2002: Breaking News- This is Why the "Crash Bros" are Just Wrong

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So I.

Closed out last month on the real estate side, sold three houses, got two more under contract. It's been a long time coming. But all that stuff that Jason and the rest of the team and I have been working on since Jacksonville, all coming through. So all good stuff.

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Welcome to episode 2002. Yes, we are in the 2000s now and thank you for joining me today. Just got back from Nashville last night hosting the collective Mastermind. What an awesome group of people. We had a great time in Nashville. First class experience all the way. Beautiful hotel property, beautiful event, wonderful people, lots of education, networking and most importantly, a lot of fun. But today we've got an exciting show for you. We've got a returning guest here. Rick Sharga is back with us today. He's gonna be here Wednesday as well because we have a lot to cover. He went out on his own, has his own consulting firm now. And you know you get all of this great stuff right here on the free of charge. No, you don't have to hire a consultant and pay them four or five hundred dollars an hour. We get it for free right here on the show. So we will get to that here in just a moment. Remember, this is in two parts and the Crash Bros. Just continue to be so wrong. It is amazing to me how people are trying to make the data based on their predictions. They're trying to make the data say what they want and they're just wrong. I mean it's just amazing to me how wrong these people are who have said for many, many years the real estate market is going to crash. Of course we are talking about these good, solid, linear markets and they are strong. It's like amazing to us how little Inventory. We have Sarah and Lisa, two of our investment counselors came to our Nashville event. They visited some properties outside of Nashville. Just almost no inventory, hardly anything to see from a couple of different new home developers that they were working with and talk to. So it continues to be a tight inventory market. We only have about one third of the inventory we need to be in a normal market. So we will keep helping people find the good properties, find them at the right price and do things that work. Of course we have our special financing offers. 4.75% financing, yeah, I know that's pretty amazing. 4.75% financing or 100% financing which allows you to defer your down payment for the next three years or so. Hey, rather than paying it all up front, pay it over a couple of years, get more inflation induced debt destruction, a little bit of a premium. Our last client that did that paid about 0.75% premium for that privilege and it is a huge privilege to be able to do that again though, these are fully underwritten loans. Everybody has to qualify, just like normal income tax returns, credit scores, all that good stuff. So check that out. Go to jasonhartman.com if you'd like to know more about our extremely unique, very special financing offers and we will be happy to help you with those. Jason hartman.com Just reach out through there. And now let's get to the first part of our deep dive with Rick Sharga into the real estate data, the real estate statistics. What is going going on with this market? What is the next thing to come? So we are going to take a very deep dive into that right now.

It is my pleasure to welcome a returning guest back to the show. And that's my old friend Rick Sharga with CJ Patrick company And he is going to go into some great data today on the economy and the housing market. You heard from him recently and we got into a long discussion about the possibility of a housing crash or not. And we're going to update that today as well as a bunch of other things. Rick, welcome back. It's great to have you again.

Always a pleasure to be with you, Jason. Looking forward to the conversation.

So what's going on in the market and what do you think? Are these, as I like to teasingly call them, Crash Bros, the people who are forever waiting for the world to end because they will be prepared, I guess and all the rest of us will be in bad shape. Are they going to be right? I mean, and I'll just give you a little more food for thought on that. Before you answer. It is astonishing to me, Rick, that real estate has survived these massive rate hikes. I mean this is historic, it's monumental, it's. I don't think we've ever seen it before. 10 consecutive massive rate hikes and look who's still standing. The real estate market. Pretty darn well, inventory is super low. It's about one third of what it should be, depending on who you ask. There's no foreclosure crisis at all to speak of. It's kind of amazing that it's been this resilient. Huh?

Well, it's funny but, you know, people tend to want to live indoors and if there's not.

You mean with a roof over their head?

