Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. So, Tracy, it's
Speaker 1: a new year. Well already I've been into the year.
Speaker 1: But it's a new year, and yet many of the
Speaker 1: big stories from last year remained the same, if not,
Speaker 1: if not even more so, if if I feel like
Speaker 1: many of them things you don't know about last year've
Speaker 1: allly gotten more intent. Yeah, I think you're right. I mean,
Speaker 1: we spent a lot of last year talking about supply
Speaker 1: chain issues, the possibility of shortages, the idea of the
Speaker 1: bullwhip effect, where you sort of get a small disruption
Speaker 1: in one supply chain that then ends up cascading through
Speaker 1: the entire chain and also causing very very big swings
Speaker 1: in supply and demand. And that feels like it's definitely
Speaker 1: getting more attention. And of course the secondary effects from
Speaker 1: all of that is this question of inflation and price
Speaker 1: increases and how is that feeding through to the broader economy.
Speaker 1: So well, we you know, we talked about it last year,
Speaker 1: but we're talking about it even more in right, And
Speaker 1: of course, one way that people experience inflation or fuel inflation,
Speaker 1: whether it's captured and official statistics accurately or regardless of
Speaker 1: how it's captured and statistics is everything related to housing
Speaker 1: and shelter, And by all accounts, it appears that everything
Speaker 1: that you just mentioned is getting more extreme with housing
Speaker 1: US A one survey that said like a hundred percent
Speaker 1: of home builders are experiencing supply disruptions, which is up
Speaker 1: from in December. Apparently it takes three weeks at a
Speaker 1: minimum to get a garage door. I think we might
Speaker 1: have an episode coming up on garage doors. By the way,
Speaker 1: how is it just seems to be completely nuts this
Speaker 1: year already and we're just a couple of weeks in. Yeah. So,
Speaker 1: I remember we did do an episode last year with
Speaker 1: Ali Wolf, and when we did that, I sort of
Speaker 1: declared my complete lack of knowledge when it comes to
Speaker 1: US housing because I'm based in Hong Kong and I've
Speaker 1: never bought a house in the States. But now I
Speaker 1: have to declare, I guess like the opposite personal interest.
Speaker 1: I'm trying to close on a house right now in
Speaker 1: the US, and let me tell you, going through the
Speaker 1: market for the past three months has been absolutely insane,
Speaker 1: and we've had like three instances where we've made an
Speaker 1: offer and gotten gazumped by other buyers, and not by
Speaker 1: like a small margin, but by an absolute massive margin
Speaker 1: compared to the listing price. It's just been really difficult
Speaker 1: to get anything at the moment. I just looked up
Speaker 1: the word, which is is British English, which is why
Speaker 1: I'm not that familiar with that. Sorry. According to dictionary
Speaker 1: dot com, raised the contract the price of a property
Speaker 1: after having formally accepted a lower offer. So you have
Speaker 1: indeed been gazumped. And in fact, it's perfect because we
Speaker 1: are going to speak with someone who has been tracking
Speaker 1: the gazumping phenomenon that is widespread of the US housing market,
Speaker 1: or more specifically, bidding wars have it breaking out across
Speaker 1: the market. So, Tracy, I think this episode is going
Speaker 1: to be very good for you. Maybe you'll give it,
Speaker 1: get like a little like a home buying strategy out
Speaker 1: of it. Yeah, I need answers why none of these
Speaker 1: offers are attractive to people, even though it seems like
Speaker 1: a lot of money to me obviously, Um, yes, I
Speaker 1: want to know what? All right, I can't wait, let's
Speaker 1: do it. We are going to be speaking with Mike Simonson.
Speaker 1: He has the CEO of Altos Research, which puts out
Speaker 1: and gathers tons of data on the housing market. He's
Speaker 1: been putting out lots of videos and exactly this phenomenon,
Speaker 1: the boom and bidding wars, rising prices, declining inventory of
Speaker 1: homes available in the United States. What's going on? Mike,
Speaker 1: thank you so much for coming on odd lots, Joe
Speaker 1: and Tracy, It's nice to be here. So Tracy's experience
Speaker 1: of getting Zoe left and left and right on, like
Speaker 1: everyone's experiencing that these days. Huh, everyone across all price points,
Speaker 1: basically the whole all geographies, across the country's it's a
Speaker 1: it's been a pretty consistent phenomenon. So remind us what
Speaker 1: exactly is going on, Like, what is driving this? Because
Speaker 1: obviously you have some of the pandemic trends where people
Speaker 1: want to move out of cities and they want more
Speaker 1: space and things like that. But you would have thought
Speaker 1: that almost two years on in the pandemic that some
Speaker 1: of that trend would be fading away, and yet it
Speaker 1: seems like demand for housing is still incredibly strong. Yes,
Speaker 1: So the biggest theme of the last few years he
Speaker 1: has been record low inventory, tight inventory. A few homes
Speaker 1: for sale. That's partly a pandemic phenomenon. But but the
Speaker 1: interesting thing about that is that we have been losing
Speaker 1: available inventory of resale homes for a decade. So as
Speaker 1: we came out of the housing bubble crisis, rates started
Speaker 1: falling and we have had each year, basically each year
Speaker 1: for the last decade, we have gone from a million
Speaker 1: two homes available a million homes in January too. Right
Speaker 1: now we have two hundred eight four thousand single family
Speaker 1: homes on the market. And it's been a it's been
Speaker 1: a decade long phenomenon for a few reasons, and then
Speaker 1: we threw the pandemic on top of it. The top
Speaker 1: team was was record loss supply. We have high demand
Speaker 1: driven to so we have booming economy, we have cheap money,
Speaker 1: we have a lot of these other factors driving it.
