Yes, we have managed to finish 2020, hopefully ’21 will be a much better year.
We are going to take a look what happened in the last 12 months now that we have a full year’s worth of data, and then at the end of the video, I’m also going to show a little outlook of what we can expect from the spring market and from 2021 in general for the greater Milwaukee area.
I only have three numbers here that are super important. The first one is days on market, and just so you have an historic perspective, days on market used to be around 140 to 160 days.
That is the timeframe it took to sell the house. Last year the market has gotten faster and faster, and 2020 set a new speed record with just nine days on market, which is insanely fast.
The next thing I hear are a lot of complaints, people saying there’s no inventory on the internet. A lot of agents are even talking about this as well, and when you look at it factually, that’s actually not true, because we have sold 8,719 single-family homes in Milwaukee County, which is up 5.9% from the previous year.
So, we had the inventory to sell the houses. They just popped up and moved really fast. This is why it looks like there’s relatively little inventory sitting on the market, but in terms of overall inventory that we’ve moved throughout the year 2020, we certainly had inventory, because we sold it.
Finally, when you have a lot of demand and not enough homes, prices are going up. In the case of Milwaukee County, we have seen the median price for a single family go from $175k to $193,000. So just by owning a home, a lot of people actually made quite a good chunk of equity last year, and in total, median homes are up 10.29%.
Now where’s all that coming from? When you look at the last 10 years, you can see a very clear trend, as supply of inventory is going down, prices are going up. The real estate market is really very simple. It’s driven by affordability, but at the very basic level, it’s supply and demand.
Like I mentioned earlier, we see a new trend, a demographic trend change in the last three, four years. Millennials are now the largest group of home buyers in the market, and they’re also becoming the largest demographic in the working part of the population.
They do everything later. They buy houses later. They get married later. They have kids later, but now, finally, they’ve started buying houses, and this is what’s driving the demand so much in Milwaukee.
We have about 300,000 millennials in Milwaukee. If they get married, that’s 150,000 couples and you can easily see what happens when 150,000 couples decide to buy in a market that sells about 8,700 single-family homes in a year. Of course, we don’t have enough, and this is what’s driving up the prices.
It’s January, with extremely low inventory, that is the season where we have the lowest inventory in the year. Spring inventory is not here yet, but the buyers are already out, they’re not seeing much for sale. We have currently 19 single-family residences for sale in Cedarburg. And it’s interesting when you look through here, you see the 10 out of these 19 already have an accepted offer and they’re ranked here by price.
Let me show you how this breaks down. This is the segment from zero, actually to $300,000. There’s nothing below $229k. This is all you’ve got, and they’re all already on the contract.
The next segment here would be from $300k to $500,000. Two are already under contract, not much to shop around here.
Then you have 500,000 to $600,000. We have four homes, one is still available, but once we go past 600,000, you can see how the market changes dramatically. Over 600,000 things are moving a lot slower. This is also where we’re seeing new construction homes. They’re priced usually in that area. You can see the most availability we have here over $600,000. The line of competition is moving up. Like I said earlier, it used to be 200, 250, that was the most competitive. Now it moved up to 300. And I think this year we’re already seeing early evidence of debt. It seems to be pushing up to $400,000 where you have most of the competition.
It makes a lot of sense because people who have sold houses in the $200,000 range are typically going to upgrade to let’s say a $350k, $400,000 home. We’ve seen that a lot with our sellers last year, we closed in total, 52 transactions last year. A lot of them were in that segment that they were coming from, either their first home or a second home, and upgrading into a mid range or into a luxury home. So this is the natural progression, and I think that the line of competitiveness is going to push up into the middle segment this year, that we already see it in the data here.
If you’re thinking now that Milwaukee is getting way too expensive, take a look at this here. I have shortened the list of the top 100 metro areas in the U.S. and they are ranked here by median home price. So you can see here at the top 10 most expensive, Denver at $400,000 all the way up to almost 1.1 million and San Jose, San Francisco.
Then we have the bottom segment, and Milwaukee is at position number 61 with 193,000.
Madison is at number 32 nationally ranked with 260,000.
But here’s the real kicker, affordability index, we are ranking here at a three.
What is affordability? Affordability comes from home prices compared with interest rates and with wages, with medium household income. So Milwaukee is doing very well.
So we have excellent affordability in Milwaukee, and I think this is one way of looking at it to say, “Okay, how are we doing; is real estate really expensive in Milwaukee? If you zoom out and you see what’s going to happen in the next 10 years, where are we relative to that journey? And where could we be?”
