268: Housing Bubble Myth, Shadow Demand, Lower Existing Home Sales, Increased Mortgage Rates, Outlook for 2023 with Rick Sharga

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It is my pleasure to welcome a returning guest back to the show and that is none other than Rick Sharga. He's with Adam Data Solutions. They are a leading provider of data to the real estate industry and they've got a lot of stuff to share with us today. Rick has some good visual aids if you're watching this on video. If you're just listening on audio for the podcast, we will endeavor to explain them to you. But you can always see the visuals on YouTube or the other video platforms if you like. Rick, welcome back. How are you?

Jason? Great to be here. Thank you for inviting me again. Always enjoy our conversations.

Me too. It's always great to have you. And Rick, I got to tell you, a lot of people that have been running around like Chicken Little for the last couple of years saying the sky is falling, they actually think they're right now. And I still think they're wrong. What do you think, Jason?

You and I are on the same page. It's impossible to ignore the fact that home sales have plummeted. Strictly, strictly an affordability issue. We'll get into that as we, we go through the, the visual aids you mentioned a few minutes ago. But it's not because of lack of demand. It's not because the underlying fundamentals of the housing market have changed. It's strictly because we've seen something happen that we have never seen before in history, which is mortgage rates have doubled in a calendar year and that simply doesn't give the market a chance to adjust. But the people that have been calling for a market crash and prices plumme huge foreclosure waves, they're still selling basically crazy sauce. I would encourage all of the viewers and listeners to avoid those people like the plague because the end results won't be any more pleasant.

There are many important distinctions that we'll talk about today, but one of them that you said right off, you know, it's impossible to not notice that sales have plummeted. Listen carefully to what Rick said, folks, he's talking about volume of transactions. He didn't say prices. Now prices are softening, but even that is very uneven and we can talk about that. What's been fascinating to me, and I predicted this quite a while back, is that there's this dichotomy between the new home sales market and the resale market because developers don't have long term debt at the lowest interest rates in 5,000 years, quite literally. And, and they don't have 28 to 29 years left on that super cheap debt like resale. Existing homeowners do. And so they're motivated and they're the builders. You do see the new home prices. I'll put it this way, there's a lot more motivation on the builders.

You're, you're hitting on something that, and to your credit, you're one of the few people I've talked to in the last six months who gets that. But you're talking about something I've been out talking about for a while right now. The new home market is much more sensitive to these kind of price swings and interest rate swings than the existing home market. If you're a current homeowner sitting on a 2 and a half, 3% mortgage, you're not terribly anxious to list that property, buy something more expensive and in a declining market, by the way, or a flat market from a pricing perspective and then take on a new mortgage at six and a half or seven percent.

Before you go on, if I just may interject, that person, that avatar that you just mentioned, that homeowner with a 2 and a half or 3% mortgage that's not anxious to sell their home and take on a 6% mortgage. Right. That's 25% of the country. It's actually 25%.

It's actually bigger.

Oh, it is. Go ahead.

If you look at existing mortgage holders, so it's, you know, forget about the people that own their home outright, but if you look at current mortgages, about between 60 and 70% of them have an interest rate of 4% or lower.

That, that I know 65% is 4% or lower. I was doing 3% or lower is 25%. So we're, we're both on the same page there. And then of course, the free and clear homes are 40% of the market. So like you gotta show me a distressed homeowner.

Yeah, the, the only people who are going to sell right now are people who have to sell. And, and there'll be two categories. It'll be People who are. And by the way, our Data shows that 93% of homeowners in foreclosure have positive equity in their homes, which, which most people wouldn't believe, but it's true. Or they're going to be people whose, whose personal or family situation has changed significantly enough that they're going to have to venture out into this market even though it's not optimal from, from a seller's perspective. So that's going to keep existing home sales inventory relatively low. Builders, to your point, if you're Toll Brothers or Pulte or some other home builder, you have three, four properties at the end of a development that are sitting there vacant. You haven't.

You're going to cut deals.

Yeah. Because they're costing you money every month. And it's a very different mindset, very different scenario. The other thing I'd point out, I'm not sure how you feel about this, but I, I do believe we're going to see new home sale prices come down, but I don't think it's because today's five hundred thousand dollar house is going to sell for 350,000. I think the builders are going to adjust and build less expensive properties to begin with because they've seen the market conditions shift. So it's not like you're going to be getting a great deal on a really big new home that, that should have been more expensive. You're going to be getting a market price deal on a, on a smaller or less expensive home because the builders know that you can't afford that, that more expensive property.

Right. The only thing though is it takes quite a while for that shift in construction to happen for those home builders though. Right.

It takes a while, but we've seen home build stop. The housing starts have dropped double digits on a year over year basis for I think four months in a row now. And so when we see them restart, I think they'll restart at basically smaller, less expensive properties.

Totally agree, totally agree with you. Okay, well let's dive into some of the specifics, the data. You've got some phenomenal charts and graphs I want to look at, so please share them. Feel free to share your screen and let's take a deep dive.

Yeah, Jason, we're going to, we're going to start with taking a look at the US economy because that really is the underpinning for, for everything that we're going to see going forward in the housing market. And you should be seeing a screen that talks about the GDP now.

Yep.

