1777: Mike Simonsen, Altos Research, National Housing Shortage, Local Market Stats, Housing Market Predictions

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Hi, it's Jason Hartman and I want to talk about some predictions for 2022. This is a big topic. It's an ongoing topic on the podcast and for the podcast episode today we have Mike Simonson, the founder of Altos. This is a fantastic episode. It was long enough that we had to do a two part series on it. So be sure you are subscribed to the Creating wealth podcast wherever you get your podcast episodes and on the video on YouTube. Also make sure you're subscribed to the YouTube channel of course, and you'll get a lot of stats on both of these things. But here we're just going to talk about kind of an introductory portion to it and we take a deep dive with Mike during the interview portion. So don't forget to subscribe to the podcast as well. So you get the best of both worlds. So you know there's a lot of concern that the market is in a bubble, that we are at the crest at the peak and everybody makes predictions like this, right? Everybody is concerned about this. They've been concerned about bubbles since the Tulip Bubble and probably long before that. The history of bubbles is a long history in human culture and human experience. But the thing we have to look at is not just the price of housing, but, of course, the cost of housing, the real cost. In other words, how much does it cost monthly to buy that house, to own that house, not how much is the sticker price. Because when interest rates are artificially low, when we are living in an era of financial repression, the payment is the key factor that determines affordability. Of course that is influenced by interest rate. And then also we have to compare to income, which is definitely not keeping up with inflation. And inflation is on a tear right now. I took my dog to the veterinarian this morning, and the veterinarian said that all of the vendors, whether it be the pharmaceutical companies, the medical suppliers for just all of the stuff they need to run a veterinary hospital. He said that they, they traditionally always raise their prices every year. Every year they just see a normal price increase. Because, hey, we've all come to accept inflation as just the way it is, which is absurd. It doesn't have to be that way. Why do we need to have any inflation? Now, I know everybody's going to say for those that study economics, well, Jason, the Phillips curve, you know, the target rate by the Fed of having this 2%. Inflation has traditionally been the target because the Phillips curve is that measure of employment versus inflation, Right? And we've got to keep this in a certain sweet spot where that intersects so we can keep everything just right with our centrally planned economy. Well, I don't believe in a centrally planned economy, but that's what we have. I believe in a free market economy where the price of money, the price of interest rates is set by supply and demand. Imagine that. Right? But that's not what we have. So I'm a practical person, and hopefully you're practical as well. And it doesn't matter what I believe, right? It doesn't matter. What matters is what is reality. So inflation is on a tear. The veterinarian said now, all of those manufacturers, all of those suppliers to his veterinary hospital, they raise prices twice a year now. And those prices of pretty much everything across the board is up about 12%. See, that's real inflation versus the fake inflation rate we get when we hear about the Consumer price index, which is highly manipulated in three major ways. Weighting, substitution, and hedonic indexing. I won't go into that now because it's a rabbit hole. We've Gone into it before on many episodes. But back to this bubble question. So everybody gets concerned that the market will crash, that the market will tank, that this will be it, that they will buy and they will be the greater fool. Right? And that greater fool theory goes, no matter what I pay, some greater fool will come along and pay more. That's the greater fool theory. And we've definitely seen that throughout history. However, I just want to remind everybody, and I'm sure you're thinking of this too, but I just want to remind you again of how important housing is to the elites, to the central planners, to the people who run our economy. We do not have a free market economy. We have a centrally planned managed economy. And while I don't think that's good, it is reality, and it's been reality for a very long time. So how important is housing? Housing is incredibly important, not only as a measure of the economy, but it's also important as a stimulant for the economy. It is a huge part of the economy. Just take a look at this. Okay, so this quote I just pulled up this morning from Time Shatter is the housing market has significant importance for the broader economy, accounting for about 17.5% of the US GDP.