Speaker 1: And then we have demographics where we have the millennials
Speaker 1: are now in their mid to late thirties their peak
Speaker 1: home buying years and so and they're the biggest chunk
Speaker 1: of people ever. So now we have tight supply on
Speaker 1: top of surging demographic demand, and that is a recipe
Speaker 1: for you know, your bidding war problem. So this is
Speaker 1: very interesting and if we could back up to the
Speaker 1: pre pandemic level, what is what were the trends that
Speaker 1: drove the decline, the persistent decline in inventory, Like where
Speaker 1: did it all? Where did they all go? Basically, I
Speaker 1: guess where it all go. As interest rates have been
Speaker 1: essentially four percent or lower for a decade, money has
Speaker 1: been super cheap. It's been a really good time to
Speaker 1: own real estate. It's been a good time to own
Speaker 1: investment property rentals. Uh So, two big phenomenons happening. One
Speaker 1: of them is it's like a doubling up. The homeowner
Speaker 1: goes to buy the next time, move up and move down.
Speaker 1: And because mortgages are so cheap, it's a really good
Speaker 1: time to keep the first one. And so each year
Speaker 1: I go to buy the next one, and I keep
Speaker 1: my first one. And so that's one big phenomenon. And
Speaker 1: all of a sudden, I'm a real estate investor. And
Speaker 1: at the same time money has been institutional money has
Speaker 1: been cheap, and so we have there's a lot of
Speaker 1: news about the big private equity funds buying up homes,
Speaker 1: but it's it's actually the individuals who are driving most
Speaker 1: of it. So in the last decade, We've taken eight
Speaker 1: million homes out of the resale cycle and moved them
Speaker 1: into the investment rental part of the pool. And that's
Speaker 1: you know, eight nine ten percent of all of our
Speaker 1: homes ten percent, but you know, nine percent of all
Speaker 1: of our of all the single family homes. So this
Speaker 1: is something that I wanted to ask, But um, how
Speaker 1: do you actually differentiate between different types of demand? So
Speaker 1: obviously you have people who buy a house because they
Speaker 1: want to live in it. Then you have individuals who
Speaker 1: you know, maybe buy a second property or do something
Speaker 1: with their first property and turn it into an Airbnb
Speaker 1: or something like that and rent it out. And then
Speaker 1: you have the big institutional buyers like private equity. How
Speaker 1: do you how can you actually track who's buying what
Speaker 1: and why? The way they tracked that when you read
Speaker 1: the numbers of like of purchases are investment properties. The
Speaker 1: way that that that is estimated is by looking at
Speaker 1: the title. When the title on the property, the address
Speaker 1: that that title gets sent to is a different address them. Uh,
Speaker 1: that's that's that there's an investor owning that property. So
Speaker 1: but it can be institutional or individual. What's the split
Speaker 1: like right now? Like do you know the numbers offhand,
Speaker 1: it's something like in the low twenties that are investor properties.
Speaker 1: So I want to talk a little bit more about
Speaker 1: this phenomenon of the individual homeowner, not the institutions and
Speaker 1: core that's obviously plays a role, but the individual homeowner
Speaker 1: essentially all getting into the game of de facto real
Speaker 1: estate speculation. Maybe they become a small time landlord by
Speaker 1: having their old home that they then rent out or
Speaker 1: something like that. But talk about the emergence of this
Speaker 1: phenomenon of Okay, maybe I moved down to Austin because
Speaker 1: it's warm, et cetera, up, but I keep my house
Speaker 1: here and rent it out or vice versa, and how
Speaker 1: this trend emerged and how big that's gotten and how
Speaker 1: unusual that is compared to I don't know, the old
Speaker 1: days whenever that was. So it's always been, you know,
Speaker 1: in many markets, has been a pretty good deal to
Speaker 1: own some rental real estate. You know, some of the
Speaker 1: you look at the blue collar folks in San Jose.
Speaker 1: I live in San Francisco, in Silicon Valley, Santose. If
Speaker 1: you're an electrician in nineteen eighty and you happen to
Speaker 1: buy an investment property, you made millions of dollars over
Speaker 1: the time, when you know, vastly more than when you're
Speaker 1: you're making from your your salary, Like it was a
Speaker 1: really good opportunity. And even that was even when interest
Speaker 1: rates were super hot. So over the time you you
Speaker 1: finance a lower and so in the last decade we've
Speaker 1: had thirty year fixed rates four percent or lower. So
Speaker 1: these are not like the two thousand five bubble investors
Speaker 1: where I'm I'm buying a house with a mortgage rates
Speaker 1: that's going to explode in two months, and you know,
Speaker 1: in after month three, I'm not going to make my
Speaker 1: payment anymore. These are people who have thirty year rates
Speaker 1: locked at two point seven percent that in a six
Speaker 1: percent inflation environment, like it's a really good deal to
Speaker 1: be owning these houses. As a result, people have therefore
Speaker 1: they do it right right. This is something that I've
Speaker 1: been wondering about because it just feels like there's so
Speaker 1: much money available for housing at the moment that even
Speaker 1: if you put in you know, I've heard stories about
Speaker 1: people putting in all cash offers, and even with the
Speaker 1: cash in hand, they will get outbid by someone else
Speaker 1: who has taken on like a very very large mortgage,
Speaker 1: but because interest rates are so low, it doesn't really
Speaker 1: matter that much to them. So yes, exactly, there is
Speaker 1: a lot of money available to housing, but you know,
Speaker 1: it's really it's a lot of money available in the economy.
Speaker 1: The the and one way you know that it's not
Speaker 1: over over supplied to housing relative to the rest of
Speaker 1: the economy is that the quality of the mortgages and
Speaker 1: the quality of the borrowers, the credit scores of the
Speaker 1: borrowers is increasing. It's actually at record high levels. So
Speaker 1: relative to to the bubble time, those credit scores were
Speaker 1: declining and the loan to value was increasing, so the
Speaker 1: loans were obviously a lot worse at that point, and
Speaker 1: the loans are now are really good. It's not just
Speaker 1: over lending to borrow or is the way it was
Speaker 1: fifteen years ago. So this is really fascinating to me
Speaker 1: that like credit scores and the quality of the mortgage
Speaker 1: like we're never We're definitely like not talking ninja loans
Speaker 1: or any of the stuff. In the mid two thousands,
Speaker 1: credit scores, high quality paperwork, lending standards all very high.
