Home Values in the Midst of Recession

Happy Friday, everybody. James and I here with you again as we have been the last few Fridays. Just trying to unpack things again. Massive amounts of information coming at us from every single different direction. And we want to make sure that we're trying our best to process it all, distill it down, trying to figure out what we think it means so that we can share with y'. All. So that is really why we do this and what we are trying to share. So we thought it would be a good discussion to talk about home values in the midst of this recession. Really taking a look at we're in a recession, what happens to home values, what's happened in the past, and then maybe some thoughts about the future, which is pretty tough to do on something so new and something relatively unheard of. So my co pilot here with me and good friend is Mr. James Dwiggins. James, thanks for carving out some time to hang with us.

You know, I have a lot of time sitting in my house for four weeks.

It's been a month, huh? Yeah, it's been a month. That's kind of crazy. I probably should have been journaling this on a daily basis to see how crazy I was going day by day. But maybe it's a good thing that I didn't do that. Let's dive in. As always, we start with the update on the daily new cases for the world and for the U.S. looks like obviously there's some bouncing around, but it looks like the curve is flattening for both. Give us your just thoughts around this shelter in place. And as a nation and as a world, how are we doing?

Well, we have flattened. That's a positive piece. I think it's important to keep that in context and that testing is still a mess across the US to put it monthly. I don't know where everybody keeps getting the idea that testing is accurate because you still can't get tests here in California. So I would say based upon the current way we are doing things, we are flat. Let's go with that. I think everybody understands at this point that there's a significantly higher number of cases out there that we do not know of and never will know of unless we did some sort of antibody test. But as of this particular point, what I will say on a positive note is were flattening, which is great. That's obviously the point that's helped keep the death toll down in this country. There's always sort of misinformation out there, but the reason why the death rate is lower is because 90% of Americans have been sheltered in place, and I think so for the idea that we're trying to save American lives. It's been successful from that standpoint. So.

Yep. And some good news from Dr. Fauci or I don't know about good news, but at least an update and more information in and around a vaccine.

Yeah. So the head, one of the head scientists for. There's multiple companies that are creating vaccines, to be clear, but the one, the head scientist behind it here in the US through one of the companies is estimating now that a vaccine potentially could be ready by this time next year, and that would be much shorter than 18 months. Again, this is all hypothetical, but they also are saying that numbers could be able to produce 600 million to 900 million vaccines, which obviously there's about 330 million people in the U.S. so the point is we have enough to go around when it happens. So we're really. Let's go positive today and say, let's do it.

There's plenty of negative out there.

Plenty of negative out there. Let's say that the timeframe is been shortened potentially to 12 months.

Here's what I've been trying to explain to people. What we do on Fridays, what we try to do is we try to be realist. We aren't going to just blow sunshine in anybody's face, but we are going to be realist, but with a healthy dash and dollop and sprinkling of optimism. Trying to be realist. Like, this is really where we are in time and space. And we don't want to act like this is okay or a good thing or. Or any of those sorts of facts. But we also don't want to push the fear any harder or further than necessary for people to be aware.

So I should add, Keith, that my opinion, which is reserved to me alone, I don't speak for anybody else. Almost everything that I will present is typically based upon what I'm hearing from the medical community. I don't take much of anything politicians say from either side of the aisle into any context, into what I formulate my opinions on. I go to my doctor for my health. I go to my attorney for legal advice. I don't go to politicians for either one of those. So the point I'm saying is my opinions on this are usually based upon reading medical journals and people who are in the business of giving sound medical advice. And so I tend to look at Fauci as a very credible source. There's people trying to discount him. He's been in four different administrations. So he's not one party or the other. He is one of the sound experts for this across the world. And the fact that he's talking about things being able to possibly be available in a year is a very positive thing.

There you go. Yep. More good news.

This is a good one.

Yeah, this is really good news. Share this.

So this pharmaceutical company is actually based here in the Bay Area. Ironically, my girlfriend's sister works for them, has developed an antiviral. They were actually heavily involved in antivirals and things for HIV and other drugs in the past. This is a little bit hard. Remdesivir is essentially one that they've been working on. There have been some very positive studies coming out now that this is looking good. There's still studies, they're still doing trials. They're still in all of it. But this is tending to lead the pack now on potential treatments for COVID 19. To be clear, it was a small trial on the first group and it was out of Chicago, I believe. And I believe it was 19 patients were in this trial. And they had 19 patients who were able to be essentially get out of the hospital within a week. And these were patients who were basically on the bad path of potentially passing away. So there's some positive news here. And you saw the stock market actually played off of this in late trading yesterday and early trading today on news of this company and potentially a possible treatment.

So, yeah, and their stock context, it's.

In clinical trials still. Everybody needs to understand that it's early.

