Foreclosure Crisis Unlikely in 2021 (Here's Why)

Foreign. Well, happy Tuesday to all and welcome to the intro for episode 1576. 1576. We've got another visit from Rick Sharga today with Realty Track. He shares some awesome information. But I have a question for you. Would you like to work for the government, for the federal and state government for 228.5 days per year? 228.5 days per year. There are 365 days in a year. Well, most years, not all. Not all years. Obviously we have leap year and such. But imagine spending 228 and a half of those days strictly working to pay income tax. Just income tax. Not gas tax, not sales tax, not tax on your cell phone bill, not tax on your landline phone bill, not the tax on all your utility bills, not sales tax, not any other type of tax, just income tax. Right here is the number. 228.49 days per year. Well, that's what the folks running in this election think you should be doing. Check it out. So by the way, if you need us, Jason hartman.com if you're in the United States, you can call us on the good old fashioned telephone. 1-800-hartman okay. So as you are probably aware by now, 50 Cent, I don't know if I'm pronouncing that right, but 50 Cent has decided to endorse Donald Trump for president because he is scared of Joe Biden and Kamala Harris's absolutely insane tax plan. This is. You can't make this stuff up, folks. It's just incredible. So when you look at the combined state and federal income tax, only just income tax, no other types of taxes? No. No sales tax, no death tax or inheritance tax, no gas tax? No nothing tax. Just income. Just your income only. You are going to work for the government. If you live in the socialist republic of California, my former home, you're going to work 228.49 days per year for the government just to pay your state and federal tax bill. Now, if you live in New Jersey, it's a little bit better. If you live in New York State, it's a little bit better. But New York City, because they add all those other taxes, you're basically up to California tax rates. Yes. It's 0.6% lower. So you can work if you're in New York City, you're probably going to work 227 days a year just to pay your income taxes only. That's it. Nothing else? Nothing else. Nothing else. Just income tax. Yeah, that's it. So, so 50 Cent is now endorsing Donald Trump. And you know, it's interesting, I put this on Facebook this morning and Facebook decided not to show it to anybody because Facebook is obviously pro Biden, anti Trump. They hate Trump in Silicon Valley. They hate him in Hollywood. You know, it's kind of like interesting when you, when you have like 60 million people that vehemently hate someone, you know, know, is that person bad or is he just ruffling a lot of feathers, disrupting, draining the swamp? I don't know. We'll see. We got special election night coverage coming up, so join us for that. Be sure to join us. More to come on that one. But when you look at this, 55% of Americans in this survey, okay, now this is a Gallup poll. So it's a, you know, big polling organization. Obviously it's not, not some little thing, right? It's. They've been around for many, many decades, Gallup. And 55% of Americans say they are better off than they were four years ago. So that's better than the ranking. When asked the same question of George W. Bush, comrade Obama, Reagan even did not have that high an approval rating. And Reagan was, you know, super popular president, obviously, even on both sides of the aisle. Reagan was really good at kind of reaching across the aisle. And you know, his, one of his best friends was Tip o', Neill, Democrat, speaker of the House. That would be like Nancy Pelosi and Donald Trump being good friends. Imagine that. Not gonna happen. And then George Herbert Walker Bush, 38%. So not a very high rating for him. But yeah, 55% say they're better off under, under the Trump administration. So there you go. Now the mass migration continues. Buyers from New York, Chicago and California are flocking to Dallas, the big D. And this is not the only place. This is just one of many examples. You know, they're coming into Dallas, they're coming into every place. They're coming into linear markets. Remember, three types of markets, Linear, cyclical, and hybrid. And all of those, by the way. You want a prediction? Here's a prediction for you. The formerly cyclical markets after they have their continued crash. Now, those cyclical markets are the high flying, left wing controlled markets. They're almost all left wings. Why is that? Well, because left wing governmental policies create housing shortages. Yes, I know they all say they're trying to help the poor and the needy, but for some reason, it just never quite works out that way, does it? It just never works out that way in actual practice. No, it does not. So, yeah, so. So they have housing shortages and they have high housing prices and they have high taxes. And guess what else they have. They have people leaving in droves. And most of these areas share high crime rates and high unemployment. And, you know, the evidence is so profound, it's just everywhere you look, it. It is undeniable. It's like Marcia Clark and Christopher Darden said when they tried to prosecute O.J. simpson. You know, they were the district attorneys at the time in the O.J. trial from years ago. They said, we have a mountain of evidence, yet the jury would not convict. So here you go. Check out this ad. And this is a Baltimore politician. It's pretty interesting what she says here.