Wow, just think of how significant that is. 17.5% of the entire economy being the housing market. Now, the GDP is highly manipulated. The gross domestic product, like unemployment rates, like inflation, like everything. Because a lot of stuff goes into the GDP that really shouldn't be there. And if you took that out, if you took out all these government projects, the infrastructure spending bill, this, in my opinion, should not be part of the gdp. This is not production. This is just government spending into the economy, which is fine, and I agree it has a Keynesian simulative effect, but it's not gross domestic product. Okay, fine. So just imagine if you took the real gdp, which we can talk about that on another episode, and we've talked about it in the past, and that housing percentage, if you had the real gdp, would be a much higher percentage. Maybe it would account for 30% of the economy. Okay, look, 4.2% of the GDP impact is the spending on construction. So we need to see that number go much higher because home builders have got to start building more houses. There is a insane housing shortage, and it is, it has got to correct itself. And that is especially acute, by the way, in the entry level housing segment, because there, there's just nothing. There's no inventory. It's absolutely, absolutely terrible how low the inventory is in the entry Level first time buyer new homes that also happen to be that target for rental property investors. That's the stuff our clients buy in the markets we recommend around the country. If you want to see what some of those markets are, simply go to jason hartman.com click on the Properties section and you can see the good solid, linear and hybrid markets that we recommend the most. Jason hartman.com it's all right there. Okay, I want to show you more. So this is a staggering chart. Wow. You know, most people look at housing price growth and they think, well, look at how much prices have come up. And when you really analyze it, you realize that real estate is much cheaper than you think. When you adjust for interest rates, you look at the mortgage payment versus the median income and you adjust for wage growth. Right. Which again is not keeping up. But there is some growth. Okay, but how about looking at it this way? How about looking at the total value of the US housing market and how it has changed? So here we are back to 2010ish, right? The beginning of this point. And then we see 2012. The value of US housing dipped. Now it has massively increased since then. Just this massive upward trajectory to $36 trillion.

From a low of just over $20 trillion. Now keep in mind, that's about the size of the GDP today, which is just over $20 trillion. So the housing market now far exceeding the GDP of the entire country. But what does this mean? And how do you really count this? Well, the lazy person would think, well, this is all just massive appreciation. And it means housing is overinflated and we're in a bubble. No, it also has to include new construction. And while new construction is definitely lagging demand, there has certainly been trillions of dollars of new construction in the past nine years since the the trough in this number. Right. So it's just interesting when you look at the overall value of the housing market. So how is that influenced? You? It's influenced by housing price appreciation, by inflation. Because this is not inflation adjusted, by the way. Very, very important. Not inflation adjusted. So if you adjusted this for inflation, it would be a lower number because it would be inconsistent real dollars. Well, not really, because inflation is highly manipulated down below the reality. It's really about double what they're telling us. Okay, fine, so take all that out. But it also includes new construction, in other words, adding to the housing stock. Let's look at something else. Look at this one. Housing supply. Wow. Okay, so the housing market faces a supply shortage of 2.5 million housing units. Now You've seen the numbers here vary actually quite significantly. Some say, well, you know, it's, it's about 500,000 housing units or it's a million housing units. Right. Let's just look at what they say here. The data from the US Census Bureau shows there were about 1.4 million newly constructed houses in July of 2021. This is a slight increase of 51,000 units from last year's same time period. Okay. This small change in the housing market supply with houses indicates that the buyers will continue to fight, they will continue to fight for homes that will keep the prices high for some time. So we're going to continue to see buyers fight over the limited amount of inventory with multiple offers, with very short times on market, so on and so forth. But what are they not telling us here? That's the question. Remember on the podcast I'm always talking about how you can't hear the dogs that don't bark? So what are they leaving out of this equation? Well, what they're not telling us, they're just talking about aggregate number of units in the market and what the shortage is. But what they're not telling us, the dogs that aren't barking are the price segments that the, this is very, very acute in the number of entry level first time buyer homes, that is, are completely missing from the market because the builders simply aren't building to support or to feed that market to satisfy that demand. Why, we've explored this in depth on prior episodes, but of course, basically you can sum it up by saying that simply the, it's just not profitable for home builders to build entry level homes anymore. There's just no money in it for them and they've got to build what pays them where there's good profit margins. All right, now one more thing and then we'll wrap it up and we'll get to the interview with the founder of Altos Research. Who's driving the market? Who are the home buyers? Who is really able to afford those homes? Well, I'm gonna represent here because this is my generation. It's Gen Xers. Gen Xers are driving this market. They have got the highest incomes right now, they've got the ability to buy the homes and they are buying the most homes and they, other than the institutional buyers, the investors, etc. Right, right. But for the traditional home buyer, it's the Gen Xers that are driving the market, not the millennials, certainly not the Gen Zers yet because they're just coming up into the housing. You know, they're about really about seven years away from their sort of peak buying time. The oldest Gen Z'. Ers. So that's going to be a while before we really see their impact on the housing market. But the millennials are definitely making an impact. They're definitely buying a lot of houses, but still Gen Z, the biggest segment of home buyers and the highest earners. Right now I'm going to talk about this interview with Mike because it's a good predecessor to our interview with Mike. It was an article that I, I recently saw, so I'll talk about that next time. But let's get to the interview with Mike. This will be on the podcast, so be sure you are listening to and subscribed to the Creating wealth show. And please do make sure you're subscribed and hit the like button and comment below with any questions or thoughts you have with. Really appreciate it. And let's go to the interview with Founder of Altos Research.