Speaker 1: One thing I'm curious about, and I don't know if
Speaker 1: this requires a more macro assessment. But obviously you have
Speaker 1: to like have a certain amount of wealth to be
Speaker 1: able to carry multiple homes. Like it's still not the
Speaker 1: norm level you know, to have to be able to
Speaker 1: keep your old house is a rental property. The emergence
Speaker 1: of people with very strong balance sheets, how much you
Speaker 1: have a lot of this is some level. I don't
Speaker 1: maybe inequality isn't is part of the word, but the
Speaker 1: existence of a certain class of people who just have
Speaker 1: a lot of cash and capital really having this sort
Speaker 1: of like a very big structural advantage in the housing
Speaker 1: market right now. You might say that that certain class
Speaker 1: of people are the boomers, so and there's more of
Speaker 1: them that's staying put in their homes longer. They're owning
Speaker 1: their homes longer. All the laws are really designed to
Speaker 1: allow people to stay, keep people in their homes, you know,
Speaker 1: the tax laws and the mortgage interest laws, all of
Speaker 1: those things are are designed for the existing homeowner. In California,
Speaker 1: we have Prop thirteen, which which basically means your your
Speaker 1: property taxes never go up. So if I bought a
Speaker 1: house for a hundred thousand dollars or two or fifty
Speaker 1: dollars in and the housing recession in California, and now
Speaker 1: it's worth two and a half million. I'm still basically
Speaker 1: paying taxes on two a little more than net, but
Speaker 1: but paying essentially no taxes in California. And so I
Speaker 1: am never selling at home. I've got a tiny mortgage
Speaker 1: at no taxes. And so those things are all designed
Speaker 1: to keep people in their homes. And and it is
Speaker 1: to the detriment of the first time HomeBuyer at the
Speaker 1: people who can't get in the mortgage payments. As mortgage
Speaker 1: rates are low, the payment is super low, So that helps.
Speaker 1: And it actually, as home prices increase, as long as
Speaker 1: the rates stay low or ratchet a little bit lower
Speaker 1: than than there's the mortgage rate has more impact on
Speaker 1: my monthly payment than does the total purchase price. And actually,
Speaker 1: Tracy this this is a partly why a function partly
Speaker 1: a function of why it's easier to overbid in a
Speaker 1: in a low rate environment. Because if if my the
Speaker 1: home prices are accelerating by ten percent this year and
Speaker 1: I overbid a little bit, what I'm doing is I'm
Speaker 1: eating away six months of equity and putting that of
Speaker 1: equity growth, you know, at home price growth that I'm
Speaker 1: putting into a payment that's super barely noticeable difference, and
Speaker 1: so that's why people that's why, that why the overbidding
Speaker 1: tends to accelerate in this kind of environment. So I
Speaker 1: guess that begs the question what actually happens to house
Speaker 1: prices and demand when interest rates start to go up,
Speaker 1: Because on the one hand, we can argue that low
Speaker 1: interest rates are causing some of the higher prices and
Speaker 1: people overbidding and some of the tight inventory. But on
Speaker 1: the other hand, I guess it's not like the pre
Speaker 1: two thousand eight situation where everyone had adjustable rate mortgages
Speaker 1: and when interest rates started to go up, you know,
Speaker 1: suddenly they can't afford their home loans anymore. Yeah, it
Speaker 1: is very different from that time. And you know, we
Speaker 1: looked during the pandemic, especially that March April we started
Speaker 1: publicized why I started publishing this weekly videos. We've been
Speaker 1: doing our data for fifteen years, but but we started
Speaker 1: publishing these weekly videos because we wanted to say, help
Speaker 1: observe what's happening to all these people as we locked
Speaker 1: down on the pandemic and people lost their jobs and
Speaker 1: we started the mortgage Forbearance program. What we're trying to
Speaker 1: find out is is there a big wave of homes
Speaker 1: that are going to have to be sold or go
Speaker 1: into some kind of foreclosure. And it turned out that
Speaker 1: wave never came, and it never came because it's a
Speaker 1: really good time to own. The laws allowed me to
Speaker 1: stay in my home if I didn't pay my mortgage
Speaker 1: for a year and then I could start again. All
Speaker 1: of my home actually gained the value. I ended that
Speaker 1: year with more equity than when I started, so I
Speaker 1: like I was in a better place after that year.
Speaker 1: So there was no there's there's no wave of you
Speaker 1: foreclosures or anything coming to market. So so that was
Speaker 1: we were we were watching, you know, is it gonna
Speaker 1: Is it gonna happen? But ultimately it never happened because
Speaker 1: it was a really good time to keep owning and
Speaker 1: the money was super cheap, and the laws were there
Speaker 1: so that I could renegotiate and put at tech my
Speaker 1: my missed payments side at the end of my loan
Speaker 1: and essentially stayed in my home, So that one off
Speaker 1: the table. No new inventory. But what we can see
Speaker 1: is that the low rates effect demand, but they also
Speaker 1: affect supply, and they effect supply in that phenomen phenomenon
Speaker 1: I was talking about in that when I go to
Speaker 1: buy my next one, it's really cheap to buy to
Speaker 1: hold my first one, to hold two mortgages at at
Speaker 1: three rather than rather than one at six. So in
Speaker 1: any rising rate environment, will see fewer of those double
Speaker 1: up transactions, some inventory will come onto the market. The
Speaker 1: last time we saw rising rates was twenty eighteen. The
Speaker 1: three quarters of eighteen started in the first quarter, peaked
Speaker 1: at about the first week in December eighteen, so rates
Speaker 1: rose pretty much all year long, and we could measure
Speaker 1: the cooling of demand and increasing a supply in a
Speaker 1: few of our metrics. So we track inventory. We tracked
Speaker 1: every home for sale in the country every week, and
Speaker 1: each year we we have a year over year fewer
Speaker 1: homes available on the market as more of them turned
Speaker 1: into investment properties. We have in eighteen. January twenty nineteen,
Speaker 1: for example, was one year in the last ten years
Speaker 1: that the January started. January twenty nineteen started with about
Speaker 1: I don't know off the top of my head, but
Speaker 1: it's like about eight percent ten percent more than the
Speaker 1: year before, So increased inventory by a fractional amount ten percent,
Speaker 1: not hundreds of percent. It's not not hundreds of thousands
Speaker 1: of homes, but tens of thousands of homes, and so
Speaker 1: and that was the one year it did. So rates
Speaker 1: rose all atween and we could see it in that
Speaker 1: inventory rate. We could also see it, and we teck
Speaker 1: a bunch of metrics like the percentage of homes on
Speaker 1: the market that have taken price reductions, which is a
Speaker 1: really interesting indicator of of demand. So the about a
Speaker 1: third of homes when they get listed rule of thumb.
