Yea dude. It’s been interesting. Today we have 1,414 existing single family homes for sale in El Paso County. That’s up about 70 since last month and if we keep increasing inventory into winter it’s going to get weird. For now too early to call it a trend but inventory is up something like 7 fold off our lows in 2021/early 2022.
Median sold price remains steady at $478,137. We saw 948 closings in September, down from 1,298 last year. Remarkably the median sold price is up from $460,000 last year. Unreal.
Interest rates are not breaking down at all. As a matter of fact mortgage rates have broken through their prior highs and seem to want to push even higher. This week we had some conflicting jobs data come out with the latest non farm payrolls report absolutely crushing expectations to the upside. The economy added almost double the expected amount of jobs in September and the inflation rate remains higher than the 2% target. And while all of the leading indicators and manufacturing numbers are absolutely deep down in the shitter the two main things the Fed looks at, jobs and inflation, are both still coming in hot. Long story short is there is no data that would support the Fed lowering rates anytime soon, yet there is still data coming in to support them hiking rates further which fits their current narrative.
Here is a graph of the last 10 years of mortgage rates where you can see us breaking the recent high and trending higher. Also if you look at this graph and continue the trend line from 2018 to now it would look pretty normal. The issues we find ourselves in today have less to do with where interest rates are right now as much as how we got to this point.
The cheap debt that was peddled onto the world through the pandemic created a significant set of problems for us all to live with. Had it not been for the Fed adding 40% to US M2 money supply we would not have seen the massive inflation that we saw. As a matter of fact had we allowed for things to run their course we likely would have seen some price deflation in 2020 and 2021, we would have seen some bad debt flushed out of the market and we would have had a natural deleveraging at the conclusion of the last debt cycle. And then we would have seen lower rates, lower prices, and the beginning of a new debt cycle.
Instead what happened is we punted the can down the road, inflated real estate prices by almost 30-45%, food prices by around 40%, used car prices by roughly 50%, and now we get to face the deleveraging anyway with much higher loan balances than before. One thing we didn’t inflate so much is incomes. Since 2020 the income for the bottom 10% of earners is up about 9%, the middle 80% by roughly 4% and the upper 10% by roughly 5%. The big difference obviously is the upper classes get to benefit from the inflation in whatever asset classes they own while the people at the bottom just get to enjoy much higher rent. But purely on an income based metric all of us are getting hurt by the inflation of the last 3 years.
Just a real quick recap on how money is created and destroyed. In a system that has a currency based off a tangible asset such as gold the money supply is directly tied to the amount of gold within the system. That shit makes sense which is why we don’t do that. In a fractional reserve system like we have today the money supply is based on credit contraction and expansion. Every time a loan is made to purchase something money is added to the supply. Fractional reserve banking allows banks to lend 10x their deposits, and the Central Bank is allowed to create currency out of thin air to lend it to banks. When a buyer buys a house using a loan the loan portion of the purchase price is essentially created out of thin air, secured by the asset, that you get to marry while dating the rate.
By ratcheting up interest rates at the fastest pace since at least the early 80s, or maybe ever, the Fed has indeed already and is continuing to cut the money supply. The amount of new loans at these higher rates is not replacing the amount of existing debt being paid off. This is what the contraction in M2 money currently looks like on a numberpicture.
Alright take an Adderall and stay with me here for just a minute. Please. This is important. The dark blue line is M2 money supply. That’s the easily accessible cashola in our mattresses, bank accounts, mutual funds and other places that can be made liquid rather quickly. The light blue line is CPI aka inflation rate in the US. The red line is the median US home price. The scale for this graph is percent change year over year. Anything below 0 obviously shows a decline in prices and most of the time the lines linger above 0. Notice the M2 money supply being highly volatile prior to 1913, that’s because the market dictated how much money was needed, the Fed came into existence in 1913.
Now here is the notable thing on this graph. Notice how many times the dark blue line goes below 0? During the great depression and then briefly as WW2 concluded. That’s it, and if you think about the economic shocks the world endured at that point it makes 2008 look like a silly bitch. Speaking of that, look at that dip in M2 money in 2008 together with the crash in home prices. All that shows was the banks’ reluctance to lend during an unstable market. That’s all it was and we talk about it like “its not gonna be like 2008 this time because its different”. The reality of it is that 2008 was just a taste of what a credit implosion looks like.
One of the most reliable indicators of economic turbulence ahead is the yield curve. I’ve covered it in depth here before and I just want to remind you that normally long term bonds yield more than short term bonds. That’s normal. An inversion happens when long term notes yield less than short term bonds, as implied risk in the short term is viewed as higher than in the long term. Nerd shit, super important to this fiat financial system we have that’s based on nothing more than hope.
Today the difference between the yield on the US 10 year treasury and the 3 month bond is -.71%. That is coming off a low of the inversion around 1.8%. Here is historic context since records started in 1981 roughly.
I’ve said this before and it’s still true. The shit show doesn’t officially start until the yield curve uninverts. This can happen in one of two ways. Long term yield can continue climbing like this, like they have been.
Or short term yields could drop drastically. That generally happens when something sudden and terrible happens, see March 2020 for context, sort of.
If we look at the context of the following risk factors what do you think is more likely, long term rates rising or short term rates dropping? We have for the first time in 100 years a speaker of the House getting voted out leaving a void in government. We have what will likely be another insanely ugly election just over a year away. We have a war in Ukraine that could very quickly and easily cross borders into other countries. More relevant financially we have a 1.8 trillion dollar federal budget deficit that is being funded by the Fed printing money to buy treasury bonds. We have a global economic slowdown on the back of the pandemic boom that was financed and not actually worked for. We have student loan payments coming due. We have 2/1 buydowns getting their payments increased. We have the largest gap between the wealthy and the poor since WW1 in America.
I’m not shitting on America, I love this country. I am willing to bet though that the yield curve corrects by the long term bond yields pushing higher. I hope that’s the case at least because the pain that will cause will be purely economic. What I’m afraid could easily happen is another manufactured crisis that allows the Fed to print even more money, kick the can down the road even further leading to societal problems here that we’ve only laughed at other countries for.
Here is one societal problem we’re dealing with and will continue to deal with until something breaks. Affordability. This is a super complex topic but lets look and see how the last 3 and a half years did us in. September of 2018 we had a median price here of $305,000. Rates back then were around 4.5%. Principal and interest with 0% down would be roughly $1,545. September of 2021 our median price was $445,000. Rates were around 2.75%. Your payment would be around $1,816. Today the median price is $478,000. Mortgage rates are like 7.25%. Your payment is $3,260. That doesn’t include taxes, which went up about 40% in 2 years or insurance which keeps breaking it’s own records.
I know it’s not very Realtorly of me to say this but we need a crash. We need prices to crash, we need to flush out bad debt, we need the economy to take a pretty severe reset. Because if we continue this policy of kicking the can down the road we’re going to end up in a system where the middle class is a long forgotten memory, where the rich own all the assets, and the poor are willing to work for scraps. Like in third world countries. I would rather suffer through a recession or even depression than live in a country where all opportunity is stripped from the working class.
A man smarter than me named Fyodor Dostoyevksy wrote this in a book:
“In the end they will lay their freedom at our feet and say to us, Make us your slaves, but feed us. Man is tormented by no greater anxiety than to find someone quickly to whom he can hand over that great gift of freedom with which the ill-fated creature is born.”
It resonates. Make good choices. Real estate is for the long haul. You own a piece of the planet, keep that in perspective.