So there's been a lot of questions about whether or not we've been in a recession. I'm in the camp that says that even though we saw two consecutive negative quarters of GDP growth, gross domestic product growth, for anybody who's curious, and that technically is the definition of a recession, I don't believe we were in one. The negative growth was really just at the margins. A lot of that was caused by some of the ongoing disruption from COVID and by a reduction, candidly in government spending. And we came out of that in the third quarter with almost 3% year over year growth. In terms of the GDP, we're anticipating a positive fourth quarter, although just barely positive. But the bottom line here is if you looking at gross domestic product, which is what most economists look at, is sort of the, the bellwether stat when it comes to whether we're in a recession, whether we're growing or declining, the numbers actually are pretty good right now relative to where they were a couple quarters. And again, not really looking like we were in a recession because all the other aspects of the economy were doing very well. One of those is employment. And Jason, this is the most remarkable unemployment to full employment recovery we've seen in history. Yeah, we, we, we peaked at about 14% unemployment. We lost 22 million jobs overnight when the government shutdown happened.

Shocking.

In two years, we recovered all of those jobs. If, if you go back to the Great Recession, the last big recession we had, unemployment peaked at about 11%, so it wasn't quite as high. And it took us a full decade to recover all those jobs. Ten years to recover the jobs, as opposed to two years this time. The other thing that was very different about this cycle was a lot of the job losses were focused in one segment of the economy. They were the service sector. So retail, restaurants, transfer, transportation, travel, hospitality, entertainment, those markets really took a major hit. Everybody else kind of stayed fully employed. And so one of the reasons the housing market didn't take more of a hit is because those industries by and large have employees who are renters. So the rental market was a little bit more at risk during this, this downturn than, than the housing market from an owner occupied standpoint. But you see that our unemployment rates, whether you're looking at short term or continuing claims, are back down to where they were prior to the pandemic. I think the most recent report we were at something like 3.7% unemployment. That's up a little bit from recent numbers. But that's, that's actually not bad news because it shows that we actually had more people re enter the workforce. So that that made the numbers tick up a little bit. So even what looks like it might be negative actually is positive. And in fact, there's still about 10 million open jobs and about 6 million people looking for work. So a very unusual set of circumstances that we're seeing in the jobs market. You and I, you and I can be a little bit cynical about data sometimes. And so we've seen the administration talk about job growth. And you and I both know that a lot of the quote unquote job growth are really jobs being replaced from the ones that were lost during the recession. So some of this is new jobs, some of it isn't new jobs. But the bottom line, as I said, is we still have about 10 million jobs looking for employees and about 6 million employees looking for work. That's put pressure on hiring managers to raise wages. So wage growth has been pretty steady and pretty strong for the last couple of years. And that's important from a housing market perspective. We talk about affordability. People always focus on home prices. There's really three legs to that stool. One is home prices, another is interest rates. We will talk more about that. And third is wages. So wages for the first time in many years are actually growing faster than home prices. So that's good news. And if wage growth continues to be reasonably stable, sometime in 2023, it will start to actually have a positive effect on affordability.

So wages are growing faster than home prices. So that's a good catch up. But when you add into the mix the Fed and the interest rates, it's not as good as that. But you know, Rick, one of the things that is just really getting my goat, to use an old expression, is when people make these comparisons. You know, one of the things I always say at sort of become a saying on my show and the listeners dub it the Jason Hartman question. I always say, compared to what? Compared to what? Right, that's the question. And so many people are making comparisons now on everything in the economy, the real estate market, whatever, to two years ago. And that's not a benchmark. It's not a fair benchmark. That was such an anomaly, the COVID era, that we can't use it as a, as a comparison point. You can Compare things to 2018, 2016, sure, 2008 if you want, whatever. But don't compare it to the COVID era. It's just not a valid comparison.

No, don't, don't do 28 either. We can do a whole, we can Do a whole other segment on, on the differences between 08 and where we are.

Oh, sure we can, sure we can.

No, that's what a lot of the YouTube crazy people are talking about. Oh, it's the next Great Recession. It's great. You know, it's like. No, but, but yeah, you'll, you' refer a lot pre pandemic and I agree with you. And in fact we're still seeing pandemic based volatility in the data today. So it's 2020 you can throw out. 2021 was kind of a recovery year. I tend to go back to 2019 prior to the pandemic as the last quote unquote, relatively normal year for housing. But yeah, you could go back to 2018, 2017, but you can't look at 2020. You have to kind of throw those numbers out. I mentioned the GDP earlier and it's important for people to understand about 65 to 70% of the gross domestic product is based on consumer spending. And you want to talk about 2020 throwing things out of whack. This, this chart looks at consumer sentiment versus consumer spending and historically those two have gone hand in hand. When consumer sentiment is strong, consumer spending is strong. When consumer sentiment dipped during pandemic, we saw consumer spending really, really drop. And that was partly because of consumer confidence, partly because there just wasn't much we could spend money on. And as consumer confidence started to come back up, so did consumer spending. But for the last year, year and a half, we've seen a huge disconnect because consumer confidence has hit all time lows and consumer spending has continued to be really, really strong, in fact stronger than it was prior to the pandemic.

So what do you make of that, Rick? Why is there such a disconnect?

So I think a lot of it has to do with government stimulus and pent up demand. So consumer spending actually dropped way, way lower than consumer confidence did during the pandemic. We couldn't buy things, we couldn't find things to buy. The supply chains were disrupted. So I think there's been a lot of pent up demand, people buying things they couldn't find a couple years ago and the government candidly overstimulated the economy. An economist friend of mine has a great phrase for it. He said the government took a $3 trillion hole and stuff $15 trillion into it.

So consumers say that again, say that.

The government took a 3 trillion dollar hole and stuffed 15 trillion dollars into it.

That's a good one. So, so basically they, their, their overreaction was 5x. About 5x overreacted. And you know, I just remember hearing Jerome Powell over and over like, we're going to do whatever we have to. We're not worried about inflation, yada yada. I mean, he was so accommodative, I couldn't believe it. I mean, in the darkest days I felt like, okay, I'm glad we have Powell. But after we were coming out of it and he just kept using the word transitory, I thought, this guy is smoking crack, you know, he's just wrong, you know.