Do you care about black lives? The people that run Baltimore don't. I can prove it. Walk with me. They don't want you to see this. I'm Kim Klasek. This is Baltimore, the real Baltimore. This is the reality for black people every single day. Crumbling infrastructure, abandoned homes, poverty and crime. Baltimore has been run by the Democrat party for 53 years. What is the result of their decades of leadership? Baltimore is one of the top five most dangerous cities in America. The murder rate in Baltimore is 10 times the US average. The Baltimore, Baltimore poverty rate is over 20%. Homicide, drug and alcohol deaths are skyrocketing in our city. Do you believe black lives matter? I do. The vast majority of crime in Baltimore is perpetrated against black people who make up 60% of the population. So why don't we care about our communities? The Democrat party have betrayed the black people of Baltimore. If the politicians are walk the streets like I do, they would see exactly how their policies and corruption affects us. If they don't want to see it, they don't want you to see this. Go to any Baltimore neighborhood and ask this question. Do you want to defund the police?

No. No. Absolutely not.

I had three sons killed in Baltimore city. And I think if we defund the police office, it's going to be worse than that. So no, I'm opposed to.

What are you gonna defund the police for? Why?

How do you defend your city, your community? Families are losing people.

It's not just Baltimore. The worst place for a black person to live in America is a Democrat controlled city. It's 2020. Name a blue city where black people's lives have gotten better. Try. I'll wait. Look at this. How are children supposed to live here and play here? Democrats think black people are stupid. They think they can control us forever, that we won't demand better and that we'll keep voting for them forever, despite what they've done to our families and our communities. Are they right? I'm Kim Klasek and I'm running for Congress because I actually care about black lives. All black lives matter. Our communities matter. Baltimore matters. And black people don't have to vote Democrat.

That campaign ad was one of the highest, what I want to say, money raising campaign ads. It raised just an absolute Fortune in like 72 hours after it appeared. So, and she's right, you know, she's totally nailed it. I mean the evidence is just overwhelming. You want to look at the poster child for big government disaster, just look at Detroit. Absolutely pathetic disaster. Decades and decades of left wing policies that have just destroyed that city. Absolutely unbelievable. Speaking of migration, I run a group like a social network called the Empowered Investor Inner Circle. And one of our clients posted in, in here yesterday and I thought this was really interesting. They wanted to rent a trailer from U Haul to go from Folsom, California, Northern California to Boise, Idaho. Okay, it was $850 to rent it in that direction one way. But if you want to go backwards, if you want to go from Boise to Folsom, if you want to take it into California, in other words, where nobody wants to take it, everybody's moving out. They're taking the U Haul trucks one way, they're taking the U Haul trailers one way and leaving them in the other city. And U Haul has the giant burden of transporting them back to where they came from or at least where they're needed. And they're needed in California so people can leave, so people can get out, so they can escape the potential for 62.6% tax, having to work for the government for 228 and a half days per year just to pay income tax. Nothing else, just income tax. It's only $99 to rent that same trailer to go backwards to take it into California soon. I bet you U Haul will make that a dollar. They probably can't pay you because just the way legal contracts work, but they can make it a dollar. So that's enough consideration for a contract. This is absolutely telling. Like if this, if this doesn't tell the story and I, I showed you one of these examples previously of moving from New York City to, to Palm Beach, Florida, that direction, very expensive. Moving it from Palm Beach, Florida, where I am, to New York City, very cheap. I showed that example before. So this is yet another. You can just go to the U Haul website and, and you can plug in these things yourself. Just anywhere you're leaving a Democrat controlled city as everybody is trying to flee from them. Just go and do the survey yourself. You know, plug the, plug it in. Go to u haul.com and you'll see how much less expensive it is to bring that vehicle, that truck, that trailer, whatever, back into that area. Because they're all leaving one way. They're going on one way trips, leaving these cities. Try it for Seattle, Los Angeles, San Francisco, Portland, you know, even San Diego, but not to as big a degree. Try it for New York. You know, you'll, you'll just see, it's just all all over the place. Folsom is near Sacramento, California. Same idea, obviously. So you see what's happening here, folks. But on the good side, well, maybe the good side, I don't know. Home builder confidence breaks previous 34 year record high. Is that absolutely unbelievable? I mean, increased buyer interest in the suburbs and the exurbs and small towns mark a bright spot for the economy as people, America is, is just rearranging itself. This is one of the most mobile populations in the entire world. Americans are, it's been that way for quite a while. After World War II, we saw the rise of the suburbs, we saw people moving to the suburbs. And what made that possible? What was the, the automobile? You know, America was one of the very rare circumstances in the world where people fell in love with the automobile. They were prosperous and you know, they, they moved out to the suburbs, they got out of the cities and now that same thing is happening again. You know, over the past couple of decades we had this move back into the cities and but now it's reversing. You know, the tide goes in, the tide comes out, the pendulum swings back and forth, right? And so that's what's happening. And by the way, David, who made that comment. Thank you, David. He happens to be watching right now. California is insane. Run by socialist nut jobs. Yes, I would have to agree with you. And David, I hope you didn't mind me sharing your U Haul example because that was a good one. So thanks for that. Appreciate it. But yeah, wow. I mean, we've broken the record. So the real estate market, home is the center of the universe. The residential real estate market is absolutely booming. It's on fire in fuego. Yes, it is, it is, it is. Okay. All right, well, hey, let's get to the rest of our show. We've got our guest today. Rick Sharga is back to, to talk to us about just what's going on in the market and a Lot of data out there and a lot of interesting stuff. And like I said yesterday, you know, if you're waiting for this big foreclosure boom, I think you might be a little disappointed. A little disappointed. So, you know, we'll, we'll see. We'll see. And just for future, I'll let you know, I am interviewing in about seven minutes, economist from England's Monetary Policy Committee and former professor at London School of Economics, Charles Goodhart. He is the one who promulgated Goodhart's law, which is very interesting. So we're going to talk about that. And that interview will probably be published maybe next week or so. So that's what's coming up. And oh, before I go, David made another comment. Thanks for sharing the U haul example. Well, thank you for sharing it, David. We really appreciate that because people have got to know what's going on. They've got to know what's going on and they've got to be more informed voters. You do not Want to work 228 days per year to do nothing else but pay income taxes. I mean, that's insanity. That's just insane. I mean, look, think about it. Think about this, folks. You know, even if you're not religious and you haven't been to church in a long time or forever, you know that the idea of tithing is that you'd give 10%. I mean, if God can live on 10%, why does the government need 62.6%? Wow. I'll leave you with that one. Okay, let's get to our guest. Thank you for joining me today for the live stream portion. And the guests will be on the podcast today. It'll be up in a couple of hours, so check out the Creating wealth podcast for the full interview. But thank you for joining me today and I will talk to you later. Until then, happy investing to all. It's my pleasure to welcome a returning guest back to the show and that is none other than Rick Sharga. He is executive vice president of marketing at Realty Track, the country's leading provider of foreclosure information for investors. He's got a wealth of knowledge and if you are watching on video, we will be sharing some slides throughout the presentation but or throughout the discussion, I should say. If you are not watching, we will try and make those slides understandable to you if you're listening in audio only format. So, Rick, that's a hint there and let's go ahead and dive in. Rick, welcome. How you doing?

