Welcome to the fourth quarter!!! I’m curious to see which version of Tebow time the housing market will get in the 4th. Is it the deep pass across the middle to DT to beat the Steelers in the playoffs? Or is it the countless interceptions? If I had to bet it wouldn’t be on the first option.
We overcomplicate markets all the time and try to present these elaborate hypotheses as to why things are the way they are. Markets at the core are simple. Supply meets demand somewhere, and that is the strike price. That’s it. Right now we have anemic demand with an increasing supply. Today we sit at 1,941 existing single family homes on market in El Paso County. That is up from 1,869 last month and if the uptrend continues into the holidays it’s not going to be pretty.
The way our MLS tracks inventory we have 3,466 active units on right now. The last time we had this level of inventory was October of 2014. I got licensed in September of 2013 and can confirm that October of 2014 was a very buyer friendly time where we had lots of fun working with buyers. It is starting to look like that again except this. October of 2014 the median price was $224,950. Rates on mortgages were around 4%. Today’s median price sits at $485,000 and rates sit around 6%.
Doing some basic mortgage math and not accounting for insurance or tax increases in 2014 your principal and interest portion would be $1,074 with no down payment and today on the same median house it is $2,907/month. So over the last 10 years it’s not a crazy statement to say the cost of housing has almost tripled. If you factor in the striking increases in insurance costs as well as the increases in taxes I think it will be a solid 300% cost of living increase on housing.
What’s crazy about that though is if you bought a house in 2014 and just did nothing more than live in it your cost of housing probably increased by something like 30-40% due to taxes and insurance, nothing like what the market has done to those who wait. That’s kind of one of those what’s the best time to plant a tree type of scenarios.
In 2014 the median household income in El Paso County was just shy of 60k/year. Last data we have available is for 2022 where we were at 82k/year. Let’s say 2024 brings us up to like 90k/year. That is a 50% increase in household income to deal with a 300% increase in the cost of housing. Do YOU think that is sustainable?
Our median price of $485,000 is a bit deceiving if you think about it. It’s deceiving because not all parts of the market appreciate/depreciate at the same rate. Our sales volume this September was the worst in 11 years so the higher end sales that are taking place relatively unaffected by interest rates are skewing the median price higher. However the homes below the median price aren’t exactly appreciating. Matter of fact certain parts of town, especially where builders are still active, are really struggling. Lorson Ranch for example. For the period of time between April and October that we all call “nice” in 2022 Lorson had 381 sales at a median price of 469k. Last year 2023 they had 252 sales at a median of $450,000 and this year they had 160 sales at a median price of $465,000.
Of those 160 sales 101 were VA and 23 were FHA. So it’s a safe assumption to make that 124 of the sales in that area have a loan to value ratio close to or over 100%. For 2023 of the 252 sales VA/FHA made up 198 units and in 2022 of the 381 sales it was 199. I’m glad I’m pulling this stat because I know what’s going on in a very hands on type of way.
So for this year you can see that over 75% of the sales volume in this neighborhood likely results in a LTV of around 100%. Last year it was similar like around 80% of the sales volume. But what about 2022? Well that would be the last year that our friends in the hedge funds were net buyers of real estate. This is huge especially in neighborhoods like Lorson where you can see that in 2022 almost a third of all properties in this area were bought with cash. That’s 124 units almost 100% of which were bought by hedge funds who have now become net sellers, not buyers of real estate. To be fair 2022 was an outsized year for hedge fund purchases in Lorson as they bought up a whole filing, but the point of them becoming net sellers at this point is absolutely true.
What is the takeaway here? Hedge funds bought with cash, have no loans, and used their investors money to buy with. As they begin to load the market up with inventory to sell at a loss they don’t give a shit. They’re just losing other people’s investment and retirement accounts while loss harvesting against gains they probably have in the stock market and elsewhere. They do not give a singular shit in the way that homeowners have to. They will adjust the price until the house sells all while setting lower comps for the neighborhood to deal with.
So imagine yourself a home owner who has to move. PCS, change of job, major life event. Whatever real reason that makes your move mandatory and not optional. Let’s use Lorson some more as an example and make some assumptions. If you bought in:
2024 at a median price of 465k you’re not selling this year so stay put
2023 at a median price of 450k and you pay and agent 4-6% plus concessions to compete with the builder you’re selling at a loss or short selling
2022 at a median price of 469k you’re probably screwed.
2021 at a median price of 442k you may come close to breaking even, maybe
2020 at a median price of 365k……woah WTF HAPPENED IN 2020!!!!!!
My point is that in areas like this we are already seeing inventory swell, demand at best level, and prices are not rising. So if supply rises, demand stays flat, our strike point is going to have to drop. As you can see we have basically 4 years of buyers that are unable to or will have a hard time selling at market price. And we have sellers from 2020 and before who theoretically have some room to lower their prices to outperform the market and actually sell. Long story short in Lorson alone we have something like 1,000 houses under water right now and that is not even accounting for any extra debt they may have taken on like refis of HELOCS. Again Lorson is not unique, it’s just an easy example.