Well, they've ignored the fact that during the pandemic they increased the monetary supply by 50%. When you have 50% more money floating around, you're going to have inflation. And it was exacerbated by the supply chain disruption, which led to product scarcity, which led to increased prices. And then it was exacerbated at least temporarily by the war in Ukraine, which threw everything else into, into question and, and increased volatility. But the, the chairman has admitted that they whiffed on, on the notion of inflation being transitory and they waited too long to get started. And that's going to have some, some consequences down the road. The consumer spending has also had an impact on consumer credit use. So we've seen consumer credit use growing pretty significantly and consumer savings rates, which spiked during the pandemic when again the government was mailing out checks, is now down below pre pandemic levels. This is actually the lowest consumer savings rate we've had in, in several decades. So this is a potential red flag. If you are looking.

This concerns me.

Yeah, yeah, it, it concerns me on two levels. One is it could be an indicator that, that people at lower income levels are having trouble making ends meet. And because we're in a high inflationary, high cost of living environment, and I.

Would say just anecdotally that's got to be true. Yeah, yeah.

And they're tapping into their credit cards now in order to make ends meet or they're, they're kind of flushing through their, their enhanced savings in order to make ends meet. Neither of those is a good scenario. Both of those movies have a really bad ending. The one thing that is a saving grace so far is while credit use has gone up, we haven't seen credit delinquencies grow yet. But that is something to watch. And then the second part of this that worries me a little bit is there's a group of borrowers out there who bought a house at the market peak with low down payment loans, FHA loans, VA loans, whatever, who are now tapping into credit or depleting their savings. That means they're one unexpected expense away from maybe missing that first mortgage payment, getting into a bad cycle. So it is something to watch. We have been calling out the FHA port portfolio as being one area of vulnerability. Those borrowers tend to have less equity, they tend to have lower cash reserves, they tend to have lower incomes, higher debt to income ratios. And they're very vulnerable in a high interest, high inflation, high cost of living environment. And these, these indicators we're talking about right now with credit use growing and savings declining are again, potential red flags.

Yeah, they are. I'm glad you brought this up because like you, I think we are in pretty good agree, even though I haven't talked to you since the last time you were on the show, which was a couple years ago for sure. But I think we're pretty much in lockstep on our agreement on the housing market. There's not going to be a big crash like everybody's hoping for or these clickbait sensationalists are. But the thing that does worry me is the things that are extrinsic to the housing market. It's not the makeup of housing and even affordability, which is a problem, of course, but that there's just so few distressed owners. That's good, that's all super positive. But it's these other things, the student loan debt, the consumer credit. I'm hearing and seeing a lot about the auto industry and the risk of defaults on automobiles. And then just look at food prices and health insurance costs. And that stuff is weighing on people even though the house itself isn't that much of an issue. I know to some people listening, they're going to think, oh gosh, it's time to write nasty comments in the remarks section. No, it's not because I'm actually right and so is Rick. Now I'll get some really nasty comments. Yeah, go ahead.

Yeah, the auto industry is the only sector of the credit market that is seeing a spike in delinquencies and defaults at the moment.

And I think that's going to get worse because for a long time my leased car actually went up in value when it was a year old. But that has flipped and now the used car market is really adjusted to normality or it's moving toward normality because, you know, prices are, you can actually buy a new car now. There, there's inventory a little, you can find inventory both.

And used car prices are down. I think between 3 and 4% now on a year over year basis.

Yeah.

Which is the first time they've declined in a few years.

Right.

So yeah, you're, you're spot on with this. It is something to watch. There was a lot of subprime lending going on in the car industry over the last couple of years and student loans could become an issue if the government ever decides to, to allow people to start making payments again. Right. Right now it's hard to gauge if it's, if they're a problem or not because people haven't been required to make a payment. Anyway, all this is, has led, we've been talking inflation. I just wanted to kind of give people an idea. Even though inflation has declined and this is good news, the last couple reports, we're still looking at numbers that are almost at their 40 year highs. The good news is if we really have peaked, and I may be a lone voice crying in the wilderness on this one, Jason, but I believe that if we peak for inflation, we may have also peaked in terms of mortgage rates for this cycle. So those slightly above 7% rates that we saw not too long ago, I'm hopeful that we don't go beyond them because it does feel like we have inflation moving in the right direction. The Fed is, has had some dovish language lately that says if the numbers continue to improve, they can stop being as aggressive as they have been. So all of this is trending, but it's still hard on households because these numbers are very high. I wanted to share this with you and I hope people can see the far right hand column of this chart. The Fed has taken been historically aggressive action, unprecedented aggressive. And I wanted to show the last time they raised fed funds rates compared to this time. And you can see back in 2016, they started to raise Fed funds rates in order to get inflation under control. And this is typically how they've done it over the years. It's been step by step by step by step.

Yeah.

