2003: UNBELIEVABLE! Prices CRASHING in Western States! Find Out How YOU Can PROFIT NOW!💰💥

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Welcome to episode 2003. 2003. I am on my way to the airport right now, so pardon the background noise, but I just got to catch a plane. So today we've got a continuous continuation of our discussion with Rick Sharga as we take a deep dive into the market and help you really understand what's going on. It is amazing to me, maybe more than ever right now, the misinformation out there about what is happening in the market. Look, just for the record, I don't like a booming market.

That is not my favorite market in which to work. But things are selling fast. Inventory is low, it's getting hard to get properties again. There's more buyers than there are sellers. You know, it's just so different than the picture you hear some of these people painting. Maybe I'm overdoing it, expressing my frustration with that, but hey, I'll stop doing it anyway. You get the message, right folks? Yes, you do. So enjoy our continuing discussion with Rick Sharga. This is a great interview and I think you'll get a lot out of it. Also, be sure to check out our YouTube channel there. You can engage, you can make comments, you can ask questions. I try to get to all of them as best I can. And you can also see all of his graphs and charts, which are. There are many and they are extensive and detailed. So all of that is available on the YouTube channel.

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 trends, 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.

Okay, so tell us why. So as we were talking about this dynamic before, that's counterintuitive to most people, I think, and that is rates go down, a little bit of inventory frees up higher affordability, more people can buy that inventory. And you got to take out your crystal ball for this one. Is it sort of for like a short, small period, you see that inventory increase just a little bit because now the market loosens a tad with lower rates. But then people also realize, hey, affordability is up. You know, I've been wanting to buy something, I just couldn't afford it before and now my mortgage payment's going to be 10% lower or 15% lower. So it's not as good as it was, certainly, but it's good enough. And incomes have gone up because there's a massive worker shortage. Right, so employers are paying more. Is that what happens? Is that just a short little period there? It sort of seems like it would play that way.

I don't see a huge burst of activity. So I'm with you. I think things get marginally better, but I don't think we're going to see a return to the kind of full throttle housing market. Oh yeah, we saw in 2021, the first part of 2022, anytime soon. I think it'll take a couple years for the market to sort of normalize against these higher mortgage rates. But again, we're in a really weird period right now. This is the first time in years where wage growth is outpac price appreciation. That hadn't happened in years. Mortgage rates are higher, but they're still lower than inflation. So you can make arguments if, if and where I say normalize is, you know, 18, 24 months from now, somebody who bought a home a year ago will have made three or four years worth of payments and got that principal balance down. You know, they might be more inclined to, to move into a new property at that point because they'll have more equity to trade on that new, that new home. So I think it's just a matter of time. But, but again that the demographics we talked about do provide a headwind in the long run for the housing market.

Yeah, very interesting. Okay, what else do we see here? So, oh boy. San Francisco, San Jose, sorry folks. Seattle, even hurting. But you look at Florida, Miami, Orlando, you know, the big markets in Florida up pretty amazing.

And I love this chart and I think it's important for investors to memorize this Char Tom or memorize the takeaway from this chart. I talked about home prices maybe going down, but less than 5% over the course of the year. That doesn't necessarily apply to your market. If you're in coastal California, the Pacific Northwest, a market like Austin where prices got outrageously high over the last few years, you're not, you're not going to be immune from a double digit price decline this year. On the other hand, if you're in the Carolinas, Tennessee, Florida, Alabama, you're likely to see prices go up. And, and the reason is those are markets where you're continuing to see job growth and population growth. And it's really important for you as an investor to understand your local market conditions because market conditions in Virginia beach are going to be very, very different than they are in Newport Beach. And, and so the national headlines are things you almost have to ignore. And, and one of the things that's driving these changes, I mentioned it briefly earlier, is, is migration patterns. And I probably didn't put that chart in here, but we've seen a continuing movement from high cost, high tax states into states with a lower cost of living. And if you're moving from San Jose to St. Louis, you're probably not going to be opposed to paying a little bit above current market price because the difference in what you just sold and what you're going to buy is so, so significant.

