2135: Data-Driven Insights: Unveiling Opportunities in Today's Housing Market with Rick Sharga Part 2

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For more information and links to all our great podcasts, visit hartmanmedia.com the last few months have affirmed something you said.

Years ago that was just so, so.

True and I don't think people appreciated.

It at the time, is that the.

Mortgage is an asset. But now, given where interest rates are.

Now to think, oh man, I got this sub 3% mortgage, why would I ever, ever, ever sell? It's tremendous. It's much more valuable than the house itself.

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Welcome to episode 2135 and greetings from Tampa, Florida. I'm just finishing up a conference here for the last few days and learned a ton of stuff, great networking and I will talk about some of these things I learned on future episodes. But today we are going to continue our discussion with real estate consultant and forecaster Rick Sharga. We'll have him on. Just a moment. I've got got two very interesting things to share with you first and not the least of which is the forecast on mortgage rates. Where are they going? I think pretty much all of us thought that we would see a Fed rate cut by now, a pretty significant one. And I tell you, good old uncle Jerome Powell, he's really tight with the purse strings here. It's kind of the complete opposite person that he was during the COVID era. These rate cuts are definitely coming but going to be forced to wait for them it looks like. Now here are three different forecasts on mortgage rates and I think you're going to see that they're a bit less rosy than they were a couple of months ago when I shared them with you. Remember when I shared that Fannie Mae, the biggest player in the mortgage market on planet Earth, they said that by the end of the year they thought they would see mortgage rates at Fanny 5.6% and we all were thinking, wow, that's amazing. If we see 5.6%, prices are going to literally skyrocket. But it looks like they've reigned that in. They've walked it back, and they are a little less rosy in their predictions, but not all of them. So let's take a look at these three different entities and what they're forecasting. First of all, the Mortgage bankers association, the MBA, they are saying that by Q4 of next year, we will see rates at 5.5%. Fannie Mae is saying 6% by the last quarter of next year. I'm not talking about this year, I'm talking about next year, 6%. And Wells Fargo, the criminals at Wells Fargo, you know, the company with scandal after scandal after scandal about ripping off customers. Well, you know, they're still forecasting, and that's fine. Their forecast may be great. I just wouldn't do business with them. That's my recommendation. 5.8% is their prediction. Now, what do they all say by the end of this year? Or really, we ought to take the beginning of next year, because, you know, when they say Q4 or Q1, you know which quarter of the year, we don't know when in the quarter that will happen. So we'll probably just suffice it to say Q1 of next year. So mortgage bankers, 5.9%, Fannie Mae, 6.2% and Wells Fargo 5.9%. No matter what. We all know that rates are coming down and this is going to do a lot of things. Number one, we have very limited supply. As you know, we're still hovering at just over 500,000 homes for sale in a country with 339 million people, about 140 million housing units, and a normal market considered to be 1.2 million homes for sale. So the inventory shortage persists. I almost hate to keep talking about it because we've talked about it so much, much, but we've got to talk about it because it's just the reality of the situation. And millions more people will be able to qualify for mortgages at these lower rates that are coming our way. Nobody knows exactly when they will come, but you dump millions of additional buyers into a housing market with such constricted inventory, where prices with these high rates over the last two years have been going up and are continuing to go up, even in the face of massive housing affordability challenges. Now, here's where so many people get it wrong. I mean, they get it wrong in a lot of ways. And we've talked about that. On prior episodes. But just one fundamental idea is this. Why is it that people think that just because housing affordability was so much better in the COVID era? Of course it was the best it had been really in forever, but so much better even years ago, you know, even five years ago, seven years ago, ten years ago. Right. You could argue that housing affordability was better at a lot of different points in history, no question about it. Somehow people think that housing affordability has to return to that point, and that is just completely false. It doesn't have to. Housing affordability does not have to get better just because it's bad now and it's difficult to afford a house. It could get worse. Look around the world, everybody. Housing affordability around the world. I mean, look at the UK for example. And I don't have these numbers off the top of my head. You know, one way to look at housing affordability is to say, okay, how many years of income does it take, you know, the median income in a country to buy the median price house? Well, in the US it's really bad. It's somewhere around like eight years or something like that. Right? And of course, it depends what market you're in, yada, yada, a lot of factors, okay? But in the UK it's like 11 times. So it's much worse there than it is here. And in many parts of the world, real estate is dramatically less affordable than it is here in the United States. So it does not have to get better. I hate to break it to you, if you're looking to enter the real estate market and you're thinking that, well, because housing affordability was so much better in the COVID era, or because it was so much better in 2017 or 2013, it's got to get better. No, it never has to get better. There is no rule saying that things have to be as affordable as they used to be. I mean, think about it. That would be like saying if you're sitting in 1990 and you know that's 34 years ago, so you're sitting in 1990 and you're saying, well, why aren't houses affordable as. As they used to be in 1970 or 1955. Right. Or 1948. Right. They didn't have to get better. They never had to get better, and they never did get better. Okay? So, you know, this is just a fallacy, this kind of logic that people have. So don't wait for that. The point is, nobody can time the market. Market timers are historically terrible investors in any asset Class, you just got to be in the game. You do the best you can with what you have at any given time and you get in the game. And that's the thing you've got to do as an investor, as a first time buyer. Does not matter, right? Does not matter. Now, a couple other comments on these interest rates. One of the important realizations is that when you look at the apartment market, the multifamily housing market, which is in deep, deep trouble, and we've reported on that extensively, when you look at that and you see how devastated that market has been by these higher interest rates, and you see how affordability has declined dramatically, increasing the number of people that are forced to stay in the renter pool, okay, that's all well and good, but at the same time, you have all of this new apartment