Where they raised things up to where they needed to get them and, and then they got inflation under control and they would drop. The, the 2020 drop was, you know, again, unusual and that was done because of COVID You men. We really can't look at 2020 as a normal year, but look at how quickly they've raised rates this cycle. We've never seen seven, we rarely seen 75 basis point increases in the Fed funds rate. We've certainly never seen them several months in a row. And even what we just kind of looked at in December is a 50 basis point or a half a point increase in the Fed funds rate. Normally we would have looked at as pretty aggressive and everybody actually sighed in relief. So it's, it's led to some things that have never happened before. You and I were talking offline before this. According to Freddie Mac, we've never seen mortgage rates double in a calendar year before. So, so the Fed actions have been unprecedented. They did this because they admitted they, they whiffed on inflation, they waited too long to get started, so they've had to be aggressive in order to, to try and slow down the train. And it's had two impacts on the market that I wanted to share with your viewers because they're what leads me to believe a recession is much more likely than not based on how things have worked historically. One is, and this might be a little inside baseball for people, so I apologize. But there's something called a yield curve inversion and economists follow the yields on 10 year US treasury bonds and 2 year US treasury bonds and typically the interest rates, the yields on a 10 year year bond are higher than a 2 year bond because there's more risk involved the longer the investment period. When you have periods with this kind of volatility and, and the market believes you're in for a downturn, those yield spreads reverse, they invert and so the yields on a two year become lower than the yields on a ten year. We've been in one of those markets now for several months. It's actually a pretty significant inversion. And the last seven times this has happened, we've had a recession. So it becomes a, it's not something that leads to a recession, but it has been an almost infallible predictor of a recession to come. And we're in one of those periods right now. The other thing, and you and I were talking about this as well, and this is, this is from the chief economist at Fannie Mae. It's public record data, so I'm not sharing anything proprietary here. But if you look at the last 11 times that the Federal Reserve has raised the Fed funds rate to get inflation under control, eight of those times they've had to overcorrect and they've steered us into a recession. The thing all eight of those had in common was they waited too long, inflation got too high or too sticky and they had to get overly aggressive with the fed funds rates and a recession followed. And those are the same criteria. We're looking at that in spades this time, Jason.

So I, and, and listeners and viewers, I just Want to remind everybody that one of the initial pitches as to why we need a Federal Reserve is to smooth out the economy. That's what they told us a little over 100 years ago. We got to smooth out the economy. We have too many cycles and look at the chart. The complete opposite is true.

Yeah. I mean, to be fair, the Fed has a brutally difficult job. They have two main object objectives. One is to keep inflation under control, and the other is to keep full employment. And, and in, in our economy, as things ramp up, you tend to run the risk of, of inflation pretty regularly. But, but these two historic trends, Jason, really do lead me to believe that a recession is much more likely than not. You live, you live in a cold weather area. I grew up in Pennsylvania, learned to drive.

Oh, no, no, no. I'm, I'm Palm Beach, Florida. It's.

Oh, then you're not. But I believe.

But when I woke up to walk the dog this morning, it felt great. It was a brisk 61 degrees.

Well, for, for your viewers who are used to, or learn to drive in snow and ice like I did in Pennsylvania, you'll learn that there's a better way and a worse way to try and stop on a slick road. And the, the better way is you tap on the brakes gently and quickly and you come to a controlled stop and pull off the side of the road. The less good way is you slam on the brakes and skid into a ditch. And unfortunately, the Fed waited too long this time to use the, the gentle and rapid decrease move. And, and so I don't think it's a question of whether or not we skid into a ditch and, and hit a recession. It's a question of how deep the ditch is and, and how long it takes us to get out.

I think the excellent metaphor, Rick, that.

Was like, like a lot of the economists I talked to, I, I, I'm of the belief that because all the other economic stuff we talked about is still pretty strong and we wouldn't normally be talking about a recession, I tend to think this is going to be a fairly short, fairly mild recession, but nonetheless a recession. We'll see unemployment go up a little bit, we'll see the economy slow down a little bit, but hopefully it won't be a terribly taxing recession.

I agree. Okay. Housing market. Now we talked about the broader economy. Now let's drill down on the actual, the housing market specifically. Yeah, yeah.

And you and I were talking about this as well. So we've come up from historically low interest rates to, to Double where they were a year ago, still near a 20 year high. If you look back over the last 25 years, we're actually in the range of, of what the average mortgage rate was. But I saw a great post on social media not too long ago. It was, it was somebody yelling at, at baby boomers basically and said, yeah, yeah, I get that you bought your $75,000 house with an 18% mortgage. Please leave me alone. And we have a whole generation of home buyers who's grown up in a low interest rate environment. This has got to be a shock for them. And it's caused sticker shock when, when your mortgage rates double. What the effect has been is if you're looking to buy the same house today you would have bought a year ago, your monthly payment is anywhere from 45 to 60% higher. And I don't know about you or your listeners, but I didn't get my 45% raise this year. So it, it's a tough market for people to be dealing with.

But again, that's the wrong comparison because that was the era of anomaly. It's not a benchmark. If anybody thought that was reality, they are just totally spoiled. Okay, that's not reality. Yeah.

And it feels like the inflection point is somewhere in the 5ish percent mortgage rates. And that's, that's kind of what at least I'm banking on for next year is. Let's assume mortgage rates have peaked for this cycle and the Fed can stop being quite so aggressive. That will give the financial markets a chance to kind of stabilize and mortgage rates to gradually go down over the course of 2023 to where we get down into the fives. And you know, if, if that's the case and if home prices, as we'll see in a moment, appear to be plateauing and wage growth continues to be strong, I can give you a scen where the market feels a whole lot more affordable toward the second half of next year than it's feeling in the second half of this year.

Okay, good.

