 100% of my montly payment and saying good bye to it OR the option to at the very least have tax benefits and in most years also appreciation I think that choice would be simple.  

All that being said people have to stop thinking in terms of "but how much is that a month".  Look at the true cost of ownership, tax benefits, opportunity cost and so on.  Stop thinking poor.  How much is your cell phone a month, do you smoke, drink, go out to eat, have a car that gets like 15 MPG?  Look at all those things monthly.  How much a mortgage runs a month versus how much your rent is monthly is a calculation that will keep you poor.  

Now let's assume that you have some money and you own a house.  You pay your mortgage payment every month, or you own the house outright, doesn't really matter.  You live in the house and you don't stress market value on a daily basis because you need a place to live.  Whether your house appreciates 20% in a year or loses 20% of it's value is pretty much irrelevant because it's your home and you're not selling it.  This is how you should think about home ownership by the way.  It's not some get rich quick scheme where you skip a year of renting and then walk away with 100k.  Yea, it's been like that the last 3 years or so but it's not normal and won't be like that forever.  You buy a house to make a home and you do so for the long haul.  Otherwise what you're doing is called gambling.

But let's just say you have the above scenario.  You have a home, you're not selling it, and you're fortunate enough to have money to invest.

Let's think of today's environment and what you could do with any spare money.

You could leave it in your bank account and have it rot at the inflation rate, which today is like 8.3%.  So imagine you have $100,000 sitting in an account, next year that money will have the same buying power as $92,000.  Doesn't sound like a great move.

You could invest into the stock market and on the average year bring in something like 7-8% not accounting for taxes or inflation.  You could use Roth IRAS and similar products to try and avoid long term capital gains taxes.  And you probably should do this with your money at some scale to provide exposure to the stock market over the long haul so that all of your eggs end up in different baskets.

But the stock market is something that you have absolutely no control over.  It's subject to FOMO and periods of crazy gains like we've seen since 2018, and it's subject to periods of intense fear and sell offs like we have seen for the last 8 weeks straight.  The Nasdaq lost something like 35% of its value since January and many individual stocks are down over 50%.  This kind of volatility is interesting to watch as a 36 year old, probably a lot of fun to play with in your early 20s, and straight up terrifying if you're about to retire.  Imagine that you're about to leave the workforce and have to live off the 401k or IRA you've been squirreling away for the last 40 years and POOOOOOOOOOOF SON!  35% of it is gone in 4 months.  And nothing you can do about it, just the market doing what the market does.  Oh yea and also inflation is above 8% and gas is projected by JPMorgan to hit 6 bucks a gallon this summer.

You could take your spare money and gamble it on cryptocurrency.  Enough said.

You could take your excess money and buy precious metals with it.  I don't think this is a terrible idea with a portion of your portfolio, most investment managers seem to agree you should have some percentage of your portfolio in actual, tangible, precious stuff.  But investing in metals is ridiculously boring and usually done to prepare for financial apolcalypse.  It's as simple as this, you buy an ounce of gold and 40 years later you still own an ounce of gold.  It's value is then determined by what the wizards at the central bank have done.  Most people that invest heavily into precious metals think of the Fed as one of the greatest evils to be brought onto the earth and essentially use their holdings of physical metal as a hedge against what they see as reckless financial policy.  I kind of sort of fall into this camp, but more than metals I love housing.

You could invest in rentals.  They're so boring!  Unless of course you have shit tenants in which case life gets exciting real quick.  But with good tenants generally you take care of them and they take care of you.  And its a beautiful symbiotic relationship where you provide them with a decent place to live and they pay you for it.  The beauty of this in terms of an investment is what I mentioned earier about numerous tax benefits.  The other wonderful part is that in general since its creation the Federal Reserve is known for printing money to stimulate inflation.  So while your cost basis on your property remains the same, generally and almost always, the rent goes up.

You could buy a place and make it into an airBnB.  You will buy an asset AND a part time job!  It can be extremely lucrative but also somewhat risky if your investment is based solely on STR income and can't float as a traditional rental.

You could invest in real estate in the true sense of buying raw land.  This is much more speculative, lacks the tax benefits, and generally comes with higher property taxes.  You should do this if you're a visionary, a developer, or are super brave.  This is not an approach I'd recommend for the average person.

You could invest your money into bonds.  That's pretty dull I don't even want to get into it.

You could invest your money into things like Fundrise or Shareestates or any other crowd funding for real estate projects.  You get all the risk and none of the control over the projects!  You could totally do this and on a very small scale I have. 

Bottom line is this.  There is a cost to doing nothing with your money.  There is always a risk to doing something with your money.  Some risks like the stock or bond market you have absolutely no control over aside from averaging your positions.  Some risks like shitty tenants and maintenance issues on rental properties you do have a higher level of control over, yet it takes more time and effort to get it right.  Me personally, for the very long haul as in the duration of my life, I believe in real estate and place my bets accordingly.  I don't suggest that it should be your only investment in life, I just suggest that done correctly it can easily be one of your best investments and something you actually have some control over.

Next week I think I'm gonna dive into a bunch of number pictures some more.  And probably talk about the implication of lumber prices dropping assuming they continue their very steep sell off next week.


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