I'm doing well. We have to stop meeting like this every 10 or 12 years.

Yeah, I know. We need to do it more often, don't we? It's good to have you back. And you're coming to us from my old hometown, Irvine, California, right?

Yep. I actually live just south of there. But Realty Track is headquartered right smack in the middle of Irvine. So we're out here in sunny Southern California.

Fantastic. Good stuff. Well, you know, everybody is asking, Rick, is Covid going to cause a housing crash? Is there a bubble? Prices are higher than they were at the prior peak in 2006, and look what happened back then. I'm sure you hear all this stuff all day long like I do. You know, I just don't think there's going to be a big, giant foreclosure crisis unless we're talking about maybe New York City, L.A. san Francisco. Some of these urban areas, I think, are really under a lot of stress. But what are your thoughts? What are you guys researching at Realty Track?

So I think you're spot on, Jason. And the cities you mentioned, interestingly, are typically cities where you don't see a huge foreclosure problem because their homeownership rate's very low. If you go to Manhattan in particular, virtually nobody owns a home in Manhattan. It's mostly all renters. So now, there's a couple things. Right now you were talking about the housing market, and Covid has not slowed down the housing market even a little bit. That's surprising given the fact that we've had the most significant drop in the economy on a monthly basis. Really, since they've been tracking the numbers, the GDP dropped 31.4%. I believe, in Q2, we've never seen anything like that. The good news, and there actually is good news, is one, it was actually an expected drop. So people saw it coming, and it wasn't because the economy was bad. It was because of this pandemic and the need to shut businesses down. The second thing that was good about it is that it was lower than a lot of forecasters had projected. There were people talking about 45, 50% GDP drops, and we wound up at 31%. It's been recovering since. From an economic standpoint, about half the jobs that we lost have been recovered. One of the reasons we haven't seen housing fall off like a lot of people would have expected in a recession of this size is because of the nature of the job losses. We really have seen most of the job losses in a handful of market segments. Travel, tourism, restaurants, retail, hospitality, entertainment, Those industries tend to be made up of employees who are hourly wages, so they're not making a ton of money. They tend to be younger, they tend to be less formally educated. And so they tend to have very low homeownership rates. So this has been a recession that has really hit renters a lot harder than it's hit homeowners and a lot harder than it's hit potential homeowners. So we've seen all those people that were on the sidelines taking advantage of these historically low interest rates to go in and buy houses that they've been thinking about buying. In fact, one of the things the pandemic actually did was accelerate a trend we've started to see millennials stop being urban renters and start being suburban homeowners.

Right.

And apparently COVID 19 reminded them that being quarantined in a 700 square foot apartment with a toddler wasn't as much fun as they expected.