Speaker 1: Third of homes when they get listed are going to
Speaker 1: take a price cut before they sell. Sometimes that's strategic,
Speaker 1: sometimes it's accidental, but about a third. And when the
Speaker 1: market is hot, then a third of them are trying
Speaker 1: to overprice, but onlycent need to. Some of them get
Speaker 1: the bid and they and they only take a price cut,
Speaker 1: or it gets hotter, maybe it's and last May, in
Speaker 1: the peak of the frenzy last year nationally we were
Speaker 1: at like fifteen percent thirty percent think they're over priced,
Speaker 1: and only fifteen percent have to take a price cut
Speaker 1: because they were getting their offers. That and so you
Speaker 1: can trek that price decreases. And so in nineteen we
Speaker 1: could watch the price decreases go from the low thirties
Speaker 1: hot market to thirty six percent during the bubble burst,
Speaker 1: we could watch that go forty of the stock had
Speaker 1: to take a price cut. So that's a function that
Speaker 1: you can see, so you can measure it in things
Speaker 1: like price production. So that means that there are fewer
Speaker 1: buyers out there. And so you know Tracy and your
Speaker 1: buying situation, you know, it's all of a sudden, there
Speaker 1: are some of these folks who are listing and saying, well,
Speaker 1: let's see if we get a better All of a sudden,
Speaker 1: they say, we didn't get a bitter and now their
Speaker 1: house sits on the market for a little while. Now
Speaker 1: you have the opportunity you have who don't have the
Speaker 1: bidding wars because there's as rates rise, then there's more
Speaker 1: purchase opportunity, more inventory opportunities for you. There's there's a
Speaker 1: less competition of the people who are using the mortgage
Speaker 1: to overbid are less likely to do that because now
Speaker 1: the payment is more impacted. So all of those those
Speaker 1: factors coming to play. And the way I look at it,
Speaker 1: you know, if you look at we had you know,
Speaker 1: increase of of inventory in that year, So you could
Speaker 1: imagine that we would need several years of rising rates
Speaker 1: from three thirty year fixed to four to five. You know,
Speaker 1: we haven't been over five in a long time, so
Speaker 1: how that impacts things. But you can imagine its several
Speaker 1: years before we have this enough of a cycle to
Speaker 1: put many of these rental properties back into the purchase
Speaker 1: market and I sell my next one, I sell mine,
Speaker 1: and I don't keep it because two mortgages at six
Speaker 1: percent is very different than two mortgages at three. So
Speaker 1: so several years to build back to the old normal.
Speaker 1: So it's really about that that cost of carry literally
Speaker 1: as that goes up in theory or in practice, as
Speaker 1: we saw in that's what at least creates the new
Speaker 1: supply from at least existing home sales. What is the
Speaker 1: state of price increases and bidding wars that we've already
Speaker 1: seen at the start of the year, and how does
Speaker 1: that compare to us a slightly more normal year like
Speaker 1: like pre pre pre crisis. The biggest, the biggest phenomenon
Speaker 1: of things like bidding wars during the pandemic period is
Speaker 1: a sort of lost the seasonality to the housing market
Speaker 1: ian normal season the inventory comes on, starts to come
Speaker 1: on for the spring in February, really accelerates March, April,
Speaker 1: peak May June, and then June's inventory starts declining for
Speaker 1: the fall. If your house is on the market in
Speaker 1: August and and you haven't gotten an offer yet, now
Speaker 1: you start taking a price cut because schools starting and
Speaker 1: and so we have all of these seasonal factors. And
Speaker 1: then the holidays and you have fewer listings, you have
Speaker 1: fewer people like you know, you have some people like
Speaker 1: Tracy who are needing to buy, but but cools way
Speaker 1: way down in the holiday seasons. Over the pandemics of
Speaker 1: the the holidays of January one, we all of a
Speaker 1: sudden we have all the zoom town phenomena. We have
Speaker 1: all the remote work, we have kids out of school,
Speaker 1: so we have all kinds of options to move uh
Speaker 1: in in the winter, and so we we lost a
Speaker 1: lot of seasonality. If you look at, in fact, a
Speaker 1: lot of the seasonally adjusted home price numbers that you
Speaker 1: might see, you'll see that they swing really big in
Speaker 1: the November December January time last year and and also
Speaker 1: this year because things demand has been unseasonably high, like
Speaker 1: it didn't cool down nearly as much. We can see
Speaker 1: that in in a number we track, which is the
Speaker 1: percentage of homes on the market that I've had price
Speaker 1: increases lately. And so price ins is a function of
Speaker 1: things like investor fix and flips. Like I buy a home,
Speaker 1: I put a little bit of money in. Ninety days later,
Speaker 1: it's back on the market at a higher price. And
Speaker 1: that phenomenon happens more in a lot of the Southern
Speaker 1: investment investment market, the sun Belt investment markets, but nationally
Speaker 1: you might see in quote normal times, maybe two and
Speaker 1: a half percent of the market is in some state
Speaker 1: like that of price increased two couple percent. Uh, it
Speaker 1: picks up a little bit after the beginning of the year,
Speaker 1: so it's maybe two and a half percent because the
Speaker 1: market's cool in the fall. If it didn't sell, I
Speaker 1: might pull it off the market. I might do a
Speaker 1: few things to it and put it back on the
Speaker 1: market in January at a slightly higher price because now
Speaker 1: I'm leaning into the spring market. So there's some pricing
Speaker 1: strategy happening there and what's happening now. So normal might
Speaker 1: be two and a half percent after that rising rate year,
Speaker 1: it was closer to two percent. It was lower that
Speaker 1: year because they were we could see less demand, you
Speaker 1: had less investment at investor activity happening. Uh, and now
Speaker 1: we're at six percent. So we're spiking right now. We
Speaker 1: spiked big last year to peek in the in the
Speaker 1: second quarter. Uh. Last year was about six point three
Speaker 1: in this week, So we're last year was slightly more frenzied.
