Friday Update October 7, 2022

Howdy howdy have you ever played Fallout the video games?  Nothing makes me more nostalgic about one of my favorite franchises than the leader of the free world referencing nuclear annihilation.  For real who gives a shit what your mortgage payment is, just embrace the flash and let go, man.  But just in case we don't all get vaporized, in Biden's words, "here's the deal".

In El Paso County today we have 1,664 existing single family homes on the market.  Seems that the seasonality that we normally have where inventory drops into winter is indeed happening.  And this is a welcome sign as our inventory levels climbed from below 400 to over 1,700 in the span of less than 3 months this summer.  The fact that we have found some sort of cap on inventory levels for now is an encouraging sign that should help hold the bottom in somewhat.  

Rates however have not quite found their top yet and are contributing to a very obvious slow down in the real estate market nationwide.  Cities that we're being called booms are now being called busts.  The Boises, the Phoenixes, the Vegases that saw >30% year over year gains are now giving it back.  Who could have seen that coming?  I mean Phoenix and Vegas led the crash of 2008 in losses but Boise?  That was a shocker.

Locally year over year let's look at data.  First week of October so far we have 145 total closed units for a median sold price of $450,000.  The sold to original price ratio is 96.55% which represents a significant drop over September's numbers.  Remember just in May this ratio was at 104%.  This one statistic basically sums up how the market is not the same as many sellers think it is.  I'm sorry, but it just isn't.  A lot of my agent friends are having difficult conversations with sellers trying to bring them down to reality, as am I, and it truly does suck.  However it is exactly what it is.

So that's this year.  Last year first week of October we had 344 closed units for a median sold price of waaaaaaaaaaaaaaaaaait for it, $450,000.  This year so far in October our sales are down by 58% and the median price is flat.  Our median sold to original list price a year ago was at 100.44% and we we're out there begging around appraisal gaps and waiving our inspections.  Well, a lot of people were, I was putting up my own money ahead of my clients' for appraisal gaps and still doing inspections.  Toot!  That's my own horn!

Rates have been super shitty and volatile.  Shitty is one thing because the market can get used to it, volatile is scary and impossible to get used to.  Monday I made a post saying hey maybe today is a good day to lock rates.  I'm not a lender, I don't know, I just follow the market.  I said that because Monday the 10 year T notes were at 3.57% and today they are at 3.87%.  Last week we briefly hit 4%.  Since last week I can personally attest to a significant slowdown in showings across all of my listings, as well as our office listings, as well as the listings of every agent I talk to.  Rates matter.

Rates matter a lot.  The vast majority of buyers in the United States take out a mortgage to buy a house.  One metric of how that is going is the Mortgage Bankers Association or MBA survey for new mortgage applications.  This week that gauge is down 14.2% over last week.  That is the biggest drop since 2020 and to be fair it's actually much worse because back then we had rates jumping from 2-5% in a few days as the market was rattled by the newscasts.  Back then we saw a 40% drop in mortgage applications followed by a 50% increase the next week.  Today we don't have that type of range in rates, we have a steady upwards slope.  Long story short I've had more lenders call me in the last month asking for business than I have in the last 2 years.

So like is this it?  Is this the end of real estate?  By gosh it's going to 0 isn't it?

In an effort to fight my inner demons and the uncertainty they tend to create I like to listen to people who are smart.  One smart person I always quote and think of is Warren Buffet and the one quote of his I know by heart is the one about being greedy when others are fearful.

I do think we're in for a shit show.  I do not think it is the end of the world.  I think too many people got too greedy over the last 2-3 years.  I think a lot of those people are about to learn about the magic of leverage working in both directions.  I think a massive opportunity is coming to acquire real property on sale as highly leveraged individuals are forced to let it go.  Let me dive into some of the factors that can FUCK this market up even harder.

1.  Interest rates remain at this level or even continue to climb.  Right now the median mortgage payment in the US is 70% higher than it was a year ago.  This is not sustainable and something is going to break.  And there are only 2 things that can break, either prices or rates.  Fed seems to be hellbent on rates sooooooo, probably prices.  These rates are breaking the back of demand while supply remains stable(ish).

2.  All of these institutional investors start getting margin calls or some kind of financial bullshit happens forcing them to start to liquidate their holdings.  This would cause a massive surge in inventory and as we all know with more supply and flat or less demand we have prices dropping.

3.  People start to tighten up their pocket books and travel less.  Highly leveraged properties being used as AirBnbs are going to start hitting the market.  You see a lot of folks bought real estate that would not cash flow as a traditional rental and relied on AirBnb income to pay the mortage and turn a profit.  So while I do think the Airbnb market will be resilient enough it will still find a way to shake out insolvent owners.  More potential inventory there.

4.  Foreclosures start hitting in earnest.  We have over a 2 year back log of forebearances and just shit loans that should have failed by now but have been propped up by one government action or another.  These are going to start making their way through the system and will add inventory.

5.  There is the potential for traditional landlords dumping their rentals on the market.  This has been a topic for a while with sensational news stories about a "wave of evictions" followed by a wave of disgruntled owners selling.  It could happen but I see traditional landlords as much more patient individuals than the average human, with leather like thick skin, that can hold on to property through the worst of times.  I do think some will sell, I don't see this as being the big catalyst to higher inventory though.  Rents are dropping here locally and as with the Airbnbs the folks who are leveraged to the max maybe forced to sell.

6.  Builders, as they've already kind of started doing, fire sell their inventory.  Builders right now are enjoying a lower lumber cost than last year and much easier sourcing for most construction supplies.   So they're able to build the same house as last year for a little bit less.  This means builders are able to undercut the owners around them if they have to.  We may soon see a time where new builds cost less than resales, which will put pressure on resales, and how much pressure is too much we will find out.

Now there are some things working to hold this market up.  It's not all completely terrible.

1.  We have a ton of trapped supply.  What I mean by this is we have a lot of potential sellers that will not be selling because it doesn't make sense to do so.  The reality is the vast majority of home owners have either bought or refinaned their properties at some of the lowest interest rates in history.  Those folks have comfy payments that they don't want to trade in for uncomfy payments.  This is going to be a fundamental reason for suppressed inventory levels.

2. Rents are substantially higher than 2 years ago despite the fact that they're dropping.  Anyone that bought investment properties prior to 2020 and has financing in the 2-4% range should be able to make ends meet even with the reduced rental pricing.

3.  If the Fed pivots and rates start to drop the market will begin to rip higher.  At some point they will.

Next week we get inflation data for September.  Market consensus again is somewhere around 8.2%.  If the reading comes in at or above expect interest rates to go up.  If we get surprised by a lower reading maybe we will see a little bit of reprieve.

The craziest thing about the financial markets of the last 2 and a half years is this.  Good news is generally bad news and bad news is good news.  This is because the markets understand that their direction is governed by nothing more than the actions of the Federal Reserve. Bad news means lower rates and more money printing, good news means the economy is out to fend for itself.  The free market is a really cool concept that does not really exist.  The overlords pull the strings, manipulate rates and in turn manipulate the human experience.

2008 was a real shock to all the people that didn't know about 2001, 2001 shocked everyone that didn't know about 1988, 1988 fucked up everyone that didn't remember 1981 and so on.  2022-2023 is going to catch a lot of people off guard.  Be ready to take advantage of a much weaker market and make your plays while others are too scared to.  10 years from now we can drink a nice whiskey and laugh about it.  For now button down the hatches and get your shit together, it's gonna be a wild ride.