2472: The Bullish Case For The Housing Market with Adam Taggart

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Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Taggart. And today we're going to have a great discussion on all things real estate with Jason Hartman. Jason, thank you so much for coming on the channel. I'm so happy to have you here for the first time.

Hey, Adam, it's great to be on with you. I followed your work for a long time, and I think the first thing everybody needs to do is they need to identify when they talk about the market going up, down, sideways, crashing, not crashing, What metric are they referring to? You know, are they referring to home prices? That is usually the one I think most people are thinking of. Are home prices going to go up, down, or sideways? But there's also sales volume, right?

Mm-hmm.

Which is a very important number, and sales volume is way down. Buyers are just not buying at these prices because housing affordability is very, very low. It's the lowest it's been in about 40 years. That is not good. That is not helping. Now, with all of this said, we still amazingly have seen prices rise on a national level, albeit very slightly. If we consider 5 or 6% being the normal appreciation rate, and that's certainly debatable, depends, you know, you can cherry-pick timeframes and studies, and they all do it differently, you know, but, but if we call that somewhat normal, okay, we've only had over the last 12 months about 1.5% increase in prices. And some markets are down. Probably the best market in the country is up about 8%, but some markets are, are down. You know, we see a lot of distress in Austin, Texas, Cape Coral, Florida, and a few others are, are pretty tough.

So even parts of California are starting to weaken. You and I both have done our time in that state.

I like how you say we did our time. Yes, we paid our dues. We paid our taxes to the, uh, the Socialist Republic of California. Yes.

So, so one thing I just want to get your confirmation on is, so we have, you know, what many people have been referring to as a frozen housing market, right? When it comes to inventory and transactions, right? And yet prices are still going up right now. And that dynamic, I think, is largely due to the fact that unaffordability has gotten to the point, to such a high point, that the only people who can afford to transact right now are the more affluent. Folks. And so you're having higher-priced homes change hands, and so that is pulling up the average sale price for the house. But it's, it's not necessarily a sign of health, right, that, yeah, the market is increasing. It actually could be a sign of weakness in the sense that just everybody below the wealthy just really can't afford to transact right now. And of course, I'm painting with a broad brush. Would you agree with that?

I would, to an extent. I always say that all real estate is local. Okay, it is a very localized market. But in addition to being local, it's segmented by geography, but it's also segmented by price range. So you're absolutely right. I agree with that completely. The interesting part of it, though, is that coming out of the Great Recession, 2008-2009 era, builders basically put the brakes on their building activity And the biggest breaks were in the entry-level housing sector. So that sector is arguably the most underbuilt part of the sector. And I'll give you an example. Just personally, I sold my home in Palm Beach, Florida, about 2 and a half years ago. And I decided to just travel and I traveled. It was the longest traveling excursion in my life. It was almost 2 years. And then I decided to move back here to Scottsdale, Arizona. Okay, which is where I am now. And I was looking and looking and looking at high-end homes. And there's not a ton of softness, it's spotty. And of course, Phoenix is kind of this cyclical market that's weird. But the interesting thing is that you just see that yes, the rich are getting richer. But with the entry-level homes being so underbuilt over, over the last, you know, 15, 17 years or so, that is sort of creating this upward pressure on rents. And so, you know, when we talk about crashes or not crashes or whatever the discussion is, rents would be another metric. Now, what's interesting about the rental market is this, and I'm speaking to it because, you know, my company helps— and I should just say, my company helps investors buy entry-level homes nationwide for rental property. That's what we do. I've been doing that for 22 years. Okay. And before that, I owned a traditional real estate company that Coldwell Banker purchased from me. Okay. In Southern California. The entry-level market is very much underbuilt. The rents would be facing much more pressure than they have been had we not delivered a record number of new multifamily units over the last 2 years. Literally, we have delivered more multifamily units, new apartment complexes in this country in 2 years than we've ever delivered in our entire history. So that has kind of suppress the rental market. And you certainly know that there's a lot of distress in the multifamily world, right? You know that already, and your listeners do. So it's kind of a weird situation. It really is a strange kind of market.