Roof over their head? Yeah. I mean most people like that better. And we have the largest cohort of young adults in the history of the country, all coming of age to form households, all arriving at, at prime age for being a first time home buyer. And it's just, it's demographics. Some, some people have said demographics is destiny and I think that's, that's really what's propping up the market. But the fed funds rate increase that you were talking about, certainly unprecedented. We haven't seen anything nearly like this since the 1980s. So you know, 40, 40 some years. But it's led to things in the mortgage industry that we've never seen. So last year in 2022, according to Freddie Mac, it was the first time in history that we saw mortgage rates double in a calendar year. That's never happened before. And not only did they double in a calendar year, they did it in a matter of months. So for that home buyer looking for a property, the same property they would have bought a year earlier cost them 45 to 50% more a month in their monthly payment. And most people just, you know, didn't have that kind of money. So it's had an impact on the market, but, but now we have this impact on demand, on supply as well because 70% of homeowners have a mortgage rate of 4% or lower and they're not really in any hurry to take on a 6 and a half, 7% mortgage rate on their new home. So that's keeping inventory levels down. You couple that with, with growing demand and you, you wind up in a market where prices continue to be somewhat stable. So the, the crash Bros are, are continuing to be frustrated by that housing market cratering. That, that just isn't happening. And we're not going to see a wave of foreclosures because the, the loan quality was extraordinary. And I don't have this in today's charts, but one of the things I'll share with you and your viewers is that 93% of borrowers who are in foreclosure today have positive equity, and not a little. If there are 270,000 people in foreclosure, which, by the way, is about half of what we would normally see.

Right.

About 100,000 of them have 20 to 50% equity. Another 60,000 have more than 50% equity, and another 20,000 have more than 75% equity.

Okay, so let me, let me recap that before you go on. So the foreclosure rate is about half of the normal rate. So foreclosures are down by 50%. They'd have to go up by 100% to be normal. Okay. At a normal level. And the people in foreclosure, the small number of them have equity in their properties. Rick, it begs the question, how'd they ever get to the foreclosure table in the first place? Because when you have equity, you have options. It almost makes me wonder if they're just trying to get a loan mod.

No, no, it's. And actually, I'm glad you brought that up because it's a very common question. Having equity doesn't prevent you from going into foreclosure.

No, I get it. But it gives you a lot more options.

It gives you options to get out. And, and the best option for a lot of people, unfortunately, in these cases, is they sell the home, because that's how they can maintain that equity, not lose all the equity in a foreclosure sale. But typically, people go into foreclosure because of some other financial catastrophe that hits the household. It's a job loss, income loss, unexpected medical bills, divorce, something like that that makes it difficult or impossible for them to make their monthly mortgage payments.

So what's interesting here, and Rick is kind of just alluding to this, but I'm going to just lay it out for you, is that the people with equity that lose a job can no longer tap that equity right before the job loss. They could have tapped the equity because they could have qualified. So isn't it interesting that the person who is the seemingly prudent conservative person by paying down debt, by not over leveraging, is actually the person who gets burned the most? And that is a backwards world, but nonetheless, it is the world in which we live.

It's the real world.

It's the real world. So what you should do the Action step there is get the equity out of your property on a regular basis. Equity strip, harvest the equity and don't blow all the money like an idiot. Right. Keep the money so you have it for a difficult time like this and then those people would never be facing foreclosure.

Yeah. And there aren't a lot of good options for people in that particular situation. There, there are now some shared equity companies out there who will actually let you tap into that equity to, to get yourself out of a short term financial hole. But, but people really need to pay a lot of attention to the fine print in those contracts to make sure they know what they're getting into.

Yeah, yeah, very interesting. Okay, well let's dive into it, Rick, and take a look at, you know, just the macro and then we will go down the funnel, if you will, and, and get into the micro.

