The Dirt Weekly: September 23, 2022
Unshakable optimism versus the cold winds of change
The Down and Dirty this week
Oy vey and boy howdy. What a week in Real Estate. Where to start? Well, Queen Elizabeth was buried. So too any hopes of a soft landing.
The fun this week started with yet another corporate iBuyer hemorrhaging value. The company Opendoor, reviled by tens of thousands of Realtors (unless you have a crap listing that you need to offload and have nowhere else to go), lost money on 42% of transactions. I guess if we are being optimists we could say that, on the flip side (see what I did there), they made money on 58% of transactions. But anyone who knows anything about real estate knows that when you gain, you tend to gain modestly. When you lose, you tend to lose… bigly.
As a home-flipping-addict myself, I recall thinking when I first learned of these outfits: they will do great as long as prices rise, but will they survive a crash? Although they are not quite dead yet, the answer seems no. Voyeur that I am, I could not believe the prices that Opendoor payed for a few properties sold to them by acquaintances. From the low view of this humble peasant, the margins appeared razor thin. There was no way a little fella like me could make those numbers work, that is for dang certain. But now, oh but now - sweet comeuppance. Investing in real estate ain’t all formulas and A.I., is it guys? Guys? Where’d ya go?
The article linked in the following tweet mentions Zillow’s collapse but I can help but think that Zillow making like a tree and leaving the iBuyer concept early seems like a prescient move. They saw first and points go to early movers - maybe especially those early to exit a crappy trade.
I like this take. But, of course, as a Realtor I would…
Optimistic to a fault
Realtors are a generally optimistic group. They are a bastion of “Yes we can” and “don’t worry it’s gonna get better”. They are some of the last to shiver in the cold and harsh winds of reality. I saw plain evidence of unshakable optimism of an entire profession on display this week. Of course this was early in the week and just prior to the interest rate melt-up discussed further below. Exhibit 1 of optimism in spite of all contrary evidence: comments from the National Association of Realtors Economic Research economist Lawrence Yun who rained sunshine and rainbows on an NAHB report noting an increase in housing starts:
A surprising bounce back in new home construction is welcome. In August, single-family housing starts rose 3.4%, thereby stopping five straight months of decline. The inventory of unsold homes and canceled contracts accumulated due to higher mortgage rates. However, the latest month's increase is implying that builders still see profit opportunities even as they concede on prices. Material prices, including that of lumber, have been moderating, and fully completed homes are selling fast. Unfinished homes still under construction are the ones sitting on the market for long periods.
Would that I could be so full of light in the darkness. What Lawrence did not mention was the decrease in permits (10%) and other anecdotal evidence of Very Bad Things like builders walking away from land purchase deals.
Going further into what I now call the Ostrich Syndrome, I found the following article from The Real Deal to be very interesting. Starting with the title: Texas housing inventory up, but crash still unlikely: Experts. Ahem… anytime ‘experts’ say anything I am immediately suspicious. But in this case said ‘experts’ are from the Real Estate Center at Texas A&M University which is my dear old alma mater. And generally speaking those PhDs are a pretty smart crew. However they are backward looking and late to most parties and always sporting last season’s fashion in a totally uncool way. Also my Aggies lost to Appalachian State, and I am still pretty salty about it and that must also be factored into their analysis. From the artice:
And indeed, the latest figures from the Austin Board of Realtors suggest that the market’s downward trend has continued. ABoR found that the area’s inventory of for-sale homes rose to 2.9 months in August, with the number of closed sales dropping 23 percent month-over-month, and the number of days a home takes to sell rising by 17 days.
But the realtor group was quick to counter the idea that the Texas real estate market was heading for a crash, characterizing the market shift as a “normalization” from a record high to a landscape more consistent with historical norms.
“I want to be very clear — market shift does not mean that we are in a downturn, and it doesn’t mean that Central Texas home values have been overvalued,” said Cord Shiflet, 2022 ABoR president, in a press release accompanying the August market report.
Oh, Cord. Such a presidential statement. Remember what I said about Realtors being stubborn to accepting bad news? Sorry to be Debbie Downer guys but the Real Estate market is tanking. Anyone with eyes can see it. A big lesson from my years as a Marine and a cop: when there is bad news it is best just to dish it out hot and plain. Bad news ages badly. Covering it with a tangy sauce of flowery euphemism won’t hide the off flavor. And in the end you come off looking, well, to use a polite euphemism - silly.
