NNA 67 - Post-COVID Real Estate Investing Predictions With Daren Blomquist

This is the no Closer show where you get the latest developments in distressed note investing and learn the secrets of how you can control millions of dollars worth of property for pennies on the dollar. Get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now here's your host, CEO of We Close Notes, Scott Carson. All right, everybody. Hey, hope everybody was doing well this Monday night. Welcome to Note Night in America. As always, here we have these webinars every Monday night just about at 7pm Central. So honored to have you guys all here. We've got a very special guest, but before I get into introducing him, we go through a little bit of the homework or updates from last week on a variety of things. Once again, everybody, if it's your first time, we do record these. I do see the red record button. You can always catch the replays of all our Note Night in America webinars by going to either Weclosenotes TV. They'll take you directly to our YouTube channel. And I highly recommend that you subscribe there because we've got a lot of different education not only with the Note Night in America webinars, but also the no Close show podcast. And you can always listen to the podcast anywhere that you listen to podcasts out there all across the country, including being nationally syndicated across the country on different radio stations. But as always, guys, you can always check out all the things that we offer@weclosenotes.com and once again, thank you again for all you guys are listening to the no Close Show Podcast. Always exciting to see that we hit continuously over 2 million and that number is growing. We'll be closer to probably two and a half to three million in listens this month alone. So over 25 million listeners, over 600 episodes. It is the 50 megawatt blowtorch of what we offer up here for you. So you'd always check out that@noclosershowpodcast.com if you're due, leave a review, subscribe. But one of the big things I know a lot of people have been enjoying our Note Nation top 40 tours. We've been highlighting the top 40 markets. We've gotten through the first, I think 2 weeks of it roughly, with a lot of great stuff, a lot of great feedback, people really enjoying us breaking down the different markets. And I'm so excited about tonight's guest too, because he's going to add to it as well in a variety of fashion. So I couldn't think of a better person to have basically just right about that halfway as we're going through a cross country tour. So lots of great stuff, guys. If you missed the market, you can always go to our YouTube channel, WeCloseNotes TV. I just actually edited the page so it should show the playlist for the past 14 markets that we've covered already in the first two weeks. But anyway, we do have one big announcement. This Saturday is our note weekend training. This Saturday from 9:00am to roughly 4:00'. Clock. Love for you all to be a part of it. It's our Cliff Notes version of note investing. Just for 49 bucks you can get a really good, you know, get your toe in the water, start learning about notes to stress investing and some of the things that we'll be discussing tonight and in the different markets out there. Hey guys, it is a great time. We see a lot of defaults out there. I'm already seeing more commercial deals come across my desk than I all of last year in a variety of fashions. So if you're an investor, now is a good time to be learning and honing your craft to find out where the different opportunities are for you. But there's no questions about that. I am excited to have our special guest join us tonight. He is the head of market economics at just a little small company called auction.com out there. Known this guy actually for a couple years dating back to I guess we actually originally met in San Diego to collective genius mastermind Darren, if it takes, takes you back a little while there. But his work has been cited by thousands of media outlets across the country. He's appeared in all the major networks, all the big networks and everything in between. I mean this guy, they start thinking about real estate trends. This is the guy they reach it out to to find out what's going on in the market. Formerly from Realty Track and Adam Data Solutions. Like I said, he calls Irvine, California home and we're honored to have him tonight. I know. Night in America by Darren Blomkwitz. Darren, what is going on, man? It's been too long.

Yeah, good to talk to you and sorry, I just dropped off there. Of course, this is the nature of the world we live in, right? All of a sudden, of course my Internet went out.

You know what, you know, we'll make the best of it. I was on a big event this weekend that had 30,000 people across the country with zoom and stuff like that. And so, you know, we may not have 30,000 people now, but we'll definitely have a lot of people join Us from different parts of the country and I can see the number clicking up plus live streaming to Facebook. That's always a moody thing. But Darren, you've done. You want to talk a little about your kind of your background and kind of how you got to where you're at today before we dive into what you've put together for tonight?

Sure, yeah. I mean I started really my career in real estate back at Realty Track in 2001, started working there and our focus was foreclosures, providing foreclosure data for folks and we started putting out a foreclosure report because we had all this great data we were collecting from across the country. Started putting that out in 2005 and little did we know really at that point that foreclosures were going to explode a couple years later. And so we became the go to source for that foreclosure data, both on an individual investor level, but also in terms of the media and government agencies because there was no national source for foreclosure data. And so that, that got us a lot of attention. And really, I mean it was a wild ride through that foreclosure housing crisis period. And continuing on with RealtyTrack, it eventually became Adam Data Solutions. In part because of that experience, we realized there was a market for selling this data in bulk. The website was designed for individual investors and that continues on to this day. But transition to Atom Data Solutions because of that opportunity to sell the data in bulk to companies and government agencies and others. And then just about a year and a half ago moved over to Auction.com, which is in a similar space but really hyper focused on the distressed market and on specifically those transactions that take place at two transactions that we focus on the foreclosure sales, which are the in person foreclosure auctions on the courthouse steps traditionally and then also the online auctions of bank owned properties, REO properties. And it's been an exciting ride here too. I mean I really couldn't have told you a year and a half when I started that we were going to see this craziness come to fruition. But you know, we're heading down the road. Not to steal too much thunder about what I'm going to talk about, but we're heading down the path of another crisis for sure. I mean nobody I think would argue with that. And so it's another interesting. Just at the point where it seemed like things were calmed down and there was kind of predictable distressed market that wasn't. It wasn't huge, but it was continued to go on. All of a sudden on the horizon, we definitely see the prospect of another increase in distress activity because of all the, the economic turmoil that's going on here.