Or worse than that. Listen, I have several millennial friends living in New York city, living in 550 square feet and in a very strict lockdown environment, by the way, where the whole point of living in a city was to have all that great entertainment and the Broadway shows and everything, and all of that just evaporated overnight.

One of the things you and I are talking about before we got online is we are seeing a flight to the suburbs, and we are seeing it in particular in some of the higher priced areas like New York and San Francisco. I would expect we might see some in the Pacific Northwest as well. Miami is seeing a little bit of that right now. So people are looking for more space. They're able to work from home now. And that trend probably isn't going to go away, although it will modify over the years. So they're not worried about a commute. They're not worried about being right in the middle of the area. And they're looking for a place big enough to have a home office. They're looking for a little bit more space so they can move around. And candidly, there's a perception that it's healthier there. So from a geographic standpoint, the fastest growing segment when it comes to home sales right now is the distant suburbs, right up against rural areas. And it's an interesting phenomenon that we're seeing that would have been hard to predict seven or eight months ago.

Yeah. So let me run this idea by you. Back in 2012, I started talking a lot about the autonomous vehicle that I'm looking forward to, and now they actually have it In Phoenix, by the way, Waymo launched its fully 100% autonomous ride hailing service. And there is no human there overseeing that car this time around. It's completely autonomous. And so what I said is that that would take the pressure away from high priced real estate markets because ultimately, and it's taken a long time to play out, obviously this isn't happening right away. But ultimately, you know, it would make the prime location less meaningful than it's ever been in human history. And with COVID we're seeing that too. You know, we're seeing people leave those kind of what we'll call prime areas to the sort of secondary areas that, you know, people living in Manhattan always looked down on. People that lived in the suburbs. Right. Not anymore. Now it's, now it's what everybody wants.

You can't underestimate the, or you can't overestimate the impact those autonomous vehicles are going to have on commercial real estate going forward. And when you start to get into autonomous delivery services, imagine that. So suddenly you're not going to need big parking garages taking up a lot of commercial. You're not going to need drivers for those autonomous trucks you talked about.

By the way, just to give you a metric on that that I read once, they estimate that 40% of a typical city, 40% of the city's real estate is used for parking.

I have no doubt.

I mean, can you imagine if that need goes away, what that would do to the real estate market in those places? Because Suddenly you have 40% more land.

Prices vacancies. On the other hand, there might be a mini boom in construction as you're repurposing all those things.

Very true. Yeah.

But one of the things we do want to talk about, because you mentioned it, we saw that boom and bust cycle back during the Great Recession. We saw prices spike and there's a lot of concern among people that we might be in another bubble or that home prices are going out of control. And if you just look at a linear progression of prices going up over the last few years, we did hit a new high all time in terms of median home sales price, both in California and the country. In July, I think it was $310,000 nationally and over 500,000 in California. But if you factor in for inflation, if you factor in wage growth and if you factor in interest rates, home buying power is actually much stronger than it was back then. And in fact, if you look at the monthly mortgage payment this year compared to last year because of what's happened to Interest rates, even though median prices were at all time high, mortgage payments were lower. There's some rationality to what's going on.

You are speaking my language, my friend. I just did my own study and I did two presentations on this so far and I'll tell you, it is absolutely amazing. Now, I did not adjust for wage growth. I simply adjusted for interest rates, home prices and inflation. Okay, those three things, okay? And guess what? The 2006 median price home was $657 more expensive than today's median price home adjusted for inflation and interest rates. So real estate has gotten cheaper. You know, I don't know what everybody's so worried about. Now, granted, you know that I'm being a little bit snarky because of course we're going with the idea that people are buying a house on a payment, not a price. We're. Which is mostly true, but the price does matter. And one more thing that doesn't take into account. So I'm just going to. On balance, I'm going to say it doesn't include property taxes or insurance, which will index higher with a higher price home, but just on the principal and interest. The P and I mortgage payment $657 cheaper than it was 14 years ago today.

Now, it also varies by price tier. So if you're looking for affordable properties at an entry level position, good luck. We've seen prices go up on a percentage basis much higher at the lower tier than we've seen at the upper tier. Candidly, I wouldn't be terribly surprised to see some price corrections at the high end of the market in some of the more expensive metro areas. So if you're looking at coastal California, the Bay Area, Pacific Northwest, maybe some pockets like Austin, and maybe even areas in Chicago and New York, those properties were probably overpriced to begin with. And I again would not be surprised to see prices correct in some of those markets. But in terms of a bubble doesn't seem likely. We're not seeing it in terms of prices as a multiple of rental prices. We're not seeing it in terms of a difference in median price versus median income in those markets. So it doesn't look like a bubble. Last time we saw prices go up because of bad lending practices. This time we're seeing prices go up because of Economics 101. It's supply and demand.

