We did it! Another trip around the sun complete and the sky still hasn’t fallen on us. I know if you read my posts you might think it’s gonna happen any minute now. And to quite a few people it is, but as a whole, we good fam.
There are 950 existing single family homes for sale today in El Paso County. We should see that number climb steadily as we move towards spring and summer.
714 homes closed out in December in our local MLS for a median price of $465,000. Of the 950 homes on the market right now 422 are priced at or below the median price. This is actually pretty encouraging as over the last few years prices kept going higher and higher and inventory below the median practically didn’t exist. Today we’re seeing homes priced at or below median often sitting on the market for a few weeks or longer.
The 750 units sold in December showed a drop of just over 100 units in sales volume over last year while the median sold price actually climbed by 20k over December 2022.
December 2021, the last December of Mayhem had us at 1,385 sales for a median sold price of $450,000. Median days on market 2 years ago was 5, today its over 30.
Long story short the madness is behind us and the market at this very point feels somewhat balanced. Inventory is relatively low but so is demand. Our median sold price has essentially plateaued over the last 3 Decembers leaving buyers facing a pricey market and sellers often unable to move. Buyers are facing high mortgage payments and high purchase prices. Sellers are stuck in low mortgage payments and often unable to move because their new payment will be substantially higher.
Here in Colorado Springs we are facing a massive influx of apartments like we haven’t seen in at least my lifetime, maybe ever. I’m personally seeing rental properties sitting around much longer than at any point in the last 3 or 4 years. Also in talking with my friends in property management they’re seeing a softening in both demand and rental rates. So if we go ahead and dump 10,000 plus rental units onto the market in the coming 18 or so months I think that softening will continue.
When investors buy residential real estate they look at the cap rate. Cap or capitalization rates are just rates of return on real estate. Historically a cap rate of 12% or so was considered good enough to invest in. If you get $1,000 a month in rent for a house that cost you 100k there’s 12%. Obviously real life ownership math isn’t that simple but cap rates can be.
With the ridiculously low mortgage rates we saw during covid investors were more than willing to settle for 6-8% and even less in some cases since the financing was so cheap. With rental rates stable or declining and the financing 2-3x pricier than a couple years ago investors are no longer flocking in, neither are hedge funds, and neither are regular people.
Hedge funds that made the news buying up a ton of single family homes around the country are on chill right now. Actually more than that. They’re facing potential regulations at the Federal level that could limit their very ability to buy/own houses. And they’re facing pressure from their own investors to cash out. Since real estate isn’t really a liquid investment cashing out these investors isn’t as simple as selling stocks or bonds, we’re talking about selling actual houses to be able to return capital. This is starting to happen, the rate at which it’s happening right now is hard to get a read on, but the important take away is buyers no longer have to compete with Wall Street for a home.
Regular buyers unlike investors have to look at the rent vs mortgage scenario. Pretty consistently from like 2011 onward it was cheaper to pay a mortgage payment than rent. This was true through early 2022 as rents kept increasing and mortgage rates were in the 3% range. Now with rates over 6%, still near historic high pricing and a softer rental market buying isn’t so appealing. I’ve seen scenarios where buyers would have to pay $1,000 or more monthly on a mortgage payment vs renting a similar house in the same neighborhood. As I always say everyone’s situation is different and maybe for some people this makes sense, but for those potential buyers who are only going to be here for a few years renting right now is and should be more appealing.
And while this sucks for Realtors, lenders, appraisers, title companies, home inspectors, movers and so on it’s really not a terrible thing. As we get more and more rental inventory on the market the dynamic will continue to shift in the public’s favor. Apartment complexes are already offering up incentives and that will only increase with the vacancy rate. The drop in rental revenue and the change in the cap rate calculations will eventually make its way into single family valuations as well. Maybe we won’t see a drastic drop in pricing, but I certainly don’t think we’re going to see some massive surge in buying activity either. If it’s cheap to rent, why feel pressured to buy?
So here’s kind of how I see this year going locally and why. I think were going to see inventory climb higher than it did in 2023 as sellers who have been reluctant to sell finally start running out of patience. We all got accustomed to low rates and hoped they would come back super quickly. 18 months into the rate hikes all we’re seeing at this point is a relatively stable range for mortgage rates above 6% and below 8%. At some point sellers are going to throw up their hands, say fuck it, and move on with their lives. This is already happening but will continue. We saw what a race to the top looked like, now we will likely see a move toward some sort of bottom in pricing.
Whether that is significant or not I can’t tell you for sure. My money is on yes, it will be significant, and that yes, there will be a lot of opportunity to score deals in real estate in the not too distant future. It’s impossible to know for sure but so far our best indicator, the yield curve inversion, has not been wrong about predicting recessions.
This graph has us at the deepest inversion since the 1970s, at least, with some people saying that we haven’t seen anything like this since the 1920s. In my opinion we have a reckoning of deleveraging coming to us and as individuals we can capitalize during this period or we can capitulate…choice is on us.
The M2 money supply has stabilized after a roughly 5% contraction. We will see how this progresses but the correlation between M2 supply and real estate pricing is very striking. A flat line on this curve will imply a flat line on real estate appreciation. And while on the average that’s a whatever, meh, who cares kind of situation a flatline will create upside down equity positions for owners who aren’t careful, wise, or whatever. If the average person is just barely treading water there will be many people who are not. Like in 2008-2009 the Springs saw a 22% drop in the median sold price. But around that median there were houses being sold for half of 2007 values as they fell into disrepair or other distressed situations in a saturated market. I do think we will see some form of this, whether it’s as bad as 2008 or worse I couldn’t tell you. No one can for sure.
There is one simple reason I just don’t think we’re going to resume ripping and running up like we did 2020-2022. The fuel is simply not there for the fire. What I mean is that going into Covid and the immediate rate cuts that followed we had something like 8 straight years of growing values. People were able to cash out refi without increasing their payments. People were able to take out helocs with funny payments. People were able to cash out their properties and reinvest into other homes or ventures. With the money supply declining or flatlining we’re not going to see an influx of cash like that. Even if rates drop to say 4-5% the average homeowner simply won’t have the equity position to spark a frenzy like we saw recently.
So me personally, I’m chilling and kind of sitting on my hands. I’m seeing a lot more opportunities already popping up for buying decent investment properties but the market isn’t saturated enough yet. I think by the end of this year you’ll hear my tone shift to one of excitement and glut but for now we just sit back and observe. Happy new year and let me know if I can help you with anything housing related from the realtor to the contractor end of it. Thanks for reading all this shiiiiiiiit!