Yeah, it's definitely been a bit of a knee jerk reaction and it's, it's so unique. You know, one of the statistics that I've seen is that when everything kind of when the music and the merry go round stop. Back in 2008, I was a mortgage banker back then and it kind of stopped like that. I mean, really came to a halt as far as originations and a lot of defaults and foreclosures. But it took us a while to really start hitting some numbers. The number I've seen is that for us to get to the 1.6 million defaults it took 18 months from that point. Well, we've basically hit that number and beyond in really four or five months now. So you think it's gonna be worse? Do you think it's gonna be just kind of kick the can down the road as long as we can? What's your, if you had a crystal ball, what would you say, Darren?

Yeah, I mean, well, we've done our best to create a crystal ball, but of course nobody really has that. But we've created some models. Looking at, we have a lot of great data internally from auction.com as well as I look at a lot of public record data and yeah, I've been looking a lot at what happened last time versus this time and in previous recessions. And I don't think, you know, the pattern that we're seeing is we're hitting a peak a lot faster. So this is a lot more like, I guess pulling the band aid off situation in terms of things getting bad very quickly. The pattern that seems to be playing out and this is, but this is a big wild part is that things will bounce back faster as well. Of course that's highly dependent on the virus itself and how that behaves and how medicine and technology and science is able to address that. So we're already talking, you know, there's already a lot more concern about a double diploma situation because of the virus kind of coming back and resurgence in cases. And so that's, that's a big wildcard. But if I were to say really high level, we're not going to see that the sheer volume of defaults and foreclosures that we saw in the Great Recession and it's not, it's not going to be extended as long, but we are going to see some really bad months and some really bad quarters in terms of that. The one thing I would say in addition to that though is the government policymakers are trying to avoid, I think, the mistakes of the Great Recession, which is it did take a while to ramp up, but they were behind the curve. It was in fact our company realtytrack at the time and in 2007 was putting out reports saying there's these huge percentage increases that we were seeing in foreclosures and we were getting pushback from industry. So, you know, so called experts and others that you guys don't know what you're talking about. You're just new to this, you're sensationalizing the numbers to get a headline. And you know, we didn't actually know enough to. They were giving us too much credit. We were not. We were just looking at the numbers and reporting them and we weren't doing it perfectly, but we were, it turns out we were right anyway. So there was a mistake last time where the industry didn't take the crisis seriously enough and the government didn't either. And so we're seeing the pendulum swing the other way now where everything is being thrown at trying to avoid a huge wave of foreclosures hitting the market. And so the defaults are going up very quickly, but because of the foreclosure moratorium and the forbearance programs, you're not seeing, you know, foreclosures are actually going down and they're drying up in a sense, from the perspective of an investor, I guess that supply is drying up and we think that's good. I mean, that prevents this huge shock to the system. But there has to be a lot of caution with that and it has to be applied carefully because there can be some unintended consequences with prolonging the pain. So as I said, the pattern seems to be the sharp uptick and then will come down faster as well. But if you kick the can down the road, which is what we're doing right now, and it's election year as well, so that's adding into it. There is a good element of that that helps protect the market from being shocked like it was back in 2008. But the problem is you have to deal with that distress at some point and you can't kick the can down the road forever. And if you do that for too long, you build up a lot of uncertainty in the market, which has a lot of repercussions. And you also risk having that big shock that you were Trying to avoid, just hit down the road, you know, further, further down the road.

No, it makes total sense now. You've done a really good job. You gave me a sneak peek of your presentation. Do you want to bring that up and kind of we can go through that a little bit and you can just hit share your screen if you've got the PowerPoint pulled up. Because I think everybody's going to understand a little bit more like the double dip you mentioned there and some of the other things that we've seen and gone from there.

So, so this is from the perspective of investors, which is your audience primarily, I think. And really there are opportunities right now, but because of this delay that we're seeing, there's also definitely going to be opportunities down the road with investing. And so it's this kind of interesting juxtaposition of from an investor's perspective when the opportunity is going to hit. And I think there's definitely opportunity now, but there's some big caveats on that. And then there will be opportunity down the road. So, and this is, you know, actually this ties into what we were just talking about just to illustrate the nature of this crisis is much different than previous crises. And this is through the perspective of unemployment, the fact that you see this basically in one month, skyrocketing, tens of millions, 18 million layoffs in basically one month. And we didn't reach that during the Great Recession over a period of many years. And so the nature of this crisis is much different to the point that we were making. Now the big question is how is that going to come back down? And right now we saw in June a very sharp drop off or you know, improvement, I should say, in employment, the employment situation. And so that's, that seems like good news. But the one thing that we're looking at is, you know, this kind of now and not yet theme that I'm talking about is the blue line is almost like a lot of, it's almost distracting from the really core problem, which is who's going to lose their jobs for the long term. How is this crisis going to have more of a long term impact on folks and those folks going to be. So that's that yellow line. And this is a graph actually from the Wall Street Journal, but it's basically data from the Bureau of Labor Statistics. But it's really key that we're seeing, yeah, this vast improvement in temporary layoffs, which is good. And of course that's at risk now too with the closing down of the economy again. But we're keeping our eye on more over the long term is that yellow line, which is the permanent job loss, the folks who are not going to be called back anytime soon to work. And those are the folks who are going to struggle. And that number, it's not super high yet, but it is continuing to increase. And there's another way of looking at it is this core unemployment, which excludes again, temporary layoffs and also includes some other categories. And that is continuing to rise even as some of this, the overall unemployment, this is the perspective of unemployment rate. Even as that overall unemployment rate saw some amazing improvement in June. And even if you adjust for the misclassification, which the Bureau of Labor Statistics is acknowledging, the unemployment rate probably is higher than they're actually reporting. But anyway, that improved. But this core unemployment, this more long term scarring of the economy that's caused by the coronavirus crisis is continuing to rise. And so that's the theme in the overall economy. And we think that also is really what's going to affect the distressed market. Is that core unemployment rate going up. And to the extent that it continues to go up, that's going to result in those defaults that can't just be kicked down the road and solved. There's going to be a reckoning on those at some point.

