2319: Housing Market SHOCKER: Why It's NOT 2008 (The REAL Reason Home Sales are Down)

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Welcome to episode 2319 and do I have big news for you today. I don't know that this has ever happened in the last slightly over 100 years that the Fed has been in existence. Maybe it has, but it's big news either way. The head of fhfa, the Federal Home Financing Administration, Bill Pulte, is calling on Congress to investigate Jerome Powell. Now, advice to the wise. You do not want to be enemies of Trump or the Trump administration. You know, they're actually doing the right thing. I mean, there's something going on with Powell and it is very wrong. So I'm actually glad this is happening and it's going to be great news for real estate prices and real estate activity if it happens. Look, you know, I've been very critical of Powell. I used to like the guy until he held off way too long on raising interest rates. And then at this time, he's holding off way too long on lowering interest rates. So he seems to be one of these types of people that just sticks with a decision even when it's proving to be a very bad decision. And I think his dislike for Trump, that is really running this. But what does Bill Pulte say? What did he Write to Congress about this. Well, his Wednesday morning statement comes after he called for Powell to resign on June 19. In several posts on X, here's what he said. Okay, if you're watching on video, I've got this right on the screen. Quote, I am asking Congress to investigate Chairman Jerome Powell, his political bias and his decision deceptive Senate testimony, which is enough to be removed for cause. Jerome Powell's $2.5 billion in capitalizations of building renovation scandal. Now, I don't know much about that, but whatever Pulte says, it stinks to high heaven. And he lied when asked about the specifics before Congress. Nothing short of malfeasance and is worthy of for cause. And Cynthia Loomis said Chairman Powell made a number of factually inaccurate statements to the committee regarding the Fed's plush private dining room and elevator, skylights, water features and roof terrace and that this is typical for of the mismanagement and don't bother me attitude of Chair Powell that he has always shown Chairman Powell needs to be investigated by Congress immediately. Well, Congressman, Congress can fire him. The president can't. But we will see what happens. We will see if this is enough pressure to get Powell to resign early. He's going to be out in several months anyway. We all know that. But I would just like to see him go because he is just insanely stubborn. He should be lowering rates. Now. Inflation has proven not to be a problem. We're right around the Fed's target rate of inflation as they sort of play the Phillips curve and rates should be lower. Now what would happen if rates are lower? Well, we're going to talk a lot about that today, so stay tuned to the end. But first I want to watch a video with you. This video is only a couple of hours old and it's from Bravos Research. Now these guys research the stock market. They talk about the stock market and that is their thing. And they push the stock market because that's how they make money. But they did an interesting video on the housing market and at the beginning of it it's going to sound like doom and gloom. But stick with me. Wait till the end of the video and wait till the end of our show today because we're going to show you some things that are going to be really, really important to you. All right, let's check in on this video.

In 2003, the number of new homes that were available for sale in the United States stood at roughly 300,000 units. By early 2007, that number had doubled to 540,000 new homes on the market for sale. This massive increase in the home supply sowed the seeds for the financial crisis that followed. But it's not just 2008. We've seen this happen several times throughout history where a big boom in housing construction leads to an oversupply of home.

So this chart goes up to 2011 and they're talking about new home. This is new homes for sale, not the overall market. And we know what's going on. We know that the resale market is extremely tight. People just do not want to sell their homes and give up their super cheap mortgages because the lock in effect which their deal is too good. It's too good to give up. But new home developers have a whole different set of dynamics. So that's what we're looking at now.

Which is followed by some kind of an economic crisis in the year that follows. And today we've recently seen the number of new homes for sale in the US jump again from 300.

Expand this chart to 2023. Okay, that's where the chart ends.

Thousand in 2021 to now, roughly 500,000 homes, the highest level since 2008. If history is repeating here, it could be that the housing market is currently flashing a major warning sign for the economy. Today, housing sector contributes to a total of 15 to 18% of total US GDP. This includes things like construction, renovation, rent and services. So a slowdown.

