441: Housing Affordability Crisis and the Impact of the NAR Lawsuit on Real Estate with Rick Sharga

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It's a pleasure to welcome a returning guest back to the show and that is none other than someone you've heard from many times on the show over the years. Rick Sharga with CJ Patrick Co. He is a real estate analyst and he always brings fantastic insights for us and so let's go ahead and dive in. Rick, welcome back.

Thanks Jason. Always great to spend some time with you and your viewers.

Yeah, and it's great to have you. So you know, the last few times you've been on the show we have pretty much agreed that the Crash Bros. Are wrong and there's not going to be a real estate crash. And so far, Rick, knock on wood, we've been right and they've been and they're looking like idiots. But is it changing? Is anything changing? Are we just kind of in for the status quo or is the market going to turn at some point? What are your sort of macro thoughts? And then we've got a lot of charts and graphs to get into as well.

Yeah, I think there were two possible scenarios. One was what the Crash Bros. Were selling you on YouTube, trying to get a lot of clicks and sell you stuff you didn't really need. And the other is the more likely reality, which is that we're probably in for a two to three year period where home sales are sluggish, prices are going up modestly and the market has a chance to reset. The fallacy was that since prices went up, they had to come down in order for people to be able to afford to buy houses. And the notion of prices have to come down because they went up really doesn't have any basis in historical fact. What we have seen in the past when there's been a sudden increase either in prices or in mortgage rates is that it basically slows the housing market down for a period of two, three, maybe four years while everything kind of resets and you get back to the new normal. And I think, I think that's probably the more likely scenario. We're looking probably for existing home sales to bounce off last year's bottom. Last year we sold just under 4 million existing homes, lowest number in 25 years. But prices went up about 6%. And I think, I think we'll see a bounce off that bottom this year in terms of home sales volume, maybe to 4, 4.5 million homes. So it won't be a huge year, but it'll be better than last year in prices.

And that's for volume you're talking about.

Now, but just volume number, number of properties. If you wanted to say we had a housing crash in 23 based on volume, you can make a pretty good argument. We had about 6 million sales in, in 21, 5 million sales in 22 and about 4 million last year.

Right.

So that the number of properties sold was down. But the, the people that we're talking about 20, 30, 40, 50% price crashes couldn't have been more wrong. And I think we'll continue to be wrong into the.

Yeah, I think you're right. People always have to distinguish between sales volume and sales prices. Those are not the same thing. In fact, in some cases it depends on the market dynamic. A lower sales volume leads intentionally to higher prices because there's fewer transactions, less inventory in the marketplace. And when you have less inventory, you're naturally, as a result of less inventory, going to have lower volume. So this is something that the Crash Bros. Got very, very wrong, much to the disma of millions and millions of people who missed out on opportunities because of their clickbait, fear mongering publishing, whether it be in the form of newsletters or YouTube videos or podcasts or whatever. And you know, look, we all know that if you want to get attention and if you want to hack the human mind, bad news sells. I mean the old saying in the news media business is if it bleeds, it leads. And so these people are really very manipulative and unethical. You know, they're not going by data, they're taking some little tidbit of data and extrapolating all sorts of ridiculousness from it that just simply doesn't exist. Rick, one of your comments I thought was really interesting a moment ago, and that is that just because prices were lower before doesn't mean they have to come back down to that prior level. You know, and that is so true of every asset class. Things do not have to revert to the mean. Why do people think and expect that? And, and why is that wrong?

Jason? I wonder that myself. I think, I think maybe it's just wishful thinking. If you look back And I've actually done this. If you look back at the last hundred years of home prices, we've had exactly one period where home prices have fallen by 20% and that was during the Great Recession back in the, back around 2008. Now that doesn't mean the prices went up significantly or that they went up in a straight line. We've had a lot of sawtooth increases where they go up a little bit and down a little bit, up a little bit more. But the overwhelming direction of over that 100 year period has been up and to the right. So prices have continued to go up. I think we have a lot of people who look at that last scenario and maybe, maybe the, the issue, Jason, is the mistake that generals make when they, they always try and fight the last war when they go into battle.

Right.