Yeah, absolutely. And the lending has been pretty darn conservative this time around. So do we have a concern for a big foreclosure crisis? Rick, a lot of my very capitalist Vulture friends are saying, oh, I'm ready. I got my war chest. I'm going to buy properties like crazy. This time. I'm not going to miss it.

Let's distinguish a little bit between foreclosures and opportunities. Do I think we're going to see more foreclosure activity? Hard to picture a scenario where 40 million people file for unemployment where we don't see some more foreclosure activity. I mentioned earlier that a lot of the job losses have been among renters, not homeowners. Renters typically don't get foreclosed on. There could be some fallout among landlords if they happen to be in an area where there are bans on evictions and the tenants stop making payments. But so far, every study I've seen shows the tenants have continued to make payments at almost the same rate they were making them a year ago.

And you know what? That amazes me. I think there's more of this rent strikes in larger multifamily properties that are owned by institutional investors. But in our network with our investors, people are paying their rent very nicely. And what's interesting about it, too, is even though they have these various eviction moratoriums, you can still literally, while your tenants occupying the property, go and sue them for.

For.

To get a judgment for the money, even though you can't evict them physically. So they know they've gotta pay. And one way or another, the rent is being paid most of the time. So, yeah.

So an investor I've known for a long time has 80 rental properties. He said he's had to evict one person so far. That person was fully employed but was trying to game the system. And six other tenants have worked out payment plans with him. Other than that, he's collecting everything on time. And anecdotally, I've heard that same sort of story repeated over and over and over. So will we have more foreclosures? In fact, you'd ask for slides. I have a slide I can show you on there. Sure. If you look at what we're seeing in terms of potential foreclosure activity, prior to the pandemic, we were at historically low numbers of foreclosures. So in a normal year, about 1% of loans are in foreclosure. Before COVID 19, we were looking at about a half a percent. So that meant about 250,000 borrowers were in some stage of foreclosure. Those are all on hold right now because of the foreclosure moratorium. The Forbearance program from the CARES act will put people into a protected state really until next March when that. When that program finally expires. So we don't really see much activity coming back to market until the second half of 2021. We'll see if the moratoria end in January, we'll probably see those 250,000 properties start to work their way through the system. We'll also. We're already starting to see this. We'll also probably see states relax moratoria on properties that are vacant and abandoned. No reason to keep them in that state. So you'll be able to foreclose on them. But we won't really see most of the activity until after the forbearance program. So Adam took a look at kind of a best case, worst case and middle case that would give us an incremental number of foreclosures ranging anywhere from about 200,000 more to about a half a million more on top of the 250,000 that will be re released. So in that worst case scenario, you wind up with about 750,000 properties in foreclosure in 2021, which is three times where we were. But that only takes us to about 1.5% of loans being in foreclosure. At the peak of the foreclosure crisis, that was 4%. So we're nowhere near where we were during the Great Recession.

And by the way, it cut out for just a moment. You said 4% at the peak back during the Great Recession, right?

That's correct.

Okay, so this is 1.5% versus 4%, is that the number?

That's correct. And personally, I wouldn't be surprised to see us maybe reach up to 2%, depending on how the borrowers coming out of forbearance are able to perform and get themselves kind of reset. So far they've been doing very well as they exit forbearance. A lot of people who I talk to are concerned about the fact that there's still 3 million people in the forbearance programs. And doesn't that mean we're going to have 3 million people in foreclosure? And the answer is no. So far, about 8% of the people exiting the forbearance program have gone delinquent. That's not default, that's delinquency. Sure. And if we have that kind of success rate going forward, there won't be a huge influx of those people defaulting on their loans.

Yeah, yeah, I agree with you. And you Know what else economists always seem to fail to account for is they fail to account for any sort of reaction. Of course the lenders are going to do something. They're going to do workouts, short sales, loan modifications. You know, they're not just going to sit there. And especially now, Rick, because we're better at this now. You know, we just went through this 1012 years ago. So now the world is ready and adjusted and you look at how quickly the Federal Reserve react, how quickly the government reacted. This is not the old world we lived in. I'm just talking 10, 12 years ago. The banks are ready to deal with this problem, much more so than they were during the Great Recession.

Well, a lot of good news here, really. The industry, the banks, the lenders work hand in hand with the government this time to avoid massive defaults. And anybody who's been in the mortgage industry for any amount of time will tell you it's much better, much easier to work with borrowers and keep them out of default than it is to let them default and try and fix things afterwards. And that's the problem we had last night. A couple market dynamics are very, very different this time than last time as well. Last time the market was overbuilt, so there was more supply than there was demand for new housing. This time it's just the opposite. Most people that I follow believe we have a net deficit of 300 to 400,000 properties a year. Demand is extraordinarily high. And here's the big thing. We have a record number, a record amount of homeowner equity in the market right now, $6.5 billion. And it goes up every month as home prices go up. That gives most of these and Adam's numbers suggest that 70% of homeowners have at least 20% equity in their properties. If you're a distressed homeowner with 20% equity in a market that has a desperately short amount of inventory for sale, you have much better options than ever losing your home to a foreclosure auction. Which is why I said earlier I think we're going to see default activity go up, but I don't necessarily think that means you're going to have a lot of foreclosures or a lot of bank owned properties. I think a lot of these things are going to get resolved much earlier than the foreclosure auction through a traditional sale or in some instances, rarely, I believe, short sales.