supply coming on the market and all of these new apartment owners that are in massive distress, whether they be new developers that have built apartments that are coming to market, or the syndicators that we've reported on extensively who have made bad bets and gotten themselves into big trouble, well, they're all cutting deals with renters. And most of the time, I mean, look, we're mostly in the single family market. Everybody listening to this show and most of the time the tenant that would rent an apartment and the tenant that would rent a single family home, these are different groups of people most of the time. But there is always a little bit of overlap where, you know, they could go either way, right? They might rent an apartment, they might rent a single family home. Of course, they prefer a single family home, but it's more expensive. And that is now weighing on the single family rental market. So I am experiencing this currently. I've got one of my own properties for rent, and I gotta tell you, I'm cutting the price a little bit because I am competing in this particular market with all of these new apartment complexes that are cutting deals left and right now, this is a very temporary phenomenon and it'll work itself out pretty quickly. But if you've got a property up for lease right now, and depending on what market you're in, and depending on how impacted you are by multifamily developers and multifamily housing in your market, you may have to cut some deals. This will probably be the one year you have to do that, and next year you'll probably be back on track pretty well. But I just wanted to say that now these interest rate cuts, right? What do they mean? Well, these interest rate cuts put these multifamily Owners, these investors in these apartment complexes, they put them in a much better position as these interest rates go down to where they will be able to be much more firm on their rents and they'll be able to raise rents more. It'll put them in a better position. So as we see rates come down, all of this starts to kind of heal itself and it starts to resolve in so many different ways. So look for that to come. Okay, this one is important. Okay? And this is a big upward pressure on inflation. I have talked to you many times over the past 20 plus years now on my trademark philosophy of inflation induced debt destruction. Critically helpful in terms of creating wealth with your income properties. It's an amazing, amazing strategy and many of you have just loved it. You've benefited from it in huge, big ways. Well, I want to talk to you about a big inflationary pressure that no one has talked too much about, and that is this. I saw this already article in one of my newsletters the other day and it is climate induced inflation. The article is entitled Climate Induced Inflation is Surging. Imagine a future where your grocery bill climbs higher each year, not because of your lavish spending or macroeconomic fluctuations, but because of the changing climate. Sound far fetched? Well, a recent study conducted by German scientists suggests otherwise, indicating that as climate change escalates, so will food prices and overall inflation rates. Notably, the study reveals that inflationary pressures are more pronounced in hotter areas and seasons. Now, no matter what you think about climate change, global warming, whether it's true or not, whether it's man made or not, whether the statistics are lies or not, and look, I have a lot of problems with this whole discussion and I've discussed them before on prior shows. I think humans are a resource. I think people are good. I like people. We need more people to be born so more people can discover great things and invent great things that solve humanity's problems. Right now, our friends on the left, they don't think this. They want to have the population decline and have fewer people and they think climate change is man made. You know, I mean, there are just so many layers to this onion. We have to first decide, is it happening? Well, there's debate about that, believe it or not. Is it caused by humans? There's debate about that. Right, right. Is it bad? Right. Some people, you know, like that's even the most amazing thing, right? Because there are big benefits to climate change. They're not all bad news. Okay? There are definitely big benefits to them. And I've reported on that before. I'm not going to go into that. I'm not taking a position on this very hotly debated political issue here. I'm just pointing out that this inflationary pressure is most definitely real. Okay? So. Published in the reputable journal Nature, the study analyzed monthly price fluctuations of food and various commodities alongside temperature trends and other climate factors across 121 nations since 1996. The researchers projected that weather and climate shocks could lead to 1.5 to 1.8 percentage point annual increase in food costs within the next decade, with even steeper hikes expected in regions like the Middle east where temperatures are already soaring. The cascading impact of climate induced price hikes will pose notable challenges for entities like the U.S. federal Reserve or the Reserve bank of India, which actively combat inflation, forcing them to consider climate change as a crucial aspect of economic policy. Now, one of the things they didn't mention here is all of the new regulations and legislation relating to climate change and how that is 100%, every bit of it is inflationary. All of those things are inflationary. Every time they make a new law, it's inflationary because what, all the businesses have to go and comply with a new law, and that costs money. They have to hire consultants, they have to hire specialists, they have to retool their manufacturing, they have to retool their supply chains. They have to do all kinds of new things. They have to get new, more environmentally friendly vehicles or modify the vehicles or. Yeah, just like a million things. Okay. And then they have to fight legal battles and litigation and lawsuits over these issues. And so all of this is very inflationary. Look, we love inflation as investors. Philosophically, I hate inflation. But as an investor, because we know how to play the game. We know how to game the system. We know how to align our strategy with the most powerful forces human history has ever known, governments and central banks. And when they make more laws and they make more regulations, they create inflation. I dare you to show me a law, a new law, a new regulation that is deflationary. Right? Every one of them is inflationary because it's just more restrictions, more requirements, more yada, yada, yada. Okay? And so what we're doing here is we've got now one more big giant reason to align our strategy with yours truly, Jason Hartman's inflation induced debt destruction strategy. It is literally the most amazing hidden wealth creator with income property because it allows us to align our interest. It allows us to game the system. It allows us to win the game along with the two most powerful forces the human race has ever known governments and central banks. You do not want to bet against either of those forces because they are incredibly powerful. They have standing armies, they make the laws, they rule the world, you know. All right, so let's get to our continuing discussion with Rick Sharga and talk about where the market is going.