And by the way, what they're talking about now is how the housing market has such a ripple effect on the entire economy. And this is why politicians and the Fed, well, maybe, maybe, except Jerome Powell right now. This is why they are so attuned to the housing market and so concerned about the housing market and will do anything in their power to keep the housing market in good shape because it is so important to the overall economy.

Traction of the housing market in the US already mechanically tracks down the overall gdp. But it's not just a part of the economy. The housing market is also a leading indicator of the rest of the economy. So in other words, when the housing market weakens, it tells us that the economy is likely to weaken next. And there is clear evidence to back this up. Historically, almost every major economic downturn from 1968 to 2020 was preceded by a decline in existing. We can Zoom in on 2008 to see exactly why this happens. When the housing market weakens, what you typically see in the year that follows is that purchases of furniture, electronics and appliances, building materials, garden equipment, and countless of other things begin to struggle and even decline, leading to an economic contraction. So less home sales directly translates into less demand for a whole series of goods and services that are related to housing, which can already slow the economy down. But even more importantly, housing weakness provides vital information regarding people's ability to spend. Buying a home is one of the most important purchases of a lifetime for most Americans. So if the number of homes being sold is declining significantly, it probably means that people are in a weaker financial situation if they're not even able to save up enough money.

And we all of course know that the dynamic now is low activity. Activity has been down for three solid years now, which leaves a pent up housing demand in the market of I estimate about 6 million people, 6 million transactions that should have occurred but didn't occur because of low activity, low affordability, high prices, high mortgage rates. And that is why we are seeing a housing market that is going to turn very, very quickly as soon as the cost of money becomes reasonable again. And I'm going to show you an interesting chart on that in just a couple of minutes.

For home it's very possible, even probable, that they'll begin to cut back on their spending in other parts of their lives and so potentially dragging the economy into a recession. Now if we look at what is happening in the housing market in the present day, we've seen a 40% decline in existing home sales. Historically speaking, that means the economy either is already in or, or should be heading right into an economic downturn. But if we zoom in a little bit closer, we see that things have actually been playing out very differently today. The drop in homes started three years ago has not been followed by weak retail sales from the sectors that we mentioned before. In fact, all of them remained very resilient to this day, holding up well above pre pandemic levels. There is something else that's happening here. One possible explanation is that the housing market that we're seeing today is not actually being driven by real weakness in the housing market like previous recessions, but instead by the housing shortage that is currently present in the United States. We can see that by looking at this chart of U.S. existing home inventory.

And currently see how low that inventory is. There is a very, very real housing and shortage in the United States. We've talked about this ad nauseam, but don't let the doomers make you believe it's any different. Right? And remember, if people can't afford the house they want, they'll buy the house they can afford or they will rent the house they can afford. That's Just the reality of the situation. And that's what economists can never evaluate very well. It's capitulation. I've said that so many times. People settle. They do not get exactly what they want. Look, our expectations are determined usually by the recent history. And just a few years ago, during the COVID era, people could buy a lot more house than they can nowadays. But those expectations adjust within about one year or less. And we've already seen that happening because the market is reasonably resilient. I mean, it's pretty darn amazing that you triple the cost of money. And housing prices still rise. Not so much as they were before, but still rise in the vast majority of metros.

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It's telling us that housing inventories is at one of the lowest levels in over 20 years. That already tells us that the drop in existing home sales isn't necessarily being driven.

Oh, and by the way, when you look at the housing inventory numbers, remember there are many surveys on this. I just want to mention it again when I talk about it, I Most commonly use the ALTOS data, which shows about 800,000 homes for sale, because those are actually active listings versus the NAR Data National association of Realtors active pending sold, which always shows more inventory. And you're welcome to use any survey you want as long as you make an apples to apples comparison. So if you're comparing 2015 with today, you want to use the same survey all along the way because that will tell you the story. But if you switch surveys because they're, they're calculated differently, then it's going to become very, very confusing.