But there is. This is the most hopeful one we have found so far. And just to reframe for everybody the process. We need testing so that we can see who's sick, isolate that those people, see who they've come in contact with, test those people so we can isolate any of them that we need to. That will help a tremendous amount with the spread. Then we need a drug that's going to help with the treatment. All of which gives us Runway to get to the vaccine, which then hopefully will eradicate this. So that is the process. We are seeing improvements in the testing. We shared that last week that there was a machine that seems to be able to do tests in as little as 15 minutes. And now we have some good news on the drug front and some. Some timeline shortening news, potential news.

We're making progress.

Yeah, we're making progress.

And it's certainly. I'm not going to discount the fact that this country was unprepared for this, but I believe we will be better prepared in the future based upon all of the, let's call them learning lessons that we've had with this, with this go around.

Yeah. By the way, I know this is streaming into Facebook Live, so if you have questions that you want to ask on Facebook Live, we've got people monitoring my Facebook Live and then they will then push those questions into the zoom. So if you want to ask questions on Facebook Live, please feel free. And as always, if you want to ask questions, here, use that little box. Okay, I'll handle this one. So jobless claims set to top 20 million in a month. You look at that graph on the lower right hand side, it's crazy. I've never seen a grass line by the way.

Not. Not tea.

So yeah, we're all using our coping mechanisms of choice to deal with this reality. You know, have we hit the peak on this? I don't know. I think so. Will we start to see this trend line also flatten and go down? I believe so. Most of the models that I have looked at cap this out at around 20%. We'll do some comparatives and talk more about that later. And 20% unemployment is a massive number. That is a number that is a painful number. And there isn't really any way to sunshine this exception of many of these are furloughs, not actual job loss, which is important. That means those people retain their medical benefits and the intent is to bring them back. And then many of these also one other inflator of these numbers is the fact that independent contractors and gig economy workers are now eligible. And so some of this increases because there was a whole section of the population that historically has not been able to file for unemployment that now can.

So I'm going to add one piece to this and this isn't meant to be Debbie Downer just because we're trying to keep it real. There are millions of Americans who have not been able to file unemployment yet. So I think that these numbers are still somewhat conservative. And so the key's point, you know, when we talk about potential deployment or unemployment around 20%, it's important to keep that in perspective that it's going to get a little bit worse or substantially worse before it gets better. But substantially means as we'll talk about, we think that's a short Runway though. So.

Yeah. And currently we're at 15%. Most of the models that are economic models that I've looked at have it going up to 20 before it really starts to come back down. So we should see a decrease in the rate of increase of unemployment as we go into the next few weeks. But there is still most likely more pain to be felt here. And nothing like this has ever happened before in the modern US from job loss standpoint, it's never happened.

So yeah, I think this adds a good comment to it. Look, the payroll protection program. I'm going to go at this from a couple ways. The intent of the payroll protection program was designed to stop the previous slide from occurring. Governments, again, this is a generalized statement. Governments come out with ideas but it's hard to implement them. And so I know there's a lot of frustration out there to implement programs. And the reality is the government's massive and they have to put these things in place. I'm actually surprised they moved as quickly as they did on getting some of this stuff out. Was $350 billion enough? No, never was. We all knew that from the get go. I do wish our politicians would focus on getting another 250 billion in there. And the reason why I'm expressing this, that previous slide to Keith's point, the growth numbers are going to come down on unemployment because 350 billion was just injected back into these companies to keep their employees. And to be clear, I want to explain two points to this. The money is two and a half times the average monthly payroll over the previous 12 months. Just to give you some context, I'm generalizing here, but this is basically how it works. You also, you can have most of that forgiven by the government if you keep the employees that you have or you hire the ones back that you let go. And so what I'm making a comment here is this is stimulus money that's designed to get people rehired again because they're giving companies the money to keep their people on staff. In other words, helping keeping companies go. And that's then going to bring those unemployment numbers down secondarily. It'll stop that growth from occurring. I do believe, and maybe I'm being optimistic, I do believe the government will put another 250 billion here. It's something they should do despite the debt we're adding. But it will help stimulate the economy again so that when we come back around to turning this thing on, which we're going to get into that there are people, there are workers there, they've got money. And when people have money in their account, they spend money. When they spend money, the trickle down of that occurs across all sectors. So is it been a mess? Yes. Has there been a lot of crap? Yes. Did the money get out there? Yes. Did it go to all the right companies? Probably not. And there's probably a lot of politics that were involved. But the underlying point still is that it is going to affect people who were unemployed being rehired or stopping them from being put on the unemployment group, which will help stave off further problems with the economy.

Great feedback. This is the great debate right now, James. Lockdown, continue social distancing at the peril of the economy, or say, you know, I think we got our arms around this, it's time to turn back on the economy. What say you, sir?