But those rates of, those rates have had a very definite impact on home sales. Existing home sales are off 13 consecutive months. We were actually seeing a little bit of a weakening of demand at the end of 2021 as prices continued to soar. And we've rarely seen a cycle like we've seen in 2022 where every month sales have been lower than the month before. We completely wiped out the normal seasonality in the spring and summer months where home sales go up and that, that you can tie directly into the, the increased costs due to two mortgage rates, new home sales. And you and I were talking a little bit about this. They're a little bit more volatile, a little bit more sensitive. And when we've seen interest rates tick down a little bit, we've seen a spike in new home purchases, but still we haven't had a single month. We've one month this year where new home sales exceeded the prior year. And, and year to date, we're down about 14%. So the likelihood, Jason, is we end this year overall down somewhere between 15 and 20% from 2021 numbers in terms of sales volume. Sales volume. And, and you, you keep making a good point. 2021 was also not a normal year. 2021 was a very strong year in terms of the volume of home sales. So we're, we're going to be down, we're going to be down a little bit from 2019, which is the last pre pandemic year. But, but still, you know, trending in not a particularly favorable direction.

Just want to point out again, everybody, Rick is talking about sales volume, not sales prices.

Yep. And we'll talk, we will talk about prices. One of the things we've, we've been fighting is lack of inventory. That's true in both the existing home market and the new home market builder sentiment, which is the blue line here. It's a, it's a, a survey that's done among new home builders has dropped almost as far down as it was at the worst of the pandemic. It's not quite approaching Great recession pessimism, but it's, it's pretty weak. And the dotted line on this chart, that is single family home starts. And after starting the year pretty strong, they've, they've been dropping in double digits for the last four months. So the builders got the memo this time. They saw the people were slowing down with their, their purchasing and so they slowed down on the housing starts. So that will keep new home inventory from, from getting terribly robust next year.

And again, for those who are silly enough to try and compare this to the 2008 Great Recession, there is one of your ingredients that shows that, I mean, we're coming into this economic era with a shortage of houses.

Yes.

Okay. Back then they came in with an oversupply of housing. So it's just a completely different thing.

People keep forgetting that. Jason, I'm glad you brought that up. Even, even though we've seen inventory appear to get a little better lately. And, and that's not because of New listings. That's because it's simply taking a little longer for properties that are listed to sell. We're looking at about a three month inventory. In a normal healthy market, you're looking at about a six month supply. Leading into the Great Recession. In two, we peaked at about a 13 month supply of homes for sale, which is twice as much as the market can usually absorb. And at precisely that point in time, we had about 15 million really bad adjustable rate loans. Resetting. Yeah, and resetting at rates that the owners simply couldn't afford to pay. So they all had to sell their homes into an oversaturated market. It was just, it was a perfect storm. We're looking at very little new supply. In fact, new listings are 28% lower than they were a year ago. And this is from Altos research and they track this every week. So very little in the way of supply. That's one of the reasons that I agree with you, Jason. We're not expecting home prices to plummet because there's simply not enough inventory on the market to encourage people to lower the price of their homes. And we have very few people who feel like they have to sell, sell. So inventory outlook is that maybe by the end of year 2023, based on current rate of sales, we might get back to two prior cycles worth of inventory. But we're, we're, we're not going to be back at that six month supply anytime soon. This is probably interesting too. We, we, we saw a couple of years in a row where list price reductions on properties were lower than normal. And that was because we had limited supply demand. It was accelerated by those historically low mortgage rates which as you mentioned, were kind of an historical aberration. But people didn't really need to lower the list price of their homes. In a normal year, about a third of all list prices are reduced. So we, we went from a period where fewer than normal property had list prices reductions to where that number is higher than normal. And, and there's a seasonality to this too. You typically see more list price reductions at the end of the year. We believe, Altos believes that that list price reductions have probably peaked, which is an indicator that new listings are coming to market more realistically priced than listings from say four or five months ago.

Where people were still, you know, Rick, I mean, Mike Simonson with Altos has been on the show a couple of times and I love their data, I quote it all the time. But this, this data, this particular chart is not very meaningful for me and maybe I'M but, you know, I spent 19 years in the resale market, right. The traditional residential market there in Orange County. And the problem is every seller, when they think of the value of their home, they're always looking in the rearview mirror. And when you get to an era like this where we've been on this extremely hot market, like just never before seen. Right. You know, of course, their expectations are just way too high. And so this seems to be like more of a little bit of a soft metric to me. I love the inventory data they produce. But this one, I don't know, the price reduction thing, I, I don't quote this a lot because it, to me, it just, I don't know, it's.

I, I like it because I, I believe it's indicative of the market correcting. And I, I look at it as people bringing to the market properties that were overpriced versus people bringing properties to market that are more realistically priced. So I think we've seen that trend happen where people aren't looking a year in the rearview mirror anymore, Jason. Maybe they're looking at somewhat more recent numbers, but there's so much data that I'm not going to get stuck on this one. And.

Yeah, I just wanted to point that out.

No, and the other two things, and this is an interesting one, and I think the next chart is interesting. We are seeing a weakening in demand, and that's indicative of what we're seeing in pending sales. Sales which typically show you what we're going to see in closed sales over the next couple of months. And we're seeing again, fewer pending sales. And that's been a month over month decline for quite some time now. And we're also seeing it in the number of purchase loan applications. And this is from the Mortgage Bankers Association. This is a little bit of an eye chart, but if you follow the yellow line, we actually started the year stronger than most prior years. And by the end of this year, we're down 41% compared to where we were a year ago, but are also significantly below where we were even going back to 2019.

So listen, if you want to give to charity, the starving Mortgage Brokers association could use it because, you know, they made so much money in the refinance business. Literally the whole country refinanced maybe a couple of times in the past couple of years, but I mean, it's just plummeted. It's off a cliff, the mortgage business.

And this, this is just purchase loans. If I showed you the chart on refinance the drop off, that's even worse. Yeah, the drop off is about 86%. We have other charts in that that I didn't bring along today. But, but this just again, it's an indicator that demand is weakening. And that's a, I believe, a short.