It still feels so cheap comparatively. And you know, I just got back from Ecuador, right. And by the way, everybody who's also the crash bros of the dollar who think the dollar is going to crash, I just want you to note all the economies around the world that use the dollar as their currency, even though they are a completely different country. Ecuador, Panama, et cetera, et cetera, right? Or they pegged to the dollar even if they have their own currency, right? So king dollar is not going anywhere anytime soon either, folks. That's unbelievable. These Chicken Littles just, they, they just don't get it. It's, it's funny but what's interesting about this is that you look at these sort of flagship cities, if you will, la, San Francisco, San Jose, Seattle, New York, which has actually kind of surprised me and I've been a bit wrong about New York. I. The big apples coming back a lot stronger than I thought it would, frankly. I. It's one of my predictions where I've admitted that I'm wrong, I think, at least so far. But these cities, all the stuff they sort of had to offer that allowed their governments to get really greedy and lackadaisical and inefficient and bureaucratic and just, you know, fat. Right. They don't have that big offering anymore because now people can just work remotely and they can arbitrage, they can geo. Arbitrage their life, lifestyle. And so that is really going to hurt these cities a lot more. San Francisco's commercial real estate market is literally in the toilet. Their office market is down by. There's been that big iconic sale, 75% price reduction. Can you imagine?

I mean, no.

And San Francisco is a city that. That is exactly like you just characterized Jason. They were anti business. They wore it on their sleeve, they took pride in it. And all of a sudden all these businesses are voting with their feet and taking the opportunity to get out. The vacancy rates in San Francisco in the commercial space are just unprecedented. And that affects all the smaller businesses that used to support the people coming into those offices, and that just decimates the tax base. So it'll be really interesting to see how they work their way out of that. But, you know, it's just an anecdotally, I have a. I have an adult son living at home. He and his girlfriend are talking about what state they would need to move to in order to become homeowners.

Right.

And I think you're seeing that in states like California right now, where it's just prohibited.

And we should say for the record, you're in Orange County, California, right? Yeah. And. And so. So they're not going to be buying a home in Southern California anytime soon.

No.

Right.

So, yeah. So where are they thinking of moving?

They're. They're still discussing. They don't know. Maybe Nevada, because it's close by.

Right.

But, but, but we don't know.

Yeah, yeah. It's. It's just very interesting. And one of the other things that's interesting about it, and I predicted this and started talking about it very early during the, you know, sort of COVID phase one, if you will, is how the distribution of talent and IQ and Ambition levels is flattening. Thomas Friedman years ago wrote that book the World is Flat, that he became very famous for. And I certainly have my disagreements with Friedman, but the concept is true. And now if you want a really smart software engineer, you might find that guy in Montana or that gal in Houston, you know, not San Jose. Right? Not Silicon Valley. The talent had a diaspora.

Right.

They've just moved around. They're all, you know, your neighbor in a Podunk town might be some brilliant software engineer that's, you know, making one.

Of the, one of the things that, that Boise and Salt Lake City both had that I didn't realize till I did some research was an established tech center.

Yeah.

It wasn't San Jose, wasn't even Boston, but it gave those people somewhere to move that was more affordable. But, but also had things that they liked and people they could, they could relate to. You know, university cities, tech centers. And, and you're right. I mean, who, who would have thought of Boise as a tech hub five years ago?

Yeah, yeah, Salt Lake City I, I would have thought of as a tech hub. I mean, you know, you've got Goldman Sachs there, you've got, there's some tech in Salt Lake City, a lot of smart people there. But Boise again, does not strike me as a tech hub. I agree with you completely on that one. Yeah, good stuff. Okay.

We talked about prices. I thought I'd share a couple, couple things. There's a company I work with called Beacon that does, does an analysis of rental listing prices across the country. Probably about 30 million or so properties. And what they've seen on a year over year basis is, to me anyway, was, was interesting. Multifamily rents listing prices up about 4%. We took a look at a number of representative states, California, Florida, Illinois, New Jersey and Texas. And on the other hand, single family asking prices down a bit, down almost 6% year over year in those same markets and across the.

Could be that we, we started to reach a saturation point in single family homes toward the end of last year.

And, and what we've also seen is that in the most recent quarter there's been a bit of a recovery. So in the, if you look at just the last quarter Q1 versus Q4 of last year, single family started to recover a little bit. It was flat quarter over quarter as opposed to being down year over year. And multifamily was pretty close. It was, it was again, it was a four year over year and almost three and a half percent quarter over quarter. It'll be interesting you and I talked about record number of, of apartment units coming to market this year. It'll be interesting to see if that saturation effect has, has any impact on pricing for multifamily as the year goes on.