Hey, while we are being a bunch of Sad Sacks…
Oh man but those interest rates though…
This is The Big Story. It is ugly, and it is smelly. As of this writing, the 10-year Treasury (the government bond around which most debt interest is based, especially the mortgage) is at decade-plus highs of 3.7%. Mortgage rates are at 6.62%. Dear reader, our economy has been mainlining the crack of historically low interest rates for over ten years. Now we are being told to quit cold turkey. This is going to lead to some pretty rough DTs.
Remember what I said about Realtors being a generally optimistic bunch: when Realtors start mumbling and grumbling and making predictions of rates going to 10% before it is all said and done, you know that general market sentiment is bad. But hold on, let’s rewind. On the off chance that you were hiding under a rock, you might-should know that the Federal Open Market Committee (FOMC) of the Federal Reserve increased benchmark interest rates by the widely expected .75% (or 75 basis points in pro lingo). AND they are signaling increased rate hikes into the winter. Ain’t that fun?
It is important to understand that the Fed does not directly set interest rates in our economy. Nope. Not that simple. Because we are humans and we absolutely must make things complicated or the market wouldn’t be any fun or have any room for nerd-splainers like me. The Fed Funds rate is the rate that the Fed lends money to member banks. And then those banks lend money to us peasants. Somewhere in there, an enormous bond market also influences rates when participants buy or sell US Government bonds (a “risk free” return). Bankers, being greedy capitalists, want to earn more money than they can get by just sitting on their hands and investing in Treasuries. So they tack a few percentage points onto the “risk free” rate. And so then the Fed charges for wholesale money and the banks charge a little more for retail money and on and on. The lesson: the Fed doesn’t control interest rates. But they absolutely control interest rates. Of course all of this is a gross over-simplification, but it gets us most of the way there without me having to write a 10-page term paper.
I feel as though I might be beating a dead horse, but we must keep in mind what Fed Chairman Jerome Powell is trying to do. He sees high inflation (too far above 2%) as an existential threat to our economy. And untamed inflation is certainly a pernicious, self-reinforcing, nasty animal that can eat an economy from the inside out - like an intestinal parasite. Yucky. And JPow does not want worms. So in response to our persistent inflation (see last week’s Weekly and the discussion of CPI) he is using his blunt and powerful hammer of interest rate control as a surgical instrument in an attempt to exercise the demon. Of course, any surgeon would probably attest to the fact that using a hammer to root out worms is going to leave an awful mess.
The bad news, delivered hot and fresh
Folks, if this little newsletter of mine has any value, any at all, these next few paragraphs are it: cold, hard truth delivered in a timely fashion. Those are the immutable characteristics of a Good Advisor.
The farmer-peasants of yore lived in constant dread of winter and drought. Because winter kills. And it happens every year. Drought kills. And it happens more often than we’d like. Best to look those Devils in the eye and prepare. So too downturns in the economic cycle. That is the best way to survive. And it is going to be a very rough winter in the real estate world. Probably in the whole world. There is very nasty stuff brewing all over. A perfect storm. In fact it could be a very rough 2023. There is a very real possibility that it could a rough 2 years. Or more. Who knows?
Real estate is a credit-driven market and has been high on low interest loans for years. That just doesn’t correct overnight. The consequences will be tough to bear but be born they must. It is going to take some time for the body to shake the addiction.
Dear reader, I hope that I am wrong. I hope that in a few month’s time you can all spit in my eye and call me Chicken Little. But Hope, dear reader, while a completely necessary ingredient for success, is absolutely NOT A STRATEGY. For those with their heads in the sand, I encourage you take a peek at the ugly and meet it head on. Make a plan.
On the bright side…
Well, I am a licensed Realtor after all, and just can’t shake the habit of looking for a silver lining. There is a little, optimistic angel deep down telling me, ‘it ain’t all bad’. For some, there absolutely will be a silver lining. There is an apocryphal quote attributed to Baron de Rothschild along the lines of fortunes being made when there is blood in the streets. Warren Buffet says to be greedy when others are in fear. Here are a few rays of sunshine in the clouds:
If you are a seller, have a great deal of equity, and bought anytime before 2020, you are still going to make ridiculous amounts of money on your property if it sold today. Prices are decreasing, no doubt. But, and speaking very generally, any seller in such a condition is still going to make a hefty profit. You just aren’t selling at the peak of the market; you won’t make as much money as though you had sold last year. So sorry. You may dab your tears with dollar bills. And then go 1031 that money into a distressed property. Thar be opportunity’n these waters, cap’n.
If you are a cash buyer, you are King. While we are still very early in the detox process, the entire real estate world will very soon bend to your whim. You are taking control.