Right. So that's a great summary. Thank you for that. So think about the differences now, folks. We have A housing shortage now versus an excess supply of overbuilding which we had last time due to the crazy lending, which was also money was lent to the developers who just built wantonly. And then we have a much better equity position for people. We don't have all the NINJA loans and the liar loans in the market. All that subprime toxic stuff is not there. We've got people who aren't underwater in a market where they got 20% equity and they can easily sell. It's just not the same thing. I wish it was the opposite. I'd love to see some big giant opportunity because I'm ready to pounce too, but it's not.

Well, you have to be careful what you wish for. People think they want that kind of inventory around, but they really don't because if that's there, it means nobody's buying. So you can buy all you want, but renting it or selling it could be a problem. One of the other headlines I wanted to let a little bit of the air out of the balloon on is we're seeing all these doom and gloom headlines about serious delinquencies increasing. And that's true. And you're going to see headlines saying, you know, more serious delinquency than during the Great Recession and all time highs. And by the way, that's exactly how the forbearance program was supposed to work. All of those loans that are seriously delinquent right now, virtually all of those loans are in the forbearance program. And not only are they going to be six months delinquent, but at some point they could be 12 months delinquent. And that's still okay because that's what the program was supposed to do. If you actually look at new delinquencies, 30 day delinquencies, they're down month over month and year over year. So what we're seeing is really kind of a bookkeeping anomaly, if you will. Even though the borrowers technically aren't delinquent because of the CARES act, their loans are being counted as delinquent because there's no payments being made. But if you're in forbearance for a full year and you haven't made a single payment and you come out of forbearance and agree to a repayment program, you've gone from being a year delinquent to current overnight. And that's the other reason you're not going to see a lot of activity until later next year. Because if somebody comes out of forbearance in March they're not technically going to go delinquent again for another three to four months. And that's assuming they miss consecutive payments coming out of the forbearance program. So again, just something for your viewers, your listeners to keep in mind as you're going through these numbers, they see in the, in the headlines serious delinquency. This case doesn't necessarily equal a lot of foreclosures coming. It's just really kind of an unintended consequence of the way the program is set up.

I think that's a very important distinction. So thank you for that. And this chart is from the Mortgage Bankers association, the mba. You know what else you don't see? This same situation of people with no options right now they've got the options. We talked about that a moment ago. It's just a very, very scenario that people are in. You know, these aren't under qualified homeowners like they were before and the whole system's ready to deal with it better.

So you want to talk about options. I think that's one of the reasons the forbearance program is working as well as it is so far. Keep in mind that historically, if a lender did a, did a forbearance, what that meant was they were going to allow you to miss payments for a certain period of time. And when that forbearance was over, you owed all of those deferred payments in a lump sum. In a pandemic like this, with unemployment being what it is, if they followed those same rules, you'd basically just be delaying foreclosures for a few months. Right, but that's not the case. The forbearance program as part of the CARES act basically stipulates, if you have any government backed loan, the preferred repayment plan is to just take tack on those missed payments till the very end of your loan. So you're going to come out of forbearance and not owe any of that money until you're really done repaying your loan.

You basically lengthened your loan. That's a great deal for the borrower.

It really is. Now there's some minor, you might have some tax money that you have to make up or some insurance payments that you have to make up. But as people are exiting the program, 92% are exiting in a positive way. Either there's a loan modification and you mentioned that we know more about how to do that today than we did back in the day. A surprising number of these loans are being paid off. Whether that's because the home is being sold or the loans being refinanced, that's a very positive outcome. There's other kind of payment deferral programs, there's repayment plans that are being put in place, but the majority are just being reinstated or they're canceling forbearance and continuing to make their payments on time. So I do believe the number of non current loans will increase as the number of people exiting forbearance increases. But again, even at that point, it doesn't mean that they're not going to work with their servicer to come up with a better option or that they won't be able to sell the property on the open market. Again, if you just look at the numbers and you look at the options borrowers have available these days, there's a lot of reasons to be cautiously optimistic.