It is my pleasure to have Mike as our guest today. He is a real estate analytics pioneer. He's the founder of Altos Research. I've been following their work for a long time. They do a great job. He also has a background in software in data, has an interesting story about how he got into this business because he just found that people knew so little about market data in real estate. And, you know, that's one of the things I've always said for years is that this is a very fragmented market, a fragmented business. All real estate is local. Everyone's got their own little different ways of doing things. And one of the reasons that there's a lot of opportunity for small investors is because it is fragmented. It's hard for institutional players to play in this world, although they've been doing that more and more, as we know. And I always say embrace the fragmentation, but it is getting less fragmented with companies like Mike's and other players just helping us sort of understand the market better. And without further ado, Mike, you're coming to us from the Bay Area. Welcome. It's good to have you.

Thanks, Jason. Nice to be here.

Yeah, it's really good to have you because I've been following your work for a long time and, you know, I guess the million dollar, well, the trillion dollar question actually is.

Where'S the market going, Mike? Are we, are we overvalued, on the verge of a crash, or is this just going to keep on going for the next three to five years?

So what we do at Altos Research is we track every home for sale in the country every week. And we check the changes in prices and the new properties that are coming out. And there's. It's just rich with signal. And. And by tracking that, it allows us to see things immediately. And we track through Friday. We published on Monday. And where traditional real estate data is like months old by the time it reaches three months. Three months old, Right. Or more. And, and so what, what I like to do is what I can say right now is in the data right now, we can see things like organic levels of demand. We can see where supply is. We can see how the first half of 2022 is setting up very clearly. And in the data right now, all signs are showing low supply and high demand already in there. So that means where's the market going? Well, you can see the main part of 2022, the main buying season of 2022 is already set up to be super strong. It may not be as crazy as this year, but all the sides are strong.

Mike, before you go on, I just want to talk about where your data is coming from. Okay? Because I think that's really important. What you said at the beginning was that you track every home for sale. So this is not the type of data that some of the other surveys use that are tracking, you know, homes through the years. Right? And really, you got to peel this onion back a lot, folks. There's a lot here. So let me just give you some examples, right? Depending on what index you're looking at, you know, Case Shiller, which I think is ridiculously overrated because it's 20 markets, and three quarters of those markets are what we call cyclical markets, the high flying markets. And our investors like to invest in these boring linear markets that have really good cash flow and more stable prices. So whatever. But, you know, are you tracking when, you know, one home sells and then the same home sells again? Is that showing you what the appreciation is? Or you're just tracking like every sale and lumping them all together. And you also don't know if that home, that resold was remodeled on a resale, which it commonly is. Right. So it's just a lot of stuff to know here. A lot of stuff is your data, Mike, MLS data. Is it just from all the MLS feeds?

So what we do is. So what happens is when a home gets listed on the mls, it gets like blasted all over the place. And we just track. We have a database of every home in the country and we say, oh, that one's for sale right now at this price, and that one's for sale at this price. And so what's interesting is by watching the active market like that, you see a house gets listed today, it gets, maybe it gets an offer in December, the sale closes in January, and then you might hear about that in February or maybe March.

Or March.

Yeah. And so, but I can tell you right now what's going on. And any given house may be over or underpriced, but in aggregate, the sellers and the listing agents know exactly where to price the homes. And so in aggregate, the, the list to the sale price is very close. So in the super booming hot markets, the sales price may be, let's say it's 105% to list. In the cold markets, it's, you know, cold times, it's like 95%.