But people saw prices rise artificially back during that housing bubble in 0506 07. We saw prices crash after that. But all of the dynamics that were in place that, that really precipitated that crash were very unique to that period of time and none of them exist. The, the BAS reference is right before the crash there was a 13 months of homes available for sale, a 13 month supply. That's more than twice what we would see in a normal market. Today we're looking at about a three month supply, so about half of what we would see in a normal market. And we have 35 million young adults between the ages of 25 and 34, most of whom would like to become homeowners. So we have a completely different supply and demand dynamic than we had back then. There's virtually nothing in place that precipitated the kind of crash we had back in 08.

Yeah, Rick, I couldn't agree more. And you know, one more thing you didn't mention there is that a lot of those young adults that want to become homeowners, you know, many of them are living at home.

Yep.

So that represents a massive shadow demand for housing inventory that just cannot be created quickly or easily. It's very hard to create new housing and that is likely to stay that way for quite a long time.

But let's go ahead and item. I know we're going to talk a little bit about the Federal Reserve, Jason, but just, just to kind of put a point here, the Fed, among other things, did want to get the home price appreciation to slow down significantly, as is often the case. I think they probably overcorrected a little bit and mortgage rates have gotten so high that people literally can't afford to sell their house. It's not because they're being picky or it's a psychological barrier. It's math. If you're sitting on a 3% mortgage and you sell your house and buy another one at exactly the same price and you're getting a mortgage at today's rate, you just doubled your monthly payment and most people simply can't afford that. So that's kept a lot of inventory off the market that normally would have come onto the market. And you're absolutely right. We have a huge tailwind in terms of the housing market. That's young adults. About 30% of young adults are still living at home with their folks and they're socking away money and getting ready for when the time is right.

Yeah, yeah. No question about it. Well, Rick, let's go ahead and dig into some of your analysis and your data. You always bring great charts and graphs, folks. If you're listening on audio only, go ahead and listen to this interview. But if you have a chance, jump over to one of the video platforms like YouTube or the others I'm on and check out the charts too. Go ahead, Rick.

Just some high level thoughts on what's going on in the economy, Jason. The gross domestic product, which is the basic metric most economists look at to determine how healthy the economy is, continues to confound the economists. The last quarter of last year, which is the most recent data we have, the growth of the GDP was at 3.3%. That was significantly higher than most forecasters. And keep in mind that about two thirds of the GDP is made up of consumer spending. So when we see strong GDP numbers, it typically means consumers are spending a lot of money. That was certainly the case in the fourth quarter. We are starting to see a little bit of a slowdown. We'll talk in a few minutes about whether or not we're likely to still see a recession. But the talk of a slowdown, the talk of a recession in 2023 was certainly premature. And we continue to see the economy kind of chug along at a pretty good rate. One of the reasons for that is that unemployment is still near historically low levels. I think the most recent number that came out was about a 3.9% rate of unemployment. That was a little higher than it had been the previous report, which was 3.8. But to keep this in context, historically speaking, if you're anywhere at 5% unemployment or lower, that's considered to be full employment.

Right.

We're really kind of used to this. Almost spoiled by these low levels The Federal Reserve has said because of what they've been doing with the Fed funds rate, trying to slow the economy down a little bit, they expect we'll end this year somewhere between 4.5 and 4.7% unemployment. So we will see those numbers tick up a little bit over the course of a year. But again, not to the point where we would be looking at a huge, unusually severe rate of unemployment. And one of the reasons for that, and this is no surprise to most of your listeners probably, is that there are still more jobs available than there are people looking for work. That ratio has compressed a little bit bit. But we still have about eight and a half million open jobs and we have about 6 million people looking for work. And the last two jobs reports that have come out have been big surprises to the upside. So again, the Fed's a little concerned that the job market is still as strong as it is. But the January numbers came in at about 350,000 jobs filled. February numbers came in at about 250,000. Those numbers always get adjusted a little bit. But again, strong job growth and a lot of jobs still available. And by the way, these are not before somebody says it, these are not all service level jobs. This is not Starbucks and McDonald's hiring. These are government jobs or manufacturing jobs. They're construction jobs. A lot of trade jobs that are open, a lot of technology jobs that are open. So a lot of these are good paying jobs.