Rick, Rick, before you go on, I want to just comment on that because you are so right with what you just said. You know, sometimes declining demand is a result of, look, people just don't want it. They already have it. Their needs are satisfied in the marketplace. A lot of this is true with like consumer electronics. You know, if you look at Apple for example, you know, how do we get people to buy a new phone? They don't need a new phone. We gotta invent some new feature that'll get them to buy it. Right. But in the housing market there is so much demand psychologically and like necessity wise with household formation, people want to buy houses in a huge, huge way. They just have been priced out. With the massive historical, unbelievable increase in interest rates. They're just priced out. So what do they do? They've got to stay in the rental market. Right. And so you've seen some data lately and I'm sure you've kept up with it, Rick, that rental prices have now finally decelerated. Right. Because they were going up like crazy too, just like housing prices. But that's misleading because number one, it surveys mostly institutional apartment complexes, not single family rentals. Right, okay, very misleading there. But also, look, it's just a lot of things are just taking a breather for this short little spot in history and everybody's trying to make a big deal out of it and project it into the future for three years and you just can't do that, especially given the seasonality issue as well.

But yeah, yeah, we've seen single family rental prices hold up better than what we're seeing in the multi family market. So we. Multifamily is overbuilt in some markets is. And this chart actually gets to part of this discussion really depends on your local market. And so you do see those rent prices varying depending on where you are in the country pretty significantly and also by price here. So the national data suggests that in the multifamily market you're seeing a little bit more of a decline in prices at the high end, which, you know, shows that people are looking for more affordable apartments when they're looking for apartments. But we're seeing the same thing in. And by the way, again, your point could not be more. Right. We've seen Industry surveys that suggest between 10 and 20% of people who plan to buy a house have decided not to at this point, at least temporarily, because they can't afford it. I would suggest that is a definite prospective boon, at least short term for single family rental owners. Because if somebody was looking to buy a house, maybe they're more interested in renting a house than renting an apartment. So something, something to keep in mind.

We talked about much further being a single family home than an apartment. Yeah.

Yeah. Especially people with growing families. You mentioned earlier how localized this particular cycle is, and I thought this chart from Freddie Mac was, was particularly particularly educational that way. This, I believe, is going to be a hugely localized market correction. I'm, I'm expecting home prices to go down by maybe 5% nationally by the end of, of next year. And look at what we're seeing in this chart. You're seeing price declines up and down the, the West Coast. You're seeing it in some of the, the boom towns from last year when the work from home movement had people, you know, moving to Boise, Idaho and St. George's Utah. You see those markets in decline. You see the, in decline. Austin, Phoenix, Las Vegas. But look at the Southeast, look at the Midwest and you're seeing prices actually continue to increase in, in the Carolinas, in Florida, in Tennessee and some other markets. So I, I do believe we're going to see a very localized correction in, in the, across the country next year. And, and yes, if you're in a market like Boise where prices went up 45%, you're likely to see more than a 5% price decline as the market sort of resets. If you're in Charlotte or if you're in Raleigh or if you're in Nashville, you may see prices continue to go up as population grows and as jobs continue to grow. So it's going to be a very localized correction and everybody is basically seeing the same sort of thing. This is a chart from Zillow for looking at the coming year. And, and again, again, whether you like Zillow's estimates or don't like Zillow's estimates, and I know the real estate market is, is kind of split on that. Yeah, they're calling out a lot of the same trends and a lot of the same markets that Freddie Mac was and some other forecasts are again, some of the markets that kind of overheated likely to claw back a little bit more. And some of the markets experiencing population growth will continue to be strong.

Yeah. So Rick, just to comment on that, you know, we divided up into three types of markets in the country. Linear markets, cyclical market, hybrid markets and the cyclical markets. They're always the high flying markets in every boom and bust. Well, yeah, you know, they, they have glorious highs and really ugly lows. They fluctuate a lot more. But most of the country is a linear market. It's just boring. Okay. And you know, you say localized, but I say the big declines are going to be limited to the cyclical markets that have run up too high and need to readjust those. They need to back to earth. They've just been crazy. So. But the problem is though, the way the media covers that story makes everybody think it's the whole country. And if you look at the case Shiller Composite index, it's got 20 markets and 15 of those, literally 75% of the markets they're covering are cyclical markets. It's so weighted towards cyclical and it just doesn't cover hybrid so.

Or linear or. I mean, every time I do a presentation to a group, Jason, I want to have an asterisk at the end that says local results may vary.

That's a good way to put it.

And I, I agree with you. I was talking to Lawrence Young, who's the, the chief economist for the National Association Realtors and, and Lawrence, Lawrence had a great point. He said if you're in Phoenix and home prices have gone up 50% in the last two years, if they go down 10%, is it really that big.

A deal you can give some back? Yeah, it's only a big deal if you were the last buyer that bought at the very peak of that Phoenix market.

And even then, if, if your time horizon isn't Tuesday, you're going to be okay. Yeah, because I desperately need a life and need more hobbies. One day I researched home prices over the last hundred years, years across the country. And in all those years there's been one period where home prices have dropped 20% and that stuck and that was during the Great recession back in 2008. And we all have PTSD. So everybody thinks because it happened once it's going to happen again. It's never happened before and, and hasn't happened since. And over time.

It must have happened during the Great Depression though, in the third 30s.

Well, it might have, but again, it didn't stick. And keep in mind, homeownership back in the great, back in those days was far, far lower than it is in today's market.

Oh, interesting.

