2152: Economic Insights: Inventory Trends in the Housing Market | Mike Simonsen, Altos Research Part 1

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Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Greetings empowered investors from Dallas, Texas. Today we have a returning guest and that is Mike Simonson from Altos Research. We've got some really important data to cover as inventory is increasing and is that a signal for a market shift? So far all the crash grows have been very, very wrong and the market has continued to increase in price and it is still still increasing in price, but inventory is inching up a little bit. So does that mean a change? Does that mean a change? We're going to explore that with Mike Simonson. Now I have a speaking engagement and a mastermind group meeting here this week and we just finished our Empowered Investor Cruise last week. I tell you, don't miss one of our live events, folks. Never miss our live events. Mark my words on that. Everybody just loved it. We learned so much. We had so many great speakers on the Empowered Investor Cruise. But we've got another great thing coming up for you on Wednesday. Remember, the second Wednesday of every month we have our free zoom meeting. And this month we are going to talk about something almost everybody can benefit from in a big, big way and that is cost segregation. Now, this world of cost segregation has changed dramatically over the years because it used to be something for only big investors with big commercial properties. I remember the first cost segregation study I did was on an apartment complex I owned that was 125 units and I paid $22,000 for this cost seg study. Nowadays, though, you can do them on your single family homes and I just did them on three of my single family properties. And it is amazing the savings. You do not have to be a real estate professional to benefit from this. You do not have to have below $150,000 in adjusted gross income to benefit from this. Everybody can benefit from it.

Almost.

Almost everybody. So join us on Wednesday. Go to Jason hartman.com Wednesday this is a free Zoom meeting. It is not a webinar. It's a zoom meeting. So everybody can participate. You can get your questions answered. We have an expert on with us. We'll have a fantastic cost segregation expert on with us on Wednesday. You just don't want to miss that. Jasonard.com Wednesday to join us for the free Zoom meeting.

It is my pleasure to welcome a returning guest back to the show. And that is my friend Mike Simonson with Altos Research. He is the founder and he's a great data guy. Really does a great job at expressing the reality of the marketplace. And I think you can be a little bit surprised at some of the things he has to share today with Mike. Welcome back. How are you?

Thanks, Jason. Great to be here. Good.

Good to be here as well. And I think it's been over a year. I can't believe how fast time flies. I could be wrong about that, but it's been too long. Anyway, Mike, so we're glad to see you again. What is happening in the real estate market? There's been a lot of turmoil since you were last on with the national association of Realtors and these commission lawsuits and settlements and so forth. But just give us your take.

So this year, it's now second quarter, the rolling into the peak buying and selling season. The biggest trends of the year are that we are finally seeing a little more inventory nationally than we saw last year. So we're seeing inventory grow. We're seeing new sellers each week grow about 5, 10, 15% more sellers each week than the same week a year ago. So that growth, and really what that growth means is that it allows for more sales to happen. And so in 2023, we had dramatically few sellers. That tight, tight inventory meant that any demand was gobbling up that supply. It actually pushed home prices higher in 2023. But there was a lid on home sales that could happen because there simply weren't enough homes for sale. As mortgage rates stay higher for longer, that allows More inventory to build. It allows more, we can see more sellers coming, inching back into the market and therefore we can see more sales starting to happen. If mortgage rates jump, buyers stop really quickly. And so any growth in sales we are having right now are fragile. Like if rates jump from here, then our, our growth in sales rate is, is a little bit fragile. But if they stay flat about 7 or drift lower, that will be allow for home sales to grow this year. So There are about 7% more homes in contract right now than a year ago. And that could go higher from here, especially if start to ease down into the mid or lower sixes.

Okay. So sales volume has picked up a little bit. So the realtors are a lot happier with that. The title insurance people, the escrow companies, the settlement providers, the home warranty people, the lenders certainly are happy with that because there's more sales volume. And folks that contrary to what all the crash bros out there say. Look, I, I mean I guess you could express it this way, right? I've always said there are three types of markets. Most people think there are just two. There's a buyer's market and a seller's market. But I think there's a third one and it's called a broker's market. Okay. And to have a broker's market you need inventory. And you know, this really occurred to me, Mike, about 20 years ago when one of my agents sent me this email. Her, her name is Marty, she's still working at my old company that I sold to Coldwell Banker. And I remember her sending me this email when inventory was very, very low. And she said, gosh, I just so wish interest rates would go up because then I'd have more inventory and I'd have more houses to sell. There's just nothing for sale. And you know, this was in Southern California, in Orange County, California, where I'm from. And you know, I just completely agree, you know, that's the thing. And so you know, we've got what, 512,000 homes for sale in the US I believe was your last report. That' higher than the COVID era lows of about 240,000. But it's a far cry from normal, which we need to add about 700,000 more homes to be normal.