So, my honest, my honest, I'm going to just be really truthful here. This is the only way I can do it. We really screwed this up as a country on handling this pandemic. Let's just cut to the chase. This is, this was not handled right. We weren't prepared for all host of reasons which isn't worth getting into. What we are faced with and is the correct. I heard Stephen say this is the correct approach is we cannot keep the economy shut down any longer than we have, or what will happen is the economy will never turn back on. There won't be an economy to turn back on. And I know everybody morally and just everybody understands what I'm saying. The decision we are faced with is basically what they're calling herd immunity. And that's just fundamentally what it's going to be. It's the fact that this virus is going to spread. It's going to spread on significant numbers. There are going to be people, a lot of people, that get sick, and it's going to pop up in hot spots of where hospitals are overwhelmed. But the detriment. It's either that or we literally destroy the US economy and then we're all gonna have a whole host of much larger problems with food supply shortages. And I don't even want to go down that road. The unfortunate part is, as a country, we're gonna have to live in a different world the next 12 months, which is we're gonna have to turn things on. I think social distancing will be basically standard. I think you'll find that every restaurant will have half the number of people in it. Large events will not happen again. You probably won't go to a concert for the rest of this year. And if you do candidly, you're being dumb because the last thing you want to do is be around a thousand people knowing the fact that 200 of them might be sick. The point is we have to turn the economy back on. I do agree from an economic standpoint that we can't keep businesses from functioning. We can't keep people from having their checks. So I believe what will happen here is, is the federal government, which they've already alluded to, is going to release some of the guidelines. They're going to come up with ways for the states to handle it, essentially pass the buck down to the states. The governors will make their own individual choices on how they want to proceed. I think if governors choose to keep their constituents locked down for too long, a lot of people will just ignore it because they got to go make a livelihood. And here's why I say this. The positive of this is I think the economy is going to come back. I think the economy will come back quicker the faster that we turn it back on. That's a fact. Like we're going to. We're going to be able to recover more quickly. The negative of this is I think that millions of people in America are going to get sick and it's going to be hundreds of thousands that will probably not make it. And I'm just being candid because anybody that's on this webinar should be taking the safety precautions you are today. For the next 12 months, you should be wearing masks and wearing gloves and using hand sanitizer and social distancing while we get through it. But the upside is, as a country, we'll be able to do business and get back to some sort of sense of normalcy. That's where I think you get woke up.

And I'm with you, like, a lot, but not all the way. And I think we're saying the same thing, maybe just in different ways. I don't think it's an either or. I think it's an and I think that there's a needle that we're trying to thread here, which is let's get the testing mechanism so that we can truly test at a rate that is meaningful. Let's get a drug protocol with a bigger sample size than 19 in the trial. Let's spend a few more weeks trying to get some of these things in place, and then it is appropriate and time to start to turn this back on.

Yeah. And thank you for filtering some of that, Keith. I'm frustrated, as people can tell. And it's because I care about everybody and I come from the human side. That's literally how our company operates, is I care about the people. The lack of optimism is that testing is a mess still. There isn't enough of it. And I don't think we're gonna get testing online to a degree to solve the asymptomatic issues before we turn things back on. I hope I'm wrong, candidly. I hope I'm so dead wrong that everybody can go, you were wrong. Because I'll be like, yay.

So if you think about 30 days, right. What 30 days has meant and where we were 30 days ago to where we are today, Sure. I don't think we need 30 more like this with this level of lockdown to have a more safe approach right now. We couldn't have had a worse approach. So, like it's hard to fall down when you're already laying on the ground. Right. So we couldn't have had a much worse approach.

Sure.

We've come a long way in 30 days.

I agree.

And in the next couple of weeks and. Or 30, I think within the next 30 days, we have to turn on the economy with wherever we are.

We have to. Yeah, but that has to happen. There's, there's no choice in this and matter anymore because we, we have to get things cooking. I think most Americans, including myself, would rather take some level of risk of getting sick versus losing our livelihood altogether. And that's, I think, where 99% of Americans probably feel.

And it's a hard debate. It's a hard debate. One that's being had and tables and zoom meetings and the halls of all of our political institutions across the nation. All right, we'll put a pin in that and move on from that one. So what does this all mean going forward? What, what is this all going to look like? And we've done a tremendous amount of research and here is what we have discovered. Who knows? This is pretty unprecedented. We're going to do our best to unpack a lot of this stuff and try to unpack it and talk with a logic based, more stoic approach to extrapolate some information here and make some not very bold predictions, but things to consider as we move through this. But nothing like this has ever happened. So who knows? This is. We've said this before on these other webinars. This is just two relatively smart guys having a conversation after reading and digesting a bunch of information. Yeah. So. Oh, couple question from the audience. Can you address the difference between national and California turning the economy back on? Yeah, yeah, go ahead, James.