Right now it's about a 5050 whether we get a recession or not. But even if we do, they don't expect to see unemployment go much above 5%. From my research, my personal research, 6% unemployment is where you start to see an impact on housing. So if you go from below 6% to over 6%, it does have an impact on home sales, on home prices. But if we stay below that, to your point, even if we are in a recession, I don't think it's a huge, huge headwind for the housing market. Speaking of the housing market.

So let's get into the housing market. Let's go deep on this. Now we, we looked at the overall economy, now we're going to dig in.

So you know, mortgage rates, not a surprise to anybody who's priced them recently, still near 20 year highs. And what that's done in a very, very rate sensitive environment is it's made purchase loan applications go down. So we're not seeing quite as much activity from people looking to buy. And we've seen pending home sales down on a year over year basis as well. This is strictly due to affordability. It's a two prong because buyers are faced with not being able to afford a house that they'd like. And sellers, as you'll see in a couple slides, are stuck with mortgages that were on such low rates that they simply can't afford to sell their house and buy a new one. So these mortgage rates are still where they are. It's a very rate sensitive environment, Jason. We saw rates come down into the sort of mid sixes back in December, early January and we saw a flood of people come looking to buy properties. And then the flip side is true as well. It went up less than a half a point. We saw that whole activity reverse course. So the most likely scenario as we go through the year, I keep using that phrase, is as we see mortgage rates slowly and gradually decline over the course of the year, we'll see more buyers come to market first than sellers, which means you're going to have more competition for the available inventory. Which means, to your point, Jason, much more likely to see prices go up than down over the course of the year. In most markets, if you look at what these rates and high home prices have done, affordability. And we'll talk about inventory too. December was the 28th consecutive month where we sold fewer existing homes in the prior year. It was the 11th consecutive month of the year in 2023 where we sold fewer properties than the month before. It's just indicative of where we are. It also tells you, and if you, if you look at the slope from the year before, we had the same phenomenon two years in a row. And I've never seen this happen where, you know, early in the year you're selling more properties than you do in any month after that. So the entire spring and summer selling season basically gets wiped out so that seasonality less and less of a factor. And if you look at January sales, it was a good news, bad news scenario in that we had more sales than we had in December, but we're still down year over year from January of 2023. And I was disappointed in that because we'd seen a little bit of an uptick in pending sales, a little bit of an uptick in purchase applications, but the transactions just didn't come through in January. So 29 months in a row, Jason, where we sold fewer properties than the year prior, you can see that the media sales price is up about 5% year over year. And there's still about a three month supply of inventory available across the country.