Yeah, that's an average. And obviously it's got a macro level looking at the different states too. You got to take that into consideration. And what's going on there, like with what Massachusetts is going through with being the highest unemployment rate in the nation, but they've also put a six month moratorium on all foreclosures. You know, that's something we all got to look at to depending on what comes back, you know, what businesses survive. And then kind of figuring out where it all kind of shakes out too, huh?

Absolutely. That's a really great point that each state is dealing with this a little bit differently, both from the perspective of the virus itself as well as from the distressed market. Right now there's a foreclosure moratorium nationwide through the end of August. But some states have extended like Massachusetts and others have already extended beyond that. And so those are states where things can behave a little bit differently. And I hope I put it in this presentation. I've had several presentations just over the recent days and I forget I can talk, I'll talk about it if it's not in here. But we look back at what happened with the state of New Jersey in the last recession and some of the consequences of kicking the can down the road too long in New Jersey might apply to some of those states that do the same thing this time around. So we'll get to that. Whether or not I have a slide for it, it's a pretty compelling visual in my estimation to see some of the unintended consequences of that government intervention. But in any case, back to this slide. The delicate dance of delay and distress again, that's that theme too. Is that so? There's a lot going on in this chart, but just to focus in on a few things is the blue bars are the 30 day defaults or delinquencies similar to the unemployment. Those spiked in April dramatically up above anything we had seen to your point earlier during the Great Recession, at least any single month worth of delinquencies, those jumped. And this is data from Black Knight. And so we saw that spike and then the kind of gray bar there is the 60 day delinquency. So not surprisingly, the next month in May, we saw those spike up above any single month we had seen during the Great Recession. And so this is hitting delinquencies. People are going delinquent, there's no doubt about it. But what's crazy is because of the foreclosure moratoriums, you're seeing foreclosure inventory, which is the black bar actually decreasing in both April and May. The red bar there is a 90 days delinquency. Those did jump a little bit in May. We would expect the June numbers on those 90 days despite similarly to what we saw with the 30 and 60. These people are progressing through. And it wouldn't be surprising to see that number jump up close to or maybe even above Great Recession levels. And so that the risk here is there is distress. Just because there's not foreclosures doesn't mean there's not distress in the market, if anybody didn't realize that. And so we're delaying that distress from hitting the market, which again is probably a good thing. But there has to be a lot of caution applied to that. In my opinion. One of the things you already see is the average day's delinquent for foreclosure is spiking up back to Great Recession levels. So that's not surprising. You have all of a sudden these older, on average older foreclosures. And what that foreshadows for me is if you let this go on for too long, you build up this bigger pool of aged foreclosures. And those are really the worst thing for the market. I mean, if you have a foreclosure that's been in the process for six months. It's typically not going to be in as bad a shape as property that's been in foreclosure for six years and has deferred maintenance and possibly the people have left the home. And so when that six year foreclosure hits the market it's going to have a lot more negative impact on surrounding values and home prices. So and it's even before it hits the market it's going to have a more negative impact on surrounding home values and home prices. This is data from Oxford Economics. Some of this stuff early on here is just looking at the higher level economic situation and we'll drill down to some implications for investors just so everybody knows where we're headed here. But yeah, a similar theme in the economy is you do see in Oxford Economics this was their headline short term gain for long run pain. So you have this idea, well let's open the economy faster to get that curve going back down. Not the virus curve but the economic curve and unemployment curve going back down quickly. And yes, that had that impact. But the risk now by doing that is you may have some more long term risk of a double dip recession is what they're seeing because of that. And so it's kind of a similar theme with, from a little bit different angle as the, as the distress. And then I did want to focus a little bit on forbearance because this really has to do. Understanding the forbearance program that's going on right now is important to figuring out what's coming down the road. The not yet part of opportunities for note investors and other real estate investors. So this forbearance is what's, it's that bucket of what's delaying the distress. And that number has actually been coming down. It was getting close to 5 million. And this is according to Black Knight. The Mortgage Bankers association has similar numbers. But anyway it was getting close to 5 million at the end of May. But in June and now early July it's been trending downward. People have been getting out of forbearance and we'll talk on that for a second. But this is a lot. 4 million. There were about just over a million, I think 1.3 million. There's a slide here folks that were in some kind of default had missed at least one payment prior to the crisis. And then all of a sudden we're adding, kind of adding 4 million people to that pool. So that's a big jump and we gotta figure out what's gonna happen with these folks in forbearance. We're seeing more of them now. Not everybody in forbearance is delinquent, but it's trending that way. The second quote there, which is from the Black Knight Report, is of the forbearance is 37% have now missed at least three payments. So they're 90 days delinquent, 60% have missed two. And we expect, you know, that three payment number to keep rising as well. And actually this dives into it a little bit more. You have this, this pool of. Now this is a little bit dated, but at the time it was 4.7 million loans in forbearance. Of those loans in forbearance, about 85 to 90% of them. The delinquencies that happened after the pandemic was declared, 85 to 95% of people who stopped making their payments after that have gone into this forbearance. So the vast majority of you have another pool there on the left of folks who were already delinquent before the pandemic. And it's a different shift there, probably not surprisingly, but only 40% of those folks have gone into forbearance. You know, they were in trouble before the pandemic. So this is really instructive for our business and I think for investors because it tells you, it starts to tell the story of how much of the crisis is impacting homeowners for a longer term and what percentage of this forbearance is likely to come out the other end and not just be able to start back up on their payments again. And so you see, that said, opposite of what I just said, 60% of the pre Covid delinquencies are not in forbearance. So the majority of them, only 10% of the post Covid delinquencies are not in forbearance. But those two pools are the ones most likely when the forbearance program is over or when the moratorium is over, I should say those are most likely to hit foreclosure right away. And then the forbearance is another matter. But then a little bit more on the forbearance here is why are people. So I mentioned that it's gone down from 4 points 8 million to now 4.1 million. And why are people leaving now? The majority are is good news. 42 not majority, but the biggest share of this pie, 42%, the borrower actually stayed current and then got out of forbearance.