Speaker 1: But it's spiking very quickly right now. And what that
Speaker 1: what that's a phenomenon is this fall it seemed like
Speaker 1: things were backing off a little bit with the peak
Speaker 1: of our frenzy last year was was May. We finally
Speaker 1: started increasing inventory for the year April. After April thirtieth
Speaker 1: last year. Normally inventory starts climbing in the end of
Speaker 1: January early February, but it didn't kept declining week over
Speaker 1: week till April um and and that's because we were
Speaker 1: people were just yeah, we're at our record low rates.
Speaker 1: We were all of the things we're colliding at the
Speaker 1: same time. But it cooled off a little bit in
Speaker 1: the second half a year last year. It's accelerating again
Speaker 1: right now. So setting aside the houses have been locked
Speaker 1: up by baby boomers um who seemed to ruin everything.
Speaker 1: If we focus on new house sorry if we focus
Speaker 1: on new house housing supply for a second, Like when
Speaker 1: prices go up and interest rates are extremely low, someone
Speaker 1: should be coming in and trying to respond to that
Speaker 1: increased in demand by actually building new houses. And of
Speaker 1: course Joe already mentioned this in the intro, and we've
Speaker 1: been covering it for a year now. There are these
Speaker 1: supply issues that are obviously impacting their ability to build
Speaker 1: new homes. But you would have thought there would be
Speaker 1: some new supply coming onto the market, or at least
Speaker 1: some new supply planned in the future. What are we
Speaker 1: seeing on that front, so the answers, We are seeing it.
Speaker 1: There are a lot of new homes in construction. And
Speaker 1: the last decade, the decade post bubble burst, we underbuilt
Speaker 1: for a bunch of you. So the twenty year average
Speaker 1: about a million and a half homes new home construction
Speaker 1: per year pre bubble, post bubble is half a million, uh,
Speaker 1: and so we built a lot fewer, right, little, the
Speaker 1: homeowners had to ditch, the home builders had to ditch
Speaker 1: their land. They there's all kinds of restructuring that happened,
Speaker 1: and and so it took them a decade to recover,
Speaker 1: and now they are back to building uh, at least
Speaker 1: starting plenty of homes are you know, they're responding to
Speaker 1: the demand. So you get a lag time between because
Speaker 1: of permitting and constraction and land you said, you know,
Speaker 1: construction time, you get you get a you get a
Speaker 1: lag time between the demand and the new construction in housing.
Speaker 1: But we've got it now. We've had demand for a
Speaker 1: long time and so the builders know exactly like there's
Speaker 1: a lot of home demand there. There's there's demographic the millennials, like,
Speaker 1: there is a lot of it's obvious demand, and so
Speaker 1: the building is happening. So the shortage right now is
Speaker 1: a function of historical construction. So if you had bought,
Speaker 1: if if we had new construction seven eight years ago,
Speaker 1: now you're in move up time that is in resale
Speaker 1: inventory now. But because it was constricted that at that time,
Speaker 1: there's few of those in resale inventory right now. And
Speaker 1: so now we have this weird phenomenon, supply chain phenomenon
Speaker 1: where we have all these homes in construction but they're
Speaker 1: not finished yet. Ultimately they're going to come to market
Speaker 1: and that's going to relieve some of our inventory challenges.
Speaker 1: I want to talk a little bit more about the
Speaker 1: bidding more phenomenon, specifically that the tracy has personally experience
Speaker 1: a what is is there a actual definition of a
Speaker 1: bidding war and be in a bidding war, what is
Speaker 1: the mix? Is it people just raising their bid because
Speaker 1: look at you know, three percent mortgage raid, it really
Speaker 1: doesn't add that much. Or is it people with tons
Speaker 1: of cash coming into with all cash offers and if
Speaker 1: they have ten million dollars in the bank because they've
Speaker 1: done really well, whether they've been a million dollars for
Speaker 1: the house or a million two and try and get
Speaker 1: it right away, it's just not that big of a
Speaker 1: cost for them. Like what are these bidding war dynamics?
Speaker 1: So the bidding wars are primarily a function of of
Speaker 1: the low supply problems. So we have we have uh,
Speaker 1: you know, generational big bulge of homebuyers millennials and generation
Speaker 1: and so there are more people competing for available homes.
Speaker 1: We could actually measure inventory per capita and we could
Speaker 1: actually see that or our home is available flipping around
Speaker 1: people per home available and we can measure that in
Speaker 1: as the bubble was bursting, you could see that that
Speaker 1: was a function of how likely a housing market was
Speaker 1: to create or down. So if you had we had
Speaker 1: more homes available per capita, then it was a more
Speaker 1: risky it's a higher beta market, it was more likely
Speaker 1: to adjust down. And so everywhere in the country is
Speaker 1: ultra low right now and an ultra low per per population,
Speaker 1: and so so bidding war ends up being, well, there's
Speaker 1: one house for sale and they're forty people that want
Speaker 1: to buy it. What's interesting is you could look at
Speaker 1: like a lot of the hot California markets. Because of
Speaker 1: California's prop their team, we have chronically low inventory. It's
Speaker 1: like rent control for the whole state, so so that
Speaker 1: these houses don't come back on the market. So you
Speaker 1: get a you get like a Silicon Valley market like
Speaker 1: Palo Alto, and it's it's fifty thousand or seventy thousand
Speaker 1: people and there's sixty homes for sale. You take a
Speaker 1: similar demographic outside of Dallas and normally there's seven hundred
Speaker 1: homes for sale in the same sized town. As a result,
Speaker 1: really one of the results of property tax laws, because
Speaker 1: your property taxes are high in Texas and they're you know,
Speaker 1: they're low in California, and so you know, in a
Speaker 1: in the normal times, you'd have the same population. In
Speaker 1: Palo Alto, you only have to be available to four,
Speaker 1: you know, forty people because there's only forty homes is available.