All right. So when you talk about the builders pretty much just not really building any more entry-level homes after the GFC, you're distinguishing the most recent 2 years from that, right? In other words, that we're starting to see a pickup in more entry-level units, whether it's in a multifamily or even just a single-family home?

Yeah, even in single-family, uh, because they are trying to satisfy the market. There's a lot of pressure on builders to cure the housing shortage problem. But yes, they are building more. And what's interesting about it is these builders are building bare bones. If you go to the Lennar website or the D.R. Horton website or KB Homes, those are kind of the big entry-level build— well, Lennar builds some higher-end homes, but they build entry-level too. They are building some really bare-bones houses, no garages, 2-bedroom, 2-bath, tiny little houses, very basic finishes, albeit nicer than any home you saw in, you know, Lakewood, California, or Long Beach, California, where I used to live, you know, after World War II, right in the baby boom. But we've all become spoiled as to our idea of what is basic anymore, right? So yeah, they're, they're building some really lower-end houses to try and meet that demand. And And it begs the question, why didn't the builders build more entry-level housing coming out of the Great Recession? Well, they didn't because there's just no money in it. The construction materials, the cost of labor, I mean, that has put enormous pressure on builders. Home construction is still a very primitive process, which I think is completely dysfunctional. We need to, as Americans, start accepting manufactured housing.

Yeah.

And that's not your grandpa's double-wide trailer. The manufactured housing today is quite nice. There are 2-story manufactured homes. It's just more logical to build a house in a factory and bring it to the job site and assemble it there rather than doing it piece by piece.

So it's funny, like with the promise of the era of robotics and AI, I would think that that would take manufactured housing to an even greater level of efficiency. Right. And to your point, there's higher-end manufactured houses now. They look quite nice. And, you know, you can design it all before it gets manufactured. And then it's just all you need to do is have a foundation poured and they basically bring the house to you and connect it.

I couldn't agree more.

Yeah. What I'm just curious, what is keeping that sort of manufactured house of the future bonanza from, from happening right now?

I think there are 2 major things, Adam. Number one is there's a huge stigma. It's just stigmatized. Americans just think it's bad.

And it's sort of like nuclear energy. We thought it was bad for 40 years. We're now realizing, wait a minute, this might be the best, greenest fuel source ever.

It is the greenest fuel source ever. Nuclear is so safe and so powerful. Jane Fonda ruined nuclear power with her stupid movie The China Syndrome years ago in the '70s. That idiotic activism. And we see that in other parts of, of culture today too, sadly. But yeah, nuclear power is far and away the best source of power. So I agree. And I'm not saying manufactured housing is the best thing ever. I'm just saying it's good for the entry level. And it should be accepted. The other part of it is, and this is changing a bit, it's the financing, you know, whenever the banks are reluctant to finance something, or Fannie Mae, Freddie Mac, the big, you know, mortgage agencies, you're just not going to get widespread building. And so that has changed. And I believe that was part of the last housing bill, which was a major change, you know, but it's not going to change things radically. I mean, it's You know, it's a step in the right direction. It's the biggest housing bill in decades, but it's still nibbling around the edges. Until manufactured housing is mainstream acceptable, until construction becomes a high-tech thing rather than the low-tech thing it's always been— I had a guest on my show with John Burns Real Estate Consulting a couple of years ago, and he said something really funny. He said the biggest technological advancement in home construction over the last 100 years is the nail gun. Yeah, I mean, it's, it's just a very primitive asset class, you know. It doesn't make sense, you know.

Well, so let me, let me just clarify a few things. To my understanding, rents are declining now. So if you look at the cost of shelter that goes into the CPI calculation, which is the biggest part of the CPI, that's actually disinflating. Right now, right? And there's a number of different factors for that. Probably not an insubstantial one is, is we've deported or incentivized to deport, you know, a couple million people.

And that's worth it, in my opinion. I'll, I'll take the economic hit if there is one for that. Yep.

Okay.

Yes. Um, let's, let's, let's have our country back. That's my belief.