So that's good.

However, what we're seeing increasing is the payment deferrals there, the yellow and then the dark blue. The defaults cancellation with no loss mitigation are increasing and then also modification almost doubled from a week ago. So people who are going, getting actually out of forbearance, the forbearance can go for up to 12 months. But certain people who are not going that full 12 months, they're already out of forbearance and they're going either into default with no loss mitigation or some kind of payment deferral, which means that, you know, they can't just catch up right away or the modification and those numbers increasing tell me that again, that's a piece of the pie that's going to represent a more long term distress in this market. We saw that with the last recession. It took policymakers in the industry a while to get on board with doing loss mitigation. Well, I think the industry in general is a lot better at it now, which is a good thing. But even so, with that loan modification, you're giving a person a little bit more time. But historically what we SAW is after two years about 24% of those loan modifications fell back into default and after five years 45% fell back into default. So those are not ironclad foreclosure prevention situations there. And then I alluded to this earlier, but there's fewer and fewer people staying current on their mortgage payments when they're in forbearance, down from almost 50% in April to now 25% by the end of June. All right, so jump into some implications for investors here and yeah, feel free. Scott, if you, if, if you're seeing questions, I can't see the questions coming in or if you have questions too that we can address, I'd be happy to do that too.

Yeah, no problem. I mean, we got Jeff Sandyga talking about some of the unemployment numbers that they, the numbers don't count. Self employed business owners who have totally lost their income in a lot of cases as well too. Correct.

Yeah, there's, I'm not sure about that specific category, but I know that there's a lot of. The Bureau of Labor Statistics is not ready. This is an unprecedented crisis for them. There were categories of unemployment that they weren't even thinking about and that misclassification. So if you, that slide where I looked at misclassification of unemployment, which Bureau of Labor Statistics acknowledges, it's not a conspiracy theory. Basically, unemployment rate peaked at closer to 20% rather than more like the 16% that we saw in the official headline numbers. They're struggling to catch up with this unprecedented crisis, too. But so in general, I would say, yeah, the headline numbers are under count.

And they're probably skewed a little bit, too. For those individuals who are making more on unemployment than they were actually working, they have no incentive to go back to work.

Right.

Or go out and find jobs. So there's a small percentage of that, too. You can throw in the monkey wrench in the machine, too.

Yeah, absolutely. I mean, well. And I think that actually is a great segue to this next section, which is this somewhat surprising housing market resurgence post Covid is the housing market is on fire. Because, you know, there's several reasons for that, I think, but one of those is that you don't see as many as much carnage in general in housing because people are still getting. There's a lot of government support coming in, including those extra unemployment checks that are helping people pay the rent. And so that's just helping to make things look a lot better. And so people aren't as concerned with buying a house, the risk of buying a house. And I don't think I'll get to this in a second. Investors are still very confident in the market general, at least the ones that are using auction.com but this is just a look at retail, and the numbers were actually even higher the next month I didn't get. Or the next week, I'm sorry, on this. I think they went up over 50%, which is crazy. So this is people who are applying for a mortgage to buy a home. And that number since May here has been rising compared to a year ago. You know, there's some ups and downs week to week, but in general, you see seven, eight straight weeks of increases. People are very interested in buying a house right now, which might seem surprising. I think some of that is the government support. And there's other psychological factors that maybe I'm not totally qualified to get into, but that are at play here where people are interested in homes rather than apartments and less dense housing rather than more dense housing. And that's, you know, everybody was complaining about the millennials not wanting to become homeowners. This might be pushing ones who might have waited a year or two to say, yeah, let's just buy that home now rather than.

Or the ones moving to more rural areas versus being, you know, congregated in New York City, moving out of the big towns where there can be a little bit of more space, too.

