Friday Update October 21, 2022

1,720 is the number of single family homes on the market today amigos and amigas.  In tune with what we have seen for roughly the last 2 months.

597 price reductions over the last 7 days is roughly in line with what we have been seeing.  Sellers getting grounded into reality.

Month to date we have 657 closed sales for a median sold price of $465,000.  Median days on market is 21 and the sold to original list price ratio is 97.14%.

This time last year we had 1,067 closings at a median price of $440,000.  Median days on market was 5 and the sold to list price ratio was 100.97%.

Roughly a 39% drop in sales volume year over year.

According to yesterday's CNBC article the last time sales volume was at this level nationally was in 2012, just for fun let's look at month to date data for October 2012 locally.  That fine year we had 467 sales to date for a median sold price of $210,000, 96.1% sold to original list price ratio and a median of 56 days on market.

Interest rates continue to get worse with 7% or higher being fairly common at the moment.  

10 year treasury yields continued to push up and finished the week right around 4.25%.  This is the highest level since November of 2007.  Number picture below.

Again the rates themselves are not necessarily a problem, its the rate of change that is shaking the market.  Keep in mind just 8 months ago rates we're roughly in the mid 3s.  Let's for the sake of comparison say today its 7.125%.  Median price in February was 465k and today it's 460k so let's just use 462,500 as a purchase price and no downpayment or any mortgage insurance or HOAs for a payment example.  Taxes let's say are $2,000 a year and insurance lets say is $1,800 a year.  Only difference is the rate.

At 3.5% in February the payment would be $2,393.50/month including PITI.

Fast forward to today same numbers at 7.125% your payment is $3,432.61.

You see the squeeze?  Wasn't it cool when affordability was getting hammered by rising prices?  Instead of getting hammered by rising rates?

Earlier this week the yield curve between the US 10 year bonds and the US 3 month bonds was at 1 basis point.  This means that an investor in government bonds would yield just .01% less on a 3 month note than on a 10 year.  This basically signals high uncertainty in the short term.  This curve got pushed back to 19 basis points today but still remains very close to inversion.

The difference between the 10 year and 2 year yields remains inverted at negative .25%.  This inversion earlier in the week was deeper at more than negative .5%.

The last several recessions that we had and specifically sell offs in the stock market took the steepest and ugliest turns right as the yield curve uninverted.  We still have that to look forward to in the coming months.

Basically something is going to break in the financial system and cause a ripple effect throughout the markets.  What that something can be is anyone's guess.  But let's look at one example from earlier this month that could have been and could still be pretty catastrophic.

Something like $2,000,000,000,000 worth of British bonds are held by pension funds in the UK right now.  The value of the bonds themselves is relative to the yield on said bonds.  In mid August the yields we're like 1.86%, October 1st they hit 4.6%.  A big mistake people make is thinking that the difference between 1.86% and 4.6% is less than 3%.  In reality this is a difference of almost 250%.

A spike in yields of this magnitude over such a short time frame destroys the price of the underlying bonds.  Think about it.  You pay $100 for something that yields 1.86% over 10 years.  A month later you can buy the new 10 year bonds that yield closer to 3% for $100.  A month after that you can buy the latest ones paying 4.6% for $100.  So the value of the older bonds paying lower yields gets pushed significantly lower.  Who cares and why should you?

Again 2 trillion dollars worth of these bonds sit in just UK pension funds right now.  Those bonds have to be sold periodically on the open market in order to get the cash to pay people's pensions.  Imagine if rates continue to run up, the pension funds are forced to sell these bonds at a loss because they're obligated to make the payments to the retired folks, and as they sell into selling the prices drop even lower ultimately making the funds insolvent.  This scenario is the reason that the Bank of England announced at the beginning of the month that they will print all the money necessary to back stop these bonds and keep the bottom from falling out.

That type of action by the Bank of England obviously supersedes the political aspirations of the now second prime minister in one year to resign.  She resigned after just 6 weeks in power having almost witnessed a complete collapse of their bond market.

Now imagine how many funds, organizations and individuals are levered to the hilt on products like these bonds that have traditionally been thought of as safe assets.  How many situations like the British one are lurking in the shadows?  According to the opinions of the heads of JPMorgan Chase, Morgan Stanley and Bank of America they seem to think it's a lot.  And they're buttoning down their hatches.

What I'm kind of getting to is this.  The amount of debt globally is completely unprecedented.  That debt is held by all kinds of pension funds, insurance conglomerates, individuals, hedge funds, banks and governments.  The impact of let's say the UK's debt market imploding would be global.  The same can be true for many countries but the US especially.

We entered the current recession in the first quarter of 2022.  The second quarter confirmed the contraction of the first, and October 27 we get third quarter numbers that should support the overall trend of contraction.  In my industry we are seeing massive layoffs across national lenders and title companies.  One of the biggest real estate firms in the country just laid off all of their transaction coordinators.  One of the largest national lenders lost access to almost 2 Billion dollars in warehouse lines that will most likely cause them to shut their doors.  Their stock is down almost 100% from their IPO 18 months ago.

Our industry is extremely rate sensitive but so are many others.  Let the real estate industry be the litmus test for what is coming next, which is layoffs.

We are going to be faced with a pretty difficult situation just like the whole world is facing.  The decision to be made by central banks around the world will be to choose what's worse, historic levels of global inflation or a historic depression.  Something tells me that the politically motivated and short term crayon eating brains of the world's politicians is going to force them to try and print their way out of this crisis, again.

Now look.  Today is not the best day to either buy or sell a house.  Marrying houses and dating rates sounds like adultery to me.  But if you asked someone about buying or selling in October of 2012 they would probably tell you the timing sucked then too.  The reality of it is as far as real estate is concerned is you buy when you can buy, when you need to buy, when buying is a better option than renting.  As with the 2012 example you sure could have bought a house for less in 2010, or for more in 2015, but if you needed a place to live buying in 2012 was just fine.

And buying a house in 2022 with a 10-20 year horizon is going to be just fine too.  

This is the same thing I've been preaching since like forever now but as we go through this mess the best things we can do as normal people is:

reduce expenses as much as possible

eliminate as much debt as possible

seek opportunities to create passive income

come up on some side hustles

and live within our means while stashing the rest.

Real estate for the long haul amigos and amigas.  And don't ball out on money you don't have to impress assholes you don't care about.  

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