Yeah, we, we talked about what's going on with mortgage rates. We'll start there and then a lot of data to share with you. Existing home sales, inventory levels, new home sales, what we're seeing in pricing, that includes rental pricing. Just a quick, quick note about investor activity and then what we're expecting for the rest of the year. I mentioned that mortgage rates have been going up and they doubled last year. And just to show you how quickly they change, as of yesterday the 30 year fixed rate loan average was about 6.69%. So it had jumped up really in the space of about a week to the highest it's been in the last month. But, but mortgage rates right now seem to be working within a fairly tight bend, somewhere between about 6 and quarter and 6 and 3 quarters percent for the last month and are probably going to stay there until the Fed stops raising the short term rates. And they gave an indication this most recent meeting that June, they might actually, that might actually be holding where they are and seeing what kind of impact they're having on the economy in general. That's, that's a good sign. And my personal belief is that once the Fed settles down, start to see mortgage rates go down over the balance of the year, gradually, but down. And I believe we'll end the year somewhere in the fives so that a 30 year fixed rate loan will be somewhere in the 5% range. And I also think that once we get down to about five and a half percent, that could be an inflection point in the housing market where people are willing to list their homes and more people are able to afford to buy a home. There are three things going on right now. That are worth watching. One is mortgage rates, which we talked about. The other is we're still seeing pretty significant wage growth on a year over year basis. And the third is that in most of the country, home prices have pretty much plateaued or the, the price increase on a year over year basis is, is very low. So, you know, you add those three things together. Declining mortgage rates, flattening home prices and increased wages. Tom and as time goes by, the market feels like it's a little bit more affordable. Now, your, your audience of investors certainly isn't going to be seeing mortgage rates or, or financing rates in the 5% range. But as general mortgage rates go down, obviously the rates that, that private lenders are charging, hard money lenders are charging, will go down commensurately. So, so things will get a little bit better for people who have to finance their purchases as well.

Yeah. So a few things there to unpack just before you move on. Rick. See, a lot of people just don't really realize these kind of dynamics in the market. And you alluded to it just a moment ago. You said as interest rates go down, it would actually increase housing inventory.

Yep.

Like most people think, oh, if rates go down, there's going to be more buyers that can enter the market. And that's also true. But the initial step is a lot of the sellers that won't sell because they've got 25% of the country having a mortgage at or below 3%, 65% of the country having a mortgage at or below 4%. They can't rationalize the decision to get rid of that super cheap mortgage and then take out a new mortgage at 6.5%. Right. So they're not selling. Right. And they got 29 or 28 years left with those cheap mortgages. But the interesting thing is a lot of those people, I think this time around are going to really try and keep those houses as rentals if they can. And I think what we're going to see is an interesting kind of new type of rental market where we see, you know, maybe it's not a massive tidal wave, but more, more expensive rental homes that would be like third, second, third, fourth and fifth home homes that would be higher price because they have those cheap mortgages. The people want to move now, they can get a mortgage at a lower price. They're probably going to lever up maybe with a second trustee, that rental property or just lever up the new house they buy so they can keep that old cheap mortgage and because it's such an asset. Right. So I do think you're right that we will see some more inventory come on as rates go down when the Fed finally pivots. And they have to, in my opinion, but with such low inventory, those are just likely to be snapped up really quick anyway. So, you know, it'll, what it means is good news for realtors, mortgage people, title companies, all of the people you consult for, because they're going to see more sales volume. Right. And that'll be, that'll be good. And it's good for the overall economy. More sales volume.

Yeah, yeah. We actually saw the beginning of what you're talking about, Jason, over the last year, an unusual number of people with one investment property. You know, typically you don't look at somebody as, as an investor until they own three or more properties, because owning one property, you're usually a homeowner if you own a second, often it's a vacation home or a second home. But we saw a lot of people do exactly what you're talking about, tapping into the equity they had in their current property and, and leveraging that one way or the other to own a second property which they've rented out. And we saw, you know, the number of, of single family rental properties is up around 20 million now across the country. So a lot, lot of inventory out there.

Yeah, a lot, lot of people owning investment property, even if they're sort of a, not really an investor. They just got one extra house that they couldn't give up because the mortgage was so cheap. They didn't want to let it go. Right.

Accidental investors.

The accidental investor. I like it. That's a good way to put it. Yeah.