Yeah, I agree to there. Yeah, absolutely. And I have some good data on that. Again, I'll dive into it more if I don't have it on this presentation. But where we actually broke down both the auction.com data and public record data sales by the census classifications. And you definitely see what's winning right now are the suburbs and even what the Census Bureau calls the fringe rural areas. Which fringe rural means they're on the fringes. They're rural, but they're on the fringes of metro areas. So they're still close enough to drive into work, but if you need to. But where you can be in a more rural setting, those are the areas that are winning right now. Areas that are losing are the large cities and the large suburbs. Even analysis. But yeah, realty, this is just another way of looking at the retail market. We are looking at MLS data by week and that the 2019 are the blue bars in. And this is looking at home prices, average home sale prices, and then the Black line is 2020. You do see one week there, April 26, where home prices in 2020 were lower, but in general they have stayed above the 2019 levels. So home prices are continuing to go up for the most part. Now getting into some of the nitty gritty of the distressed market. This is our own data, auction.com data. And I think this is a really starkly shows how the foreclosure market is dried up. And you know, the gray lines there are the weekly properties brought to foreclosure auction on the. This is just on the auction.com platform alone. Now we are the biggest, by far the biggest player out there. We account for over 50% or about 50% of all foreclosure sales nationwide. So we're 50% of the market. So but it's still not quite the, it's not the entire market, just to be clear on that. And you see the red line is 2020 pretty much following the 2019 heartbeat in terms of foreclosures. And then in week 13, which was March, right about the middle of March, the week after the pandemic was declared, you see that fall off. And the moratoriums went into effect very shortly after that. You saw those fall off a cliff and of course flatline, we do see a little bit of an uptick. So the foreclosure morator, they don't and I think this is really, this is a good thing is they do have an exemption for vacant or abandoned properties. Now mortgage servicers early on said, hey, we are not going to risk violating this foreclosure Moratorium, we're going to basically not foreclose on anything. And so we saw it flatline down to, I mean, going from 1500 a week on our platform that were brought to foreclosure auction to really literally single digits for several weeks now. Now we have seen in the week of July 5, 239. So it's creeping back up and the servicers are getting more comfortable with saying, identifying those that are truly vacant or abandoned and going ahead and foreclosing on those. And I think that's a really healthy thing because at the end of the day, those vacant and abandoned foreclosures or abandoned foreclosures are. That doesn't represent someone, someone who's living in the home, losing their place to live. It represents actually a property that the longer it sits there is going to drag down neighborhood values and hurt the neighborhood that it's in more. And so the services I think are realizing that and starting to move that through. And so there is some more opportunities available and we're seeing a lot of interest in those few opportunities on our platform. This is just that broken out by state and your viewers, if I'm happy to share for you to share this digitally with your audience, they actually click on this link here, they can go to the interactive map and see some more details about their state. What this is showing is the percentage in the last eight weeks, the eight weeks that ended in July 11, the number of foreclosure auctions as a percentage of the same eight week period a year ago, if that makes sense. Hopefully. So we're still, you know, basically in Florida, 0%. So it's infinitesimal. Hardly anything is happening there now. In Texas you see 10% of, we're at a 10% level. So we're 10% of what we were at last year. So still very, a fraction of what we were at last year. But the numbers are starting to creep up. Interestingly, Arizona is one of the higher states with 22%. So almost, almost a quarter of the volume of what we were seeing during the same eight weeks last year. So it is, you know, to your point earlier, things are happening on different timelines in different states and that certainly affects the opportunities available to investors.

One of the things too that we've seen, I mean, Arizona had one of the lower default rates anyway, for the most part. And so they didn't have as long an extension statewide like other states have had, which is, I can see why that number is bumping up to 22% as they're getting More friendlier to foreclose. But one of the things that's been interesting too is the fact that most of the foreclosure delays have been just basically for the owner occupants. You're not really talking investment properties in different states too out there. You know, it's got to be your primary residence for us to delay the big chunk to stop the foreclosure aspect. I saw that in a couple states and a couple of the major metroplexes last week as I was driving into it. So it's a, it's a, you know, it's an interesting market there. That big like pushback. Oh, we're not going to foreclose on anything. Well, well, we got to do something, you know, and it's starting to loosen up a little bit, right?

Yeah, that's right. I mean investors tend to be the overlooked, if you want to call them victim in these situations. But yeah, you're right. And so, but you know, there's some over. You could overlap some of the political leanings of these states with this map too. It is interesting that California is back to 10% but again their volume even a year ago was pretty low. So there were 10% of that. A state like New Jersey up here, that you barely see it here, but you know, in New York tend to be much more longer foreclosure processes inherently. And then on top of that the courts there have pushed back and so there's actually still some backlog from the last crisis in places like New York and New Jersey that is still working through, but they're sitting at zero percent. They're basically not foreclosing anything. And so they're on top of the backlog they already have. They're building up another backlog. That's what's going on there. So getting back to my theme of now and not yet, but for me opportunities for investors now are that one thing we do see is separate from the. So there's not a lot happening on the foreclosure front, but it is starting to come up in some states. So there is some opportunity now on that foreclosure front. But now on the other types of auctions that we have, which are the bank owned auctions, REO auctions, which are online and you can do. They're very, I guess coronavirus friendly, for lack of a better way of saying it because you can. They're not in person auctions, they're remote. You bid online. They don't require in person interaction. What we're seeing there is those are continuing on and we're seeing evidence that the banks are trying to move those properties because it's a good time to sell them. And there is this sense that if we see a wave of distress coming down the road, you don't want to also have this huge pile of bank owned properties on your books. And adding to that, we're not seeing the volume is down from last year, but that is in large part because foreclosures are down and that's what fills up that pipeline of bank owned properties are the foreclosures. But even with that volume down, we're seeing some good volume of these properties selling and some really strong demand from investors, which is what this graph shows. It's kind of a V shaped recovery. Investors got scared in March, got a little scared. So you see the percent of these properties with multiple competing bidders went down a bit, but we're back up to 85% with multiple competing bidders and so there's still some strong demand. And I talked to one of our bigger investors who buys 1500-2000 properties a year and he's very familiar with going back and bidding on properties and seeing how the servicers respond. And his take on it was that they're pretty motivated to sell based on how they're responding online. So that's a now opportunity. Those properties are selling and we do see. I did an analysis that I thought would be interesting to your audience and just where these specifically these online reos where the best based on the prices they're selling at, where you can get the best returns. And again this is an interactive heat map that folks would be able to click on and see this for their this is by county. It's obviously not every county in the United States but where there's sufficient data and you see some of the best markets with prices that sometimes are in the tens of thousands on average for these online bank owned properties auctions, places like counties in Topeka, Kansas, Danville, Illinois, Terre Haute, Indiana, Columbia, Pennsylvania. Pittsburgh was the biggest city that's kind of at the top of the list. But even then if you look in some of the bigger markets, which might get into your top 40 conversation, there is places like Baltimore again, Pittsburgh, Memphis, Detroit, Cleveland. Those are the top markets. We're talking about easily double digit gross annual rental yields in these markets. And of course we don't, we can guess at the cap rates. The cap rates are still very good. We don't know the expenses that investors are incurring. But just based on the purchase price which we know, and then the average fair market rents from HUD in those areas. That's what we're basing these returns on.