Yeah, it sure will. You know, Rick, I mean, I know it's getting better, but historically rental data on single family homes has been pretty weak. It's good on apartments because, you know, it's easy for these firms to survey big institutional landlords and say, you know, they call up, you know, one person at Sam Zell's company or the Irvine company, Donald Bren's company. Right. Irvine Apartment Communities, you know, and they say to them, you know, are you offering lease incentives? Are your rents going up and down? If so, by how much, what's your vacancy rate? Yada yada. Right. That's a cinch to get that. Or if it's a public reit, they just get it from their reports. But for single family homes, in all my decades of doing this, I have never, ever, and I've owned a lot of rental properties, had anybody survey me as to what's going on with my rental properties. They never asked if I was having to offer incentives except low security deposits or if I could really increase the security deposits or, you know, did I have to do some improvement for the tenant to get them to move in or could I keep my property in slumlord condition.

Right.

You know, like nobody knows that about single family homeowners. So talk to us about this data for single family homes, if you would, to whatever extent you can.

Yeah, you're right. 90% of single family rentals are owned by smaller investors own, you know, under, under 10 properties. And trying to collect data from that many tenant or landlords is just about impossible.

Yeah.

So this company actually tracks properties that are listed for rent. So their, their category is any property they can find that's being listed as a rental property and they collect that data. And, and they do that for about 10 million single family rental properties. So it's about half of the inventory of homes that are out there. But to your point, all the properties that are retained, tenants are retained that those never get listed. We don't know what those rental prices are.

Yeah.

And let me just speak to this problem a little further, folks. You really got to understand this because here's the thing, with all the big institutional landlords owning tens of thousands of single family homes now, right, that's easy to survey. They've got public reports because a lot of those companies are public in one way or another. So it's getting better. And there's all of these online services where they can survey at least the listing date data.

Right.

They don't know what they ended up with always, because it's not always reported. They don't know if they took a lot less or got more, if they had multiple offers or what. But the problem is you can't answer still the question compared to what?

Right.

And you're not going to be able to answer that question for 10, 20 years. Why? Because 10 and 20 years ago from today we didn't have this data. It's only gotten better in the past maybe seven years or so. Right. Or maybe 10. Okay, I'll give you 10 years. So you can't answer it before 10 years ago. So, you know, it's really hard. And we've looked into this for my index, the Hartman Comparison Index. We've really tried to get good rental data from the 1970s, the 80s, the 90s, the 2000s. You just, it's just, it's so weak.

I think the value of the data is more directional than it is specific. I also think the single family rental market probably got a little overly aggressive a year or so ago with, with what it was looking. But, but look, multi family asking, asking rents were up something like 17 a year ago. That doesn't mean they were getting 17%, but that's what the asking rates look like.

Right.

So, you know, rather than look at this and say, okay, I'm in California so I can, I can ask 0.4 more percent than I could a year ago, it's to know that, you know, the market is saying price increases for rents in the state of California probably not going to be getting 10% this year. Now, on the other hand, if you haven't raised your rates in five years because you had a tenant there, you know, maybe you're going to get 10% or more. So you just, you use these again, as directional gauges, not as absolute percentages for your own, your own purposes.

Yeah, and I think directionally you're absolutely right. You can tell, you know, what was happening three years ago, two years ago, last year. You know, that does give you some good directional data and it's gotten a lot better. One of the other dynamics that's kind of interesting and I don't think many people are thinking about this is that I think the institutional landlords are going to make the mom and pop landlords better because they're really good at raising rents. They use all the latest software and of Course they're greedy Wall street people. So they just know how to turn those rents and tighten that, tighten the noose and just make it more expensive. And those then set comps in the marketplace for the mom and pop landlords who are historically terrible at raising the rents. You know, I always say, look, you, you know, in and out of any market, you should try to get at least an average of 4% per year. So you know, if you've got a place that rents for $1,000, just as an example, you raise the rent 40 bucks. Nobody's moving over 40 bucks. Trucks, okay, just the cost of moving and reconnecting utilities and you know, it's just not worth it. That's part of it. But the single family people, they just sort of have this sort of fade accompli attitude. The mom and pop landlords, I've heard it a million times, ah, they're a good tenant, they pay, they don't bother me too much. I'm not going to raise the rent. I want to be nice to them. You know, I think they're nice people. I, you know, I get it, there's a human side of everything. But you're also running a business and, and you know that just the mom and pop landlords just don't think that way most of the time.

Well, the institutional folks are running a business and so to your point, yeah, I think they've, I think they've kind of pushed a lot of the mom and pop investors to be more business, like more professional.

I think so too.

And, and yeah, I think you're right. I think at the very minimum they're establishing comps that, that mom and pops can use as, as the basis for, for what they do. From a pricing perspective, this is just charts talking about what we talked about earlier, but migration patterns going from, from higher cost to lower cost regions. And, and you can see that the red dots are where you've seen more people leave than enter and blue dots are the opposite. So we've seen people go just using California as an example, you know, from San Francisco and San Jose inland towards Stockton and Sacramento, from Los Angeles and San Diego in, toward Riverside or, or Las Vegas. And, and again, a lot of the, has been toward the south, an awful lot toward the Southeast.