We talked about the impact rates had, and I think this is, this is a chart that surprises a lot of people. If you look at that line running across the bottom, that's so your average level of affordability going back to 1981. And even while prices were soaring over the last couple of years, affordability was actually very good because interest rates were historically low. But once those rates jumped last year, affordability ran down to the lowest level we've seen since the mid-80s. So you really can't overstate the impact that those rising mortgage rates had on affordability last year. And that affordability directly led to demand weakening. And you can see that in some of the, some of the metrics that are out there. For example, I mean, to jump past that, the Mortgage Bankers association takes a look at loan applications, and their numbers are off about 35% on a year over year basis. So 35% fewer people applying for a loan to buy a house than we saw a year ago. And that's strictly due to affordability.

Yeah, yeah. To go back to the beginning of our talk today, it is amazing they can kick affordability in the teeth, which they have done. I mean, affordability is, is on the ground knocked out. Right. Yet there's no real estate crash. I mean, it's, I don't know if that's ever happened before, certainly not in my career.

And well, you know, there, there are some urban, urban legends. You know, there's the giant alligators living in the, the sewers in New York and, and, and other things like that. And one of the legends is that, you know, when mortgage rates go up, prices crash.

Tom.

And historically that's actually not true. If, if you, you look at numbers historically, mortgage rates go up and home price appreciation slows down, but home prices don't crash because mortgage rates are going up. In fact, they tend to, to go in the same direction. But this was such a sudden increase that it really had a, a material impact on, on demand. But as we've been talking about, it also had a material impact on supply. People just not listing their homes for sale. So that, that balance is what's kept prices from, from plummeting. And what people don't realize, you and I probably do, but, but if you go back to the crash that we had back in, in 2008 or so.

There was a 13 month supply of homes available for sale when the market condition shifted. There were 15 million really bad adjustable rate loans out there that were all resetting at the same time. So you had these, these market conditions, these market that really fed off each other and, and led to prices cratering. It, it's, it's not anything like what today's market is, just the dynamics are entirely different this time around.

Yeah. Yeah, very interesting. Okay, let's go on. What else do we have?

So if you look at, at existing home sales, this chart is a chart I've, I've never seen. Well, that's not true. I've seen this chart before, but I've never seen a chart look like this in, in the years I've been in real estate. Those blue lines show monthly existing home sales in 2022. And last year was the first time I've ever seen January be the peak month for existing home sales and every month after that had lower sales. We basically wiped out the spring and summer selling seasons when, when home sales typically go up. And that's directly related to the time when Mortgage rates doubled.

We continued the streak in January. That was at least 13 consecutive months where the, the home sales were lower than they were the prior month. We broke the streak in February, but we're still at, at the end of March. We're still at about 19 months in a row now where home sales are lower than they were the prior year. So these numbers aren't as bad as they were back during the financial crisis in 2008 through, say, 2010. But, but based on what we're seeing so far, I've been forecasting that we'll see about 4.3, 4.4 million existing homes sold this year, which would be down from about 5.2 million last year. So a significant drop. But we're still looking at 4.3, 4.4 million existing homes being sold. So certainly not the worst we've ever done.

Yeah, and I think part of the crash bro narrative, which is just very mistaken, is that home sales volume does not equal price reductions. Correct. You know, everybody thinks that and it's simply not true. You have to have a massive increase in inventory volume and a decline in home sales volume to equal price reductions.

Yep. And, and you and I are. I, I can't, I can't add too much to that, Jason, because you and I are in complete agreement. And this is the inventory you were talking about before. So we've seen some false positives in the headline. We've seen inventory numbers are up on a year over year basis. What's really interesting is we're down below a three month supply and normal is all we got. Six. Six months is what we're typically looking for, for kind of equilibrium.

That's. So six months is normal. What we've got now is 2.6 months and no big sign that there's going to be some massive inventory increase.

No, in fact, in fact signs just to the opposite. Because when I said we got a false positive in the headline, the only reason inventory numbers look better is because it's taking longer to sell properties once they're listed. We're actually seeing fewer new listings. So there are fewer properties being listed for sale, fewer new properties being listed for sale, even though the inventory numbers look a little better. But that simply means the properties that are listed are taking a little longer to sell than they were in, in, in a year ago.