So, you know, the states do control what efforts that they want to do. That's pretty much a fact at this point. I think that you're going to find certain states will probably take more of a conservative approach and you're going to look out for the health a little bit more than the economic factors. That's just meant to be a general statement. I think California's timeframe, this is my guess, my estimate would be California's timeframe to turn back on is gonna be somewhere in May. I think the states that have been hit harder will be looking at this more aggressively on the turn back on timeframe. The states that have had very few known cases, I should say, will move very quickly. It's opening up. And then also it'll be looked at probably by county level. I think there's certainly an element of different. Different areas. We'll look at it. For example, here In Northern California, May 5th is currently the estimated timeframe. We're still in lockdown, whereas in Southern California that was already extended to May 15th. So they're going to look. The point is different states will look at this differently. It will also change if in four months we have a mass outbreak theoretically in Northern California again, I wouldn't be surprised if they said it's being shut down again, guys, for three weeks. We got it. We got to flatten that curve. I think one other caveat is you have to look at how the hospital systems are dealing with it. And that's the element, that's the wild card. If the hospital system cannot handle the amount of sick people, they're going to have to somehow curb that. So it's going to be a moving target consistently for the next 12 months or until treatment's in place.

Yep. All right, so who knows? We don't. But we took a shot at trying to discern and filter through all this. One thing that you can look at is China was the first one to go into this. They've been the first one to come out. Obviously. It's interesting to take a look at what happens to their gross domestic product, which was released this morning. 7% is a big number as far as a reduction in gdp. They are seeing the early trend lines start to come back as they are reopening their country and as people are. It's not like it's going back to the way it was before. To James's point, people aren't going to concerts that movie theaters aren't. They aren't going to movie theaters. They are going to coffee shops, but they're staying far apart from each other. They are going to restaurants. They are slowly. The early indicators for quarter two seem to be better, but there is a real impact to GDP to the point about the economy. And it's interesting. If you look at their March retail sales, China hasn't had a reduction in their GDP since the early 90s because it's been an explosive growth mode for almost 30 years now. So for this entire generation, if you think about our industrial revolution or our financial revolution that we had, where the US just rocket shipped forward, that's what China's been in for the last 30 years. If you look at retail sales for March, it was really bad. I know I've spent a lot less. I mean, James can't get a haircut. I can because I just do it myself. But everything that you used to do and spend money on gas and groceries. Well, groceries, we're still doing the gas, restaurants, entertainment, travel, leisure. We just aren't. We, we aren't spending nearly as much money. Yeah.

The GDP is what, Keith? It's about 2%. Right. That's a fairly average number for good growth is around 2%. Right. On the annualized basis. So to put that in perspective, when they dropped seven, seven and a half, whatever it was.

Yeah, seven, seven.

Pretty. It's a. For context, it's a pretty big number.

Yes. And if it stayed there, that would obviously be horrific for, for China. But they should have positive GDP going into Q2, 3 and 4, and the net effect won't be negative 7% GDP.

And I also want to make a comment sometimes that people are. There's probably some sudden like, ah, it's China, who cares? It's actually a really important thing because so many of the goods and services that we purchase in this country come from China. As much as we think that we're not a global economy, we are. What happens there affects here. What happens here affects there. Like that's, that's the way the world operates today.

We experienced that in 2008 when it was our fault. We're the nation that pushed the globe into a recession in 2008. So the interconnectedness of economies, of global economies has never, it's always been there. Trade has always been important. It's never been more enmeshed and entwined than it is today. So there's obviously bad news here. Right. Looking at China's gross domestic product number and looking at China's retail sales numbers, I just picked two data points. But what I'm really curious to look at is how they do in Q2, because that gives us some indication of psychology and how humans will act as they come out of the other side of this. So just giving you that to think about Anytime I can work Back to the Future into a presentation, I want to.

DeLorean's producing new version, by the way.

They are, they are. But someone's got to make it a time machine or I'm not that excited. So let's, let's look at what happened in the past in some past recessions just to get a historical perspective and try to then extrapolate a little bit of what will happen here. Now, going through this one and this one means a lot to me because you're hearing the news start to talk about the Depression era numbers or we haven't seen this since the Great Depression. The media is making a comparative to what we are currently experiencing to the Great Depression. And I understand why. And to some degree it's not a bad idea. It's an accurate portrayal because some of the numbers that we're experiencing are Great Depression era esque. But to then say that we're going to have the Great Depression and I'll explain why, I think is, is not realistic and not painting an appropriate picture. So here's what happened in the Great depression. It's a 10 year period. GDP was down 30%. That's obviously really bad. That's down 3% a year for 10 years. Unemployment hit 25% at its peak. Averaging family income was down 40%. There was a multitude of things that happened that contributed to the Great Depression. There was a stock market crash. Not a dip like we've had, but a real crash. Then there was the Dust bowl where a bunch of middle America lost all of their farms and farming was just devastated and people were losing their homes. There was a run on the banks where now we have insurance. But at that time, imagine if you went to your bank to get your money out and they were like, yes, sorry, we don't have it. Or you just went to, you went to the bank and they were closed. Like you gave them your cash, they were holding your cash, but the bank was closed and you know, sorry, we're not open for business anymore. That created a run on the banks that pulled even more liquidity out of the system. And then the impact on home price was 35%. This is not apples to apples, this is apples to oranges. What we're going through right now has been hard on the stock market, but not a crash, anything like what you saw during the Great Depression. In the Great Depression, stimulus came at the very end. That's actually where we really learned that stimulus can help push through some of these things and love them or hate them. Bernanke had studied the Great Depression probably more than any other American. He was one of the most educated about the Depression, what happened, what caused it and how it eventually was fixed. That's why he was so aggressive with stimulus in 2008. We have pumped stimulus in early and a lot in the Depression. They pumped not a lot in and very late. It wasn't until the New Deal at the very tail end and between that and everyone getting a job because of World War II, that's what eventually lifted America out of the Great Depression. It was not housing that led us into it. So this is different. And it, this is every model I've looked at. The most impactful ones, the ones that show the most impact, they show this as a two year drag on the economy before we work it through. Not a 10 year drag on the economy like the Great depression.