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And this. This is another indication of that, Jason, for the people that are looking at the charts, because there are. There are fewer people available and there are jobs open, we wages go up. So the average hourly wage across the country today is over $29 an hour, and those wages are going up between 4 and 5% a year, which means for the first time in several years, we can actually say that wages are growing at a faster rate than inflation. And I think some of the negativity that you're hearing is we're seeing the rate of inflation come down, but it's not reducing prices. So prices are going up more slowly. But we had that huge bump a couple of years ago that's made it really difficult for a lot of households to be able to afford, you know, the common necessities. That said, consumers are still spending a ton of money. We saw a drop off in consumer spending and consumer confidence when Covid hit. Consumer spending started to come back as soon as the government lockdown was over, but consumer confidence has been a little weak. We saw Covid 2 and Covid 3, and then we ran out of Greek letters because there were so many more waves of COVID And then there was a war in Ukraine, and there was potential for a government shutdown in D.C. and now there's war in Gaza. And consumer confidence really hasn't bounced back to the level we saw prior to the pandemic. That's a concern because historically speaking, consumer confidence led consumer spending. And as I mentioned earlier, consumer spending accounts for about two thirds of the gross domestic product. So if we don't see consumer confidence start to get a little bit better, we could theoretically worry ourselves into a recession as consumers pull back. And we're starting again to see a little bit of a slowdown in this first quarter as we look at some of the retail numbers coming through and some other consumer spending metrics. But by and large, consumers are continuing to spend. And one of the things that's concerned, Jason, is the kind of money that's being spent. So if. If you look at, at what's been going on with credit card usage in the, the third quarter of last year, for the first time in history, credit card debt surpassed a trillion dollars. And it went up a little bit more than that in the fourth quarter. And this happened at a time when interest rates on credit cards was the highest it's probably ever been. New cards being issued over the last couple quarters had an average interest rate of somewhere between 25 and 30%.

Right. So, so what's interesting about this, and I see all these things about, you know, household debt has increased and credit card debt has increased and auto debt has increased. I get it. Right. But the, the first thing is most of these surveys are not adjusted for inflation. Okay? So that's part of the problem. Okay. And then of course, if they are adjusted for inflation, inflation is understated, so that adjustment is now off too. But that also goes to what you just mentioned about incomes and inflation too. So, you know, to be fair, it's on balance. Right. But really sadly speaks to the wealth gap because people who are doing well, they're not carrying any credit card debt, okay. They're not paying those high interest rates. It doesn't apply to them. And the people who are in the, you know, lower middle class and even middle class and the poor who are carrying that debt, they're basically put in the position of essentially renting money. They never get out of the debt trap most of the time because the interest rates are just usurious. They're so high that they just can't get out of the trap. Right. Without bankruptcy. So really what this is speaking to is not a measure of the housing market, it's speaking to a measure of wealth inequality. And remember, these people carrying this debt, they're not buying houses, okay? They're not the market of home buyers. So now granted, they could potentially be. But you know, another topic is developers don't build entry level houses anymore. So what are they going to buy anyway? Because there's a huge shortage of those. But that's another.

Yeah. For your, your listeners, your viewers who are investors and looking at rental properties. This is your rental market. And, and so you have to watch the, the financial well being of those folks. It's funny you mentioned usurious that that's a term I use a lot when I'm talking about this too. 25, 30% interest on a loan used to get you arrested for usury. Now apparently it's the new normal and it's okay.

Yeah, Rick, the saying because the banksters get away with everything, right. They've got the army of lobbyists to get the laws they want. You know, it's that great old saying, if you have a gun, you can rob a bank. If you have a bank, you can rob the entire world. That's the deal.