Nice.

Yeah. So a lot of green in the Midwest and Rust belt and in the Southeast, but you know, you get to some of the coasts and that's where you don't have as much opportunity on the hold for rent side. Mm. This is looking at just to put some specific numbers on that properties. Again, this is a now opportunity. There are distressed properties selling not at the foreclosure auction, but I mean, not as much at the foreclosure auction. There are some selling and the average price is $125,000, which is $81 a square foot. Properties selling at the REO auctions online are also selling $81 a square foot so far this year, 133,000 on average. Yeah, it's certainly a big cushion compared to non distressed sales. So for investors out there looking for those discounts, they are there. Not as it's not a huge wave of them, but they are there for, for purchasing opportunities. And just looking. We did a survey of our investors and right after the pandemic in April and even then, you know, really with the shock still setting in there, the type of investors who are most likely to be confident in this market were the folks who are holding for rent. 67% of them said they keep acquisitions the same or even increase acquisitions or at least they plan to. The smaller investors purchasing 10 or fewer properties a year tended to be more confident. And then folks buying the REO properties were more confident, the bank owned properties. And that might have had to do with the fact that there was still inventory. There's still inventory of those. Compared to the foreclosure auctions, where we saw a little bit less confidence from investors was on the fix and flip side. The majority of them said they plan to decrease acquisitions. And then also for the some of the bigger investors, and this may again be a bit of an inventory issue, 58% of them said they're planning to decrease. I mean, another issue for the big investors is they're just more exposed. So, you know, you're doing 30, you're flipping 30 houses out there on the market and something happens where the market takes a dive and you're at a lot more risk than someone who's just doing one flip at a time.

Especially as competitive as the markets can be out there, you know, a lot of people have been doing stuff to try and as the margins have been getting squeezed, you know, your market, if your values drop 5, 10, 15%, you may not be in the black anymore. You may be down right in the red, depending on where the market comes out at, you know, final closing costs.

And things like that, too.

I mean, it's kind of what happens here in Austin, Texas. A lot of time it's gotten much more competitive and there's a lot of cities like that across the country. So it totally makes sense out there.

Yeah, yeah, totally. I mean, yeah, we were already seeing those margins get squeezed and especially in places like Austin. But this just adds a lot more risk. If for those, especially for those large institutional investors, they're honestly probably more between now and not yet opportunities. They're waiting for the not yet opportunities. They're waiting for the foreclosure wave to hit, but which is good for the smaller investors out there that you can find these properties now that are selling and not have as much competition from those institutional investors potentially. So here's just putting some numbers to it. So this is looking down the road and again, this is not a crystal ball, but just actually sit down and it's a little bit of back of the napkin, but we've actually done some modeling around this too, so there's some math involved. But give some numbers about what it's going to look down, like down the road when this delayed distress finally does come back online, at least in greater volumes. And prior to the pandemic, we were seeing 12,000 or roughly 12,000 actually, probably. That's a conservative number. It's probably closer to 15,000. But anyway, foreclosures every month. These are completed foreclosures, either going to an investor or going back to the bank as an reo, it's not a huge number, to be honest. It may sound like a lot, but relatively compared to historical numbers, it's not a lot. But it does start to build. And when you see if the moratorium ended August 31, as it is set to right now, and everybody just started right away, which we know isn't going to happen, you'd already have a backlog of 60,000 foreclosures that had not that would have happened, but didn't happen. And then if it goes until the end of the year, you're getting up to over 100,000 backlog there. So that's one element of this. Another element is the forbearance, as I talked about earlier. And if you assume about 20%, so we're roughly at 5 million people in forbearance at the peak of this, if 20% of those folks, you know, aren't able to just start back up when the forbearance ends, but they have to go into some kind of loan modification. That would be a million folks in loan modifications, which adds up to 240,000 additional redefaults within a couple years, 450,000 additional redefaults within five years. So that's some volume being added down the road. And if you kind of add all this stuff up, you get to about 636,000 foreclosures over a two year period, roughly 2021, 2022 and actually probably really ramping up in 2022 more of that. Much more of that 636,000 in 2022. And so that's that kind of back of the napkin when we plug in our models using unemployment rates and tappable equity. Because one, one thing a lot of people argue is yeah, you have all these people going delinquent, but you have more equity home equity than ever these days. And that is very true. So we use home equity as a counter to the unemployment rate. And anyway we're getting actually a little bit lower than that range, but between 575,000, 625,000 in that two year period. Put that in context there. That's well less than half of what we saw in the two year period in 2007 and 2008. And it's actually not that much more than what we're seeing in 2018 and 2019 now. I think it starts getting 2022 is when it really starts ramping up because of all these delays. And so you actually see it continuing in our models we would see it even continuing to increase pain past that. But right now I'm just comfortable talking about right in the two year, going two years out. But so you know, a lot of people who say yeah, we're not going to see this huge wave of foreclosures. I mean, I hear that that's true. I mean at least over the next two years. I don't anticipate that we would see this massive wave of foreclosures hit like hit in 2007 and 2008. It's going to likely get worse before it gets better on that front. Oh, so I did. You know, this is the New Jersey thing I talked about earlier. If we do the further things are pushed out in states like you're talking about Massachusetts or New. What we. This is looking back at New Jersey in 2010, they instituted a blanket foreclosure moratorium that lasted a year affected most of the foreclosures in that state. So you see with the yellow line, New Jersey foreclosures look really good. In 2011 and 2012 they were back. They were back at 2005, 2006 levels. This is great. Our market is not being impacted. The moratoriums are working, I guess, if you're thinking that way. Now, the moratoriums were instituted for probably a little bit different reason, but anyway, that's another story. So. But what you see there is in the long run, New Jersey foreclosures didn't peak until 2017, and that was seven years after the nationwide peak. And we put Ohio on here because Ohio is another judicial foreclosure state that has a longer foreclosure process like New Jersey. And so we just wanted to illustrate this is not just a judicial issue. This is just was specific to New Jersey. And we think at least a large part of it had to do with that foreclosure moratorium that backed up foreclosures that were going to happen anyway. And so that delayed that distress and created this long tail of elevated foreclosures in New Jersey. Whereas Ohio peaked, it peaked a little bit later than the nation in 2013, but then there was this gradual descent from there. And we think this has implications on home prices in states like New Jersey that the states that delay things longer. As of earlier this year, New Jersey home prices were still 7% below their pre Great Recession peak. Whereas Ohio and the US As a whole have both seen home prices recover back above pre Great Recession peaks. And we think part of that had to do with that long tail of delayed foreclosures there because we all know.