Yeah, a two year recession versus a 10 year depression.

Correct, correct. For clarity, let's look at 2008. More good news. Right. This is the great recession. 10 years from peak to trough GDP was down 5.1%, unemployment hit 10%, average family income was down 8% and the impact on home price was 19%. So all bad news all along. Right. And you can see why they're making some of these comparatives to the Great Depression because we have unemployment that is getting that. We will probably hit that number of 20%. That's a big giant. Number one we haven't been at since then. But it's a lazy analogy to say we are in the next Great Depression. They just are not the same things. Nor is this a next Great Recession. No two recessions are ever the same. Our unemployment for this one will be higher, but it will be shorter. The impact on home prices, I believe it will be less. We'll explain why, but primarily because it's not housing that pushed us into it.

Yeah.

So this is different because housing isn't what led us again two years. And we're going to go into real detail on this because I think it's an under communicated story but that housing inventory levels as well. So let's do some estimates on the models that we've seen and looked at with regard to Covid and its impact. Again, most of the models that we've looked at, they show it to be worst case, a two year recession. I've seen some as little as nine months. I'm probably somewhere in the middle. But a two year recession, GDP could go down by as much as 20%. That's a huge, terrible, horrible number. But that'll be at the bottom. That doesn't mean it's down 20% for the year. Again we just saw China's GDP in Q1 down 7%. My guess is much of those models will be revised. But these I'm showing you the worst ones. I've seen unemployment to hit 20%. I can't find anywhere where they've modeled the average family income yet because it's so soon. So I just had to leave that as a question mark for the comparative. And we're going to talk about home.

Prices just real quickly on this GDP thing. I want to just make sure everybody understands when they see that number because we just talked about 7% being really bad with China. So remember that, you know, it was a very specific part of China that was completely locked down. In our particular case, YGDP will drop. So look, the Q2 numbers are going to be pretty ugly but you have to remember we shut down 90% of the country. So it's to Keith's point, real steep trough. But when we turn things back on, it's going to come shooting back up. It'll be down but it's not going to be remaining at this 20% number for very long.

We will not end the year with a 20% negative GDP. It will not happen. So I went back and just price modeled or modeled the last few recessions that we've had and talked about what pushed us into them just for contextual purposes so we could see what the shape of recovery looks like has looked like in past. You could see the one in the 70s which was there was big oil embargo fight. I remember I was a kid then. I remember that odd license plates could go on Monday, Wednesday, Friday and get gas. And if you started with an even number then you could go on the alternating days to get gas.

Keith, I don't remember that. I'm going to be honest with you.

Well, I'm a lot older than you.

Well I don't think I was more than maybe three.

Yeah, well I remember because it was weird, there were gas lines. I remember you knew it was your day and I got to ride with my mom to go get gas in our little Volkswagen Bug beater car. And then inflation was crazy, you were buying houses on credit cards. 20, 17, 18, 19% lot of creative seller financing and other structures are what impacted it. In the 90s we had oil and then the savings and loan scandal is what pushed us in a bunch of bad loans through savings and loans. That one real estate did participate and was part of It. And then obviously most of us remember 2008 and the shenanigans and insanity that came out of that. But it's just interesting to look at for again, this is us just trying to look at it with a rational logic mind and make some extrapolation.

And the key's point just on that last slide was remember that as we go, we're comparing 2008 here. And so when you look at what caused this in real estate, we're going to go into some pretty specific details about, you know, why that drove this particular recession where this is nothing to do with real estate at all.

At all.

And it's actually. Which will allude to. Here is the bright spot coming out of this is actually real estate. Yeah.

Yeah. Most real estate companies in January and February of this month were having their best to best quarter of the year before we had to hit the COVID brakes on everything. So this is the last five recessions and home price change during the last five recessions, as you can see, in 1991 that was partly because of the savings and loan impact. And then the most recent one in 2008, that was because of real estate. So obviously home prices were.

Yeah, but just stay, just stay here for a second. I just want to, I want to correlate this to the previous chart.

Yep.

When real estate is part of the recession or drove it into the recession, prices come down.

Yeah.