Right?

Yeah, yeah, yeah.

So.

And we can see a few things, Jason. We can see there are some parts of the country which are back to more normal times, like pre pandemic times. Some of the really it's around the Gulf, the Gulf states. So like western Florida, around Through Louisiana and down into Texas, those markets have grown inventory more. And those tend to be like higher property tax markets, high insurance costs, high property taxes.

Yeah, that's for sure.

Yeah, yeah. And. And especially compared to California, where our property taxes never go up. And so as a result, it's you. You hold real estate longer in California. And, and so we can see that, that turnover happening and driving inventory higher, especially those Gulf states. And then there's places like Boston and even San Francisco right now have very low inventory, barely coming off the pandemic lows. Inventory is growing pretty much everywhere across the country, like, growing over last year pretty much everywhere across the country.

A couple of comments before you go on. Number one, I have long said, and I don't know if you agree with this or not, Mike, but if it wasn't for Howard Jarvis back in 1978 or something around there with Prop 13, California's property taxes, I mean, look, the prices are high, so the overall tax bill is very high, but the percentage is actually quite low. As long as you're not in any of these special assessment areas where there's mellow roofs or whatever. You know, they got a million different names for these bonds. And, you know, I think that has been one thing that has kind of allowed the California market to appreciate so well over the years is the fact that you have these very low property taxes and older people could afford to keep their houses, which artificially kept inventory low, whereas it, in a place without Proposition 13 like they have in California, would have caused people to sell as their taxes got reassessed every couple of years.

You know, that's exactly right. And that was the whole point of a Prop 13 in California is like, don't let Granny get kicked out of her house.

Right.

And it works. The downside is that we give the advantage to Granny over our kids.

Yeah.

You know, so there's chronically short inventory, chronic shortage of inventory in California, and it pushes home prices higher. It's like, it's like doing rent control for the whole state, for the homeowners in the state. But we can see, like, Texas has high property taxes and adjust very quickly. So if you bought a house, if your house in Austin appreciated a ton over the last five years, then your property taxes went up a ton, too. And so you're much more likely to resell that than to hold onto it. And that turns out to make a healthier market for buying and selling a home in Texas. Keeps it more affordable, keeps more selection available. Yeah.

What it means right now, churn Right. Where you don't have this. And like you said, it's like rent control for the state because in rent controlled markets, like where you are in San Francisco, you know, people just don't move this really stagnant, weird market. It becomes very dysfunctional. You know, you have these. Same with New York City, you know, it's, it's.

Yeah. And that's what happens to California in the resale market. Right. And so you can see that it's why Texas has a much healthier, more affordable. It's one of the reasons that Texas has a healthier, more affordable. And it's ironic because it's like due to high taxes, but that's, that's how it works. Right. But what it means though is right now many of the Texas markets are now back at their pandemic, pre pandemic, normal levels of inventory. It means that, you know, you can see therefore less upward price appreciation, which in an affordability, like we have an affordability challenge right now. And so that means that that market becomes more accessible again to more buyers. And it's like, so, so those are underway right now in especially those Gulf states. But, but it's, but inventory is growing everywhere across the country right now.

Right, right, right. Yeah. So it's growing a little bit. So you know, I say that's a good thing. We need it to grow a little more, to get into more of a healthy market with some dynamism. It's been very closed down for so many years. Do you want to share some of your great visual aids with us?

Sure. We can dive in. We're looking at this week's data. So at Altos, we track every home for sale in the country every week, all the pricing, all the supply and demand, all the changes in that data. And then we, we publish out the data. So this is data including all last week published, this was, you know, through April 5, and it actually includes the Easter weekend in there. So right now there's 513,000 single family homes on the market around the country. So it's 25%, 100,000 homes more for sale right now than a year ago.

And in, in this chart, each line is a year. And so the dark line there, 20, 24, you can see it's keeps expanding versus last year. And.