The foreclosures will affect the market derogatory and value drop it. And the longer you drag it out, it's really kind of like, oh, let's keep pouring salt in the wound to the local markets as foreclosures keep getting added to the comps these days versus they were trying to be avoided for a while. For the most part. That totally makes sense, you know.

Yeah. And in New Jersey, to be fair, New Jersey had some other issues hit them later on. But my, you know, we also looked at places like. So New Jersey has a hurricane, Hurricane Sandy hit in 2012. So it wasn't great timing. Right. And then they had, at least in Atlantic City they had the casino closures and that was around 2014. So they did have other tough things hit. But Ohio is not having the best economy during that time either. And I think you're Setting yourself up to be more susceptible to things like that, shocks to the economy. If you have this shadow inventory, as people called it, of foreclosures sitting there, when they actually hit, they affect, they have a derogatory effect on home prices. But even before they hit, just the fact that people know they're there or have the sense that it's almost the unknown that they're there does impact the market as well.

Cool. Yeah.

One of the things. Oh so I did I mentioned this earlier, but I just thought this was a cool thing to be showing is that the migration that we're seeing based on POP. This is 2019 census data, the net migration. And this is another of those interactive maps that your viewers can can look at. And the states that even before the pandemic the states that were losing population were California and New York were the big and Illinois. Those are the three big ones. And you see the blue is basically losing population, yellow is gaining population and I would say specifically population due to net migration. So people moving there or moving away from there. Whereas Florida was the biggest gainer and Texas and Arizona were the top three on the other side of things. So that trend was already in place. And I think that in some ways this pandemic is accelerating those trends for different reasons. But people are moving from these high cost densely populated coastal cities and moving to suburbia and rural areas. And we see that. I think I have this here. When we overlay public record home price data with the census data, you see that mid sized cities, fringe rural areas, as I mentioned earlier, mid sized suburbs and even some other distant rural areas that are further out, those are outperforming the overall U.S. home price appreciation. And this is for the second quarter of this year. So this is after the pandemic. Now you have this rural remote is down. So those are the far. I think those are at least 25 miles away from any metro area or any urbanized area. So those are really rural. Those didn't have not done well. But besides those large cities barely saw a percentage increase. Large suburbs was below the mark the overall market and then even small suburbs were below the market. But particularly large cities, there's a lot of volume there and that's where we saw very weak home price appreciation, which is does support this idea that we're going to see a map somewhat. I mean it's again for different reasons, but I think we're going to see a map continue to look like this as people move away. Not only from last year was because of high taxes and Weather in some cases. And now it's because people want to get away from densely populated areas. And we see that. So investors are catching onto that trend. And this graph on the right shows that where actually the sales rate for these online REO auctions that we're doing, the percentage of those that are selling in Cities is down 7% from a year ago. But the sales rate on the flip side in suburbs is up 34% or excuse me, is up 8% on the Arnon area and rural areas is up as well. The foreclosure options, which that's a small sampling size. So you see a little, I think that's why you see some more dramatic numbers there. But again, the suburbs far and away are the winner. Investors are saying, hey, this is where I can buy properties and actually sell them because that's where the interest is. And so we're seeing more interest for buying the distressed properties on our platform in the suburbs as opposed to the city. Wow.

Definitely makes sense. Yeah, people like to move. They're moving here. I live in Williamson County, Texas.

So. Yeah.

What is one of the top.

I think I called that out. Yeah, Williamson county right there.

Yep. And then the other part in Collin county, basically Plano up in that neck of the woods up near Dallas.

So.

Yep, good times, good times. You know, I know you guys focus primarily on the REO side. Any type of insight on, you know, when the banks you don't think will be. This is all on the residential side. Let me make that sure that this is all resident. Just doesn't have anything with the commercial side.

Right, Darren, this is all residential. Yes.