Unfortunately. Speaking of banks, the other thing on this chart is the rate of personal savings. And it hit all time highs when the government was sending us stimulus checks during COVID Hit an all time low in 2022, has recovered a little bit debt, but, but we're still seeing lower than normal personal savings rates. And in fact, on average, according to some research I've seen households have more credit card debt than they have savings. So it's not a great ratio. And one of my concerns looking at this is how many of these households, and you mentioned middle class and lower middle class and then people be up beneath that line in terms of income. How many of these folks are using their credit cards to make ends meet? How many of them are tapping into personal savings to make ends meet. And it really does show why it's so important to get the cost of living on a national basis. Or we could see a bad ending to this movie which you know, none of us would be happy about. Inflation does look like it's peaked. I wanted to show people this chart. The shaded area is, is what the Federal Reserve is doing with the fed funds rate. And the, the line that's going across the the chart is, is the rate of inflation. And if you go back to way back in history, maybe four or five years ago, you can see a more typical process by the Federal Reserve. They'd, they'd raise the fed funds rate a quarter point. They'd wait to see what happened, they'd maybe raise it another quarter point. But very methodical, very thoughtful process to try and make sure inflation didn't get out of hand and then was under control. They whiffed this time and I'm not picking on the Federal Reserve. They've acknowledged this themselves in their meetings. They didn't expect inflation to get as high as it did. They didn't expect it to go up as quickly as it did. They didn't expect it to be so difficult to lower once it got there. And as a result of that, they've had an unprecedented series of fed funds rate increases, both in terms of the size of the increases and the rapidity of the increases. It has basically roiled the financial markets and had a huge impact on housing. But we've never seen anything like this before with the possible exception of the 1980s in terms of the amount of rate increases. And the speed, for what it's worth, it does look like it's had the desired effect. It's gotten inflation under control. We're bouncing around somewhere in the threes right now in terms of the rate of inflation with the target being in the twos. Some of the more recent reports have showed inflation a little higher than what they'd expected. So I think we're in a situation where we're not going to see the Federal Reserve reduce the rate of the Fed funds rate probably at least until the second half of this year.

Okay, so in other words, no mortgage rate relief until the second half.

Personally, I don't believe we're going to see a significant decrease in mortgage rates until after we get that first Fed funds rate cut. And if that happens in maybe June, which I think could be probably the earliest, then we could start to see mortgage rates come down. You know this because you follow it. It's probably a little inside baseball for some people. But the, the 30 year fixed rate mortgage is tied loosely to the yields on the 10 year U.S. treasury bond. And they tend to go in correlation over, over time. And usually there's about a point and a half to a two point spread between those yields and mortgage rates. So if the yields on a ten year US treasury are four, usually your mortgage rate's somewhere between five and a half and six. And for the last couple Fed started raising rates, that spread's been more like three points. So if, if people were comfortable that the Fed really was going to, to settle down and start to reduce the fed funds rates, we could see some compression in, in that, in that gap and we could see mortgage rates start to come down. But, but if I'm looking at most likely scenario from my perspective, the Fed doesn't cut rates until June at the earliest. Between now and then we see mortgage rates kind of bouncing up and down in a of ton tight band between about 6.75% and 7.2%. You know, some months a little higher, some months a little lower, but not really starting a steady decline until we, until we get to that June rate cut.

Yeah, okay. All right, let's keep going.

In terms of the economy in general, very often when the Federal Reserve has done what they're doing right now with the Fed funds rate, they overcorrect and steer us into a recession. If you go all the way back to World War II, prior to this cycle, they raised the Fed funds rate to get inflation under control 11 times, 8 of those times they've overcorrected and it's led to a recession. The three times it didn't happen all had something in common. They were acting proactively and raised the Fed funds rate early to help keep inflation from getting out of control. And they've already admitted that they missed that window this time. So they could pull off a miracle and we could execute a soft landing this time. What I think a lot of people forget is that when the Fed raises the Fed funds rate, the impact isn't immediate, it's usually a lagging impact. That impact can take place anywhere from 12 to 24 months after the rates have gone up. So if history is a precedent here, it seems more likely than not that we still have a recession in our future. It's likely to be a very short and very mild one because the only reason we'd have a recession is because of what the Fed's done. But the probability is that we see that short, mild recession and if we don't, we're definitely going to see an economic slowdown.

Yeah. So a couple comments on that. Number one, the yield curve has been inverted for quite a while and that's all always been an indicator of a recession for like the last five decades. And that recession never came this time. So you know, that's another prediction the Crash Bros. Got wrong. But number two is just because there's a recession, if there is one, doesn't mean real estate prices will fall. Okay. You have to have high inventory levels and distressed sellers. That's what will cause the market to change in terms of real estate. So recession and real estate do not necessarily go together. They certainly might, but not necessarily. Any comments on that?