Mortgage rates are higher. That means more homes are like, it's, it's, you know, demand slows, inventory grows is a way to think about that. So, you know, as, as mortgage rates stay in the sevens, we see inventory growing. You can see though, that there's for fears about whether there's too much inventory. Like do we have a price crash coming? We can see and I think you pointed this out early on. You know, the, the gray and green lines up there, those are previous years. So there might be 800-900-000amillion homes on the market in the second quarter not too long ago. And right now there's 513,000. So we don't really have, they don't see anywhere in the data like a flood of inventory. But, but as you point out, like more inventory, more supply is a good thing. More supply is very clearly leading to more sales. So more sellers means more sales happen. And so like all of those things are good for in general for the.

For the housing market and for the broader economy. I mean, look, when, when someone buys a house, they go and buy furniture, they go and buy appliances, they spend money at Home Depot and Lowe's. It is just a very stimulative thing. And this is why folks, the politicians will do anything in their power to keep the real estate market going. Okay. Because it's such a huge part of the economy. It just, it has such a ripple effect on so many different industries. So it's a, it's a very important part of the economy.

Yeah. And you know, we can see that in essentially all the laws, you know, are designed to help the homeowner. They're designed to make sure that, that you know, you get your tax breaks, you get like everything we do, all the policy we do is about helping the homeowner. And so as a result, over time we own more homes. And over the years and you can see really 18, 19, and you can see how year over year fewer and fewer homes are been for sale over the last decade. And we're now coming out of that with, with higher mortgage rates for, for two years. We're two years into rising rates now.

Yeah. And it, isn't it amazing, Mike, that I mean if you, you know, if you consider the highest rates went and the lowest rates out there that people still have. Right. The cost of money on this credit based asset, real estate has virtually tripled. Right. And there was no crash. Prices kept going up in the face of the cost of money tripling. Like think of the, what other asset could withstand that? That is a barrage. I mean that is, that's amazing that it has been this resilient. It really amazes me.

It made it me too. You know, and if we look at this point, we take April of last year, April 2023, at that moment we were showing year over year home price declines. 4Q22, rates had jumped all year long and jumped even more in the fourth quarter and it really slowed the market down. And so By April of 23, we were showing home price declines versus the previous year. But what happened last year, which surprised me because there was so little new supply that the existing demand was there to essentially keep a floor on prices. So even though demand fell, supply fell dramatically. And, and that really kept a floor in prices. And we ended the year with about 5% home price appreciation last year in a year when, when demand was way down. And it was, it, it was really hard to, to bet on that a year ago. Right, it would have been really hard to bet on that a year ago. So that was a bit of a surprise that people like how all those pieces ended up working together.

Yeah, well, that's the lock in effect for you. It's just keeping people from selling. It's kind of like, it's kind of like we have tens of millions of people in America with Prop 13 rent control. You know, they don't want to give that up.

That's exactly what we have. And, and it is a generational benefit in that, you know, the people will have that. Like I have a 2.8% mortgage and I'm not selling that house. And now on the other hand, there are 5 million people a year who do buy houses.

Yep.

So now we have 10 million people who are not locked in. And that's one of the reasons that we will see more and more relisting inventory each year. That we have higher rates.

Absolutely. Yeah. Yeah. So even in a low volume market where you're going to have maybe, you know, just under 4 million sales versus 5 or 6 million, which you'd want to have to be in a normal dynamic market. In that market though, you know, you do that for a couple of years and, and people start to peel off and then you reduce the lock in effect, which is a great thing because I'd like to see some more sales and some more inventory.

That's exactly right. And so we're two years in the higher rates. And so we look at this chart here, inventory, see the single family homes on the market. And people ask me, when do we get back to the old normal levels? And the answer is like your, your agent who worked for you 20 years ago. The answer is when we have higher rates for longer. We have multiple years of higher rates each year we're going to see inventory build and we'll Build back closer to the old normal levels. And so it took us a decade to get down to the pandemic crisis lows. It takes us a few years to get back to the old normals. And so you can see the, the red lines there last year and the year before. You can see inventory starting to build as rates climb. So rates rise and inventory rises, but.

Again, overall, it's a drop in the bucket.

So yeah, yeah, it's slow. And on the other hand, you know, we have a lot of forecasters. Morgan, I don't forecast mortgage rates, but they're mortgage rate forecasters who keep assuming that rates are going to fall this year. And if they do fall, what's going to happen is we're actually going to, we'll stimulate demand more than supply, so our inventory levels will start to fall again. So if your rates are about seven right now, 7% for a 30 year fixed mortgage, if they fall to six or into the six and a half or, you know, closer to six, like, you'll see this trend reverse and they'll start to compress again.