Right.

New home sales, a little different story. And new home sales right now account for about 25% of, of overall home sales. And that's about two and a half times the normal level. And the reason for that is, guess what? Builders have homes available for sale.

Right.

So while while existing homeowners are keeping their properties off the market, new home builders are not only looking forward aggressively to selling these properties, but they're offering concessions, they're offering price reductions, they're putting cash in to buy down points on. On a mortgage. So if you're Toll Brothers or Pulte Homes or somebody like that, you have a few properties available at the end of the development, they're costing you money every month. So you're motivated to sell those properties. And, and they are doing so. That said, I don't think we're going to see enough new homes coming to market over the course of the year to. To difference in inventory levels. In fact. Right. Right now I'm still projecting about 600,000 new home sales for the year, even though right now we're running a little bit higher than that. If you look at seasonally adjusted numbers. But this is an interesting chart, Jason. The red line here is months of supply of homes that are completed and available for sale. The blue line is properties under construction. And the gray line is properties where a permit's been issued but construction hasn't started. The the properties on that are completed are coming back from the lowest levels ever recorded since this data began being collected back in 1973.

Wow.

And so they're almost back to normal levels. We had a huge run up in properties under construction because of supply chain disruptions and labor shortages and high demand.

And at high demand. Well, what was high demand, which has since slowed down a little bit.

Right. But the building process is so slow, builders have to make decisions long before the market. Right. And that's why it's very dangerous to be a developer.

And what we've seen by the way they've adjusted this time, that was one of the mistakes that happened during the Great Recession is the builders kept building after buyers stopped buying.

They got way out over their skis. Yeah.

And this time they got the memo. So, you know, in July of last year, as buyers activity had slowed down, the builders housing starts numbers dropped by 18 and a half percent year over year and they stayed down double digits for the rest of the year. So the builders have slowed down their pace of construction as well. But the point here is that as these properties under construction are being completed, they're being absorbed relatively quickly. But the builders aren't ramping up construction. So we're not going to build our way out of this inventory shortage in the short term either.

Yeah. And you know, Rick, that's the thing. Reagan and Arthur Laffer, I guess, you know, made the idea of supply side economics a famous term. Right. We all heard a supply side or supply side economics. And you know, it's so interesting because the housing market we have now is a supply side problem. If there was more supply, then maybe there'd be a demand side problem. But we're quite a long way away from that. We have a supply side problem and I just don't know how. And I just question myself all the time on this. Am I missing something? Am I blind to something? You know, in, in a lot of supply side markets for various products out there, especially technology and software, you can fix them quickly because you can have a technological disruption that kind of revolutionizes something. But with a low tech commodity like housing, I just don't know what the disruptive technology could be. You know, some will say, oh, Jason, haven't you heard of 3D printing? Of course, 3D printed houses. Of course I have. I've done many shows on the topic. It's not the disruptive technology. Sorry to burst your bubble. It's still made out of atoms. And as long as something's made out of atoms and not bits, it's hard to disrupt any break in supply that would possibly change our opinion and make the crash Bros right now.

I mean, you're talking about an industry where the last real technology disruption was the staple gun.

It's a slow moving market. And there are other issues. I mean we have labor shortages and we also have lack of availability of land where people want to buy. So the builders are constrained there. The regulatory hurdles have to jump through in some of the more populous states are just ludicrous. You know, one of the things that's interesting though is there's a record number of rental units coming to market this year. Probably a million apartment units coming to market all in 2023.

Yeah. And the apart. The apartment market, by the way, is a real mess right now. You know, syndicators are in, in big trouble. A lot of them that got out over their skis. I know, I'm hearing a lot of, a lot of concern there and a lot of new supply and apartment units that'll eventually equalize itself. It's going to take a couple of years to probably just work through that. But yeah, comment more on the multifamily housing the apartment market, if you would.

