It’s still up there, the sky is.
1,280 single family homes on the market today marking roughly a 30% increase in inventory over a month ago. This is the most inventory we’ve seen since December. This weekend is PPAR open house like kick off to summer weekend, Justin Timberlake is all over social media, and tomorrow May the Fourth will be upon us. It’s safe to say summer is right around the corner and the real estate market is kicking it into gear for what are generally the busiest months of the year.
Interest rates. Aren’t they a big part of the whole story? On Wednesday we got the announcement from the Fed that basically nothing is happening. Fed Funds rate remains at 5.25%-5.5%. Overall the speech touched on what seems like a resilient economy, sticky inflation, and no real reason to raise or lower rates. Powell did say something along the line of keeping this policy in place unless there is an unexpected increase in unemployment. He said a variation of that several times and it caught my attention. Low and behold 2 days later we have jobs data missing expectations to the downside, significantly, and a slight uptick in unemployment to 3.9%.
Today the bond market took that recent information in and as a result the yield on 1o year US bonds fell by about 20 basis points over this time last week. The yield curve that I keep talking about inverted slightly deeper to finish the week at about negative .87%. That’s the difference between US 10 year and 3 month bond yields. We are now in month 19 of the yield curve inversion charting deeper and deeper into historic territory. The negative Nancy in me and the last 100 years of history say this is bad. The stock market, housing market and job market all tell me its fine though. The stock market, job market and housing market all did great in 2007, 2000, and the late 80s too. Until they didn’t.
Let’s take a gander real quick at something I haven’t touched on much lately. Foreclosures. Are there any? Most recent data from the trustee right now is for March. Regarding foreclosure starts meaning new ones March 2024 saw 47, down from 82 last year and 91 the year before. Prior to Covid we we’re at 90 in 2019 so starts right now are super low. Total foreclosure starts are tracking at about 2/3rds of last year and since the beginning of 2018 we have had less foreclosures combined over 6 and a half years than we did in 2010 alone. In 2010 we saw 4,657 foreclosures. Since the start of 2018 we have seen a combined 3,800.
This is why when people call me asking me to find them a great deal on one of them many foreclosures I tend to not call them back…
What would force more foreclosures on the market? It would have to be a combination of rising inventory, falling prices, and rising unemployment. So far we have seasonally rising inventory which is not alarming.
Let’s look at prices. For the month of April we saw 832 sales PPMLS wide for a median sold price of $480,000. March 2024 median was at $470,000. The current sold to original list price ratio has returned to 100% as we now see more and more multiple offers across the market place. It’s not the shit show of 2020-2022, but its reminding me of it a bit all of a sudden.
April 2023 gave us 956 sales at a median price of $450,000. And April 2022, the last April before rate hikes brought us 1,334 sales at a median sold price of $481,000.
So really on the median we peaked in roughly May of 2022 and have never fully recovered that price. But people that bought property prior to 2022, like even as recently as 2021 are for the most part above water and even many properties bought as recently as 2022 are solvent, but not all. So going back to the question of what would force more foreclosures. Prices rebounding towards 2022 highs suggest that most people should have solid equity positions in their homes and even if forced to sell at this point should be able to at least break even. As we can see by the dip in median price last year though this can change quickly, and a difference of even 30k on the median can make a huge difference to many struggling home owners. At this very point though falling prices are not the reality.
So third portion is rising unemployment and borrowers’ inability to repay their loans. We’re at 3.9% unemployment. That’s the lowest rate since September of 2000. May 2007 we bottomed out at 4.4% unemployment. February 2020 we we’re at 3.5% but you know then the things and stuff and here we are. The point I’m making here is that unemployment rates bottom out before recessions and then spike. So a current low unemployment rate does not speak to it remaining low forever. See graph.
As you can see here unemployment rates come down gradually but go up quickly. So going back to what Jerome Powell said earlier this week the job market, strong as it is today, may be the wildcard in this where did all the foreclosures go question.