Driven by a collapse in demand, but rather that people are just not looking to sell their homes right now. This is definitely not the same situation to 2008, where existing home inventory was sky high at the same time as home sales were dropping like a stone. That was reflecting a truly weak housing market and hinting at the underlying economic weakness that was going to follow. Today there is a major housing shortage in the United States that is skewing all of the data on the housing market that we have. This is a shortage that stems from a combination of underbuilding after the great financial crisis, rising demand for millennials, and also increased construction costs. There's more evidence of this housing shortage on this chart that tracks the time that it takes to sell a newly completed home.

It's currently sitting at look at difference. If you're watching the video on median number of months of existing home sales right during the Great Recession, 14 months today, right around two months. So very, very low inventory. And that is the thing that lock in effect of inventory is what is keeping this market largely appreciating in the vast majority of metros, even with the economy and the high interest rates and the very high prices.

Just three months, which is not only far better than the 7.5 months we saw at the onset of the 2008 financial crisis, but also lower than the long term average of around four to five months of the last 40 years. A higher length of time to sell a home is a signal that the housing market is actually weakening as lower demand naturally leads to a slower market. Today, homes are being sold at a record pace, not really reflecting the underlying weakness that we talked about before. So what about that chart at the beginning?

Definitely a weaker market, but again, very, very limited inventory. That is true in the resale side, which is the vast majority of the market is resale homes. Right. There's about 140 million housing units in the US and new homes are just a drop in the bucket, but very different dynamics. So if you want to get a good deal on a new construction home, contact our investment counselors. We've got builders who are wanting to move inventory and make deals. They will buy down your interest rate. They will offer incentives, they will offer lower prices. There are some great opportunities out there. This is one of those. And you know, if you've been following us for years and my work for the last 21 years. Right. You see that there are times when we're in more of a resale market where we're buying remodeled properties. Fix and flips. Right. Where an investor flipped that property, fixed it up and flipped it to the end buyer, which is us, our long term buy and hold people. That's us. Right? And now we're in a market where we want to buy from new developers most of the time because those are the people that are more motivated.

Getting of the video that showed a record number of new homes currently coming into the market. Are all of these homes being swept up at a record pace as well? Well, when we dissect the data on new houses for sale by their stage of construction, we see that the majority of these homes are either.

Now, the important thing I want to say here is that when they talk about the properties that are not started, that number is reducing on a regular basis because these builders are worried. They're worried about tariffs, they're worried about high interest rates. They're worried about the overall situation, and they're worried about the increased inventory in the new home site. And those builders are deciding, hey, look, we've got this lot that's entitled. We can build on it today. We've done everything. We're ready to go. But they're saying, hey, let's slow the machine down. Let's not build them so quickly. So a lot of these homes that they're talking about here in this chart will not be built anytime soon. Right? Because the builders, you know, just look at their stocks, read their annual reports. Well, their annual reports aren't very good because they're annual. But just follow their earnings calls and listen to them. You know, the homebuilders, you know, whether it's Dr. Horton, Lennar, whatever, any of these big builders, you hear what they're saying, you know, you kind of got to read between the lines a little bit because those CEOs, you know, they want to paint an optimistic picture, but they are worried. Builders are worried right now because they're worried about this increased inventory. So they are slowing that machine down.

Still under construction or haven't even been started yet in fact, only 20% of the current home inventory is made up of completed homes. That's a Stark Contrast to 2008, where the bulk of the supply was fully built and flooding the market. The excess in new homes that were actually built, plus the actual underlying weakness in the economy in 2008 set the stage up for a big downturn in housing and a big downturn in the economy today. When we look at the number of new homes on which construction has not even been started yet, it's at record highs. So this tells us that new homes are being built and that could solve the housing shortage. And it also tells us that we're at least a couple of years out from.

It's really interesting right now. We are in such an interesting market. I mean, I've been doing this for decades and, you know, mostly the market kind of tracks, right? It's the same market for new homes and as it is for resale homes. But now, as a general statement, of course, it depends where it depends on the product, depends on the property. It is a seller's market where the sellers have the power a lot of times in the resale market and a buyer's market in the new home market. It's kind of really interesting. And you know, of course, that is market dependent. It's price dependent, it's product dependent. There are many layers of that onion that you have to peel back. But as a very general way to look at it, that would be an accurate way to see it, seeing actual.