So do you think with the banks and especially the government backed loan with a six month forbearance time frame and I was speaking to somebody today that Fannie and Freddie have already come up with the fact that they expect to do another six month forbearance agreement after six months. So that's a 12 month. And then even then as they gauge their borrowers, they're still willing to go forbearance beyond that for another six months. So it could be 12 to 18 months forbearance claims on the government backed securities. Do you think that's going to incentivize the banks when they look at their portfolio now and the fact that they haven't had to do anything, they've been given a little bit of a, like we say, kick the can down the road a few months. Do you think it's going to incentivize them to start moving some of that Stuff that heavily. The loan products that are probably haven't taken a higher hit rate like the non prime stuff off their books. They could move this quarter and try to move that headache away from their portfolio. Do you think that's going to see an increase in that? Some.

And so by that you mean the loans that are actually on their books in their portfolios? Yeah, yeah, we're actually. I do think so, yes. Because they'll have more control over those of course because you don't have the government piece of that. And so yeah, I think you'll see them moving those more. And then we've even seen the buybacks some of the banks and I sorry, I can't recall any of the exact numbers but the banks are buying back some of the, especially the Ginny May secure. So that's FHA and VA loans buying them back into their own portfolio because I think they want to be able to control the forbearance and control the fate of that loan themselves. And so that's in the forbearance report that we saw last week. There was a big drop in the Jin May forbearance and it actually corresponding uptick in the privately loan forbearance bucket. And so I think you'll see some of that going on as the banks want to really control their own destiny a little bit more. And I think they know these loans are still, they're not the terrible quality loans of the last era.

You don't have as many liar loans as they say fog a mirror and get a mortgage. So it wasn't quite as bad. You know, it was extreme. I mean you look at some of the numbers, you know I was talking to some mortgage brokers and bankers of bank of America a few months ago. They were doing a basically leaving for FHA loans. They were donating the down payment and then putting ten grand towards closing costs so people could still get in with 100% down. That's obviously been the biggest uptick in the default rates when everything hit the van in March and April for us out there. So it's just, you know, it's an interesting timeframe, right Darren? It's definitely interesting.

Interesting is always a good word to use. But yeah, I mean to your point about FHA loans, even before back at the beginning of the year, before all this hit, we were a lot of our clients and our own selves, you know, looking at our. Yeah, I mean we were seeing an uptick in foreclosures as a result of FHA because of the increasing risk of the last few years. So those are also going to be more susceptible to. With this shock to the system.

One of the things too, I was talking with a gentleman today who does a lot of conversations with fico and fico, being a lender facing institution, trying to identify opportunities there. They came out with a new banker or a new borrower stress test in November 1st year that they are identifying opportunities. Of course, with everything being with the quantitative numbers and being able to pull all this stuff in. Now they can. I think they're really glad they did this in November because now they can identify specific borrowers who are much more likely to distress or defaulting. Not only just on the mortgage side, but also on credit cards, other loans. But they also, it works the opposite way. They can see those that have been quality borrowers are willing to lend more. He's seen an increase in credit lines being approved. Business lines are credit approved for some of the more stable borrowers out there that haven't gone to a forbearance agreement or haven't defaulted in a variety of ways. So it's a weird kind of like you said, I think perfect on the front end. It's like I have a perfect storm of weirdness kind of happening in the lending markets these days.

Yeah, that's. That's a. I like that phrase.

You guys have any questions for Darren before we let him get back to his Monday evening out in Southern California there in Irvine there any questions for me? Got some questions, comments that, hey, just pull the band aid off. That's what we said earlier. Online says great information. Yeah. If you guys would like a copy of his slides, email me@scottclosenose.com we'll make sure and get a link out to you guys for that. You know, Darren, if people have some questions, do you want them to reach out to you on other things too or other things? You're always looking. I don't. Maybe I'm not. But you're fine. You like being guests on podcasts and the media outlets to share some of the information you got going on too, right, Darren?

Yeah, definitely. I mean we're, we're not doing as much, I'm not doing as much of that here in terms of the media, but certainly with folks in the industry, certainly happy to share our market insights there. Yeah. But yeah, I mean if you're, you can see the research that we're doing on. If you go to auction.com inthenews that's where we're posting a lot of our research. Some of these heat maps that I've referred to there. And Also on our LinkedIn page, we're putting a lot of that stuff up there as well.

Darren, man, thank you so much for coming on, spending your Monday night with us here on Note Night America. Totally appreciate it. As the World Turns, we may need to have you back on later time in six months. What do you say, huh?

Yeah, for sure. I mean, I want to see if some of these predictions have come true.

There you go. Hey, are you going to Vegas?

I can't get there, but not anytime soon for having me on. It's been awesome.

Yeah, thank you so much, Darren. Appreciate it. All right, guys, that's gonna wrap it up for Note Night in America. You guys got a lot of great information from Darren tonight. He did a great job, especially in those heat maps. The numbers tell him where everything's at and what he's foreseeing, Obviously. Hey, if you're an REO fix and flipper, you're probably going to. It's probably going to take a little while before you see some of these things hit the market over the next 12, 24 or months beyond that like you talked about. And then of course, you obviously have to take a look at where your state is at, where your market's at, what's going on microeconomical, besides just macro. So. But any guys, as always, thank you for being here on Monday night with us here on Night in America. Go out, take some action, take the information that you learn, apply it and use it to your benefit in your real estate investing business. Be doing a lot better in the long run. But the more that you learn and the more they take in and research the different markets you're in or even the other markets out there where people are going to. So go out, be safe, everybody. Have a great evening, everybody. Bye.