Okay. And, and I think we're probably on similar pages there. And it's, it's nothing, uh, Nothing racist or xenophobic or whatever.

Nobody should have to apologize for being entitled to the country their ancestors built. There's nothing wrong with that.

And also, just no matter where you're coming in from, if you're coming in illegally, you're breaking the law, right?

That's right. Imagine that.

We have that. That's, that's, that's certainly not the only factor there. And theoretically, you know, the price of a house should essentially be the discounted cash flow of the rents that that house would be able to generate if it were being rented out. So I'm curious, you would expect housing prices to be coming down as rents are disinflating beyond the dynamic we just talked about of sort of the frozen inventory and the rich only transacting. Is that the thing that's keeping prices from disinflating right now, or is there something else going on?

Well, correct me if I'm wrong, but I believe you were referring to the owner's equivalent rent concept as part of the CPI. And that is a very weird equation. But in practice, you know, you're generally right. I mean, rents—

I mean, when you're investors, don't you basically say this is what we think the cash flows are going to be, and therefore the price you should pay for the house is around X?

Yep, yep, absolutely. For investors, it's an equation. But remember, investors are about, you know, give or take 25% of the market, depending on when you're looking. You know, the largest share of the market is homebuyers that owner occupy. But yeah, you know, the rents certainly matter to investors, no question about it.

One of the things that Melody mentioned last time I was talking to her was we've had this period of rage delisting, right, where sellers are putting their homes on the market. And of course, as you said, real estate's totally local. So this, this isn't every place in the country.

But Phoenix and Miami are the 2 biggest markets for delistings. Yeah.

Okay. So these are people saying, look, I want to sell, I give up, I'm not going to go below this price. And oh my God, nobody wants this price. I'm either— I'm offended or I think the market's just not pricing things right right now. Let me take it off. Let me wait 6 months. Let me put it back on to see if I can get something better. She has said that she feels like we're transitioning from a rage delister to a distressed relister, where the person's now eventually saying, look, I actually got to sell this thing, and maybe I'm now willing to bring my price down as a result. What are you seeing on the ground with this?

You know, we have choices. We don't care. It's an apathetic kind of trend where sellers are saying, look, we put our house on the market, we didn't get our price, we have no distress whatsoever. There is no pressure for us to sell this house. So we're going to take it off and we'll put it on later. And hopefully, but then someone will meet our expectations.

Mm-hmm.

And the buyers are resisting these expectations, but But look, Adam, here, here's one of the reasons that the doomers and the crash bros just keep getting it wrong. As I always say, there is one ingredient you absolutely positively must have to have a housing crash. And we should define crash. Okay, so that means prices declining by 20, maybe 25%. That would definitely be considered a crash to me.

Agreed.

You know, if prices decline by 25%, That's a crash. Okay. If you want to have a crash, you must have tens of millions. And by the way, for reference, there's about 140 million housing units in the country.

Wow.

You must have tens of millions of homeowners who become suddenly millions of distressed home sellers. There is just not enough distress to matter. Okay, so let's look at some distress points. Just going back to our opening of our discussion, this one shows you that home prices year over year are up about 1.5%. Again, frozen, sleepy, boring, nothing to write home about. But think about it. What asset class could be this resilient that you triple the cost of mortgage money from the COVID era low and prices still go up? That's kind of amazing in and of itself.

Okay.

And then we talked, Adam, about how demand declined. The massive demand destruction with the higher rates and already elevated prices. We see this deficit of home sales that has happened now for 3.5 years, where give or take about 2 million fewer transactions are occurring. And this represents a lot of pent-up demand.

These people that right now are basically people who would like to buy, but it's just too unaffordable for them, right?

Absolutely. Absolutely.

So which COVID largely helped create, right? Because All this money just flooded in and prices went through the roof.