Which is, which is only about half of the months when you look at it from a month supply, the normal market is considered six months supply. We have half of that at only three months supply. Now, just so you know, I usually don't quote much months of supply when I talk on the show. I usually quote inventory numbers of available homes. And so, so, you know, those don't exactly sync up, but they're pretty close.

Yeah, funny you should mention that.

Oh, there we go.

One of, I think one of our mutual friends, I believe, Mike Simonson Altos Research, does this weekly. He's looking at inventory being about 21% up from last year, but I mean, last year was about as low as it could get. And the current inventory is about 500,000 units, which is better than it was a year ago, but about half of what we would like to see in the market and where we were back in, in, in 2019 prior to the pandemic. This is only partly because of new listings and I think that's important for everybody to understand. We are seeing an increase in new listings, about a 15% increase compared to last year. So about 59,000 new listings in the last week of this data that I have from Altos Research. But if you can see all the gray lines, you can see that in most years past we, we've had more listings. So the reason that the inventory numbers are up a little more than the listing numbers is because it's simply taking a little longer to sell the properties once they're listed. And that's not an indication that we're looking at a housing market ready to crash by any means. It's just taking a little longer than, than, you know, the house is flying off the shelf in years past. So again, good news, bad news. More listings that we had, not as many as we'd like, but what we are starting to see some movement in terms of listings. This is what I was talking about earlier. This is what economists call the rate lock effect. And about, according to Freddie Mac, about two thirds of homeowners with a mortgage have an interest rate of 4% or lower. These folks simply can't afford to sell their house and take on a mortgage. With a 7% mortgage rate on, on what would inevitably be a more expensive property, about 90% of homeowners with a loan have an interest rate of 6% or lower. Now, again, this is where some of the crash bros come into play and they say, well, therefore what has to happen is people lower the prices of their homes in order to sell them. Well, I'm a homeowner. I think you're a homeowner as well, Jason.

Yep.

I'm not really in a hurry to sell my house by lowering the price 20, 30, 40% just to be nice to somebody who wants to buy it. I'll, I'll wait out.

Why would you be. You don't have to there.

You know, that's the key. So the properties that are coming to market today are from people who feel like they need to sell, as opposed to people who might just want to sell. There's always going to be, you know, marriages and divorces. There's going to be deaths, there's going to be births, there's going to be job losses. There's going to be jobs that require a transfer. Those are the people who are going to be, for the most part, listing their properties. You're going to see.

Let me tell you something. I don't know if you caught that article. Several months ago, I reported on maybe a Wall Street Journal article that talked about how people are getting a divorce and still living together because they can't afford to sell that house with that cheap mortgage. Yep.