When recessions occur that are not related to real estate, prices still go up. So just the trend charts just to pay really close attention to on this. This is not a real estate driven recession.

Correct. So here are some things to consider. And again, I just want to emphasize I'm not an economist, I'm just an economics nerd. James isn't a mathematical genius on regression analysis and doesn't have a master's in finance or economics. Right.

Dad is not an astrophysicist.

My dad is a mathematical physicist. But so that makes me, I think I win the nerd contest. But these are the things we're considering. Look, James and I's lives are trying to determine what's going to happen to the residential real estate market. That is what we do for a living. And these are the things we're thinking about as we're trying to model and make decisions for our company. And the first thing is mortgage rates, though there was a blip. And I've talked on the last few of these about the liquidity issues and how that's impacted mortgage rates. But mortgage rates are still historically low. Money is very Cheap. And we're at a one year low right now, or at least yesterday we were the last time I checked. So there is very inexpensive money out there and that shouldn't change dramatically in the next 24 months. I mean, yes, I do think we will see some downward pressure on rates for a little while and then they will start to creep back up.

They're still historically low and that's still going to drive people to want to buy.

They're crazy low. And if it's affordability is one of the issues. And so since rates will be really low for a while, that should bolster the housing market. There's gonna be an inventory shortage and there are multiple reasons why. But new home sales got their faces smashed in 2008. They have always been a little mavericky. Historically they've been a little mavericky. They're comfortable consuming. They understand it's a boom bust kind of business. And then in 2008, a bunch of their buddies lost their companies. And the ones who made it through said, man, I don't think we're going to be quite as comfortable with this whole boom bust thing. Let's be a little more thoughtful, let's be a little more methodical. And that's why you haven't seen builders building at the same pace that they were before 2008. They've been building and being aggressive, but not with the zeal that they had prior to our Great Recession because they, they got their heads handed to them. So. And they're being much more responsive as things like this are hitting us. So they have residential starts down 22.3% applications, which is permit applications that turn into residential starts down almost 7%. Basically, the new home industry has said, I don't know if this is two months or two years, but I know I'm a slow down.

Yeah. And the thing to keep in mind with this, this is, this is why it's such an important number. We were already on an inventory shortage before we went into this a month ago. Like there was millions of units short of housing in this country.

Yeah.

We weren't basically to simplify that we weren't building enough housing based upon household growth. And we're going to show you that in a minute. Now they're even slowing it down further.

Yeah, yeah.

Which is going to create even more problem with supply.

Yes.

And that's the thing to think about as we talk about where are the housing prices going to be? Again, this is no correlation to 2008. You can't even put them on the same. The value shouldn't be in the same conversation.

No. Because we had a massive surplus of homes as we went through the Great Recession. And we do not have that situation here. And we have things that are actually exacerbating that, like builders slowing down. And you're also seeing new listings, obviously are not hitting the market. Now. Some of this will be pent up demand where there are people who are going to put their home on the market and they're like, not so fast. Some of these bigger numbers that you see are either areas that are a hard shelter in place where real estate's deemed non essential. Pennsylvania, for example, you literally can't close a home transaction there right now. So there isn't much of a reason to list. But even places with a soft one, like California, you're seeing inventory be held off the market, which makes sense. But all of that inventory won't come back into the market after this. People might decide, we sheltered in place here, we've been home for two months, we like this place a little more now, or whatever the case may be. Their life circumstance may change and they may decide not to sell. But we're seeing new listings, obviously, or.

There'S going to be a boom of. What do you call them? The new group of people coming out of this. There's lots of new kids, you know, from everybody.

Oh, the baby boom.

Yeah, yeah. New houses. We need bigger houses with more bedrooms.

Yeah. For the future quarantines. That's terrible. This slide, you and I both really think is the best encapsulation of it. Because what this overlays basically is current inventory, inventory overlaid with household formation. And the millennial generation is the largest generation in the history of the United States. They are entering their prime earning years. Your older millennials are in their early 30s. So they're entering their prime earning years and the prime years of household formation. So if you overlay our inventory levels with the population that's going to want to buy houses, we have the tightest inventory market in the history of the United States. There is not nearly enough homes.

So I love this chart. I love this chart because if anything, we're showing you today should give some optimism. Look at 2007, 2008, 2006. That is where you have so much inventory that we had to get through when we went into the recession. And that just proves the previous point. There's not enough housing being developed. So we are in a massive problem of shortage of inventory is what I still stand behind when we come out of this and this chart just shows you that we just don't have enough housing in this country.