So meaning that the list price is, you know, a million dollars and the house sells for 950, right?

That's exactly right. Okay. And so some house may sell for 800 and one might sell for a million two. But in aggregate, they're very close. So by looking at the asking prices now, you know exactly where the market is because the, you know, the sellers in general know exactly where they want to price their house. And some are overpriced, and some are overpriced. But. And so that's just the price that we can track, but we can also track the changes in price. So the, you know, in this active market data, we can see that 35% of homes have taken a price cut. And guess what? That's normal. When the market cools, it's maybe 45% or 50% are taking a cut. When it's hot, it's 20% taking a cut. And so like, watching percentage of homes with price reductions is a powerful leading indicator of where transactions are going to be in the future. It's like if I want to look at a market like Jacksonville, Florida, and I can say, you know, what's the demand? Like there is demand cooling off. I can watch, for example, price reductions and see if it's cooler than normal or if it's cooling off or if it's accelerating. And so that's why. And these are for houses that haven't even sold yet. And what happens is if there's no demand, the sellers in general reduce their price a little bit. And so that's a signal in all this active data. And so that's what Altos does uniquely. That's why we can tell you right now what's going on. And in data that if you're looking at the traditional approaches is say, what did it sell at and what did it sell at before? And that. That traditional approach is useful for maybe evaluation, but it's super lagging. It's a smaller sample size. You know, four houses sold, but there's 40 on the market. So, like, there's what. What we do uniquely in the world is we watch this active market. And so therefore, we can see, like, I can see exactly where the world's going.

Okay, Mike, this is great. So why don't you share your screen and let's take people through this so they really see it and understand it. Now. Also, if you're listening to audio only on the podcast, of course, this is on the YouTube channel, so check it out there. Please try and explain the graphs in case someone's not looking at them. Okay.

For sure.

And I'll try and help you with that, too. Okay.

Okay, so. So Altos tracks every home for sale in the country. And this is a chart here of home prices. And while we're looking at the active listing home prices. So as of this week, the median price in the US is 380,459, and that is up 10% year over year.

And that's a list price.

That's list price. And what happens is it is highly correlated to where the sales price is going to be in several months. And so it's. It's like exactly the view I want to see. I don't want to see the sales price because that's what happened years ago on a given property. You want to know the sales price when you want to understand the market. I want to look. If I walk into the market right now, this is what the market looks like.

So there's a difference between understanding the market and understanding a specific property.

Yes.

Yeah, right.

That's right. So we'll look at some reports, some local market reports. And the way you to read those is if I'm an investor and I walk into Jacksonville, Florida, right now, I will see these hundred homes, and they're priced here. It's not what sold last month or three months ago or repeat. It's like, this is what the market looks like right now, and that's what we're doing here. So one of the advantages you get is that you get all these leading indicators. One of the stats that we like to track is the price of the new listings. So these are the properties that got listed this week, each week. And what happens is because the sellers and the listing agents, they know how many home, like, they know how many multiple Offers were last week. They know how many people are walking through the open homes. They know where the demand level is. It's what the economists call wisdom of the crowds.

Right.

And they're the crowd.

They're going to price that in. Exactly. In other words, look at, I used to be in traditional real estate. I did that for 19 years and then sold that company to Coldwell Banker. Right. And understanding that it's always a fight between the listing agent and the seller. Right. The listing agent wants to get a well priced property that's going to sell in a reasonably quick time. The seller wants to get the highest price ever. And you know, they're always way up in fantasy land, so you got to get them to be a little realistic. But those agents are more likely to be more liberal in their pricing and let the sellers take more control if they know that everything's been getting multiple offers, that every time they hold an open house a zillion people come through. So that price information has, there's a lot of signaling in there.

So that's right.

Price signals. Yeah, yeah.

And so what you get to see, so in, in the chart here there's a, there's two lines. A light colored line is the price of the new listings. And what you can see is at the inflection points jumps faster because these are the new listings. And like the beginning of this year, if you remember.

By the way, Mike, can you point your mouse to.

So oops, here we go is. Do you have my mouse pointer here?

I can see it, yes.

Okay, so this is the, the, each low point is January.

Okay.