Right. You know, one other point we didn't mention, Rick, is that there aren't all these adjustable loans in the marketplace. You know, we had so many borrowers last time around get payment shock because maybe in 2002 or so, you know, they took out a 31 arm or a 51 arm. And then that adjustment came along and there was, it was like looking, you know, I'm sure a lot of people have seen a, you know, a snake swallow a mouse or something and it's all fat in the middle. It's pretty disgusting to look at. But you know, I saw it once in like my science class or something in junior high, I think. And you know, it's got that big bulge and that's what the adjustable rate mortgages were last time around there was this big bulge. There were two of them from the 31 arms and the 51 arms that were so popular. And when they adjusted, the people got payment shock and went right into default. So you just don't have that nowadays. It's a different.

The new lending regulations eliminated a big problem from those arms. Those arms, in many cases, those adjustable rate mortgages were given to borrowers who could only afford to move into a property because of that teaser rate that they started with.

Right.

And nowadays they'd have to qualify based on a much higher monthly payment. So even if they have that adjustable rate loan with a low initial payment, they're qualified before they get the loan to be able to make the higher payment.

And there's just not that many people using adjustable rate mortgages lately. Right?

They really aren't. I'm actually more concerned. So two things for investors. One is if you're going to be looking at Deals from distressed properties. As we go through this cycle, I believe that most of the deals are going to be prior to the foreclosure auction. And that's. Pardon the sales pitch here. I hate to do this, but sites like RealtyTrack and other sites out there will give you access to properties in the early stage of foreclosure is really where you should be focusing rather than at the auction or at the REO category where the bank will have already repossessed the home.

One other element to that is now we have a lot of big institutional players in the game. So how do you see that playing out? You know, in California they want to make a law, Gavin Newsom's behind this one, that the institutional buyers can't buy foreclosure properties. To talk about a market distortion.

They've actually already passed that law.

Oh, they passed that?

Oh my gosh, yeah, Bill 1079. And they haven't excluded them, but what they've done is put a 45 day hold to allow nonprofits or tenants to go and buy those properties. So basically I have to outbid Invitation Homes or blackrock in order to buy that property, which doesn't seem horribly likely in most cases. But yeah, that's that. Check with a real estate attorney or somebody who follows that. If you're, if you're looking at. And the law has not gone into effect yet, but it's there. It's another, yet another wonderful move on part of the California state government.

Yeah.

So the institutional buyers, look, there's the guys that have gone out and bought properties to rent and then there's the ibuyers, the open doors offer Pad Zillow, who are probably going to do very well for themselves once there is more distressed inventory on the market. But if you think about their value proposition to a seller, it's certainty of transaction and speed of closing. Right now if you put a property on the market that's priced properly, in a lot of cases you'll sell it in a week or less and you're going to have multiple bids on the property from both home buyers and local investors. So the value proposition the institutions have is meaningless at the moment. And the institutional guys, the really big guys who have bought properties, I think their role in the market has been grossly overestimated. I was telling somebody earlier, it's like one of those urban myths that won't go away, like alligators in the sewers of New York. If you look at the fact that there are 16 million single family rental units today, collectively they own less than 2%.

Yeah. I mean, everybody thinks, oh, invitation homes is so huge, they've got like 80,000 homes. And that's true. That is big. As investors, we all wish we could be that big a deal, but in terms of the overall market, it's a drop in the bucket. It's just nothing.

So I don't see them being a big player. The other area of opportunity though, that I would see for investors is in the commercial market. If you have people looking for distressed assets. We're already starting to see a higher number of commercial foreclosure properties pop up on our website than we would have expected this early in the cycle.

When you say commercial, can you define what type of commercial? I mean, obviously there's a huge difference between multifamily hotel, office and retail and industrial. So I hate that word commercial, like you know what segment of it.

Right, fair point. I don't expect to see a lot of industrial foreclosures.

Yeah, I agree with that.

Market's going to come out as a winner because Amazon's still looking for distribution locations and we need more cloud computing centers now that everybody's working from home. Retail and hospitality are both getting hammered right now. So if you're looking even at kind of low dollar retail opportunities, restaurants, small shops, all sorts of retail establishments were starting to see pop up and retail was kind of already on the edge before the pandemic.

Oh, sure.

The hotel industry is looking at Occupancy rates below 40%, which is less than half of where they were a year ago. I can tell you from my days@auction.com that we sold a lot of limited service hotels, your Hilton Garden Inns and Marriott Fairfield Suites to small investors who may not have the capital to get through this long recession. So hospitality and retail are both going to get hit pretty hard. I think there might be some short term disruption in the apartment sector because of what we talked about. The fact that we have a large number of small investors who may not be able to collect rent for the time being and may have to sell off in order to salvage their own personal financial situation. Offices, I think are going to be protected for a while only because at least the lease terms tend to be a little bit longer. And I think the landlords are probably going to try and work things out with the tenants rather than go through the foreclosure process.

Yeah, but with all the remote workers, I mean, are people coming back to the office? You know, you look at the big tech companies, they've said everybody can work at home indefinitely or for the next year and a half. And I think people might get kind of spoiled and used to that, you know, but they're going to need a bigger house, that's for sure. Nowadays houses need two home offices and places for the kids to study. So, you know, it's not just like one home office anymore.