You know. You know, Rick, you could almost, you could almost just call this a political map because, because we're not going to go there today.

But yes, we could.

You know, if, if it leans left, people are leaving. If it leans right, people are showing up. You know, it's it's interesting.

Yeah, no, you're right. And, and you'll like this chart even better. If you look at the, the metropolitan areas with the highest outback.

You'Re looking at la, you're looking at New York, you're looking at San Francisco, you know, San Jose, Seattle, Boston, you know, it's across the board. But, but those, those cities are the ones that seen the most out migration. And if you look at states, last year California led the country with losing 300,000 more people than they gained. New York and Illinois both over a hundred thousand. So people are, people are voting with their, with their feet.

Yeah, no question. As they should. Yeah, as they should.

Yeah, if they can, they should. And this is, I thought this was interesting too. This was a chart I borrowed from the national association of Realtors. So you remember I mentioned that the two things you want to look at as an investor when you're, you're looking to buy a property to flip or to rent is population growth and job growth. And this is the job growth part of that conversation. Look at the markets with the most growth. You know, Idaho, Utah, Florida, Nevada, Texas, North Carolina. You don't see California here, you don't see Illinois here, you don't see New York here. So it's been a lot of migration to the, the Southeast, to the south and to some of those mountain states where people were flocking. So not, not only is it work from home, taking their job with them, we've seen job growth in those markets as well.

Right? Yeah, very interesting, but not surprising at all. Good, good stuff.

And this is a fundamental, again, people keep pointing back to 2008 saying last time, so it's going to happen this time. We're going to get another crash, significant change this time. If, if I'll use Riverside, California as an example, Jason. Last time people moved to Riverside because they could, that's where they could afford to buy a house. So they moved from LA or Orange county or San Diego to Riverside and it was a bedroom community. These people had an awful two and.

A half hour commute to and from 91 freeway.

Yeah, the 91 is, is my nightmare road. This time they moved to Riverside because there were jobs in Riverside because AMAZ Warehouse and Distribution center because there's a cloud computing facility going up. So they move there and they, or.

The job was in their spare bedroom.

Or their den and, and they don't have that commute anymore. So the small businesses then started to pop up in the Riversides of the world to support the people that were living in those towns now because it wasn't just a bedroom community anymore. So it's a more structural, substantive change than what we saw during the last cycle. And again, another reason why the market dynamics are so different this time. They were last time.

Yeah. You know that, that's an interesting point because I certainly thought of it as far as remote work, of course, Amazon warehouses, et cetera, but also the small businesses that come around, the restaurants, the coffee shops, the, you know, the dry cleaners, the whatever, you just have a whole ecosystem of these other businesses that open up. And it, it's interesting because when you used to go to these kind of commuter places, you were always sort of of suffering with like tacky restaurants. But now you have nice restaurants in these places that are these commuter towns. Right. Because people are actually living there and setting up their whole life there. That's, it's a very interesting dynamic.

We talked about this early, that 25 to 35 year old cohort. But if you're looking at home buying these days, you almost have to expand that to the 25 to 44 year cohort.

We've got a failure to launch problem. We all know that.

Yeah, this is a problem, a study done by Harvard, but it shows you what, what groups are forming households and that's, that's a tailwind for, for both rental and owner occupied properties that will continue to support the, the market. We're not going to peak in terms of that 24 to 35 year cohort until sometime late next year. So you know, it, it's, it's a tailwind that's going to support demand over the course of the next few years. At least.

Least.

Yeah. And a lot of those people are saddled with big student loan debts and they will try to buy, but even if they don't buy, they're still forming a household. So they're going to rent. And that's, that really bodes well for investors that can serve these people that can offer them rental properties, especially single family homes, because that's what they want. I mean, 99.9% of the time they'd rather live in a single family than an apartment.

Yeah, I mean it stands to reason if somebody was looking to buy a house, they probably prefer to rent a house.

Right.

And I completely agree with you here. And a lot of people are investing. That's last, last graphic of today's conversation. If you look at Q1 sales, about 45% of residential purchases were made by, by cash buyers and investors. And this is a number From Adam Data, they have a very loose definition of investors. They, they call anybody who buys more than 10 properties a year an institutional investor. So I guess, Jason, you are now officially an institution.

I'm an institutional investor. I never knew that.