Something we talked about at length the other day with some people smarter than me is survivorship bias. This term came from the Air Force when they studied planes that came back from combat missions with damage. They would see heavily damaged portions of the aircraft and the initial thought was we need to reinforce these areas that get shot to shit. But the correct line of thinking, without survivorship bias, is that you need to look at the failures of all the planes that didn’t make it home. In real estate when we talk about sold stats like I do here we are talking about just the planes that landed, maybe with damage and maybe just barely, but they made it to the closing table. What about all the ones that didn’t?
On the MLS we have two categories that represent a plane that didn’t land/a house that didn’t sell. Cancelled listings and expired listings. Since rates went up in 2022 the number of these failed sales has skyrocketed. In the last month our ratio of sold homes to those that got pulled from the market was almost 56%. That means that for every 2 houses that did sell 1 failed to land. Last year this same stat was closer to 30%. In 2022 it was lower and I bet in 2021 it was in the single digits. Why is this significant and draws gasps at Realtor gatherings?
Because when someone is trying to sell a house it represents a significant moment in their lives. Decisions are being made and lives are changing directions. This forces people to do things that they may not want to do. If your house does not sell you have a limited set of options like for example:
Keep living in it but forego whatever other opportunities you were trying to pursue. Whether this is good or bad is so subjective.
Sell the house for less than what you hoped, or worst case scenario short sell the house or foreclose on it destroying your credit in the process.
Rent the house out and assume all the risks and liability of being a landlord. There is a 0% guarantee that the rent will cover your mortgage and expenses.
Sub 2 the house but that is a whole other topic.
A lot of people try to rent their houses out so they can move. I personally own some rentals and can tell you despite the head aches for me overall its been worth it. But I’m like fully stuck in Colorado Springs with family and business roots at this point that would keep me from ever really leaving. And even if I left this state I’ve got a network of people that luckily I can rely on to take care of my shit in my absence. Is this true for many people who become landlords, especially the ones that did not mean to become landlords? I don’t think so.
And so in talking with folks that do property management for a living what I’m getting is this. A lot of failed sales lead to phone calls to property managers. A lot of those conversations go over how rent values are lower than your current mortgage payment, how rental demand has slowed significantly and with the good managers the conversation redirects into the reserves you should have as a landlord just in case. Let me go off on a brief tangent here.
Let’s say you are considering renting out your current or about to be former primary residence. The guys and girls doing this full time suggest that you have 6 months of expenses in reserves. Considering what the average mortgage payments are around here that is anywhere from like 12-20k in reserves that you should have as a landlord. This is money to pay the mortgage while securing a tenant and money in reserves for any unforeseen expenses like the ones I constantly deal with in my construction company. Things break and that is normal.
But things don’t always work out normal. I’ve had my property trashed and I have now seen way more wrecked properties than I’ve ever wanted to. Here is a quick story from the real that I got to be a part of. May 2024 tenant in a house owned by an individual decides that the house is not inhabitable and does not pay rent. Property manager is forced to deal with the situation and we are out there to make sure all the habitability boxes are checked. Tenant claims drains don’t drain and there are active leaks. We respond within an hour to find in deed there are no leaks and all the drains work. We get some bullshit from the tenants. At this point we see damage to the home in flooring, drywall, etc. Tenant then claims back door lock does not work so we respond immediately to add a locking mechanism and see even more damage to the home. June rent doesn’t get paid as we continue to do work on the house. We are getting paid, the property manager is getting paid, the landlord’s house is getting wrecked and they are not collecting rent. July rolls around and the tenant ghosts everyone. No rent being paid. So May, June, July, August and September there are douchebags inside this house living for free. And finally a few days ago after kicking in their own front door they vacate the premises. I get to go and do a bid for putting this house back together which is going to be well over $10,000 and I know the landlord hasn’t made a dime since May. What would you do if this happened to you? When this happened to me I lost about a month of my time putting my house back together as well as roughly 22k in actual money between lost income and repairs.
Then let’s add to the mix all the apartment buildings coming online that have “now leasing” banners flying proud. You know we’re not even done with this influx yet and have like another 3,000 units or so to add? So now you have vacancy rates climbing, cost of ownership climbing, days on market climbing and rents dropping. Basically the opposite of what we saw leading into and shortly after 2020.
In summary I think the iron is heating up. I don’t know what the catalyst will be that finally breaks the back of this market but something has to. If for no other reason then because a 300% increase in housing cost and a 50% increase in income is not sustainable. But in addition to that I think as the FOMO and the greed exits the market we will see a much weaker housing market than many of us remember. Think about the implications of what the Fed is doing right now. They lowered their funds rate and said they intend to lower it again next year and into 2026. With that in mind why would anyone be in a hurry to finance an asset like a house when they see weak demand, growing inventory and the prospect of lower rates in the future? It’s like the Fed is basically telling you wait this thing out, let it fall apart, and then take advantage of the market with lower prices and lower rates.
That’s where I think we’re headed. That’s where I want to buy more rentals and maybe Airbnbs. That’s where I want to help you.
Some of you guys that are pretty close to me have asked me if I’m even still doing real estate. I am and I always will be involved in this hustle. However I am grateful for the fact that I don’t rely on closing checks to make a living at this point and I’m not comfortable talking people into making decisions that I’d hesitate to make myself. So thank you guys for the decade plus of support, I’m here, I’ll always be here, but I’ll never be that dipshit cheerleader of the real estate market hyping everyone up to make my lease payment.