No, it's it's in fact I was just talking to a reporter about that before we got on today. Yeah, there are all sorts of of weird things going on just because of what happened. But this is whiplash, Jason. The Federal Reserve with its fiscal policies, its monetary policies during the pand kind of over correct corrected in a I guess a positive way trying to make sure that the economy didn't tank due to Covid and and was buying billions and billions of dollars of mortgage backed securities which drove mortgage rates all time lows. Now again on, on the flip side of that we, we've seen their actions have caused mortgage rates to go up to the highest level they've been in 30, 40 years. So when you have that kind of sudden shift and you've had two sudden shifts back to back, it just takes time for the market to normalize. And I, I do believe that's probably what we're going to see over the next couple of years. You mentioned supply and demand and what it does to prices. This is data from the fhfa. So this is all those Fannie Mae and Freddie Mac backed loans across the country. It's your 30 year fixed rate conventional loans. It's, it's the majority of loans that are out there and in their pool 6.3% year over year increase in prices. True in every region of the country. If we'd had this conversation maybe three or four months ago, you would have seen the Pacific region and the Mountain region were still negative year over year but they've since both gone positive. So price appreciation bottomed. June started to come back up and whoever's numbers you're looking at at this point, whether it's the nar, whether it's Freddie Mac, whether it's Fannie Mae, whether it's the case Shiller assessment, they're all showing an increase somewhere between 4 and a half and 6 and a half percent year over year. And I wouldn't be surprised if we see something else like that this year. Now for your, your folks who are looking at regional investments, it's really important to keep in mind that these numbers are general numbers. Every region is different. Every county within a region, every neighborhood within a city or county is going to be a little different. So we are still seeing markets like Austin and Seattle where for the most part prices are down a little bit year over year. But offsetting that you have markets in, in the Southeast that where prices are jumping up pretty significantly. So it's really important to understand what's going on in your local market rather than look at the national numbers.

Yep, that's what you have us for folks. We'll help you with that. Now Baseline, our sponsor. It is the number one banking platform built for real estate investors. It's banking online, rent collection, bookkeeping, tax reporting analytics and more. You can enjoy real time cash flow analytics on your properties. You can get ready for tax season with automated bookkeeping and financial statements ready for your CPA. Join more than 40,000 real estate investors who trust Baselane to manage their rental property finances. Go to Baselane.com Jason for a chance to win a $500Amazon gift card.

You mentioned the builders earlier and builders are doing very well for themselves for a couple of reasons. The most obvious one is they have inventory available to buy. You know this. But in a normal market, new home sales account for somewhere between 10 and 15% of sales. their peak last year they were accounting for almost 30%. So we, we ended the year with about 4 million existing homes sold and with about 660,000 new homes sold. And that ratio is, is, is a little bit out of, out of whack historically speaking. But again one of the reasons is because we've seen the inventory numbers come back and if you look at, at the inventory of, of new homes, it's about a seven month supply which is just about historically average for new homes. So the inventory is there and, and people are looking and buying at those houses. I've even talked to some investors who are looking for properties to rent rent who are buying some closeout inventory from builders in some of their developments. So it's, it's a very unusual market.

One thing we should note for almost everybody listening, they're interested in entry level housing that makes for good rental properties. So you know when you talk about the new home market which is arguably correctly supplied in, when you look at months of inventory, those aren't houses that make good rentals. Most of the time mostly your average new home price is like $475,000. But if that new home that's nationwide but if that new home is in a nicer area, you know that's going to be a $600,000 house, right? And so it just doesn't work that well from a rent to value ratio perspective for the investor. So the resale market massively under supplied. The new home market arguably correctly supplied with an even keel balance of inventory versus demand. But again the new home homes much more expensive. So again that doesn't mean the investment market works.

You have to be, you have to be very selective and sharpen your pencils for this to work. And you're absolutely right. Most new homes are not entry level homes. If you're only building a limited number of properties, you're probably going to build more expensive properties. That said, this is kind of interesting and it kind of goes to your point about pricing. Existing home sales prices are up six and a half percent year over year. New home prices are down about 15% from people speak. So the, that gap between existing home median price and new home median price is, is lower than it usually is. And the other thing that, that builders have been doing, which is very smart on their part and good for buyers, is they're coming into closing with thousands of dollars, tens of thousands of dollars sometimes and paying down points on a mortgage.

They're doing buy downs.

Yeah, buy downs. I was speaking to a group in Denver not too long ago where I saw a local builder advertising 4.9% mortgage rates. So rather than discounting the home prices by 30, $40,000, they're offsetting mortgage costs, which allows them to keep their prices where they are, but also gives those, those home buyers a better option. The good news about new homes in general is that a lot of them are purchased by move up buyers, which should theoretically free up some lower priced inventory for other buyers.

