The Hornet's Nest

As we rounded the corner to 2024 I spent a lot of time staring at the ceiling and wondering what a sustained stock market rally would mean for the housing market. Although many bears thought a retreat was imminent I had a feeling that too many forces were at play, including political ones, to stop the rally in its tracks. And, I remember very clearly the way that Tesla stock drove housing market sentiment in 2021. I’ve said this before, but there were numerous borrowers who submitted Tesla-only investment portfolios with their loan applications. Although I no longer look at origination financials - unless it’s after the fact and there has been a booboo- I can imagine that Nvidia has taken Tesla’s place.

Indeed, I bet there are a fair amount of people who are looking at their 401K or stock portfolio and feeling a bit giddy about what has transpired in recent days…and really since the Fed pivot performance in December. In looking at the U of Michigan Consumer Sentiment Survey which clocked its lowest level at 50.0 in June of 2022, rivaled only by April and May of 1980, we have seen sentiment improve modestly with quite a large jump from November to December.

That jump, the rally in stocks, the relief in rates we saw in December and the reality of an election year forced a full review of my thesis to understand how these forces could impact timing. Now, if you review the chart above, you will see sentiment has been pretty abysmal since COVID with some peaks and valleys, but never reaching the high seen in February of 2020. Many have argued, and I would agree, that if not for COVID we were likely staring down the face of a recession in late 2019 based on fundamentals and macro themes. You can see though sentiment was unfazed. Based on historical work done by the Fed and others, I believe the sentiment trend in 2020 tracked the stock market at the time which reached respective all-time highs in January and February of 2020 despite weakening seen in the larger economy.

Thus, I would be woefully remiss if I did not take this factor into consideration in relation to housing and how improving sentiment buoyed by 401K statements might impact our trajectory. So, where are we now? Because it can take anywhere from a week to 50 days (if you are taking out a mortgage) to close on a home, exact correlations are always a bit hard to pin down.

But, Existing Home Sales data was released this week and at first glance it looked as if everybody’s end-of-year rate fairy tale was coming true with a +3.1% gain month-over-month and year-over-year slightly negative at -1.7%. If we peek behind the covers aka seasonal adjustments, however, things look very different with non-seasonally adjusted sales down -21.2% month-over-month and up slightly by 1.3% year-over-year. Firstly, like what?

Yes, that is just how much seasonal adjustments can distort the reality of the situation. I for one am sick of modeled data. Give me the raw data any day and let me do my own seasonal comparisons. Leaving that little rant aside, when digging into the National Association of Realtors (NAR) non-seasonally adjusted results we see that from a distribution perspective, the largest % increase of sales from last year comes in the $1M+ category.

The West is the winner in the +$1M bracket, with the Northeast a distant second. In looking at January sales per Redfin for my cities, the areas that fared the best were the more affluent ones in California and New York. Only 11 of my 80 cities recorded an increase in sales month-over-month (Dec to Jan) and only one of those cities had a median sales price under $450K. The average median sales price in the cities with increased home sales was $927K with the highest median price in Carlsbad, CA of $1,525,000.

A quick illustrative example in CA of Year-over-Year Sales:

Encinitas (median sale price of $1,415,000) +30.8% year-over-year

Versus

Bakersfield (median sale price of $390,000) +7.50%

Even though sentiment will surely bring some of our top 10%ers out to buy, especially those feeling wallet-fat and fancy free, they alone cannot turn the housing market around. The household median income in the United States is $74,580 per FRED data. Using a mortgage calculator and assuming a 5% downpayment, that means the purchase budget of The Forgotten American is $224,900. Even if you throw in some downpayment assistance which is abundant, most Americans simply cannot afford to buy or maintain the cost of owning a home. The ones who understand the time value of money have started to realize that a house is a Money Pit full of hidden expenses that aren’t worth it unless it’s a primary residence or a beloved second home. I cannot tell you how many people, including clients with 75+ doors in multifamily, have told me they no longer want to be landlords, that they are getting out, that it’s not worth the headache….especially in our states that with each passing day make it harder and harder to operate. So, while all my ceiling-staring and thinking have been useful, I feel resolute that the recent mania and the political shenanigans - outside of extraordinary, direct fiscal stimulus which does not seem likely in our current political climate - may cause delays and hiccups, but does not change our path.

Dare you mention this reality, or the reality of rent trajectories, or that in fact, per NAR, home prices have been decreasing since June of 2023

Or, for that matter, home prices have been decreasing since Q4 of 2022 (with a little upward blip) for all transactions including both new and existing homes

You will, if you hazard to say these things, certainly find yourself in the middle of a hornet’s nest. In speaking with fellow Twitterers and Boom & Bust survivors, the anger out there right now is unparalleled. You would think if everybody is getting rich, felt rich, they wouldn’t be so angry. Who knew talking about published data would create such rancor?

And this truly is my warning for all, which many that I respect are echoing - the anger out there is only explained by the de-stabilizing effects of cognitive dissonance. Innately people know something is off no matter how much they wish it wasn’t so, or how much the media or politicians tell them otherwise. If you haven’t already, please check out this excellent interview between Adam Taggart and Grant Williams.

For today’s post, we turn to a discussion of my boots-on-the-ground site visit to Charlotte, NC, also known as the Hornet’s Nest. How did Charlotte earn that nickname and what did I find in Charlotte to inform our current path?

I thought you’d never ask….