Yeah. Just as a way of saying, you know, I was kidding earlier about people wanting to live indoors. If they can't afford to buy something, they'll Rent and there's been a shortage of both owner occupied and rental units over the last few years. So that inventory coming to market at least take some of the pressure off the rental side of the equation. And for as much as, as people focus on ownership when they talk about affordable housing, the, the truth is much of the affordable housing available is, is going to be those rental units. So while we're waiting for boomers to eventually move out of their homes and make those, those properties available, while we're waiting for catch up a little bit and make up for 10 years of underbuilding, people are going to rent. And whether they're running a single family home or multifamily unit, that's I think where we're going to see a lot of people migrate over the next couple of years.

Yeah. So you're saying the renter population is going to increase quite dramatically over the next few years?

I don't know how dramatically, but it's definitely going to increase over the next couple of years as these young adults form households. And we. I've seen research that shows that anywhere from 20 to 25% of them who had planned to buy have decided to hold off on buying for a year or two just because market conditions have made it so difficult for them to afford anything. The other thing that we can talk about a little bit is migration patterns and we're seeing people move to less expensive markets. And we'll get into that in a couple slides.

Sure.

We've been talking about this. Price appreciation has gone from, you know, over 20% nationally to I guess the most recent report from Case Shiller had it at about 1% year over year. But I think what's frustrating for the Crash Bros. Is that you're looking at year over year prices on houses and they're still positive, not, not negative.

I do believe that'll probably change before the year is over but, but not, not dramatically. You're looking at at national numbers that are going to be below 5%. And if you look at FHA, FHFA numbers most recently going through year over year in February, the most recent date available for them, every region of the country except the Pacific market showed year over year price increases.

Yeah. And let's look at some of those price increases. So you look at and the type is very small on the slide, but South Atlantic 6.2% increase. Right. Just share some of those other ones.

You got a really big across the country overall 4%. But if you look at some of the higher areas, what they call the east South Central middle part of the country was up 8.3%, New England up 5.4%. The, the West South Central 5.2%. So really the only two markets that, that took a hit were the Pacific coast, which, you know, to yours, use your term. I think prices got out over their skis a year ago.

Yeah.

And the mountain states where you had places like Utah and Boise, Idaho, where you had, you know, outrageous year over year price increases as people moved from coastal areas into those lower cost air. Lower cost regions.

Yeah, yeah, yeah. It's amazing because many would argue that the sort of the normal appreciation rate for real estate is about 6% annually. Right. I mean, you've got that in many of the markets, you're right near that. Some. In some you're over that amount. Given that we've had 10 consecutive huge rate increases making houses much, much less affordable, it's pretty startling that it has held up that.

Well, if you look at national association of Realtor numbers, February broke a streak of 131 consecutive months where the median price of a home went up 131consecutive months. Wow. And if, but if you, and, and the number I go with, Jason, if I Look at historic US home price increases is on average about 3 and a half to 4% a year. And that's exactly where FHFA has us right now. So the fact that we were looking at 20% annual increases a year or two ago makes this.

But, but the truth of the matter is it's, it's really just getting us back to more normal levels of appreciation. This is another way of looking at it. If you're looking at year over year numbers by state or month over month numbers, you can see that on a year over year basis, some of those markets we talked about, Idaho, Arizona, Nevada, California, Utah, are places where we're seeing the, the largest year over year price declines. And that's not a surprise because those are the places that had the most outrageous price increases over the last couple of years. But if you look at the month over month numbers, almost everybody across the country in March saw prices go up. Even some of these states where we've seen prices declining again, like Idaho and Arizona and California. So the, the trends, I, I think if we, if we look at what happened in March, and there was a period in March where mortgage rates went down a little bit, I think if, if you believe me and if you agree with me that mortgage rates are going to go down over the course of the year, that suggests there's going to be a little bit of of flexibility in pricing as we as we move into the latter half of of 2023.

And we'll be back with a lot more on this topic with this guest.

On our next episode.

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