Hey guys thanks for reading these and sticking with my logic for years now. The market is anything but boring these days and the data is incredibly conflicting and confusing. Some easy numbers to grasp though are the 1,298 single family homes we have for sale in El Paso County right now. That’s down about 117 since last month and makes total sense as people settle in for the holidays.
The confusion really comes from the headlines and I want to break some recent ones down. This week I saw a headline on CNN saying that the median home price for October just hit a fresh record high. Headlines like that would imply that the housing market is ripping and roaring. Today I saw a headline on CNBC that said pending home sales are at the lowest level since NAR started tracking the stat in 2001. That’s right, sales volume of homes is lower today than it was at any given point during the 2008-2012 period.
I believe by definition that when sales activity slows and prices continue to grow despite a lack of strong demand that type of condition is called stagflation. A stagnant market still facing inflationary pressure.
What we’re seeing locally mirrors the national headlines. Check out a story of the last three Novembers.
November 2021-1,394 units sold for a median price of $445,000 ——5 median days on market 30 year rates 3-3.25%
November 2022-793 units sold for a median price of $435,000——-24 median days on market 30 year rates 6.5-7.125%
November 2023-616 units sold for a median price of $460,000—25 median days on market 30 year rates 7-7.75%
It’s really easy to manipulate numbers to support your own narrative. 1,298 homes is incredibly low inventory. It’s only 2 months of supply. This is true. However 2 years ago we we’re working with a week of supply, so inventory levels by that metric are 8 times higher. The ultimate metric in my opinion however is price and since our median price keeps rising that tells me that inventory really is tight and it also tells me that a lot of buyers are gambling for refis down the road.
There is a sentiment out there that’s a little bit concerning to me. That sentiment is rooted in what we call recency bias. The idea is that the minute rates go down, people will rush into the housing market resuming the absolute insane orgy that we lived through in 2020-2022. This is what agents and the public got accustomed to and therefore in their opinion if rates go down then sales activity can only go up. However we’ve run our metrics on correlation between interest rates and median home values and have found that correlation to be very weak at best. The strong correlation that we did find at something like a .88 correlation coefficient was between the M2 money supply and median sold home pricing. So long story short is that if the Fed is serious about correcting inflation back to a 2%ish range, and taking into account all economic metrics being lagging indicators, it’s unreasonable to think we’re going to immediately return to printing money. And if the M2 money supply pictured below continues to dwindle we can ultimately expect housing prices to do the same with a 18-24 month delay. You can see in the image below that the monetary supply actually bounced in the Spring right after we saw banks start to fail, and is only gradually starting to lower now.
Meanwhile below you can see the correlation to median housing price which tumbled about 15% from Q4 of 2022 to Q1 of 2023, following the reduction in M2 money supply. I personally do not believe we have run the full depth of the price correction.
To better understand the where we’re at today lets recap the last few years and how we got here. In 2018 and early 2019 we saw the housing market slow significantly. I believe it was 2018 that started the year and finished the year at the same median price here locally. We had interest rates on mortgages go into the 5-6% range and sales started to slow up noticeably. In August of 2019 we had a yield curve inversion and a run on the Fed’s overnight repo facility. We had warning lights blinking all over the place and then we got hit with 2020.
It’s easy to say the Fed printed off something like 5 trillion dollars real quick but it’s kind of hard to picture how it happened. Stimmy checks account for 814 billion USD and went into our pockets directly. That’s less than 20% of the money creation though. The bulk of the rest came in the form of sales or refinancing of real estate. You got to imagine that by 2020 the average American homeowner had a great equity position, and by 2021 it got to be about 15% better. By 2022 it got to be roughly 15% better than that. Matter of fact here locally Nov 2019 saw a median sold price of $320,000 to 2021 seeing $445,000. That’s a 39% run up on the median without cherry picking the best months to drive home the narrative.
So now we’re wiping our asses with scraps, covering our faces with whatever is available and drinking record setting amounts of booze. Interest rates fall to the lowest levels possible with the Fed funds rate at 0%. All of this equity out there thanks to the low rates, and so much of this equity is getting cashed out at these low rates. You know this as well as I do, the average person looks at debt as a function of their monthly budget. So if it’s suddenly possible to cash out a bunch of money out of your house on a refi without increasing your mortgage payment, who wouldn’t? If you can tie up 100k on a HELOC at 3% why would you not?
So that’s how trillions of dollars made their way into Americans’ pockets by either refinancing or selling their homes. And then that money went out and chased all the goods and services that ran up in price over the last 3 years. That money chased stocks, other homes, cars, luxury items, pasteurized cheeses and oriental massages. That equity got spent, yo.
Fun fact about housing. Housing directly and indirectly contributes roughly 15-18% of America’s GDP. Fascinating fact is that housing sales volume has more than halved in the last 2 years yet somehow that is not reflected in the GDP numbers at all, which came in incredible last quarter. Something doesn’t add up.
But historically the way stagflation works is it squeezes people until they can’t take it anymore. Stagflation tends to end with lower productive output, higher production costs, increased unemployment and ultimately a deflationary/deleveraging cycle that end the inflationary period. We are seeing the deflation hit in the automotive market, hardest hit is the EV sector. We’re starting to see deflation in certain consumer goods like electronics. We are seeing noticeable deflation in certain building materials. Not seeing much deflation in labor. So far however no significant or sustained deflation in housing.
I do believe the correction is going to get deeper because our inventory levels will rise. We have a backlog of foreclosures starting to make their way through. We have a backlog of sellers who could not afford to sell that will be listing when rates are low enough for them to rationalize getting into a new mortgage. We have institutional sellers that are going to have to ramp up their selling as they are currently unable to satisfy withdrawal requests from their investors. We have some pretty dumb ass rental laws being discussed that will incentivize landlords to not be landlords. If we combine this higher inventory with a higher rate of unemployment and a decrease in consumer sentiment towards real estate (the opposite of the FOMO we saw) we can expect to see lower rates and lower prices. This condition is like the goldilocks zone and will not last forever, it will also seem scary as hell.
I know a lot of agents say this can’t happen. I also know a lot of agents that can’t count. 2012 was a perfect example of when the storm had already passed, rates dropped, and prices remained low. So it’s happened here before, more than once, and it will happen again. And when it does yours truly will be all over Facebook and TikTok telling you it truly is a great time to buy a house. Be fearful when others are greedy, which for now they still are.