But between, between those institutional investors and cash buyers, the majority of which are investors, 45% of Q1 sales. Now they're, their numbers aren't up dramatically quarter over quarter, but they are capturing a higher percentage as your, your typ consumer home buyers slow down a little bit. But the point is there's a lot of opportunity out there for investors and investors are going to play a very important role in making sure that the housing market doesn't crash like the crash pros are talking about.

Yeah, very interesting. You know what's interesting too is the very high percentage of property sales that are all cash.

Yeah.

I'm wondering if you have any comments on that, why that is the case. Where are people getting all of this cash? I mean, you know, earlier in my career, well on up till, you know, just recently, but every deal was financed, you know, people weren't buying properties with all cash. I mean, I got an all cash offer on a property I had recently and they're coming in eight hundred and something thousand dollars cash, like it's nothing. Yeah, we'll close in two weeks, no problem. You know, what do you attribute that to?

I attribute that to home prices going up almost 50% in two years. We had a run in the stock market that was unprecedented from, from let's say 2015 to 2020. So people had a lot, a lot of equity in their homes and a lot of equity in their investments that they could turn into cash purchases. And you have a lot of people doing that because they like the investment opportunity in these properties. Not necessarily because they wanted to live in the house, but because they thought it was a good way to maximize their return on equity. So I think that's where a lot of this has come from.

Yeah. And here's why this is challenging for statisticians and Crash Bros. Because if they're looking at housing affordability, which is in the toilet at the moment, prices are high and they're still high and interest rates are now really high. So housing affordability is low, meaning people have got a rent they can't buy. Right. Which puts upward pressure on rents ultimately. But that takes a little while to work its way through the system. But, but when people are in a market where they're trading equities.

Trading big chunks of equity from one home to another, they're not thinking about affordability. And this is what I noticed when I lived in, right near you, Newport Beach, California for many, many years, is that it wasn't so much about affordability. I'd look at the affordability index and at certain times in my career it was down. And I'm thinking, why is the market still so good? Good meaning seller's market. Right. And it was because people were just trading big chunks of equity from a prior home or the other thing. They were foreign buyers with big chunks of cash from the Middle east, from China, et cetera. And you know, you live in Orange county, you know what that's all about. And the Housing Affordability index doesn't take that into account at all.

All right.

It just completely misses that. So when we look at affordability, that doesn't give you the whole picture. It doesn't give you trading equities, it doesn't give you foreign money.

No, foreign money is down a little bit over the last couple of years. Right.

But the question is, compared to what? I mean, the US has always been a giant recipient of FDI foreign direct investment. So yes, it's still high.

We've seen, we've seen Chinese investments specifically dip a bit over the last couple of years, probably because nobody was allowed to leave their house.

But, but in capital controls, I mean, China is making it very difficult to move your money out of the country.

It has. The other thing I didn't mention, but probably should have mentioned, is you and I both know that in that huge number of cash sales there are a lot of small investors and, and a lot of them are probably taking advantage of market conditions. You know, if it's going from renting five properties to, to buying that sixth, and, and they've been able to scrape together enough cash to go and do that. So there's a lot of investor activity that's, that's in these numbers as well. So just kind of recapping some of the stuff we talked about today, Jason. Mortgage rates, I believe are going to gradually decline toward the end of the year. We'll be back in the fives. There's enough volatility in the market right now to keep the number where it is. But I think as the Fed starts to, to slow down a little bit with its activities, you're going to see the market settle down a bit as well. There's already a much larger spread between the 10 year US treasury yield and the 30 year fixed rate mortgage than we'd normally see, almost a full point. So you could actually see mortgage rates come down a full point. If we just got back to a normal spread, we'll continue to see that migration from higher cost states to lower cost states. Home prices may decline nationally, but you're going to have wide geographic variation.

And again, as I mentioned earlier, I think, I think we're going to see a decline in both existing and new home sales over the course of the year, down to about 4.4 million existing and 600,000 new homes. So about 5 million home sales overall this year, but that the market will have a tailwind because of demographics at least through next year and probably, probably for the foreseeable future.

Very interesting, Rick. You are such a wealth of knowledge. It's always great to have you on the show. And by the way, I want to also say congrats, congratulations on your new company. You're doing great things with your consulting work. Give out your website for people.

Yeah, the website is just cjpatrick.com that's my email address there. And you know, I'm also easy to find on Twitter and LinkedIn, so happy to connect with, with anybody there. And I'm, I'm, I tend to post a lot of real estate related information on those two social channels.

Good stuff. Rick Sharga, thanks again for joining us.

Thanks for having me, Jason.

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