Alrighty! You know for a while there I was writing these updates every Friday and it got old to write and old to read. Today I’m genuinely excited to write this update because things, they are a changing.
Let’s start with the facts before getting into the rant. Today we have 1,842 single family existing homes on the market. That is up by about 200 since last month and in theory should represent the final push of last minute sellers before inventory drops into winter. And that could be the case but I’ll explain shortly why I believe a shortage of inventory might turn into a glut quickly.
The way the MLS keeps track of inventory is broader than just existing single family homes. Today MLS wide we have 3,348 units available for showings. The last time we had inventory at these levels was in August of 2015.
That’s the supply side in a nutshell.
Demand is the other half of the market and it is weak. There are multiple ways to quantify demand and one of the best leading indicators for it is probably mortgage applications. The charts below, pardon the screen grab quality, show mortgage applications as a whole and as purchase vs refinance sectors. As a whole we can see that mortgage demand is the weakest its been since roughly 1996. Not 2008, but 1996. The population of the United States has grown from 270 million to 333 million people since 1996. In 1996 total housing stock was approximately 116,000,000 units and today its closer to 147,000,000.
So the point is that demand is near the lowest levels in over 30 years.
To my understanding after briefly reading over the MBA index methodology it is not adjusted for population growth or housing stock growth. So we’re seeing 1996 levels of mortgage demand in a market with roughly 25% more population and similar increase in housing stock. I could easily argue that if these factors were adjusted into the index we would be at the lowest demand levels since its inception.
Mortgage applications are a leading indicator of demand. Sales are a lagging one.
Total sales in our MLS in July of 2024 were 1,127. The median sold price has plateaued at $499,000 over the last 3 months. July of 2023 was 8 units weaker but prior to that we have to go back to July of 2012 to find this level of sales volume. Again over the last 12 years our population and housing stock both increased significantly so saying that sales are at 2012 levels doesn’t do it justice. It’s 2012 volume in a much bigger market. For comparison the best July on record was in 2020 with 1,978 total sales.
Other indicators of demand that are more subtle include institutional buying and investor buying. When interest rates were half of what they are today and rents were rising monthly it was easy to cash flow rentals. Also if leaving money in your bank or in some other safe haven type of investment yielded almost no return but real estate could produce 6-7% cap rates with the potential for appreciation buying houses was kind of a no brainer. But today we have a different reality where CDs and certain treasury bonds yield over 5% for no effort while housing won’t even cash flow without a massive downpayment. And the institutional side, the hedge funds that were going crazy with the buying, I can tell you with 100% certainty that they’re no longer buying properties and are actually selling some off.
Other stats that are interesting. We had a Fed meeting on Wednesday that changed market sentiment from wondering if there will be any rate cuts this year to wondering about how many there will be. With that we saw the Nasdaq give back almost 15% off its peak and more importantly saw yields on the 10 year treasury plummet. Lenders are quickly pointing out that mortgage rates today are the best they’ve been all year. Yet demand isn’t spiking to create the feeding frenzy that so many Realtors are hoping for. Why?
Here’s the rant part with some more spicy stats sprinkled in. While it is true that bond yields and mortgage yields both came down noticeably another alarming thing is also very true. We finished the week with a 10 year vs 3 month yield curve inversion at 137 bps. The length of this yield curve inversion is now the longest since the Great Depression and the depth of it is too. We’re in month 22 of an absurd financial condition that has a remarkable record of predicting downturns to come. FRED chart below is over the last 10 years and the one after it is since records started in 1982. Please note the depth of the inversion in relation to others that preceded recessions in the past.
The next chart is the unemployment rate also since 1982 so it matches the yield curve chart directly above.
Please notice the pattern of yield curve inversion followed by a rise in unemployment. Also please note the acceleration in the increase in the unemployment rate that we’re now seeing. The unemployment rate rose to 4.3% as job creation has slowed drastically. A rising unemployment rate is a reliable leading indicator for housing demand as jobless people can’t get mortgages (generally).