And it was only going to continue as more and more millennials continue enter their prime earning years. Let's do a little basic economics of supply and demand. And I'm not an economics professor, so this is going to be crazy Uncle Keith's version of how we talk about supply and demand. But basically you hit equilibrium when you've got stuff that people want to buy. That's the supply and then the demand of people who want to buy it. What we've been talking about is the supply side of this issue for residential real estate, the available houses to buy. We have a supply side issue and that is only going to continue. And the demand so far remains relatively high. The thing that I was most worried about when we came out of the 2008 recession was it was the first real generation that saw their parents home be a problem and be an investment that harmed them, not an investment that they got right. For a lot of people, the forced saving aspect of buying a house and having a mortgage, compounded with the appreciation rates, make owning a home the best financial decision they've ever made. This was the first generation to see it be what crippled their family economics. I was very worried that on the other side of this the demand for home ownership would be impacted. Turns out it was not the demand for home ownership post 2008 and for the kids that saw their parents go through it, the demand was still very high. It's still seen as a massive accomplishment. We all know that feeling the first time we bought a home or when you have a friend who buys their first home, it is still aspirational. The demand weathered that very well. So do I think demand will weather this? I do, because it's so short and I just believe that the demand will stay quite strong on the other side of this.

2 Comments so I think that to add context, you know, 20% unemployment, people are going. Well, that takes people out of the buyer pool. Yes, it does. Understandably. There's a percentage of those people that were planning to buy a house. Absolutely. As unemployment numbers drop and they get to a place where some of that savings was put back in maybe over a year or two, they come back into the buyer pool. Was second home. Is second home market going to be a tough area? Probably 20% drop in your portfolio. Painful. But keep in mind it was a 25% drop not that long ago. The stock market is already starting to recover and as optimism continues to occur, your portfolio comes Back therefore in time, you know, is it under two years? I think so. That people start to come back into to looking at that. Regardless of all of that, the sheer fundamental that Keith's making is that we still have an inventory problem. So even if you pull out part of that buyer pool, there's still plenty of buyers potentially in the market that will do that. Do I believe that we've got still a pause like Keith and I have addressed for a while now of a good 60 days? Yeah, I do. I think that it's going to be a little wonky for a few months. But as people start to get into this new normal, as we turn the economy back on, et cetera, there isn't many more downward trend. It's going to start to go the other way through it. That U shaped recovery we've been talking about on previous webinars.

So really if demand stays flat, though it won't be perfectly flat. There are some people that will exit the buyer pool that that's a fact. And Ann, I see your question and I'll answer that in just a second. I just want to finish this thought. If demand stays flat and supply constricts, you see upward pressure on price and we don't see anything solving the supply side issue very soon. And so that is why it would seem to me based off of very simple economics. And real economics are never this simple. But these are all contributing factors as to why it should be a situation where so long as this is really short and we do work our way through this with relative speed and the economy starts to turn back on and we aren't in a ten year cycle of pain, but a two year cycle of pain, then that really paints a picture where this could put upward pressure on price. As we move through this, Anne asked what about foreclosure rates as people lose jobs? And that will be a real issue and there will be an increase in foreclosures. I believe that to be true. I don't think the increase in foreclosures is dramatic. I think most of the forbearance that that has been provided gets people through four months. Yes, some of there are of course the stories about where the forbearance is only for four months, then they owe the full amount. But if people get their jobs back, which many will, they should be okay and they should be able to weather this storm. Yes, there will be an increase in foreclosures. Nothing like we saw in 2008. So long as this is a two year problem and not a 10 year. Yeah.

And I don't, I don't think the banks. I will. I'll speak for banks in my own opinion. I don't think they're going to want to be adding a lot of, you know, a lot of foreclosures to their books. I think that they'll, they would rather work that out knowing that people's got their jobs back and can figure it out that there was a different time frame in 2008 than now. I do agree with Keith. I think there will be an increase in foreclosures, but foreclosures are very small right now, so an increase is just going to. It's gonna show a number there regardless. But to Keith's point, just to reiterate, if we move quickly to turning the economy back on, I think that number stays fairly low.

Yep. And this is for the real question of. And I get it every day.

I love this slide.

People try. You know, listen, you don't time a real estate market. Okay. Crazy Uncle Keith's about to tell you. The in and out costs of buying a house are very high. You've got taxes, fees, et cetera. It costs a lot of money to buy a property. And then. So you need a good time horizon. Even if it's an upward trending market. If you buy a house today and try to sell it tomorrow, you're going to lose money because the in and out costs are so high. It's roughly somewhere between 8 to 11% in and out. So total. So the in and out costs are very high. You've got to make 8 to 11% before you even break even as far as an appreciation. So I thought it'd be fun to look at if you were the person who bought at the literal worst day in our generation. Like, you're that guy. You are so bad at timing things. You decided you would buy a house on the worst day in a generation to buy a home. That's what you see on the left. And then I just move the slider over for just about 10 years. It is a little longer, but it's like two months longer. So it's 10 years and two months, 10 years later, that person was in a positive equity position and that is if he or she had the worst luck in a generation.

By the way, Keith, I bought a house in 2007. I don't know if I mentioned that or not, as you keep repeating that to everybody. So appreciate that.

Yeah, you're welcome.

Here's the timing part.