I'll give you the bull and the bear case on that. Okay, so on the bear case, if you want to say housing is not doing well, then you would say, well, the COVID-era low interest rates pulled demand forward, and you would be right. That is true. Okay, to some extent, but that kind of dissipates after a while. Now we just simply have pent-up demand, in my opinion. Okay, and you know, people can argue with me. So there are all these people waiting in the wings that haven't done anything. And here, this chart shows you construction residential units completed coming out of the Great Recession. You see the deficit here that happened for many, many years. Okay. And then this is why we have a shortage now.

The 2014 to 2017 surge there, would you consider that was an overage at the time?

Starting about here?

No, 2014 to 2017.

This is 2014. Right, to 2017. Uh, here's '17.

Oh, okay, right. You know, you're totally right. Sorry, I should put my glasses on here because I'm an old guy and need glasses now.

Yeah, um, me too.

I am talking— sorry, 2004 to 2007.

Oh yeah, yeah, yeah.

So, so some of that initial shortage was just burning off the excess, but then it went into true shortage.

Yeah, you know, We'd have to go back even farther on the chart, and we'd have to adjust for what? Population growth is what a simpleton would adjust for, but the real thing you have to adjust for is household formation. That's much more important than population because population has about a 25-year lag. I will become very bearish on the housing market in the mid-2040s. Okay, that's when I get really bearish, uh, because, uh, we're gonna have a problem there. But looking back here, you know, you could definitely argue that this section of about 2003 to 2006 was overbuilding. And I would agree with you, maybe here is kind of a stable line. And that's the long-term average, right, according to the chart maker. And here, you know, we started to see it ramp up a little bit. And then COVID era got, you know, got really big again. This goes up to 2021.

Okay. Okay. But get it. I mean, you're making the point, maybe the shortage isn't quite as deep as the downturn in the chart during those years implies, but it's still on a net basis, Yeah.

And, you know, there are lots of opinions on the shortage. First, the first opinion is whether it's true or not. Your prior guest would say there is no shortage. Okay. But I would disagree with them. If you look at some of the big think tanks, Fannie Mae, Freddie Mac, I mean, they're not think tanks, but they all have economists and economics departments within their companies. Zillow, Zonda, my friend owns Zonda, Jeff Myers, you know, all of these big groups, right? They argue that the housing shortage is between 1 million and about 7.5 million units. And I, I do have a chart on that. I don't have it handy though. It's not part of this slide deck, but that's what they're saying the housing shortage is. So look at my friend Jeff Myers. He owns Zonda. It's a real estate software developers use. He says it's only 1 million units. And, you know, you could clear a shortage up like that with some strong building in a few years. Mm-hmm.

Why do we have these vacant units?

Well, vacancy is not the same as shortage. That's a different thing. Okay, so let's, let's talk about Nick Gurley for a moment. Okay. He really got a lot of traction for one video he did, which specifically talked about Airbnb or short-term rentals. Okay. And you probably saw this video, because he got some big news exposure from it. And basically his argument was that as the rates went up and the COVID-era moving trend, where this massive kind of migration was, where people were moving around the country to less liberal places, which was a good decision, they rented a lot of Airbnbs, right? And there were so many Airbnbs that were going to hit the market and they were going to crash the market. Now we got to ask ourselves, why was he wrong about that? Well, because he only talked about one part of that equation. Airbnb owners are in distress. And I agree, you know, I never liked short-term rentals. I always thought that was a bad business. If you look at hotel construction since 2012, when short-term rentals got so much traction, especially with Airbnb, but VRBO too, there were so many non-primary beds created in the country and in the world that people just didn't need all these beds. Okay. And if you think about it, that caused, I, I would argue, the rise of a lot of new mattress companies— Casper, Tuft& Needle, you know, I mean, like Purple. All these new mattress companies came out of the blue, you know, to home deliver mattresses direct to consumer. So we saw that. But here's why Nick was wrong. Okay. He didn't account for all of the people that already owned second homes Or would have just had a second home anyway. Forever wealthier people or people that are in the middle, upper middle class have had a second home. That's not a new idea. They just kept it vacant. But when Airbnb got so popular, starting really about 2012 when it gained a lot of traction, they said, hey, we can turn this into an income stream. So they stuck it on Airbnb and they still used it as a second home, but then it became a side hustle. They didn't need to sell their second home just because it wasn't performing well as an Airbnb. They still wanted a second home. I mean, I'm sure you know many people that have second homes and third homes and fourth homes. I sure do.