For first time buyers. Right. Because the new home is usually the second or third home. Yep. Not the first home because they're not building any first homes anymore. Hardly, you know, in any real way. So yes, if that seller of their first or second home to buy their second or third new home, if they sell their property and don't keep it as a rental because the mortgage is so cheap, then it does free up some inventory. So that's very nice for buyers. One of the things that's really important to understand is that builders are addressing this problem by making smaller, cheaper houses with inferior finishes and features to try and make new homes more affordable. In fact, the size of new homes has decreased pretty substantially. I can't remember the exact number, it depends what survey you look at too. But in just the last three or four years. So keep in mind, if you look at a survey, folks, and it says, well, new home prices are flat, flat, or they've only gone up a little or they're going down, it's because it's not the same new home.

Right.

The new home is now a lesser home. Yeah.

So they're not discounting existing inventory. They're building smaller homes or building homes.

With less expensive, cheaper houses. Yeah.

The good news is they're building more. So when you see headlines that say housing starts are down, they are down overall, but they're down mostly for multi family units.

Right.

And there's a million apartments coming online.

Way too many. Yeah.

So, but building permits are up, housing starts are going in the right direction for owner occupied properties. So we should see more inventory of new homes coming to market. And that's a, that's a good thing overall.

Yeah, we need more.

This is some data from CoreLogic. Investors continue to buy pretty significant share of homes. Their data shows that we're, we're somewhere between 25 and 30% of all residential sales going to investors. And what's important to know is that this is not institutional investors driving this, this wave. This is mom and pop investors, mid size investors, people who typically own 10 or fewer properties that make up the overwhelming majority of investor purchases. Now the other thing I need to point out with this number is you have to make sure you understand that everything is relative. So the percentage of investor purchases is higher, the volume of investor purchases isn't quite as robust as this number would suggest. It's just that there are fewer consumers buying these properties.

Good point.

Yeah. So the investor share is high. In fact, we've seen flipping numbers down. So the fix and flip investor activity has been down three of the last four quarters the last quarter. I think this was Q3. 2023 was down about 30% from the same quarter. In 2022 was down to about 70,000 flips. And it's been a difficult market for flippers because of first price appreciation falling and then the rates of financing going so high that the people would have bought these flips simply can't afford to pay the price that the flipper wanted. So I think we may have bottomed out in terms of the number of flip. Starting to see gross margins improve a little bit. I don't have that chart here, I don't think. But we are seeing gross profits come back. And as gross profits come back, flippers will come back as well. But that, that combination of pricing and inventory has made it difficult for flippers. So the flip side of that, so to speak, is gross profit. So that's simply what I bought the property for and what I sold the Property for again 3/ consecutive quarters here where that number has gone up a little bit. So hopefully a slightly better environment for people that are fix and flip investors than what we saw earlier last year year. If you're looking to buy rental properties, apartment rents. So if you're looking at multifamily units really have come down, they've been flat year over year in some markets are actually negative now, again coming down off a huge, huge increase over the last couple of years in asking rents. And the good news for most of your investors, Jason, is that if you look at single family rents, they, they have not gone negative by and large. So in all price tiers, whether it's, you know, low end apart or low end single family rent rentals, high, middle or high tiers, everything has continued to go up, at least marginally. So those rents have been protected a little bit better than apartment rents.

And I do think, and you know, I was hoping this wouldn't happen actually this is kind of bad news for investors a bit, but I do think that the absolute glut of multifamily apartment complexes is softening our rents a bit. I'm going to say that I was hoping that wouldn't be the case and I don't think it's a huge impact, but it does definitely nibble around the edges. A single family home renter wants single family home if they can get it. But when you've got so many apartments out there offering incentives galore and you know, good deals, you're going to have to compete with that with maybe 10, 20% of the potential renter pool for your single family homes because they could sway either way, you know, so it's.

Those people on the margins that are going to make the difference. And it depends on your market. Some markets are going to be oversupplied with apartments, some still won't. So it depends on where you are. In terms of what we're seeing in delinquencies and defaults, we are seeing consumer delinquencies increasing and in most cases above pre pandemic levels for things like auto loans and credit cards and general consumer loans. The one area that's not been true yet is student loans. And I believe that's just a timing issue. People hadn't had to pay back those student loans for a while.

Yeah, they got a nice moratorium.