If you are a credit buyer and can buy real estate with a very long time horizon (at least 5 years, probably more) then you are well positioned to buy as well. The enormous concessions of loan originators and RE sellers are just beginning. High rates can probably be overcome on the concession side. A long enough time horizon might1 give you opportunities for better rates or better trades in the future.
Let us pour one out and not forget the millions of other unbridled optimists out there: entrepreneurs. Somewhere in the vague mists of chaos is some enterprising person working Right Now to figure out how to make lemonade out of lemons. Then they will package it and sell it and make a bazillion dollars. God Bless ‘em. They will save us all. Never discount human ingenuity.
Some might call me a pessimist. While I have been spouting my fair share of doom and gloom over the past few weeks (hey, I call it like I see it), I absolutely subscribe to the notion that, in the long term, things will get better. I am always looking for the gremlin in the closet. I am always looking for the ninja which might fall from the sky and karate chop me in the face. But deep down I always believe that I can beat the gremlin and ninja. So can we all. So will we all. That is the real optimism.
We, Human(s) have an incredible ability to adapt and overcome. We are indisputably the most adaptable species on the planet. This is cold comfort to those who are, or will be, in a bad spot, but remember that this too shall pass. We only need to crawl through the muck a short while to get to the other side. And that, dear reader, is advice that you can bank on.
Texas Land This Week.
Land listings have been inching higher week over week. Prices are nudging lower. But it is a creep, not a deluge. So it could very well be just a normal seasonal slowdown. Land real esate is not as susceptible to rate changes as other types of real estate because so much of it is still cash based. Notice I wrote as susceptible. Rates still have an effect. They just take a little longer to show through.
While I do expect listings to increase and prices to moderate, land markets are very slow moving and will take longer to register stress than other markets (especially residential). Still, I keep my eyes open and nose close to the ground. Paid subscribers to the Dirty Deep Dives will see a report on September land trends, including listing prices by county and lots of maps, next week. The following information comes from LandWatch.com2.
As of September 22, 2022 there were…
13,714 acreage properties listed as Available
1,152 acreage properties Under Contract
4 properties up for auction
Five counties with the most listings:
Grayson County - Texoma Region (277 listings)
Hunt County - Dallas Prairie Region (249 listings)
Edwards County - Edwards Plateau West Region (237 listings)
Van Zandt County - Dallas Prairie Region (227 listings)
Smith County - Piney Woods North Region (224 listings)
Listing price per acre trends for the five counties listed above:
For the last 7 days there were…
604 properties listed or changed
7 properties marked as under contract
0 properties identified as Sold
Five counties with the most listing activity in the last 7 days:
Brown County - Cross Timbers Region (19 listings)
Gillespie County - Highland Lakes Region (18 listings)
Edwards County - Edwards Plateau West Region (16 listings)
Hudspeth County - Trans Pecos Region (15 listings)
Erath County - Cross Timbers Region (13 listings)
Price Trends for the five counties listed above:
This week in Dirty Deep Dives.
They are not finished quite yet, but I am working on two Deep Dive reports. The first is an analysis of TREC license data showing how many active RE licenses are out there, licensee attrition for the past 5 years, and the number of licensees by cohort year for the past 20 years. I am also torturing the data to create a map of licensees by county and show some possibly interesting albeit Very Dirty statistics on the number of active listings to licensee by county.
The second report is one that I will produce monthly and is probably worth a subscription in and of itself. This report will look at price and listing trends by county. Both of these reports will be release next week. My excel spreadsheet and I shared a very lovely and romantic couple of days together and these are our love twins.
Sorry, paying subscribers only. Although I am delighted to offer a 7-day free trial so some of you will temporarily get the milk without having to buy the cow. Feel free to subscribe HERE so that you are notified of the release of the new reports (a separate subscription than the Weekly). Or check out this deep dive first to get a taste:
Important News.
A lagging indicator but still, this what the Fed looks at.
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).
Stuff about Texas.
The Dirt Recommends.
We are all nutty in one way or another. We all have our peccadillos. I try and keep mine close to the chest lest people get all scared. BUT - nutrition is a big thing of mine. I have a lot of very strong opinions about the nature of food and medicine. And I have been recommending this podcast to every person that I know. It just might change your life. Better, it might change your health and the way that you look at what is food (and what is not). Bon appetit.
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
Folks, this is not a prediction. I do not predict. Prediction carries a connotation of surety. And I am anything but sure. Mine is simple, logical and linear reasoning. And ours is a complex, illogical and dynamic world. The most that I can do is make an educated guess; all while acknowledging that I know nothing.
Data Disclaimer: The information in this report 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.