Okay, I do. But just, just to insert a thought here, during the COVID era, right, all of a sudden, creating your own Airbnb became, you know, sort of pitched to many as a It was oversupplied. Get rich quick, whatever. So you had a lot of people who weren't naturally going to have a second home.

They're not going to be a hotelier. They became hoteliers.

Yeah, but they bought in saying, okay, I'm not going to use this as a second home because I'm not that rich. But if I can just buy one and then rent it out at the rates we're getting here in 2022, and the lockdowns were beginning to remove and everybody had this pent-up, well, I'm going to go travel.

Well, yeah, I'm gonna leave California and move somewhere, and I need a place for 2 months while I'm looking for a home. That, that was a lot of that demand.

I love that too. But those trends are now over, and I think there's a number of people who have said, wait a minute, this thing was supposed to be putting cash in my money every month. I'm now actually having to put cash in it every month because it's not renting out as often as I had expected, or it's not renting out for as much as it was, you know, 2 years ago, right? Wouldn't that be, you know, as those people kind of throw in the towel, wouldn't that be bringing new inventory into the market here?

It has been. They've been throwing in the towel for 3 and a half years now.

Right, right. So, so which I get, which I guess to your point, that's where we're seeing South Florida, places like Austin drop a lot because they had a very heavy Airbnb concentration, correct?

My understanding is that Austin was pretty tough for Airbnbs from a regulatory perspective. But I could be wrong about that. That could have changed. I mean, that used to be the case. I don't follow the Airbnb market too closely.

Too closely.

My point is that Nick made it seem like— and I understand that selling fear is very profitable. Our minds love to look for fear because that's what kept us surviving for eons as humans, right? We lived in a world of scarcity and danger, and we had to Be alert for that. So when someone puts a clickbait title on YouTube and says the market's going to crash because all the Airbnb people are going to sell, that gets a lot of clicks. Okay, you can exploit people's fear like that. But he, he was wrong. Okay, because only some of them sold, some of them kept them as second homes, some of them turned them into long-term rentals. It didn't happen all at once. They peel off slowly. You know, he made it seem wrongfully like 1 million new listings were coming on the market tomorrow, and that was just fake news. It didn't happen. And inventory now, right now, and I'll show you a chart on it, is historically low. Here's inventory. Okay, so we're historically low. I mean, look, we're higher than the COVID era for sure, but if you go back to 2015 Our inventory is much lower than it was then, and our population was lower then. Number of households in the country was also lower than 11 years ago. So when you adjust for that and you look at inventory per capita, it's even lower.

So, so what is your outlook for inventory going ahead for the next couple years?

It all depends on interest rates, Adam. I mean, you know, that I thought we would get some rate relief this year, but the Iran war probably paused that for another year. Okay. I ultimately think, uh, we are going to see lower rates, hopefully for mortgages in the mid-5s. Trump would certainly like to see that. He's our first real estate president. Okay. As I always like to say, love him or hate him, but I am terrible predicting interest rates. I will be the first to admit it. I'm pretty good at everything else, but rates are centrally planned. So I cannot view them like a market economy.

Okay. So I can't speak for Melody. I wouldn't try to. I think part of her thinking is, is, look, you know, the market was kind of holding on through the tougher years. And it was what, survive till '25, when the Fed's going to ride to our rescue, and they're going to bring rates down. And hopefully, there'll be no price decline in the market or anything like that. And it is interesting that Yields have continued to rise. And as you— we said at the beginning of this video, prices are still rising, you know, ever so slightly, ever so slightly, but we're not getting the normal mathematical relationship you would expect between home prices and interest rates.