Weakness in the housing market, because most of these homes that have not even started yet won't come into the market for another couple of years. This is not unlike the big wave of construction that we saw in 2004, 2005. This building frenzy did set the stage up for the housing market that we had in 2008, but that was only two to three years later. So while on the surface level it may look like we're about to witness a second housing crisis, the reality is today's situation is a lot more complicated and not necessarily pointing to imminent economic or housing weakness over the next 12 months. So we are still quite confident in our bet on risk assets or long on financial markets today, as we think the economy will remain resilient over the next six months as long as we don't see a huge escalation of the trade war or a big oil shock.

But the interesting thing about that is that the population has increased dramatically. Okay, so they talked about the Great Recession. They talked about back to 2003, right? Well, we've added 51 million people in this country since 2003. And you have adjust all of those numbers for population and household formation growth. And remember, the household formation stats are pretty tricky right? Now. Usually those would be a very nice accurate thing to look at. But the thing that's different now is we've got so much failure to launch. Yes. Just like the movie Failure to Launch. We've got so much of that. We've got about 11 million young adults, qualified young adults, who would normally have formed their own households that haven't done that yet. And I've shown you the data on that many times on prior episodes about how that is creating a bunch of shadow demand. We have slight shadow supply coming into the new home market, but we have tons of shadow demand of people that would have normally purchased homes that didn't purchase homes. But remember, even with a population increase of 51 million people, we went from 290 million people to 341 million people. Actually slightly higher than that. Now even with that, there is so much pent up demand in the market of people that want to make moves. But regardless, remember, this whole discussion is about demand for purchase. Purchase demand, right. And it feeds into appreciation. But that's not the game, right? If they don't buy, they rent. They've got to do something. Housing is not optional. It is a requirement for everybody. Everybody needs a home. And so they buy or rent or they be homeless, right? And that's the choice. And so if they don't buy and you see this kind of demand destruction that the Fed has caused over the last three years, then they rent and that puts upward pressure on rents. So either way, if you take number of people, number of households and compare it to number of housing units, you have a shortage. And when you have a shortage, whether it's a shortage of homes to buy or shortage of homes to rent, either way that is going to work in your favor. There has been some temporary softening in that rental pool because the apartments have been overbuilt. They delivered a record number of new apartment units last year. They've been overbuilt. We've talked about that many times. I've shown you lots of data on that on prior episodes. And that has caused rents to be much less reactive in terms of increasing than they normally would be because the apartments are cutting great deals. I shared an example from Ken McElroy, my business partner in our collective mastermind group. He talked about an apartment complex in downtown Phoenix, one of these new apartment complexes that is literally Offering four months of free rent. If you'll sign a one year lease, they'll only charge you for eight months. I mean, you know, it's hard to beat those deals, but those deals are now diminishing. And now we're starting to see some very small rent growth, rent increases in the apartment market as those units have been getting absorbed over the past year. So this is going to flip very, very quickly and we as investors need to be ready when it flips. Now, let's look at this. Shown you this chart before, but I highlighted a couple of things this time that makes a difference. This is the buyer sensitivity. How many buyers will be able to afford the median price home if we see interest rates drop? We're definitely going to see interest rates drop. I mean, I would be 99.9% sure of that at this point because of all the pressure on Powell, all the economic data and all the geopolitical uncertainty and many other factors which are pointing to lower interest rates. They go from 7 to 6 and a half percent. Right. We started with a baseline of 7% in this survey. That means 2.8 million new people can qualify for the median price home in a market where we only have about 800,000 homes for sale. If, say, 1 million of those people enter the market, we will see multiple offers, we will see inventory being gobbled up very, very quickly. One million people entering the market, new buyers in addition to the buyers that are in the market already with 800,000 homes for sale. I mean, think of the numbers they shared about the new homes, where there's this new home inventory overhang that's