And this January we had super abnormally, seasonally strong demand. And you can see that the, the new listings price jumps very quickly, faster than the, the overall, about a month before the overall market. So in January and February, the overall market turns in February to March. And then the sales, the traditional data is turning in March and you're seeing that in April. And so this is why the fastest thing to see here is the early leading indicator is this price of the new listings. That's where the data is getting, where the crowd is getting first. So if you wanted to, for example, test your hypothesis, you say, I think rates are rising. And as rates are rising, I think consumers are going to, they're going to demand is going to back off. So what you could do is you can watch the price of the new listings and you can see for example as, as sellers, as listing agents say, wow, there was no offers on that house last week. And I've got another One, I'm going to price it at a little discount. It shows up here in the price of the new listings very quickly. So what we can see right now is that the price of the new listings has stayed elevated this fall because demand has stayed elevated this fall. And that's also why we can see that the newly listed properties are staying priced aggressively now so that their transactions that happen in December and January, we already can see that their prices are going to be elevated. If, if they were taking discounts now, we could know that January transactions that happen in the future are going to be, they're going to be at a discount. So we can already see it in the data right here.

Okay, so what we can see in the data is that the market looks like it's going to remain very much a seller's market, very much a strong market, right?

That's right.

Okay.

In the data. And we can see that already. And this and the active market data really is the six month window. And there's some of the signals it might be 12 months window.

But then beyond that then you have all kinds of other economic situations that you have to pay attention to. Like do interest rates climb or does a recession hit those that aren't built into this data yet.

And by the way, your data includes, it's an MLS feed, so it doesn't necessarily include new homes from builders, right?

That's exactly right. So in general, the new construction will be outside of our data. The stuff that will be outside of our data are things that aren't publicly known. So we're actually not MLS members anywhere. It's all our own analysis, it's all our own data. But it is like the properties that get listed. But if you have to go to the builder to get the price of a property that's not yet built, that's going to be outside our data set.

So that might be an issue. In an area where you've got a massive amount of new homes, you would know a little less. And the reason the builder data is probably not going to help you anyway is because every builder price is pretty much a big lie. You can't actually buy a house at that price. It's like, you know, it's not even a loss leader like they do in the auto business. When you want to buy a car, they don't even have that house at that $300,000 price that they say they have it. You know, by the time you pick a lot and then you put in any options that anybody would want. Yeah, it's another Hundred grand, right?

That's exactly right. The other thing, though, that we can observe over time is that in those new construction markets, the price of the existing properties in aggregate moves very tightly with the price of the new property. So you have housing demand and people are shopping for existing stuff and they're shopping for new stuff. And if they're not shopping, everybody's taking a discount. So you can use them as a proxy. You can use the demand indicators in the ALTOS data to understand what's happening with new construction, too. And a lot of homebuilders are our customers.

Yep.

We can move on to inventory. This is really the big story of the last few years. Yeah, inventory over the last decade, at this time of year, normal levels of inventory, there'd be over a million single family homes on the market right now. And we currently have 3, 384,000 homes.

So basically, Mike, we have about one third of the typical inventory. Now, listeners and viewers, I want you to just get the impact of that. Right. Think about if you walked into the grocery store tomorrow and one third of all the shelf space was empty, or no, sorry, one third was full and 2/3 were empty. That's the market we're in now where we only have one third of the typical inventory. It's truly. Yeah, it's astounding.

And Jason, you know what's interesting is it's actually a testament to the success of your audience what's happening. And this. So we have a chart here of seven years of inventory. And if each year peaks a little bit lower than the previous year, the reason that is is because as investors, and most of it is individuals with one to four properties, a lot of times it's, I'm buying my next home and I'm keeping the first one for investment. And I do that because rates are so low, I can afford two mortgages. But each year we're taking. We've been taking about 10% or so out of the resale stock and turning it into rental stock. And it's been happening for a decade. As we came out of the last crisis, rates dropped super low. And it was a re. It's been a really good time to buy and own single family homes.

Yeah. So the investor market has expanded dramatically. Of course, the institutions are playing in a very big way now. But compared to the overall market, though, for buy and hold single family rental homes, they're still not that big a deal.

They're still like 5% of the market.