Well, I can tell you why. And we haven't discussed this aspect yet. Okay, so here's another chart on inventory. You know, you can see inventory is pretty low, historically speaking. You know, the COVID era was an anomaly, so you really have to take that out. Okay. Yeah, that was super low. But just to go past this quickly, the existing mortgages, very strong credit scores, very little distress, high-quality borrowers that have the existing mortgages. Look at this. Okay. A significant majority of recent loan originations have been to borrowers with credit scores above 760. This is—

And that was my point earlier, right? It's the affluent who can afford to transact right now.

This is no Great Recession. Okay, this is such a different market than it was back then. This is the key thing. Once— are you ready?

I'm ready.

Okay. Okay. So look, when rates went up at the historical increase just over 3 years ago, with already elevated prices from the COVID-era bidding wars, affordability was massively constrained. Housing affordability was the worst in 4 decades, and it still is pretty much the You know, it's right about there. And the payment-to-income ratio with— for new buyers entering the market would be about 36%. And that's not impossible, but it's not easy either once you add student loan debt, credit card debt, a couple of car payments, right? And I do want to make the disclaimer, Adam, that as we're talking here today, I am not analyzing And this could be the doomer perspective, okay, and probably should be because it would be the best counterargument to what I'm saying. I think I'm not analyzing every part of the person's life, of the public's life. I'm only talking about the relationship of their home that they already own or want to buy to the mortgage and the price and their income, right? That's what I'm talking about. Their student loan debt is a problem. Their credit card debt is a problem, right? Those are outside of my analysis today. It would just take too long to dive into all that. And I understand that those pressures exist, okay? Higher grocery prices, you know, everything else going on in life, okay? But what they did is they looked at new people entering the market, and that really wasn't the right way to look at it. If you looked at it just that way, you would think, yeah, we're going to have a crash because nobody can afford to buy. But what they should have looked at is the existing homeowners that control the vast majority of the 140 million houses in the country. And here's what their picture looks like. About 25% of them have a mortgage at or below 3%. About 65% have a mortgage at or below 4%. And they are in this section of the graph, and their payment-to-income ratio is only 17%. They are so comfortable and so unwilling to let go of the great deal they have because they have discovered that their mortgage is a major asset, not a liability. Their mortgage at such low rates is a major asset. One example of this that is very, uh, prevalent and understood in today's world is baby boomers who would normally— they are empty nesters. They would normally sell their 5-bedroom house in suburbia and they would buy a condo and go on a cruise around the world. That's like a very sort of stereotypical scenario. Okay. They would downsize. It's more expensive, Adam, for that baby boomer couple to downsize than it is to just keep their big house. And you know what? Their millennial children are quite upset about that because they need a big house, right? Your parents are hoarding the inventory, right?

So I'm glad you brought that up. And I've sort of discussed that a number of times in past real estate interviews here. So I totally understand the argument you're making here, right? Of those folks who still own a home, which is a large percent of homeowners, Or it's all of homeowners, but it's a large percent of the total market. From what I have heard, you correct me if this is wrong, they are still feeling pressures, right? So they've got a low mortgage, right? So that's an asset to them, as you say, and I get why you say that. But lenders have tightened their lending standards. So it's harder to get home equity loans or refinance. And the costs of homeownership have gone up a lot substantially, you know, since COVID right?

So getting their garbage disposal fixed is more expensive than it used to be. Getting a new roof is more expensive, maintaining their landscaping, their property taxes. Now, insurance has actually come down a bit, believe it or not. It was elevated for a couple of years, but it's come down.

But property taxes have gone up as well with the additional mix. My point is just, if they've owned this house for 10 or 15 years or 25 years or whatever, they're saying, I might still have a pretty attractive mortgage, but the cost of carrying this house has gotten a lot higher in recent years. How much pressure, if any, is that putting on them, do you think?

