A Mexican Standoff
A cold stare under a brimmed hat. A cigar tucked into the corner of a taut and grimacing mouth. Squinting eyes shift right then left then right again. Sepia tones. Cue an overly brassy trumpet blaring anxiety-inducing Spanish eighth notes. Hands inch toward guns. Ahhhh, yes. A good, old-fashioned Mexican standoff. Spaghetti Western style.
Wikipedia (always a dicey reference but it gets this one right) tells us that a Mexican standoff is a sort of ‘wedged in between a rock and hard-place’ conflict where no strategy exists to achieve victory. The tension in the standoff has undercurrents of a need to act soon, a certain knowledge that if you don’t act then someone else will, and also having no good options from which to choose. I cannot think of a better description of real estate at the moment.
Last week I mentioned in The Inventory Argument that the buyer pool was shrinking due to increasing interest rates on the heels of one of the fastest real estate price increases in over a decade. I mentioned that buyers are still out there, but the number of them that are ready and willing to purchase is small and getting smaller. I wrote that I could easily imagine a future where this market extends uneasily sideways for a few years (barring a catalyst). Aside from the catalyst bit, last week’s essay was largely from a buyer’s perspective. But what about sellers? What is up with them these days?
I am going to make a bold statement and confidently assume that 100% of everybody agrees with the following: moving is a pain in the ass! No one likes to move. It sucks. What with all of the packing and the lifting and heaving and sweating and stress and yelling and ‘where the hell did you put my iPad charger oh my God you didn’t pack it did you’ followed by unpacking then repacking and… yeah. It sucks. Inducing someone or some group of ones (a ‘household’ in pro talk) to sell their beloved home and then uproot and move to yet another house is not easy. There must be some overwhelming benefit to undertake such a nasty, nasty thing like selling a house and moving. Let us imagine what such an event might be:
New job in new location (or job transfer or some such)
Upgrade to bigger house (growing family)
Downsize to smaller house (empty nesters)
Loss of job
Marriage or some household formation event
Divorce
That covers a lot of of the more common reasons and is good for now. Now let us consider all of the above in the context of today’s market. Statistics tells us that if you own a house today then there is a high probability that you bought in the last 5 years. There is also a high probability that, during the last two years of historically low interest rates, you wisely partook in the refinancing boom. That is great. You have a great spot with a great rate with a great payment with a great job with a sky-high property value and things are just going great. But…
What if one of those things above happens? What if you want to upgrade? Or downgrade? What if you need to sell? What is a seller facing in today’s market? Well a seller in the Austin, TX region is listing their beloved home into a sliding market with rapidly deflating prices, increasing interest rates, and increasing inventory (competition). On top of all of that the seller must trade their great spot with their great rate in order to move… where? Valuations are decreasing but still enormously high. A potential seller-mover is faced with a situation where they probably cannot shift into a similarly priced house (much less upgrade) and have the same monthly payment. So unless they are moving from a high-priced geographic area to a much lower-priced geographic area (e.g. San Francisco to Shreveport, Austin to Oklahoma City) then the seller is indeed in a Mexican Standoff within their own circumstances. There are no really great options!
Dear reader, I have a bottom line when it comes to economics and markets: incentives matter. A human is incentivized to act. A person will move because they perceive some benefit, some profit to themselves1. Absent some incentive that overwhelms the negative trade (loss) inherent in today’s real estate market, it is difficult to see a net gain for a vast majority of residential sellers out there. Hence, the Mexican standoff. More so if there is a need but no desire to sell.
But what about land?
A big difference between residential and land real estate occurs in the dynamics of financing and interest rate-induced volatility (how sensitive sales are to changing interest rates). Land markets are far less dependent on financing and are, to a large degree, still very much a cash business. That is a good thing in terms of price stability. Another good thing is that owners of acreage properties (I define those as properties greater than 10 acres) tend to be more financially secure and less apt to sell due to personal financial pressure. Such is very much NOT the case in residential real estate.
I do, however, see the general (very general) current trend in residential markets as largely the same for land real estate. Sellers are stuck on the idea of last year’s price. If they are financed with debt then they probably have a pretty good interest rate. They probably want to keep this rate until it adjusts in the case of an ARM (usually at year 5) or forever it if it is fixed. So at the moment there is little incentive to sell unless something Very Big is happening in that owner’s life.
But despite general reluctance the fact remains that prices are no longer to the moon. Holding land at the moment doesn’t have any obvious price appreciation benefit in the short term. There will be sellers who see this trend and choose now as a good time to exit (especially if they were on the fence anyway). And, of course, there are still buyers. There is still a market. The problem as of today is that the spread between the bid and the ask is wide and widening. Buyer’s see a weakening market and want a deal. Sellers want to juice every last dime from last year’s prices. So there seems to be a Mexican standoff in land as well. In this uncomfortable situation I imagine that land sales (and this is more true the farther out of the major metro areas one goes) will slide sideways for quite some time. Probably on decreased volume. But for how long? I have no idea. Weeks, months, years. Until something Very Big happens to shift the market out of its funk.