Here is how I see the near term playing out. Interest rates continue to drop on souring economic data and as they generally do in Presidential election cycles. The drop in rates allows sellers who have been stuck in super low rate mortgages to finally make the decision to move. That activity adds inventory to the market.
Next up at some point in the not too distant future the 4 year old foreclosure moratorium on government backed loans will expire. A backlog of foreclosures will add to inventory with many of those properties distressed and dragging on the surrounding property values.
Hedge funds feeling the squeeze from their investors will remain net sellers of real estate and will contribute to inventory.
Short term rental properties will likely continue to see net selling rather than buying as the cash flow problem applies to them too. Also looming out there is the fact that some of these STRs we’re bought using product like HELOCs and ARMs with adjustable rates that can make owning them even less appealing. This will contribute to inventory.
Shortly after the election in November our lying ass politicians settle in for their term and don’t have to make any more promises. This is generally when the shit truly hits the fan as the reality of the situation without any political theater sinks in. I imagine we continue to see a weakening of the labor market and at some point with the rising inventory levels we will finally see prices start to slip.
Once this happens it creates a fascinating scenario of negative equity. While people have equity in their homes they view them as assets but what happens when you owe more than a home is worth? Well historically this is when people, facing hardships at home and at work, say fuck it. That contributes more distressed inventory to the market and pulls values lower in a self reinforcing spiral. If you don’t believe me just look back to 2007-2012.
Then we also have the wildcard of how this NAR settlement will impact the market. The new rules come into play August 15 and the general state of our industry can be summarized as “WTF just happened”. I’m going to share anecdotes with you on the real life impact of this dogshit settlement as soon as I start experiencing them. For now I’ve got just 13 days left to enjoy business as usual. I do not believe that housing will magically become 3% cheaper and I believe that what we’re going to see is much more volatility in housing prices over the next 12 or so months as this thing shakes itself out. I do think on the industry side we’re going to be dealing with a whole lot of frustration and conflict. I don’t see how sellers being unwilling to pay a buyer’s agent and forcing that cost onto the buyer is going to lead to more demand. I think this will contribute to more inventory and inventory sitting on the market longer.
People have two fears in the market. The fear of missing out and the fear of losing. One is greed, the fear of missing out, one is just pure fear. Fear is stronger than greed. Why is this important?
We’ve seen the run up in real estate prices since 2020 at an absolutely astounding pace. I was there for hundreds of situations of escalation clauses, appraisal gaps, waived inspections and just random madness of buyers chasing and pushing prices higher. But you know what buyers hate doing? Chasing prices lower!
I’ve had this argument with local brokers before about what I like to think of as kind of a goldilocks moment. That is not the inhabitable space that is Earth but a period of time in which prices AND interest rates remain suppressed because inventory is ample and demand is subtle. Agents here locally tell me that can’t happen in Colorado Springs. Yet I distinctly remember refinancing my house in 2012 at 4% while the real estate market was distinctly in the shit.
So now what? Should you sell your house in panic and run for the hills. I wouldn’t. As I’ve said in many of these rants real estate is a long term game. The game is to buy a piece of the Earth with the improvements upon it and pay that piece off as quickly as possible to truly make it your own. The game is to have a place on Earth that is your own that you can pass down to people you love. If you truly need to sell then sell, just know the market is about as soft as it was in 2012 with some of our agents in the office absolutely raking sellers over coals on deals. Other properties that are priced aggressively are selling quickly.
Buyers. Same deal. If you know you’re settling into the area for years to come don’t try and time the market. Buy when the time is right for you to buy. Buy something you’re comfortable in and with a payment that doesn’t stretch your budget. You should think of your home as exactly that, your home. If you’re making decisions about your home based on what the market will do 3 or 5 years from now its because you’re delusional and buying into bullshit realtor and lender hype. Truth is nobody knows what the market will do next quarter, its all speculation. Yet the rent goes to me and other landlords and your mortgage payment secures a piece of the earth for you and your family. Do what makes sense for you and your loved ones and pay no mind to the Joneses, those fools are broke AF anyway.