Skimming over the non farm payrolls report from today guess what the average hourly salary is for employees, outside of farms obviously, in the US? $34.75/hour. The median home price in the US right now is just shy of $420,000 as shown in graph below.
Let’s take for an illustration a sample rate of 7% for the mortgage interest rates today. Let’s break down affordability super mad quick yo.
Purchase price of the median home in America is $420,000.
Our borrower is going to put down 20% to avoid the math of mortgage insurance, which is significant.
We’re financing $336,000 over 30 years.
We’re assuming $2,000 a year for taxes and $2,000 a year for insurance. These numbers make sense in Colorado and may not make any sense in other states, but we will roll with it.
Total monthly payment PITI is going to be $2,568.75. Take than and divide it by $34.75. That means roughly 74 hours of the month go to paying just the mortgage for the average earner on an average house. Now many people don’t have 20% to put down so this same scenario with an FHA loan would look something like this:
Purchase price $420,000
Loan amount after 3.5% downpayment is $405,300
Lenders if you’re reading this correct me if I’m way off but for rates I’ll use 6.375% and for mortgage insurance were using 85 basis points of the loan amount FOR THE LIFE OF THE LOAN.
Home owners insurance and taxes the same as before at $2,000 each a year.
We end up with $3,148.96 a month for the median house in America when financed using an FHA loan with 3.5% down. That’s over 90 work hours of the month just to pay the mortgage, not taking into account utilities or anything else. That’s tight man, that’s very tight. Makes sense that we see so many households with two adults working and picking up sidehustles.
Look at this boring ass graph below, this is average hourly wages that we’re referencing above.
For fun lets break down some random years like we did above to see where we are on the affordability situtation.
April 2022
Median American home costs $449,300, average hourly wage is $31.95 and mortgage rates are at roughly 5%. We’re gonna keep the insurance and tax numbers the same as before and we’re going to assume 20% down to avoid accounting for mortgage insurance.
$2,262.88 a month, 71 hours worked.
April 2020
$322,600, $30.01/hr, 3.25% rates.
$1,456.51/month or 48.5 hours worked. Good old buying with a mask on super paid off.
April 2015
$289,100, $24.89, 3.7%
$1397.88/month or 56 hours worked.
April 2010
$219,500, $22.49, 5.25%
$1,303/month or 58 hours worked.
So if you’re feeling like you have to work damn near twice as hard or twice as much to afford the same thing as in 2020 it’s because you’re right. How long can this be sustained? Time will tell.
I went off on a little rant this week about the lower end of the market seems to be slower than the higher end. Let’s check my intuition in real time and see if I’m wrong.
At or below the median sold price of $480,000 April had 441 closings at a 99.5% sold to original list price ratio with a median days on market of 13. Over 480k we have 496 sales at 99.98% ratio with median days on market of 11. Seems like a minor difference between the two but guess what, my intuition is right and I’m gonna go pat myself on the back now. Or I’ll ask my wife for an attaboy and see what happens…
I think here locally with the over 8,000 multi family rental units coming onto the market and multiple complexes renaming themselves to “now leasing” and “move in specials” we will see some relief for tenants. Rents dropping means cap rates dropping. Cap rates dropping means less investors competing for single family inventory and maybe ultimately some relief on resale pricing as well. However keep in mind that too much relief on single family pricing will put a lot of people upside down on their mortgages and a delicate little tight rope this whole debt based system is.
In the very short term I would encourage potential home buyers to look at real estate as a long term play. I know for a fact, from personal experience with real people that regular normal people suffer badly from recency bias. Your friends bought a house and sold it 2 years later and made 100k! Awesome. That is not normal and you should not expect the same. Keep in mind that getting lucky is super fun and very cool. Getting upside down on your house and fucking up your financial life for the next 5-10 years is not nearly as cool. So make decisions with your family’s long term financial and emotional health in mind and don’t FOMO into real estate if you know you’re not going to settle down in that city. But long term, man, long term they’re not making any more land. So if what happens next year, or 3 years or 5 years from now doesn’t bother you then disregard what I’m saying here and fire away.
In a nutshell, the market is much more resilient than I thought it would be.