Yeah, but they're getting, they're getting bigger. Okay. So, you know, it's something to watch for, sure, but that's more than ever before. So, in other words, a lot of these properties are being taken out of service to buy and hold investors, and that's also limiting the inventory. Now, Mike, I want to, you know, speaking of that, before I forget, I want to throw a prediction, okay. That I've been making for about a year and a half now. Tell me if you think this is true. I think that the low interest rates we've had are actually going to lead to a further housing shortage, because five, three years from now, five years from now, let's assume interest rates are probably going to be higher. I think that's a pretty safe bet given how low they are now. They don't have anywhere to go but up. You know, people are not going to want to let those properties go with those cheap mortgages. They're just going to want to keep them. So I think this bodes well for the home improvement business and the remodel business and the add an extra room business, you know, add on to your house business, because people are going to be more likely to stay put, or like you said, they're going to keep that existing home that they're occupying now as a rental because that cheap mortgage is going to be just impossible to duplicate.

It's going to be cheap forever. So I 100% agree, and I've been talking about this same phenomenon. And you can see cheap rates that have been getting cheaper in this inventory chart each year. For example, the one time in the last six, eight years that rates rose was in 2018 from like April to December of 2018. And what happened was you can see that the beginning January of 2019 started with slightly more inventory than the year before. It's the only year in the last decade that that's been true. And that's because for that eight months, rates rose and it was a little more expensive to own both properties, to invest. And so a little bit of inventory built. And then this year, in the last 18 months, rates tanked, and it was a really good time to have the second property to own the investment property. And so people went in droves during the pandemic. And so I, in our view, we don't see any signal, except if rates climb, we can expect a little bit of new inventory. If rates climb and stay persistently higher for several years, maybe we get closer to back to the, the old way.

But everybody, the interesting thing is about that is the inventory that will be the new inventory would be new Construction from builders that don't turn those into build for rent. Right. But also, you know, again, you have that problem of people not wanting to give up these mortgages. So people in financial hardship. Yeah. They'll have to give them up. People that just don't want to be an investor, you know, they'll give them up. But there's going to be a big incentive to hold on to your house.

There are.

And that's why I think these low interest rates are so, so toxic and dysfunctional to the overall economy. It's kind of like this. I mean, look, you live in the Bay Area, right? So you understand rent control. Okay. And one of our team members lives in San Francisco and he and his wife rented this place, a Victorian, I think, in 1996. They're now renting a place that is worth well over $2 million for about, I think, 2,700amonth or something. Okay. They're just not moving. Like, these people are just never going to move. They cannot duplicate that deal anywhere else. So what that does, though, is it makes the market dysfunctional and stagnant, you know, because there's no sort of clearing. Right. And repricing of stuff. It's just very unusual. And I think that's part of this interest rate problem.

I think that's exactly what. And we can see it in the inventory. We. We can see the inventory decline as rates have declined. It's been more and more common. One of the other things, Jason, that'll happen is as rates climb, let's say rates, mortgage rates climb to 5%. Now, one of the phenomenon of investors has been if rates are 2.8 and I buy my second home, it's really a good deal to keep my first one. If rates are 5 and I buy my new home, I maybe can't make two payments. So even though I had a really good deal on the first one, I might give it up to make my new 5% payment. So you'll get a little bit of there, but you will. But. But just a little bit. Americans have a really good deal on. On their mortgage. It's also why in California, you may, if you're not from California, may not realize this, but California, because of Prop 13, your property taxes never go up.

Yeah.

So that's like a massive rent control for the whole state of homeowners. And as a result, California per capita, lowest available inventory per capita, and therefore the highest prices. Like it's. It's a direct. And it's. It is it.

It. Prop 13 started in 1978. Howard Jarvis did that and we'll see if it can last because they, they're already attacking that, as I predicted they would. And, and they, they did to some extent just last year or the year before. But again, I think that's going to be progressively. I posit that if California never had Prop 13, the prices would have never risen the way they did in California. Prop 13 helped buoy the California market for decades.

For decades. Yeah, it's, it's nuts because it's, you think about like, I mean, how beneficial it is to me personally, but to my kids, they're screwed.

Right.

Right. Because they can't buy. And it's, and it's funny because. So that's what's tricky. Like you have to vote to get rid of this massive tax break because it just destroys the market for anybody who wants to buy in the future. It's really a tricky space.

A lot of tricky, dysfunctional stuff for sure. Okay.

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