Right, Right. So again, trying to time a Residential real estate market is crazy. What I think people should be focused on is, is buying and selling because of timing in their life. Totally not timing. A real estate market, if you really need a home and you have a long time horizon, it's probably going. History would indicate it's going to look like a good financial decision because if you're James and you bought on the worst possible day, a decade later, you were in good shape.

To add context to Keith, what he's saying. I bought it because of a life decision. Yep. I bought it In August of 2007, literally the worst possible timeframe to buy. Wrote it down 26%, but happened to be smart. And then I bought it in San Francisco and made 35% on that purchase five years later. So it's six years later. So the point is to Keith is saying it goes down, but it comes back up. If you're buying it for that life decision, then it doesn't really. If you're gonna hold it for 10 years, it doesn't really matter because this is not 2008, 2007, based on my timing. And you're gonna make a lot of money on the property eventually as it is. Not to mention the fact, by the way, in case anybody wasn't paying attention, there's a housing shortage in the country.

I don't know if we mentioned there's a housing shortage.

So you buy it right now, in a year, it's not gonna make a difference because. Because you're gonna probably make some money on the thing anyway because there's not enough supply in the market.

Yep. Several requests. Can we make this slide available? Yes, we will. We'll make sure this slide is emailed to all the attendees. If you're listening on Facebook Live, you'll have to email me, but I'll make sure we get you a copy of this slide if you want it. So, yeah, we can make this slide available. Raven asks, how do you see appraisals being affected, if at all? I think the biggest impact on appraisals will be near term in that some appraisers are saying they don't want to risk themselves by going out into the marketplace. Some banks are tapering their appraisals or moving to a desk appraisal or a drive by appraisal because they don't want people to get infected. I think the biggest impact is it's going to take a little longer to close deals near term because getting appraisals done. There's a flood of appraisals on the refinance market. So then on the purchase market you've got supply and demand again. Right? The supply of appraisers is going down because some of them aren't willing to, but the demand for appraisals is still very high. So I think you're going to see an extension of time on your transactions. But again I don't so long as this is a big caveat, our belief is that this is a two year thing, not a ten year thing. And so long as things continue to indicate that, then I don't think you're going to see massive downward pressure on home price, which should mean that it doesn't impact appraisal from an appraisal standpoint. It impacts appraisal from the efficiency of getting an appraisal done. Hopefully that answers your question, Raven. All right, so timing don't try to time oh, another one. What about lending standards? How hard will it be to get a loan? Okay, we've talked a lot about liquidity. So I think right now you're seeing banks make it harder to get loans because they want to do fewer of them because they aren't sure because of the liquidity thing, the liquidity issues surrounding the forbearance and if they have unsellable notes. So I don't want to reframe. We've done a whole webinar on the liquidity crisis. So if you want to email me keithehome.com we can send you a link to a couple conversation James and I had that was primarily about the liquidity crisis. But in the near term, next four months, while the forbearance is eligible for folks, it is going to be harder to get a loan. Then once the forbearance goes away and banks don't have to consume that risk of a first payment default making that loan unsellable on the secondary mortgage market. Once that goes away, I think you will see things start to loosen up. I think it'll be a little while until we're fully back to stated income loans or actually we haven't had those. But say the bank statement lower credit.

Scores and lowering the standards that they had before. Yeah, the banks have to have confidence and they don't want to have to take on too much risk. They're being smart. I mean if I was a bank right now, based upon what I'm looking at, I'd be like let's be a little more conservative about how we lend right now and then as that confidence level increases, then they'll loosen things up. Look as soon as we know, I'm giving you some bright spots as well. The minute we know that there is an actual treatment, this economy is going to open up in a real hurry because people's fear of things will slow. Financial institutions will be like, we're going to come out of this. We're good. There's still a lot of uncertainty in that, which is why Keith and I keep saying kind of a two year run rate on this recession and that a lot of these issues we're facing will certainly solve some of themselves as they move forward. All right, what are we doing, Keith?

That's it. It's a wrap. James, thanks again. Really appreciate you carving out some time to share that big old brain of yours with everybody. We will keep doing this as long as it seems like people want it and need it. So for sure, we will be back next Friday with an update. If you guys have topics you wish we would cover, please message me or email me. We're happy to continue to try to dig in on various topics to help all of us navigate this new time and new space.

Yeah, and stay safe. Like, you know, we're making some big decisions as a country right now. And you know, it's as Heath and I look at this, we're trying to understand what's best for the economy. And the point is as things open up, which it's going to happen, still practice being very safe about stuff. Until we have a treatment or vaccine, go work, go do things that need to be done. But be smart about it. Don't let your guard down. So that's what I would add to the comment and that as we talked about, things are going to get better. It's just going to take a little time.

So, yeah, I will end it the way I end most of my zooms and conversations now, which is take care of yourself, take care of each other, stay safe. We love you guys a lot. If you've got more content you want to see from us, just let us know. Again, take care of yourselves, take care of each other. Love you all a lot. Thanks, James. Talk to you next time, brother. All right, bye.

Bye.