But now that that's over, I, I wouldn't be surprised to see that that tick up a little bit. We've seen mortgage delinquencies go up a little bit bit, but still lower than historically normal levels.

Still a total nothing burger here.

You know, it is, you're, you're looking at about a 3.8% delinquency rate, which is exactly where we are in unemployment. So keep that in mind. If you're wondering about mortgage delinquencies There's a very, very strong correlation between those delinquencies and unemployment rates. And if you look at this chart, Jason, the blue area there is short term delinquencies. So Those are the 30 days, and that's the bulk of delinquencies. We're actually not seeing a lot of these things. Things roll into longer term delinquencies. And since there are a few delinquencies, there is also a few foreclosures. And this is bad news for investors who are looking to buy distressed properties.

Right. There just aren't many of them at all.

No, we saw, we saw about a 10% increase in overall foreclosure activity year over year. I expect we'll see something like that again this year, but I don't think we're going to be back to 2019 levels of foreclosure activity probably until next year year. And the reality is the majority of borrowers in foreclosure, about 90% have positive equity. About 60% have at least 20% equity.

Which, which means most of them never make it to the foreclosure.

You read ahead. So what we're seeing is that these, these folks are protecting their equity by selling the property before the foreclosure sale. And that's where we're seeing most distressed property sales. So if I'm an investor looking for a distressed property, I'm going to be reaching out to homeowners when they get that first foreclosure and trying to negotiate a deal with them. If you're looking at foreclosure activity, about 80 to 85% of foreclosure start activity, we're back to about that level of pre pandemic. So almost 85% as many foreclosure starts as we would have seen before the pandemic, only 50% as many auctions as we saw before the pandemic, and only 30% as many REOs or bank repossessions. So the borrowers really are, are either selling the properties or getting the loans cured before those foreclosure processes take place. If you're, if you're an investor waiting for those REOs from the bank, it's the wrong strategy for this marketplace.

Yeah, and one of the things we should point out is that he keeps comparing things now to 2019 before the pandemic era. He's not comparing them to 2008, folks. Okay, 2019 was a great year. Year. Like there was nothing wrong with 2019. That was a, a fine year in real estate. Okay, so again, the Crash Bros. Just out of their mind. Yeah.

And just to wrap up quickly because I'm coming up to it to a timing deadline, we are starting to see some distress in the commercial market. So if you have anybody looking at commercial, the office market, we're looking at about $35 billion in distress right now. Retail a little over 20 billion. So across the board we're seeing more, more of that. And because of that we're seeing more commercial foreclosures. But keep this number in perspective. We're looking at about 700 foreclosure actions a month with which is two to three times higher than usual, but it's still only 700 foreclosures a month across the country. So.

And that's for commercial properties. All commercial properties and mainly office. And office is a bloodbath. I mean office and multi. We're going to see some multi family and multifamily. Yeah, yeah.

Because. Because people got in over their skis.

So.

So looking ahead for this year, I still think a short, mild recession is at least a possibility. But unemployment probably won't get completely out of hand. I think we're probably going to see a 10 to 15% bounce back in terms of home sales volume in existing homes. But that still doesn't get us back to 2022 numbers. Those mortgage rates will decline over the course of the year, but probably going to bring more buyers to market than sellers, at least initially. So prices will go up. The investor share of the market is going to continue to be strong. There is going to be more demand for rental units because a of people who'd like to buy simply can't afford to right now. And then I think commercial sales you're going to see decline through the first half of the year while people are trying to figure out what everything is worth out there and they'll improve a little in the second half. Office sector is going to take the biggest beating and then foreclosure activity is going to remain below normal levels for the rest of this year and we're not likely to see much in the way of REOs for even longer than that.

Well, Rick, as always, that has been very informative. Thank you for joining us and giving us the real outlook rather than the clickbait pseudo news that we're always hearing. So we always really appreciate that. Go ahead and give out your website.

Yeah. If anybody's interested@cjpatrick.com you can also find me on Twitter and LinkedIn. And if you reach out to me on LinkedIn, mention that you know me from Jason, so I know you're not some crazy Russian bot trying to connect with me on on social media.

Good point. All right, Rick Sharga, CJ Patrick, thank you so much for joining us.

Thanks for having me, Jason. We'll talk soon.

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