It's putting additional pressure, but remember, their incomes have also gone up. I mean, you know, it's, it's not like incomes are stagnant. The labor market unbelievably is holding up, you know, reasonably well. Their incomes are higher, and inflation is inflation. I mean, it's part of life, right? But what's interesting about it is kind of my trademark strategy, which I call inflation-induced debt destruction. Inflation has reduced the value of their debt massively. Under Biden's mismanagement, when we had 9.1% official inflation rate— I mean, that's insane, right? That's almost like the Carter era, that, or really the beginning of the Reagan era before Volcker fixed it. You know, the real inflation rate was probably 17% at that time. If you have a $1 million mortgage, in one year you've got a $170,000 discount. on your mortgage because inflation debased the debt. There are multiple factors taking place at the same time. But yes, I agree with you, you know, home services have gotten more expensive, property taxes have gone up. These municipalities, some of them are struggling and they're getting predatory on their, their victims, their taxpayers. So yes, I agree, that's a pressure. One thing I did want to say, since the chart is on the screen, Adam, is that We should ask ourselves, what isn't this chart telling us? What dogs are not barking? And what's not barking here— we talked about the mortgage rate distribution, but we didn't talk about the fact that 40% of the country has no mortgage at all. You can't feel much distress if you only have to pay taxes and insurance. You know, it's, it's pretty hard to be in distress.

I mean, true, but, but on a net basis, they are at least a little more stressed, right? Because they don't have the, the asset of the They've got a super low mortgage. The inflation doesn't help.

It doesn't debase the mortgage they don't have. Fair enough. Yes.

Right. It doesn't debase the mortgage they don't have. And the cost of ownership has gone up. So unless their income has gone up accordingly— and I think for those who have assets, the assets have done a great job of keeping up. But like I said, the majority of at least retirees don't. Again, I'm not trying to paint the doomer picture. But to me, I sort of look at the net of all this and just say, it seems like the current market conditions here is sort of a rising flame on the pot. But maybe I'm looking at it the wrong way.

Look, I mean, there will always be people in trouble. There will always be people who are succeeding more than others. I mean, the fact is, if we look at the charts of equity, right? So this is interest rates of mortgages. We talked about that. This is mortgage delinquencies and foreclosures. Okay. They're basically a nothing burger. They've been rising a little bit, but compared to what? Compared to the Great Recession? Compared to the COVID era when we had moratoriums? I mean, they're still lower than they were in 2002, 2003, 2004. You know, delinquencies and foreclosures are historically low. Yes, they're slightly higher than they used to be, but there's just not a lot of distress in the market, and you've got to have distress if you want to have a crash. This is the equity cushion. Okay, 82.6% of borrowers have at least 30% equity in their home. And, and look at the negative equity. It's a tiny sliver. Yes, it's been growing slightly.

Wait, that's amazing. Uh, it's not even almost visible in the past decade.

Yeah, I mean, look, coming out of the Great Recession, you know, the lenders have been extremely strict and careful on their underwriting. They want to know your income, your shoe size, your DNA. before they will give you a loan. They're just not, you know, this is not what it was leading up to 2007, 2008. Okay. 2009. I mean, it's just a completely different world. Here's the loan-to-value ratio, the distribution of them. Okay. A record 76.6% of borrowers have LTVs under 60%. So they've got 40% equity. And 91.2% of borrowers have LTVs under 80%. During the global financial crisis, there was a lot of talk about what they called underwater homes. So what is an underwater home? It means someone who has a mortgage balance higher than the value of their home. Okay, they're underwater. If they sold, the lender would have to do a short sale, or they'd have to bring in cash to the closing table. We had about, at the worst point, about 26% of the country was underwater in their homes. At the worst point back then. You know what it is now? It's 2%. And even if they're underwater, they still probably have a low-rate mortgage. So you could be underwater and still sustain it. It's kind of like being in a car lease when you know you're underwater the minute you drive off the lot on your car lease. Right. But if the payment is low, who cares?

Right. You get to keep the car.

Yeah. Here's loan-to-value ratio of US mortgages. It's only on average, it's only 46.9%. I mean, look at, look at historically, go back to 2013. And it's just gone down and down and down. People have more equity than ever. You've got to have negative equity. You've got to have high payments, you've got to have high rates to have a lot of distress in the market.