One of the things that we also see changing is the impact from COVID. We have a lot of tech companies that allow people to work from home, and they basically tell them, it doesn’t matter in which state you reside. I’m getting more and more phone calls from people that are relocating to Milwaukee. They’ve been visiting here to enjoy the lifestyle in Milwaukee, and the low cost of living and the low cost of real estate.
Milwaukee is still not a destination like Denver or Austin, but we are seeing a significant uptick in the trend. That’s not helping with the inventory either.
Here’s a quote from Mike Fleming, he said, “Despite the best intentions of home builders to provide more housing supply, the big short in housing supply will continue into 2021 and likely keep house price appreciation flying high.”
The builders play a significant role here because we have only two ways of how we can gain additional inventory in the housing market. Number one, is building more houses. Number two is by old people passing away, and good for them this is not happening. A lot of people are living longer and are healthier. So, they’re staying in their homes and they’re not making them available for the next generation in the marketplace.
Those are the only two sources of supply that we have. New construction and vacancies. If somebody sells a house, buys a house, that’s just a wash. That doesn’t really help. The problem that we have with the builders in Milwaukee is that they’re facing really strong increases in labor and material costs. So cost of new construction is going up.
If you’re seriously looking for a new construction home, a few would have base prices below 500, but it’s really not that much of a home. So for all practical purposes, new construction really starts between five and 600,000 here in Milwaukee, and then goes up seven, eight hundred thousand.
Where are we in terms of inventory looking at a long-term picture? We are in a very hot sellers market, and you can see back when we hit a surplus of inventory building up.
Right now we have very low inventory, and this is our very fast moving inventory. This is what’s driving the market.
The real estate market always did very well during recession times. So it did in 2020 is we now know. This is a recession on the books where real estate did really well.
The only exception it was 2008, and 2008 was different because it was not a recession that led to a real estate market crash. It was a mortgage crisis that led to a real estate market crash that led to a national economic recession. It was a little different story, and in general the real estate market is usually holding up, but doing very well in times of an economic recession.
What is the consequence of home prices going up? We are seeing an increase in home equity. You might be surprised how much equity you have in your current personal residence. So here’s some national numbers, 58.7% of all homes in America have at least 60% equity. Americans are sitting on a tremendous amount of equity. 42.1% of all homes are owned free and clear, and $177,000 is the average equity of a mortgaged home.
That is a lot of equity. This looks way different than what we had for example, 10, 15 years ago. The reason why this is important is when we look at forbearance. As you will recall, there are a lot of people still enrolled in forbearance programs. So they’re currently not making mortgage payments with the permission of the bank. The number is down. It used to be almost 6 million. So now we’re down to 2.7 million that are still in forbearance, but most of them have a very favorable outcome. So, they have never lost a job, but they were worried that they might lose the job. Now, they’re resuming payments or they’re restructuring the loan, but what all of them have in common is that they have one big insurance policy against the ultimate threat, which is to end up in foreclosure. And that insurance policy is the equity.
Two things have to happen before somebody goes into foreclosure. Number one, they have to be in financial distress, which obviously is very widespread, because of COVID. The second condition is that they need to be underwater with their home. Because on average, homeowners have so much equity, they always have the option to put the home on the market and sell as a last resort. The market certainly needs to inventory. This is why when you do some high level math, you can clearly see that the threat of a huge wave of foreclosures, as some places in the internet are predicting, is most likely not going to happen. Even the ones that are getting seriously in trouble, which is 18% out of the 2.7 million still have an option.
Most of them have the option at least to sell their home, put it on the market, cash out on their equity, walk away with the check, maybe pay off some credit card debt and start over. But, they don’t have to go through foreclosure as their only option, because they’ve got equity into their home, and that’s going to protect them.
There are going to be foreclosures. It takes in Wisconsin about a year for a bank to go through the process. So, we are going to see more foreclosures, but quite frankly from a buyer’s point of view, that is welcomed inventory, because we can certainly use more inventory in the marketplace.
Let’s take a look at equity across the U.S. On average, $17,000 across the U.S., and we’re sitting at $14,000 in equity gain, and I like where we are in that position.
Now, what are people doing with the equity? I found this really interesting, because that was one of the problems that got us in trouble back in 2008. People were leveraging their home equity to go on vacation. For example, paying off credit cards just to load them up again. Home equity lines were $240 billion back in 2007 and 2019, we are here at $89 billion. Homeowners are three times more conservative right now with their home equity. And they’re being very careful to not over leverage themselves.