Speaker 1: And in Dallas it has to be available to essentially
Speaker 1: the media income because there's seven hundred available. That's the
Speaker 1: that's the normal time. What's going on right now is
Speaker 1: that that Dallas town is down to you a hundred
Speaker 1: and forty uh instead of seven hundred and or whatever
Speaker 1: that that that you know threshold is. And so all
Speaker 1: of a sudden that now you don't have to be
Speaker 1: available affordable to the median income. You just have to
Speaker 1: be affordable to us a much smaller chuck of population.
Speaker 1: So on that note, if I could just ask um
Speaker 1: a question completely out of um personal interest, but you know,
Speaker 1: what should you do if you find yourself in a
Speaker 1: situation where you put in an offer for a house
Speaker 1: and suddenly people are putting in much higher offers, Like
Speaker 1: is there anything you can do? Or are you just
Speaker 1: automatically doomed because you don't have as much money as
Speaker 1: the next person. Well, I will preface this but saying
Speaker 1: I am not a realtor, and it's one of the
Speaker 1: reasons that you work with a really good realtor, you know,
Speaker 1: they they know how to structure the deal, when to
Speaker 1: make that offer. What are the the other opportunities for financing.
Speaker 1: There's a lot of interesting alternative financing products that have
Speaker 1: come to the market in the last decade. For for
Speaker 1: home buying. This as a function of having a lot
Speaker 1: of capital that there are ways to make cash offers
Speaker 1: even when you don't have the cash, And so working
Speaker 1: with a really good realtor is really how ultimately you
Speaker 1: make that success. You know, the guidance I give in
Speaker 1: what people ask me that you know, the challenges of
Speaker 1: the bubble came when you bought a house either that
Speaker 1: you couldn't afford or one that you didn't like but
Speaker 1: you felt you had to buy. Then you've gotten stuck
Speaker 1: into a house that you didn't want to be in
Speaker 1: when the mark market was creating. And so the way
Speaker 1: I look at it now is if you find a
Speaker 1: house that you like and you can't afford, then you
Speaker 1: buy the house. And if you're you're looking at the payment,
Speaker 1: you go, well, you know it's more than they're asking,
Speaker 1: but we can afford that payment, and this is the
Speaker 1: house we want like, then then that is that's the
Speaker 1: time to buy the house. If you can't afford it,
Speaker 1: or if you don't like it, don't buy the house.
Speaker 1: Don't buy it because you think you need to know.
Speaker 1: So that's the way I framework guidance when people ask me.
Speaker 1: So it really sounds like, I mean, you mentioned obviously, uh,
Speaker 1: the rates issue, and lower rates make the cost of
Speaker 1: carrying an old home more attractive. And then you've called
Speaker 1: California specifically a couple of times because of how the
Speaker 1: taxes don't go up, contrasting that with Texas. It seems
Speaker 1: like and I don't know that there's like a policy
Speaker 1: silver bullet, but the issue is it's when it's really
Speaker 1: cheap to carry a house for for taxes and or
Speaker 1: rates or whatever reason, that is a real detriment to supply.
Speaker 1: It's it's a real detriment to supply. It's like, it's
Speaker 1: the everything we do in this country makes it really
Speaker 1: good deal to own your house, and therefore people own it. Uh,
Speaker 1: And that is that to a detriment to the buyers
Speaker 1: who don't own yet. So so one of the things
Speaker 1: the conversations that I recall taking place again very pre pandemic,
Speaker 1: when the market was probably a warm or hot but
Speaker 1: not crazy like this. You know, you mentioned the boomers housing,
Speaker 1: and there was all the simes like, oh, boomer homes
Speaker 1: aren't what millennials want and maybe they're like too far
Speaker 1: away from the city or you know, two big lawns,
Speaker 1: or maybe they don't have like a YouTube studio involved
Speaker 1: or whatever, like millennials are like into for homes, they
Speaker 1: just don't look like the homes that millennials want. Whatever,
Speaker 1: and that it was gonna be all the supply and
Speaker 1: also that either boomers would downsize or moved to a
Speaker 1: condo in Florida or eventually die as they get older.
Speaker 1: Like what happened to that? Because I thought there was
Speaker 1: all this stuff about like boomer inventory that was going
Speaker 1: to have a really hard time hitting the market. Yeah,
Speaker 1: so we've been looking, you know, you keep looking for
Speaker 1: the boomer inventory. Uh, and it has and it hasn't.
Speaker 1: It hasn't shown up, right, Uh. You know, the boomers
Speaker 1: are finally getting to the age where maybe it really
Speaker 1: has to show up soon. They're as they're getting their
Speaker 1: seventies eighties like that, like, maybe we finally get to
Speaker 1: see that come to market. And so you know, when
Speaker 1: we we measure are the you know, the entire US
Speaker 1: market every week, and there's some leading indicators in that data.
Speaker 1: You can see where the supply is going to go.
Speaker 1: You can see where you know, three, six, twelve months.