coming, right? Where it's going to be a buyer's market in the new home market or already is, versus a seller's market in the resale market. Well, what if we see 6%, 5.4 million new qualified buyers, 5 and a half percent, 7.7 million newly qualified buyers. That is nearly 10 times the inventory we have today, folks. It's just so clear. I mean, what else can happen? What else can happen? The only two things that could derail this thesis, number one, a massive decrease in population through disease, pandemic, whatever, right? If the population just decreases massively and say we lost those 51 million new people that came into our world in our country. And I'm not talking about immigration, I'm talking about births, immigration, everything. The country's population increased by 51 million people since the start of the numbers that were just shared on that video. So say we lost 51 million people. Well, that would certainly hurt demand for housing. Right? That would be terrible. Or we suddenly built 5 or 7 million new homes in America. They just appeared out of nowhere and that ain't going to happen. We've talked about that so many times before. As to all of the different pressures on that, Trump's solution of selling federal lands to developers, it's a drop in the bucket. That's a nothing burger. Okay? Because in entry level housing, most of the cost is in the structure, not the land. And tariffs. That means higher prices for all of those ingredients going into that house. All right, let me share a few more things with you today. I think we got a little more time. And this is more positive news for the housing market, right? Fannie Mae and Freddie Mac say single family delinquency rates decreased. Yeah, I know all the doomers are talking about the crash that's coming, right? The economy that's collapsing. But single family delinquency rates on their mortgages decreased in May. Multifamily delinquency rates, though, a record near the highest since January of 2011. Okay, so excluding the pandemic. So we are seeing a very different market in the multifamily market. Big apartment complexes and single family, very different. One market unhealthy. The multifamily single family market. Extremely healthy. Let's look at some charts on this. So here are the single family serious delinquency rates. These are people that are more than 90 days past due on their mortgage payment, or they're literally in the foreclosure process. They were insane, incredibly high during the Great Recession, and now they are at some of the lowest points in history. You can see the chart right here. That goes back to 1998. Remember, the one ingredient you absolutely, positively must have if you want to have a housing crash is tens of millions of people who are distressed that own homes, tens of millions of distressed homeowners who become millions of distressed home sellers. Again, we still have exactly the opposite scenario going on right now. And here we see the opposite in the multifamily market. Now this multifamily market is starting to heal. It's been on the mend, but it's still pretty tough. Okay? So delinquency rates for apartment owners, a lot of these syndicators that are just, they're just in massive trouble, right? They have seen big, big delinquency rates. And the banks are doing workouts, they're doing short sales. They're trying to help these borrowers to get them back on solid ground or get rid of those assets. So very different markets in both the new home market, the multifamily market and the single family market. So keep that in mind. And before I go today, I want to encourage you to go to jason hartman.com AI A lot of you have been giving us such great feedback on how helpful my AI bot is. My clone that is trained on 1800 of my podcast episodes. And we're going to do a massive push for more training of the AI. And it is really good. I mean it is super good. So if you have questions on refi till you die, inflation induced debt destruction, the Hartman comparison, that's questions on how to deal with your property managers. Whatever it is, we've got a consolidated version specific to your request in our AI bot at Jason hartman.com AI it's totally free. It's a free resource. Use it. It is really, really helpful. All the people that are using it, it just keeps increasing every week as I look at the reports. But all of you who are using it say great things and I'm really glad it's a good resource for you and our investment counselors. If you want. Humans are also a good resource for you. You can always reach them at 1-800-HARTMAN or direct 714-820-4200. Press extension 2 and you'll get one of our great investment counselors, all very experienced, all real estate investors, all with me for many, many years now. All of them except one. Former clients. So they started out as clients and became investment counselors. They know what they're doing and for all those of you working with them, you already know this. But for those of you not working with our investment counselors, reach out to them. Jason hartman.com, the website, or any of the phone numbers I gave you previously. Until next time, happy investing.

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