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Fortune favors the brave?

Housing and cryptocurrency

Let’s deal with the thing which I know almost nothing about: cryptocurrency. Here’s what I do know. I was watching a football game the other night, and the commercial for crypto.com came on. I didn’t know that’s what the commercial was for, because it was actor Matt Damon walking through displays of people who dared to take great action throughout history, compared to the “almosts.” The commercial ends with Damon, looking at the camera, then peering out an open door to space and a planet: and declaring, “…four simple words that have been whispered by the intrepid since the time of the Romans: Fortune favors the brave.”

I got a little chill while watching it. Then I realized what the commercial was for, and then it hit me: this commercial is daring people to invest in cryptocurrency. To me that is not investing, it is speculating. There is no “return” – cryptocurrencies don’t earn profits, they don’t pay dividends. They have been going up in value because people keep buying them – demand increases, and so does the price.

Do you know what else is going up in value? Real estate. For some reason, real estate has become a very scarce resource (at least in certain markets around the country).

Why has it become scarce?

  • Building has not kept up with demand since the Great Recession.
  • Migration: people have been moving, in some cases pouring, into other markets.
  • Vacation Rentals (i.e. Airbnb, VROBO, etc.) properties have been pulled inventory out of the market via vacation rentals (do NOT get me started on this one…this makes me so angry my wife says I am not allowed to talk about it).
  • Demographic trends: there are more households in the U.S. for various reasons – people are deferring to get married, people living longer.

Then, COVID happened, and the Federal Reserve helped push interest rates to zero, as well as instituted bond-buying programs to influence the Treasury yields, and hence mortgage rates. We had home mortgages that were offered at less than 3% interest…and people flipped out.

Fear of Missing Out (FOMO)

It started with, “I can’t NOT afford to take advantage of these rates…I must buy!” And people did. Limited supply, strong demand fueled by government intervention. People said, “I don’t care what the price is, with these rates, I can afford it!” Or, I will be paying so much less in interest it’s okay. Real estate agents, mortgage lenders – they were all-in on this ‘once-in-a-lifetime’ frenzy. Fortune favors the brave. Don’t miss out!

Starting the year, in many markets around the front range – and especially in the more median-priced homes, it is an absolute frenzy. There are still not enough homes for sale – like not even close. Last weekend I met clients at a house priced at $550,000. Before COVID, that house would have sold in the mid 400’s. Last Saturday it received 22 offers, well into the 600’s.

That’s a 33% increase over two-ish years. And here’s the problem with the current news cycle. When I turn on the “news,” I hear people reporting about inflation and the supply chain. I think that is completely missing the boat. I have said this many times before: the real issue is housing inflation. Sure, it makes a difference if milk, meat, and other groceries go up 33%. Yes, no one wants to pay more at Home Depot, Walgreens, Grubhub, or wherever they eat out. But most groceries don’t all go up at the same price. You have alternate choices for food. You don’t always have to eat out, you don’t always have to re-decorate your home or any other consumable. You do not have the same choice for housing. Housing – shelter – is the biggest expense of most U.S. households.

Prices have gone up significantly

Since 2010 the median price of a single-family home in the Denver metro area is close to tripling, going from just above $200,000 to just under $600,000. And it’s going to keep rising. I fully expect prices to increase through the spring, into early summer. At that point, interest rates may have gone up quite a bit, prices will have gone up likely another double-digit, and summer typically brings a pause to the buying. I suspect that by mid-year buying activity will slow enough to halt price increases. I suspect many more buyers will have given up, being left out of the market by the price increases, inventory shortage, and likely increased borrowing costs.

So it’s the same story. Every time it seems like things can’t get more pressed in the housing market (at least in markets like the Front Range) they do.

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Steven Ross

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