I completely agree, Mike. This is a little bit of research we did. We have an economist that works for us and I gave him this assignment of researching how many more people could qualify at different mortgage rates. And so what we did is, I said, you know, just use a baseline of 7% mortgage, right? Could be higher, lower, but we got to start somewhere, right? So if, if 7% is our baseline, right, Our sort of benchmark rate, and we fall down by a half a point in mortgage rate reductions. Now, keep in mind, at the beginning of the year, Fannie Mae predicted by the end of this year we would see 5.6% mortgage rates. It doesn't look like that's going to happen, folks. I think they're going to revise that forecast. Maybe they already have and I haven't seen it, but Uncle Jerome Powell is being pretty tight with the purse strings on the rates, that's for sure. But you know, the pivot is going to occur. I think we all know that's coming. You know, it's just when is the question. So if rates drop a half a point, that means that 2.8 million more people can afford the median price home. Now, of course, they won't all enter the market, right? But say a third of them enter the market and they start bidding and they start putting offers on houses, and then there are multiple offers on houses. And so, you know, if you have what, seven, 800,000 people come into the market in a market where you only have an inventory of just over 500,000 homes. Folks, this is just supply and demand. It's not complicated. Now, if rates go down to 6%, that means 5.4 million new people can qualify if they go way down to the. What's called the magic number by John Burns. Right. And I think you've talked about that, by the way, Mike. I don't know if he started with that, but that's the first one I saw, you know, mention the magic number. Barbara Corcoran is using that term now. That's 7.7 million new buyers. I mean, what do you make of this? This is crazy. In a market where we have 500,000 homes, or maybe by then we'll have 600,000. So what? It's. It's nothing compared to the demand. And, you know, I'm only just assuming maybe a third of these people actually enter the market. Your thoughts?

Yeah. So, you know, I think this highlights the message that I have been trying to communicate recently, which is that it's actually, I don't see it as a magic number. I don't see it as a fixed number, like 5 1/2 percent. For a while, I was looking at that. We were coming out of the 20, 23, 22. We were watching. We could see where people would start to buy, we'd see where it would slow down. But what I've observed recently, and we can see it really clearly in the data, is that consumers are more sensitive to changes in rates than to the absolute levels.

Yeah, that's a good. I expand.

So, yeah, so if I'm shopping at 7% and suddenly it's six and a half, it looks like a bargain.

Yeah.

If I'm shopping at seven and suddenly rates are seven and a half. Now I take a step back, I don't make an offer. I. We can see that then those sellers don't get their offers, that then inventory builds, then they do price reductions. Like, we can see it across the board pretty much to the day of the big mortgage rate spikes. And so, you know, I think about, like, we've been traveling now in 7%. We started the year in January, was in the sixes, but then rates pretty much climbed all year, maybe a little higher, early March, back down a little bit, but we're still in the sevens. So rates have essentially been climbing all year. And we can see that, like I mentioned, we're trying to sell as a little bit more sales happening. But you can also see how that is held back by. By rates having not receded. So now though, they are flat at seven. And we can see the sales starting to build again. And once, if they, if they drop from here, then we'll see a big spike. And, but if they spike from here, then we'll see that slow down again. And so we can see it really directly correlated. So right now, because rates have been at 7, the magic number is 7. So they fall below 7, like that stimulates demand.

In other words, it's all relative. Because the way the human mind works is, is by answering the question I ask all the time. Compared to what? Right. That's the way we all. The only way any of us know the value of anything, money, goods, a potential mate or a date is by comparing it to something else. Right. That's the only thing we do is we just were comparison beings. And that's why you saw all these people that have been around a while. As soon as the rates spiked, they said, well, when I bought a house, rates were 18%, you know, in the early 80s. Right. Or whatever. Right. But of course, houses were a lot cheaper. You didn't bother to mention that.

Yeah.

You know, but it's just all relative.

Sure it is relative. And what really the lesson here is how quickly we reset our comparison. So, you know, rates have been at seven for a few months. We're comparing to seven and it's only a few months. Right. We're not comparing to five and a half. We're not comparing to three from two years ago, we're comparing to seven. And so if homebuyers are, have been shopping this spring and they're looking around, they're setting their expectations about what kind of home they can buy based on 7% mortgage rates.

Yep.

And so it's, it's only a few months of stability that then they go, okay. But if rates jump to seven and a half, now they're frustrated.

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

The following is a blog post found.

On jason hartman.com blog.

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