That is something that I think is very healthy and I’m really happy to see that here.
Here’s the housing affordability index, and we are still doing quite well in affordability. We’re still in the very affordable range because of the low interest rates and because of the increases in wages that we have seen. Even though home prices went up, the percentage that a household has to spend on average on housing is still a lot less than it used to be in the first 20 years from basically 1992, almost to 2008.
Yes, homes have gone up significantly, but when you look at it from the affordability point of view, we are very much in the green here.
Let’s take a quick look at unemployment. So we are currently on a national level at 6.7%. We’re doing better than national here in Wisconsin. We projections from the Wall Street Journal and from the Fed, and you can see we’ve lowered unemployment rates very significantly in a very short amount of time. But now to get it from where we are currently, to get it down to pre COVID levels is going to be a very tough challenge and it’s going to take three years.
In red you have the great recession from 2006 to 2016. That was basically 10 years it took us to recover in terms of unemployment rate. In yellow, you can see what happened this year. We went down sharp, but we came back sharp as well. This was the much anticipated V-shape recovery. Now, we have basically two scenarios, depending on which one you believe, it’s going to be three to five years before we see the unemployment levels that we have seen before COVID.
There’s another way of looking at it. We’re talking about a K-shaped recovery, because for a lot of people not much has changed. Their personal economy is doing really well. They have a job. Job is doing great, companies doing great, no problem there. And so they have experienced the V-shaped recovery, but then we have other parts of the population that have experienced a downtrend. So this is why we call it a K-shaped recovery, because a part of the population went up and another part went down. And we have a lot of people that are still struggling massively, that are financially at the wits ends. A lot of them are not home owners. Some of them are homeowners and are currently in forbearance, but hopefully we’re going to see improvement on that end, that also this segment of the U.S. population can start seeing some of debt recovery.
But the implications of COVID have gone way beyond just the unemployment rate. They literally have changed how people are looking at housing in general, and a quote from David Mele, president of Homes.com, says, “The surge in the work-from-home population has rewritten the playbook for many homebuying and rental decisions, from when and where to relocate, to what people are looking for in their next residence…” I see that a lot on a daily basis, whether I talk to a seller who’s looking to put their home on the market, because they want something bigger, they’re working from home, they need more yard space, a rec room, maybe a home gym. These are very typical requests or desires that we see currently in the market. And that is really changing like David Mele says.
Next, let’s talk quickly about interest rates. So I have a quote here from Michael Fratantoni and he says, “Treasury rates have really been moving up since the election, but mortgage rates have kept going down…” So his prediction is we are going to see mortgage rates drift up with treasury rates as opposed to moving down and in the opposite direction. And that also lines up with the data that I have. From 2.87 in the first quarter of this year, to more like 2.7 now, we are expected to slowly start drifting up more towards 3.05 at the end of the year. Of course, that will also change the math for home buyers.
Not by much if you go through it, that’s maybe 50 bucks on an average house, if you have a little higher interest rate, but it’s certainly going to impact the buying power that buyers have in terms of how far up into price range they can reach and still maintain a very affordable monthly payment with the low interest rate. Outside of interest rates, we are seeing strong numbers. So here are my lagging and leading indicators. And early in the year we’ve seen a lot of red numbers here, but if you look at December, the lead metrics have all been very strong and very positive. Based on that, we are going to see a very strong January and February. And with that, we’re going to take an outlook here for the spring market for the Milwaukee area. Spring market is already here.
At least as far as the buyers are concerned, we’ve written four offers last weekend got two of them accepted. There’s going to be more of that. Sellers are missing out on an early bird opportunity. Traditionally, sellers are always thinking they have to wait until spring. That’s not true. Buyers are already out. A lot of them are looking, and as you’ve seen before on the Cedarburg example, there is just not very much inventory available right now, also fierce competition amongst those listings. Good for those sellers that are listing right now because they will be under contract, and now they can focus on finding a new home for themselves as we are seeing more inventory coming up in March and in April.
Millennials will continue to drive the market. No doubt about it. This is going to be a macro trend for the next 10 years.
At least that is not going to change, and I think we’re going to see price pressure from being focused mainly on the lower segment. We’re going to see that starts building under the medium price segment and $300k to $400,000. I think we’re going to see this become very competitive this year. Builder confidence is very high, cost of building keeps going up, cost of lumber, land and labor is increasing and just in general in terms of quantity, they’re building as many as they can. But, if you look at the numbers that they’re cranking out compared to the overall size of the Milwaukee market, it doesn’t really make a dent in our marketplace.
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