Yeah. So I totally get that. And I know that's sort of your main thrust. Again, I'm not trying to paint the negative case here, but—

No, be negative. I love—

No, no, no, no. I mean, so this is the data. It is what it is. But To me, this shows the impact of high inflation. In that pandemic boom era, loan-to-value ratio dropped really materially, but that's largely because—

Prices inflated. Yeah, exactly.

Prices inflated, which if you're a homeowner, you're like, okay, good. But there's a lot of stuff that happens societally that isn't great from that inflation.

I agree.

I agree. I'll let you talk to this chart if you want to, but let's get to the source of your optimism here. So in terms of what could rescue this frozen housing market without disaster is rates could come down. So you had your chart before that shows as rates go down, you get all these new people coming into the market. That makes sense, right? Housing prices don't necessarily change, but I don't have as big of a nut that I got to make every month if my interest rates— my mortgage rate's gone down.

Listen, my business has been slow for a few years now, right? Because, you know, we help people buy investment properties nationwide. It has not been exciting. Okay. You know, because nobody's excited about real estate right now. I get it.

I totally get that. And rising mortgage rates just make the DCFs worse, right?

Yeah, I know. I know. But if we get those lower rates, and that's an if, nobody really knows, right? Or, you know, it's not really if, it's when. I mean, we'll certainly have them at some point, then What will likely happen is at the beginning of that cycle, or right before the cycle, the people who bought properties will be the total winners, as they always are at the beginning, right? And then those low rates and additional buyers who can afford the properties, as we showed on that prior chart or table, they will come in and start bidding up the market. And then we'll see prices rise, you know, shortly after we hit those lower rates. That's what always happens in every cycle.

What is going to bring more inventory onto the markets? Will it be lower rates? Will it allow people who are currently frozen or, you know, trapped in a low mortgage to be able to then do whatever they want to do?

Yeah, you know, it's, it's interesting to say trapped in a low mortgage, but you're right, you know, that's called the mortgage lock-in effect, right? And, you know, I, I talked about that early in the COVID era, and I predicted that that would happen. I did not give it that name, unfortunately, because that is a good name— the mortgage lock-in effect. And what's counterintuitive about it, Adam, is that the higher mortgage rates are, the better their deal is, because the delta between what they have, that low COVID-era mortgage, and the existing rates is the, the value of their mortgage. When rates come down, their mortgage becomes less valuable. Think of it like the bond market, how interest rates are opposite of bond prices, right? So when the bond market rallies, you know, we see the opposite in the rates, right? So that's basically what happens. All those existing mortgages should be viewed like bonds, right? So their mortgage gets less valuable as rates go down, and then the lock-in effect starts to evaporate, and people will make decisions and move. So yes, more inventory would likely come on the market. But a lot more buyers will also be on the market to gobble up that inventory. And those people that are selling will likely be repurchasing because rates will be desirable and lower at that time, unless they just completely exit the market. And just to finish, Adam, I know we've got to wrap up, but this one chart that I didn't explain yet— this is just showing renter and buyer demand in the boom phases. The other thing we didn't talk about is how the baby boomers You know, generally don't own entry-level houses. They own higher-end homes. Okay. And by higher-end, I just mean not an entry-level house. You know, they own a bigger family home or whatever. And here we see the, the Gen Zers known as the Zoomers or the millennials who are older. And by the way, the millennials are not kids anymore. You know, the oldest millennial is about 44 years old nowadays.

Yeah.

Uh, so they're definitely adulting, if you will. And so The, the Gen Zers are coming right into their prime rental demographic age, and the millennials are already well into their prime home buying era, you know, of their life. So this has gotten much later. You know, first-time buyers when I was younger, they, you know, you'd buy a condo when you were 26. I had all kinds of girlfriends in my 20s that were like 25, 26 buying their first condo in Irvine, California, by the way. And now they're 40. Before they're buying their first home. So it's a different world, no question about it. Thank you so much for listening. Please be sure to subscribe so that you don't miss any episodes. Be sure to check out the show's specific website and our general website, hartmanmedia.com, for appropriate disclaimers and terms of service. Remember that guest opinions are their own, and if you require specific legal or tax advice, advice or advice in any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you're using and write a review for the show. We would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.