If you go back historically, and I need a better hobby, I've actually done this too. And you look at, you look at home sales and prices, you know, during recessions, what you find is from the beginning to the end of the recession, typically home sales and home prices go up. And in fact in most cases the housing market helps bring the economy out of a recession. The one exception to that and, and the one that everybody looks at right now is what happened during the Great Recession. Recession. And, and that was the one back in 08 where the housing and mortgage industries actually are what dragged us into a recession. But, but again, historically speaking, you're absolutely right, Jason. The, the most of the time you, you, you don't see home prices come down or if they do, they come down a little bit and then tick right back up. You pointed out the inverted yield curve. So people understand an inverted yield curve doesn't cause a recession. It's an indication that the market believes that that something is, is wrong economically speaking. And inversion is, is that it means that yields on a short term investment like a two year treasury are now higher than the yields on a longer term investment like a 10 year treasury, which is the opposite of how they should go. The longer your, your investment, the more your yield should, should be. And, and the last eight times we've had a yield curve inversion. It's been followed within 12 to 15 months by a recession. This is the longest and deepest yield curve inversion we've had since the 80s. And, and again I still think, think more likely than not it eventually points to a recession, but you know, hopefully one that isn't all that severe. The economists I've talked to, by the way, the ones that I respect who aren't trying to sell you something on YouTube, basically have said it. You know, right now it's about a 50, 50 whether we get a recession or not. But even if we do, they don't expect to see unemployment go much above 5%. From my research, my personal research, 6% unemployment is where you start to see an impact on housing. So if you go from below 6% to over 6%, it does have an impact on home sales, on home prices. But if we stay below that, to your point, even if we are in a recession, I don't think it's a huge, huge headwind for the housing market. Speaking of the housing market.

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

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

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

Yeah, funny you should mention that.

Oh, there we go.

One of, I think one of our mutual friends, I believe. Mike Simonson, Altos Research does this weekly. He's looking at inventory being about 21 up from last year. But I mean, last year was about as low as it could get. And the current inventory is about 500,000 units, which is better than it was a year ago, but about half of what we would like to see in the market. And where we were back in, in 2019 prior to the pandemic. This is only partly because of new listings. And I think that's important for everybody to understand. We are seeing an increase in new listings, about a 15% increase compared to last year. So about 59,000 new listings in the last week of this data that I have from Altos Research. But if you can see all the gray lines, you can see that in most years past we, we've had more listings. So the reason that the inventory numbers are up a little more than the listing numbers is because it's simply taking a little longer to sell the properties once they're listed. And that's not an indication that we're looking at a housing market ready to crash by any means. It's just taking a little longer than, than, you know, the house is flying off the shelf in years past. So again, good news, bad news. More listings than we had, not as many as we'd like, but we are starting to see some movement in terms of list listings. This is what I was talking about earlier. This is what economists call the rate lock effect. And about, according to Freddie Mac, about 2/3 of homeowners with a mortgage have an interest rate of 4% or lower. These folks simply can't afford to sell their house and take on a mortgage. With a 7% mortgage rate on, on what would inevitably be a more expensive property, about 90% of homeowners with a loan have an interest rate of 6% or lower. Now again, this is where some of the crash pros come into play and they say, well, therefore what has to happen is people lower the prices of their homes in to sell them. Well, I'm a homeowner. I think you're a homeowner as well, Jason. I'm not really in a hurry to, to sell my house by lowering the price 20, 30, 40% just to be nice to somebody who wants to buy it. I'll, I'll wait out.

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

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

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

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

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You mentioned the builders earlier and builders are doing very well for themselves for, for a couple reasons. The most obvious one is they have inventory available to buy. You know this. But in, in a normal market, new home sales account for somewhere between 10 and 15% of sales. their peak last year they were accounting for almost 30%. So we, we ended the year with about 4 million existing homes sold and with about 660000 new homes sold. And that ratio is, is, is a little bit out of, out of whack historically speaking. But again one of seen the inventory numbers come back and if you look at, at the inventory of, of new homes, it's about a seven month supply which is just about historically average for new homes. So the inventory is there and, and people are looking and buying at those houses. I've even talked to some investors who are looking for properties to rent, who are buying some closeout inventory from builders and some of their developments. So it's, it's a very unusual market.

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

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

They're doing buy downs.

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

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

Right.

The new home is now a lesser home. Yeah.

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

With less expensive, cheaper houses.

Yeah, well, the good news is they're building more. So when you see headlines that say housing starts are down, they are down overall, but they're down mostly for multifamily units.

Right.

And there's a million apartments coming online.

Way too many. Yeah.

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

Hey. Yeah, we need.

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

Good point.

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

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

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

Yeah, they got a nice moratorium.

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

That's still a total nothing burger here. You know, it is.

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

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

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

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

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

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

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

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

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

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

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

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

Thanks for having me, Jason, and we'll talk soon.

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