Real Estate Horoscopes.
Venus has aligned with Mercury in the 4th turning of the subliminal equinox causing swamp gas to reflect off of a weather balloon which means I know the following:
Buyers using financing are staring down the barrel of rapidly increasing rates with the cherry-on-top of another Fed funds rate increase on September 21. For you, time is of the essence. Be careful because timing the market now is like trying to get out of the office before rush hour traffic: move too late and you might as well work a little longer until the highway clears. Fortune awaits the bold.
Buyers using cash have little impetus to move quickly (unless you have a 1031 exchange deadline or some similar hard deadline). In fact, the cash buyer has every reason to wait for prices to continue to fall. For the perfect property, your bargaining position is strong and getting stronger. An old friend is thinking of you.
If you are a seller and needing to sell then you had better move quick. Timing the market now is like trying to get out of the office before rush hour traffic… oh wait I already did that one. If you don’t need to sell but want to, well, you are in a Mexican standoff. If you don’t need to sell and don’t want to, you are in a great spot. You may get a call from a long lost stranger.
Late addition: I’ve noticed a dramatic uptick in wholesalers and other purveyors of “really great off-market deals” cold emailing me with their crappy listings. I consider this uptick in ‘investor deals’ to be a signal. I have also been slammed by emails from builders with all of the ways they love Realtors and how much they want to pay us cold hard cash plus swanky bonuses to sell their stacking inventory. Also a signal. Anecdotal but interesting.
Texas Land This Week.
The following information comes from LandWatch.com. (Read Data Disclaimer footnote2)
As of September 2, 2022 there were…
13,352 acreage properties listed as Available
1,134 acreage properties Under Contract
6 properties up for auction
Five counties with the most listings:
Grayson County - Texoma Region (273 listings)
Hunt County - Dallas Prairie Region (254 listings)
Smith County - Piney Woods North Region (222 listings)
Edwards County - Edwards Plateau West Region (220 listings)
Van Zandt County - Dallas Prairie Region (209 listings)
Price per acre trends for these five counties:
For the last 7 days there were…
562 properties listed or changed
6 properties under contract
3 properties identified as Sold
Five counties with the most listing activity in the last 7 days:
Hunt County - Dallas Prairie Region (15 listings)
Gillespie County - Highland Lakes Region (15 listings)
Parker County - Fort Worth Prairie Region (14 listings)
Henderson County - Piney Woods North Region (13 listings)
Hill County - Blacklands North Region (13 listings)
Price Trends for these five counties:
News from the Front.
A good chunk of the sellers and potential sellers that my fellow Grand Land Realtors and I work with are over, at, or near retirement age. I have personally noticed that most of the people that I speak with about selling land and ranch real estate are 55 or older. As land owners, a good chunk of them have been at this real estate game for a long while. Two interesting notes from the field this week (this from Grand Land Realtor and Land Guru Dustin Preston): 1. One investor and seller is happy to see the real estate market return to earth. He saw the frenzy of the past couple of years as just plain irrational. 2. There was another potential seller who was floored by the sky-high valuations (and hence increased taxes) that county appraisal districts are assigning to properties.
Important News.
Cool stuff about Texas
Interest Rates (Compliments of the Mortgage News Daily app for iOS and my iPhone).
Financial Markets (compliments of the MarketWatch app for iOS and my iPhone).
The Dirt Recommends.
Empire of the Summer Moon by S.C. Gwynn is one of my all time favorite books. Y’all! - the Comanches were some bad dudes. The Texas Rangers were also some bad dudes. If there is one takeaway about Texas in the early to mid-19th Century it is this: Texas was NOT A SAFE PLACE! There is a picture of Quanah Parker on the second floor of the Hotel Van Zandt in Austin; I lost a $20 bet to my wife that she didn’t know who it was. Apparently I’ve talked about Quanah Parker and the Comanches over the years more than I realize. Get this book and learn some cool stuff about Texas.
Where I get my information:
An analyst’s analysis is only as good as the information they possess. As the old programming saying goes: garbage in-garbage out. The following is a list of my sources…
I follow a bunch of smart people on Twitter. A sample is represented above. You may also follow me on Twitter:
The Amazing Realtors with the Grand Land Company
LandWatch.com and LandsofTexas.com
MarketWatch App (market quotes and data)
FRED: Federal Reserve Economic Data, Federal Reserve Bank of St. Louis
North Texas Real Estate Information System and Heartland Realtors
Houston Association of Realtors
Take note: incentives can be on the negative side too. An example of a negative incentive is the loss of a job forcing a person to sell a house. The net gain comes in NOT going bankrupt or NOT being foreclosed upon.
Disclaimer: The information is based on properties that are greater than 10 acres and which I refer to as ‘acreage properties’. This information is single source. Which means that this is NOT an exhaustive list of all properties available and sold everywhere in the Great State of Texas. Texas is a non-disclosure state and is therefore a Dark Market. This means that there are a great deal of data that are hidden, dispersed, not allowed to be shared publicly, or just plain unavailable. The following information is for reference and entertainment purposes only.