Speaker 1: But when you look at five years, that's there's some
Speaker 1: real macro things that aren't you know, there aren't in
Speaker 1: the data yet. So you know, like, are there are
Speaker 1: big shocks of the economy. They're like those kinds of
Speaker 1: things that you that that aren't yet visible in in
Speaker 1: the data that we measure. So things like when the
Speaker 1: boomers finally go, do we have a generational transfer for
Speaker 1: of those properties? You know, we could see the zoom
Speaker 1: town phenomenon that your Bloomberg colleague kind ofcend quote of
Speaker 1: the label bloom zoom towns during during the pandemic. You know,
Speaker 1: people moved to you know, the remote load with the
Speaker 1: work remote locations. And in New York it was that
Speaker 1: Hudson Valley exploded. In California, it was the mountains like
Speaker 1: truck Ee or places like Bend, Oregon, and so these
Speaker 1: zoom towns happened. The phenomenon though was it turns out
Speaker 1: that most of those are a great majority of those
Speaker 1: were second home is like people moved from San Francisco
Speaker 1: to the mountains. They didn't sell the San Francisco home, right,
Speaker 1: they just they just had another one. So those kinds
Speaker 1: of that millennial purchase turned to be that way. There
Speaker 1: was there were, you know, some of those some of
Speaker 1: that migration, especially out of places like New York and
Speaker 1: San Francisco. At the time, we were younger people who
Speaker 1: didn't already own, they were renters, and so it was
Speaker 1: it was a pressure on the rental market much more
Speaker 1: than it was a pressure on on the resale inventory.
Speaker 1: So let me ask, I guess the big question, but
Speaker 1: bringing everything that we just discussed altogether, when would you
Speaker 1: expect the housing market to actually start to normalize? And
Speaker 1: what does a normal housing market actually look like now?
Speaker 1: So if we if we look at the last decade,
Speaker 1: we could say, quote normal being a million homes on
Speaker 1: the market around the country at this time in January.
Speaker 1: We're at two d eighty four thousand this week, so
Speaker 1: that's single family homes. Getting back to that level of
Speaker 1: normal is a long way. Multiple years, multiple years of
Speaker 1: higher rates of systemic changes. Uh, you know, we have
Speaker 1: one of the big phenomenons has been the institutional investors
Speaker 1: buying building and buying homes for two intended force as
Speaker 1: single family rental units. And so if there's structural change
Speaker 1: such that that's no longer a good business and those
Speaker 1: start to be sold, like there there that's been a
Speaker 1: big phenomenon, and therefore there is some you can imagine
Speaker 1: some risk in there if that falls out of fashion
Speaker 1: or out of financing as a as a business, that
Speaker 1: those then start to become actual resale inventory. There's a
Speaker 1: number of those phenomenons that have to happen in order
Speaker 1: for us to get back to an old normal. You know,
Speaker 1: we we are at rates rates have climbed a little
Speaker 1: bit in the last month there in the three point
Speaker 1: something percent. Now do like I'm I am unable to
Speaker 1: predict interest rates? Like where do they go? I M so?
Speaker 1: So if they go up from here? The first thing
Speaker 1: that happens actually is as a rise is there's a
Speaker 1: there's an accelerating phenomenon where people are like I gotta
Speaker 1: get in before while it's still good. That actually accelerates
Speaker 1: demand first, and then it probably pulls demand for it.
Speaker 1: And so before it takes you know, eight months or
Speaker 1: a year before people start to really impact it, like aen.
Speaker 1: It took all year, and so then it's a multiple
Speaker 1: year process to get us back to some level of inventory, uh,
Speaker 1: some level of lower demand because rates are money is
Speaker 1: more expensive that combination of things. Because everyone in the
Speaker 1: country has a thirty your rate locked it basically everybody. Uh,
Speaker 1: in a six percent inflation environment, there's no there's almost
Speaker 1: no impetus to sell those homes ever because and they
Speaker 1: also have lots of equity, so there's no there's nobody
Speaker 1: who is underwater in their home, essentially no one in
Speaker 1: the house. In a few weeks, we will have record
Speaker 1: few homes anywhere in the foreclosure property and then foreclosure pipeline.
Speaker 1: So uh, there are always some of you know, deal
Speaker 1: went bad or divorce or whatever the thing the thing
Speaker 1: is that that triggered that, but will have record few
Speaker 1: properties in that because the market is so good. Everybody
Speaker 1: has strong credit, lots of equity, and cheap money. UM,
Speaker 1: so all of those those Americans are in really good position,
Speaker 1: and so there's no big catalyst for a lot of
Speaker 1: homes to come to market. So it's a multi year
Speaker 1: inching more homes on back into the market. And then
Speaker 1: at some point it could be that that it is
Speaker 1: the boomer transition that those finally start to unlock from
Speaker 1: from the boomer population and transfer to the to the millennials,
Speaker 1: you know, before we go, and that was that summation
Speaker 1: was extremely helpful. The one the one thing in my
Speaker 1: mind that I'm still very curious on and if you
Speaker 1: have more stats about you know, there's obviously tons of
Speaker 1: talk these days about the big institutional buyers um who
Speaker 1: buy tons of homes and rent them out, and there's
Speaker 1: all kinds of anxiety about them. But as you've pointed out,
Speaker 1: there is there's other phenomenon which I have seen extremely
Speaker 1: little discussion, but it continues to come up about the
Speaker 1: person buying a home, the family buying a home and
Speaker 1: not feeling the need to sell the first home. How
Speaker 1: big is that essentially the rise of the small landlord
Speaker 1: or the small real estate speculator, And how does that
Speaker 1: compare in terms of what moves the needle relative to
Speaker 1: the institutional investor which gets tons of coverage all the time.
Speaker 1: The numbers I've seen on that are individual investors who
Speaker 1: own one to four units. Yeah, is it about the market? Wow? Wait,
Speaker 1: So when you say of what market of those of
Speaker 1: those investment properties that are on our own by individuals.
Speaker 1: Just to be clear, the investment market and single family
Speaker 1: home is overwhelmingly dominated by individuals. That's correct. And you
Speaker 1: can see in some markets the big institutions are you know,
Speaker 1: trying to build market share, but but it is in
Speaker 1: the in the across the US is overwhelmingly individual investors.