Homeownership rates nationally were probably only about 35 to 40% because financing wasn't available. It wasn't really until 30 year fixed rate loans were allowed back in the late 50s that you saw it all changed.

In 1938, folks. That's when the GSEs came about FHA and you know, that changed the whole market. And that's what made the United States a very special real estate market. Investors very different from every other country on earth. So yeah, good points.

And there's still still massive equity out there, which again is another $29 trillion according to Freddie Mac. Our data at Atom says that almost 50% of people with a mortgage are equity rich, which means that they owe less than half of the value of their house. They have a $400,000 house and a $200,000 mortgage. So this cushion is also one of the things that leads us to believe we will not see a huge increase in foreclosure activity. Because if you have positive equity, and I mentioned earlier, 93% of people in foreclosure have positive equity, you have ways to get into a soft landing. Sell your house at a price, profit, perhaps even refi, if you were short, short term, out of work, but now have a new job. And just a couple quick slides on foreclosures because I know your audience is interested.

Yeah. Before you go into the this and you know, I want to talk about the 10 people in the country that are in foreclosure. There's only 10 of them. Just kidding. But I mean, the numbers are, I think you're going to say really low, but we'll see. But 93% of the people in foreclosure have, have positive equity. They're not underwater. Is that what you said?

Yes.

You know, the foreclosure process takes time, folks. So a notice of default was filed. That's what you're calling in foreclosure. Right. That means they've defaulted. But still there are many months and in some places years before it's actually going to turn into a change of ownership. And during that time they're going to, going to do a workout, a loan modification, a short sale. Well, they don't need a short sale because they have positive equity. They're just going to put the house on the market and sell it and get a little bit of money out of it. Maybe not as much as they wanted, but yeah, it's just.

And we're actually already seeing that the numbers people again coming out of 2008 tend to believe that if you're in foreclosure you're underwater on your loans.

It's not the same.

No, you're in foreclosure because you lost your job, you took an income hit, you had a divorce, death in the family, unexpected bills that turned you upside down financially and so you can't make your mortgage payments.

Or hey, don't forget to mention like the millions and millions of people back in the Great Recession in 2008 who just did strategic defaults. They had money, they could have paid their mortgages. They just chose to not to.

We're not seeing much of that this time and.

Yeah, well, fair enough.

I, I think we did last time because so many people were underwater.

Right.

If suddenly you found yourself 30% upside down on a loan, you did ask.

Yourself like, yeah, I'll walk away.

Yeah, but, but, but let me put this in context for you, Jason, because I think this is an important point. Our data shows that about 6% of homeowners nationally are underwater on their loans. There's a half a percentage of, of homeowners who are in foreclosure. So that means that the, the overwhelming majority of, of borrowers who are underwater on their loans are still making their mortgage payments on time. And, and I believe in many cases they're doing that because A, they can see a light at the end of the tunnel and they're almost neutral or almost going to be able to be right side or B, it's cheaper for them to keep making that mortgage payment than it would be for them to go try and rent something. So it's, it's actually, you know, kind of a strategic non default decision, if you will.

That's an interesting point.

Yeah, I think you're right. To your point, the predictor of foreclosures is mortgage delinquencies. And according to the mortgage bankers, we're actually below pre pandemic levels of delinquency rates. There was a big fear when the pandemic hit and the government put a forbearance program in place that everybody who took up the government on, on that forbearance being able to stop making mortgage payments for a period time, which wound up being almost two years for a lot of people. Those people were going to go into foreclosure and 8.3 million borrowers took advantage of that program. There's about 300,000 left. It wouldn't be that high except some people who were affected by the hurricane in Florida opted to get into that program temporarily. But of the 8.3 million people, less than a half a percent have defaulted on their loan after going through that program. Program, it's just been one of the most remarkably successful programs we've ever seen. So that's why we saw delinquencies spike, because people were in that program. Particularly the green bar you're looking at here, which is 90 days plus delinquencies, but down. Now in a normal year, you look at delinquencies, it's typically about 4% of loans that are delinquent but not in foreclosure. There's another 1% that's in foreclosure. We're down to 3.64% of all loans being delinquent. And if you, if you look at early delinquencies, those 30 day delinquencies, almost the lowest levels the NBA has ever tracked since they started collecting this data back in the 1970s. So the loan quality has just been.

Extraordinary due in part the underwriting standards have been obnoxious.

They have been. And the rules that the CFPB put in place after the financial crisis have kind of kept lenders coloring within the lines.

Yeah. Oh my gosh. I mean, it's like that's an overcorrection. I mean it's been so hard to get a mortgage that no wonder the loan quality is so good. I mean, I'm, you know, it's, it's good and bad. I mean, I think they've overcorrected. Like I say, but last time, I.

Don'T disagree with you, but I think, I think there was some overreaction. But. Yeah. And I'm fearful now that you mentioned earlier, mortgage volumes are, are dropping. I'm a little bit concerned that we're going to see some lenders go back to wild west days and start giving loans to anybody who can fog a mirror, which also wouldn't be the right approach.

That's, you know, there's a happy medium balance, folks. There's balance. Yeah, that's.

So you mentioned 10 people in foreclosure. It's slightly more than that, but in.

In a, in a. Eleven people.

Yeah. So this is foreclosure starts. This is the initial notice of foreclosure. And, and we track. At Adam. Foreclosure starts. We track properties scheduled for a foreclosure sale, which is the next stage. And then we track repossessions by the lender. The numbers tell kind of an interesting story. So you can see how far foreclosure starts, dropped after the government put its moratorium in place and put the forbearance program in place. I mentioned in a normal Market we're about 1% of loans in foreclosure. We dropped to about 210 of a percent at the, at the, the nadir of, of this, this cycle, we're now back up to about somewhere between half and six tenths of a percent of loans being in foreclosure. But again, to give you some rough numbers, normally with 55 million active mortgages, we'd have about 550, 000 loans in foreclosure. Today we have about 260,000, 270,000. So we're roughly half of where we would normally be.