Well, and again, that's one of the reasons that for that trend acceleration we talked about earlier with people moving from urban centers out into the suburbs and even the distant suburbs, jury's still out on how much office utilization we'll see. Hard to imagine that New York and San Francisco remain ghost towns forever. But I think the dynamic will shift quite a bit. If you're going to reopen an office, you have to manage to have enough space per worker to have social distancing to maintain health standards. And I think you'll start to see some regulations come into play there. So while you may have fewer people.

Going into offices, they're going to be more spaced. Yeah.

And the other thing, and I think Mark Zuckerberg at Facebook has been talking about this since you mentioned the tech companies, I think you're going to see more decentralized locations of office workers. One of the trends I saw through the second quarter is while office sales overall had dropped, we were seeing more of an incidence of suburban office sales. You might be seeing more movement towards second and third tier offices as the Facebooks and Twitters and Googles of the world realize that it might be cheaper for them to have an office in Omaha and pay Omaha wages, but to.

San Jose, no question about it. Yeah. And also a lot of the big companies have talked about doing sort of this like hub and spoke concept like the airlines do with their office space. So we're obviously reading the same stuff, you know, and so little sort of conference center type suburban offices, you know, where people can go and work, can get out of the house and have a change of environment and still, you know, have some social distancing but. But not go in as often. It's interesting. The world sure is changing, isn't it?

It sure is. In ways that none of us could have imagined in January.

Yeah, this is. This 2020 has been quite a year of the year of acceleration changes again that were already happening, but now it's just moved the future up five, ten years sooner. Rick, one thing we didn't talk much about is the different price segments of housing or different types of markets like our investors like to invest in these linear markets with lower priced housing. That's $150,000. Certainly not California type properties. It seems like the shortage is more severe in this lower priced linear market housing than it is in more expensive markets. Do you have any data on that or any thoughts you want to share?

Well, you're absolutely correct. One of the reasons for that is that none of the inventory being built is being built in the lower priced years. And one of the reasons for that is it's so expensive for builders to build a property. Fannie Mae estimates that it costs a builder $80,000 across the country before they break ground, $100,000 in California. That doesn't include the increased building costs because of raw materials going up or labor costs going up. So you're just not going to see a lot of new inventory being built at the entry level. In fact, some of the builders have shifted that kind of stock into build for rent properties. The other problem is we have an historically low level of existing home inventory for sale. So there are people sitting in those prices, the properties that would sell at the lower prices, who simply aren't putting the properties on the market because they're not sure if there's something for them to buy. They're not sure how stable their economic situation is because of the recession. And candidly, they may be uncomfortable going out and looking for a new house for fear of catching the virus. So until we start to see a little more building activity that frees up some of the properties at the lower end and until we see people more willing to list their properties, we're going to continue to see a shortage of inventory at that part of the price tier.

And we see the cost of construction materials, like especially lumber lately just skyrocketing. Now that's going to tone down a little bit when you look at the lumber futures market. It's, you know, has signs of toning down a tad, but still very expensive. And that's just going to keep the upward pressure on. So we really do have an affordable housing crisis in this country, don't we?

And there are no easy solutions. I was talking to somebody yesterday about Vice President Biden's notion of having a first time buyer credit tax credit of.

$15,000 that'll just make more first time buyers and push the prices up. Exactly what I was going to say all over again.

You know, it's a well intended approach that doesn't really understand the market dynamics, of course, but I keep going back to what Ronald Reagan said, that the scariest words in the English language are I'm from the government and I'M here to help.

I love it. That's one of my favorite Reagan quotes. He was so great. He had said some of the best quotes. They're awesome. Well, Rick, this has been really, really phenomenal. Anything you want to just wrap it up with? Any thoughts, any advice for investors?

There are going to be investment opportunities. I would be looking at rental markets as short term opportunities, whether it's traditional rental or Airbnb. I would keep my eye on low dollar commercial assets in the retail and hospitality space in particular. Again, if you're looking at the foreclosure market, I would be looking at the early stage foreclosures as where a lot of the activity is going to be taking place. So you have to tune your game up and be ready to approach those distressed buyers, those distressed homeowners rather, and not wait for those properties to come to auction.

Good stuff. And of course, which website do you want to give out? Just realtytrack.com Yep.

So visit us at realtytrack.com there's no K on RealtyTrack. R E A L T Y T R A C Sign up for our blog if you want to follow this kind of stuff. It's free.

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Nothing required other than your email address. And if you like this kind of information, feel free to follow me on Twitter or reach out to me on LinkedIn. I'm not hard to find, it's just Rick Sharga.

Excellent. Good stuff. Rick Sharga, thank you so much for joining us.

It was a pleasure. We'll have to do it sooner than another 10 years.

Absolutely. It.