Speaker 1: That's really interesting, Yeah, because it seems like the coverage
Speaker 1: and you know, the coverage is totally scued. I mean,
Speaker 1: there's tons of talk about the big asset managers buying homes,
Speaker 1: but it sounds like in terms of like who's owning
Speaker 1: a house for investment and therefore rental, it's actually probably
Speaker 1: much smaller the one, uh, the impression one would get
Speaker 1: from the media and the just the general discords. Right,
Speaker 1: there are a few fewer easier villain targets than a
Speaker 1: landlord private equity right A right, guess it makes a
Speaker 1: very good bad guy. It's super interesting, Mike, that was phenomenal.
Speaker 1: I genuinely learned a lot from that conversation. I recommend
Speaker 1: everyone go check your videos and tweets always updated with
Speaker 1: the data. Mike Simons and CEO of Altos Research, thank
Speaker 1: you so much. For coming on outline, Tracy, is my pleasure.
Speaker 1: I really enjoy listening to the program, so it's it's great.
Speaker 1: Thank you, it's really fun. Thank you so much, Thanks
Speaker 1: so much. Yeah, take care of Mike, Tracy. Do you
Speaker 1: feel any better about having been repeatedly gazumped in your
Speaker 1: quest to buy a home in the United States? Um?
Speaker 1: I guess. I guess it's comforting to know that I
Speaker 1: am not alone in this extremely frustrating experience. And I
Speaker 1: guess um now that I am a homeowner, or hopefully
Speaker 1: will be very soon, I guess I can take some
Speaker 1: comfort from Mike's prediction that it will take a very
Speaker 1: long time for housing to actually normalize. But on the
Speaker 1: other hand, I can't shake off a suspicion. I guess
Speaker 1: everyone probably feels it after a major purchase, but I
Speaker 1: always feel like I'm probably buying at the top of
Speaker 1: the market. Yeah, I think that's like a phenomenon. This
Speaker 1: is kind of news, right, Oh, oh, like this is
Speaker 1: a little bit hashtag personal news, right yeah. Yeah. Um,
Speaker 1: I'm going back to New York, which means Joe and
Speaker 1: I will finally be able to record these podcast episodes
Speaker 1: in the same room, which will be a lot of fun.
Speaker 1: I figured we I figured like the announcement would be
Speaker 1: a little bit bigger. But I like how we sort
Speaker 1: of backed into it a little bit by you talking
Speaker 1: about the frustration of being, you know, it's a home buyer. Yeah,
Speaker 1: for clarity, I'm not buying a US house for investment purposes.
Speaker 1: You're okay, I'm not one of those people, but you might.
Speaker 1: You know what, when you buy when when when mortgage
Speaker 1: rates in ten years or twenty years right down to
Speaker 1: point five percent and you're ready to move, and you're like, good,
Speaker 1: pretty cheap to refinance the old home and keep carrying it. Uh,
Speaker 1: it might become an investment property. But anyway, I will
Speaker 1: join the ranks of like baby boomer mini landlords that
Speaker 1: milk everything for money. But I did find that to
Speaker 1: be extremely I did not realize a quite how skewed
Speaker 1: that is, because there is a you know, tons of
Speaker 1: attention to as a managers buying homes and how small
Speaker 1: they still are and be the long term structural issues
Speaker 1: that you know what, It makes sense when you're younger
Speaker 1: and you think about buying a home, it's like, oh,
Speaker 1: you're going to move to a new town. But it's
Speaker 1: really complicated because you gotta sell the old home and
Speaker 1: you gotta get the timing just right to free up
Speaker 1: the money. And you heard all, you know, people just
Speaker 1: all these stories of like I gotta like sell to
Speaker 1: get my down payment. But in this in this market,
Speaker 1: where there's a robust rental market, low cost of care,
Speaker 1: you just buy the second home and don't even so
Speaker 1: many people don't even have to worry about what they
Speaker 1: do with their first home totally. Um. The other thing, well,
Speaker 1: I guess the one question that we didn't actually ask Mike,
Speaker 1: which would have been good, um, is at what point
Speaker 1: do prices get so high that they start actually impacting demand?
Speaker 1: Because that feels like it's the only thing on a
Speaker 1: near term basis that might you know, take some of
Speaker 1: the heat out of this market. But otherwise, Yeah, the
Speaker 1: sort of long term structural trends that he outlined were
Speaker 1: really interesting and definitely suggest tightness for years to come.
Speaker 1: And also, you know, just his point about like in
Speaker 1: rates this low, you know, you could you could lob
Speaker 1: in a bid way higher than the market, and it
Speaker 1: just does not move that much in terms of where
Speaker 1: you if if you could make the down payment, it
Speaker 1: doesn't Uh, changed that much the monthly payment potential. Right, well,
Speaker 1: housing just looks like a really good investment in the
Speaker 1: current climate with low interest rates, and now as inflation
Speaker 1: ticks higher. I mean, Mike made that point that you know,
Speaker 1: if inflation is at six percent or something and your
Speaker 1: mortgage is basically at zero percent, that looks like a
Speaker 1: pretty good trade. Yeah. Absolutely, Well, it's a fascinating episode.
Speaker 1: I did learn a lot and Tracy, I wish you luck. Yeah,
Speaker 1: thank you. I will probably need it. Okay, shall we
Speaker 1: leave it there? Let's leave it there. This has been
Speaker 1: another episode of the All Thoughts Podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway. And
Speaker 1: I'm Jill Wisenthal. You can follow me on Twitter at
Speaker 1: the Stalwart. Follow our guest on Twitter, He's Mike Simonson
Speaker 1: at Mike Simonson. Follow our producer Laura Carlson. She's at
Speaker 1: Laura M. Carlson. Follow the Bloomberg head of podcast for
Speaker 1: Incesca Levi at Francesca Today, and check out all of
Speaker 1: our podcast at Bloomberg under the handle at podcasts. Thanks
Speaker 1: for listening.