So when you say normal on foreclosures, Rick, is that just sort of at any given time, like through all economic cycles, about 550,000 homes are in foreclosure just in any given time.

Almost historically, if you look at the averages, about 1% of mortgages are in foreclosure at any given time.

1%. Okay. Now we've got half a percentage.

Yes.

Right.

And so the 550 number is relative to the fact that we have 55 million mortgages active today. So if you have more mortgages, that number rises, you get the right.

Sure. Of course.

What's interesting here is that foreclosure starts just that first notice are back up to about 80% of where they were in 2019. The subsequent stages of foreclosures are nowhere near where they were back in 2019.

Right. Yeah.

And that's an indicator to me that what you and I were talking about earlier is actually what's happening, that people are getting that first notice of foreclosure. And rather than waiting for the foreclosure auction and losing their home and losing their equity, they're putting the property on the market and selling it and, and probably selling it at a profit. And that's nowhere more obvious than if you look at repossessions which have not come back to anywhere near prependant.

This is unbelievable folks. This chart, if you're not watching this on video, this chart is mind blowing. It basically shows you foreclosures that actually finish the process and turn into an reo. Mean real estate owned by the lender, by the bank. Right. So this is a finished foreclosure and there's like nothing. I mean it's just nothing. It's inconsequential. It is. This is the 10 people I was talking about earlier.

These. Yeah. And all kidding aside, Fannie Mae usually has the biggest portfolio of, of REO homes.

Right.

I spoke with somebody there a couple of weeks ago and they have 1200 across the country.

That's it.

That's it.

In a country this size, Boy, if you're in the foreclosure business, you're starving.

You are, you are. And, and so here's for your investor audience, this is probably the most important thing I'm going to say in our conversation today. If you're going to play in the foreclosure space, you need to change your mindset and your approach and do a 180 from where you were in prior cycles this cycle. You're going to need to find the homeowner in the early stage of foreclosure and negotiate a deal with that homeowner. If you wait for the bank to repossess the property, you're going to be waiting a long time for a very little bit amount of inventory.

Yeah.

The other thing we're seeing, Jason, is, is that the properties that don't sell prior to the foreclosure sale, but they get to that auction, the sell through rate at the auction right now at the courthouse of the Sheriff sale is about 70%. Prior to the pandemic that was about 30 to 35%. So there's less homes getting to the auction and a higher percentage of homes getting to auction are selling to third party investors. So there's just nothing left to go back to the lenders. And so if you're going to be playing in this space, you either need to be at the auction or you need to be working directly with that distressed homeowner earlier in the cycle or you're not going to be able to find a foreclosure asset.

Yeah. So, so if you're an investor and you, you make money by getting foreclosure properties, you've got to be working the pre foreclosure market and the nod market, meaning notice of default, like right when it's filed, you got to be negotiating with that home owner to try and buy it because they're not getting to the end of the cycle. Hardly any of them get there. Yeah, good. Well that's, that's bodes really well for the real estate market. All of the stuff you said. I mean Housing Wire likes to call them the Crash Bros. Yeah, I get a kick out of it. Logan's been on the show several times. He writes those articles about the Crash Bros. And the Crash Bros have just been wrong, wrong, wrong. And I think they're going to continue to be wrong.

So. Well, this, and you know, you and I are talking about prices earlier. And again, one of the reasons we don't believe there will be a huge drop off in prices is if you have a lot of REO inventory, they, they typically are sold at, at discount prices which becomes one of the comps in your neighborhood and, and can have an impact on, on local market pricing. With no inventory out there that's distressed, you're, you're just not seeing that have, have its, its impact taking its toll on prices. So again, very different market cycle than we've been in in prior years and, and, and people need to be looking for sources where they can find those, those homeowners who are in delinquency and distress earlier in the cycle this time and, and learn to knock on doors and, and send out postcards and do that sort of thing.

Yeah. All right, Rick, is that it or do you have anything else to show us?

Gosh, if that's not enough, I don't know what is. That's plenty of slides for one day.

I think Jason, that that was a very, very good overview. I mean a lot going on. We love the data you share. There's just so much of it and we appreciate you coming back on the show. Anything you want to wrap it up with? Of course. Give out your website or any resources you want to share with people.

Yeah, a couple things. We publish this information for free on the website. No subscription, no anything. It's Atom data with two T's A dash T T O M data dot com. Go to the insights section on the website and you'll see new reports up literally every week. You can follow us on, on Facebook, Twitter, LinkedIn. You can also follow me on LinkedIn and Twitter if you like. It's just ricksharga. I make it easy for everybody to find me. If you want to connect with me on LinkedIn, mention that you you heard me with Jason so that I know you're not some crazy person from, from China looking to hack my account account because I get a few of those. But the other thing I'd point out and you know, shameless plug here, Adam does have a product for individual investors called Adam List. And if you're looking to, to find a list of, of distressed homeowners in early stages of foreclosures, you can, you can develop a marketing list to self service product online. So there are other good resources out there as well. But again I'd encourage your, your listeners looking for those distressed assets to think upstream this cycle. Don't wait for the banks to repossess because you're not going to find the inventory you want.

Good stuff Rick. Well thank you so much for joining us. We always appreciate having you back and we'll look forward to talking with you in the future.

Do it again sometime soon. Jason take care.

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