Home Foreclosures are Surging. Repeat of 2008 Mortgage Bust Coming? | Nick Gerli & Amy Nixon

Nick Gerli 0:00
I think there’s actually a high likelihood that we do see a big increase in foreclosures going forward. There’s right now there’s some very concerning things going on with lending practices in lending standards. In the US housing market, particularly the government is starting to incentivize risky loans for low income, low credit households through a variety of different mechanisms. And we’re starting to see the debt burden and the interest cost for homebuyers in today’s housing market. It’s at the highest level ever, according to data from Fannie Mae. And so when people are having to spend such a crazy amount of their income on their mortgage and on their interest in debt costs, that greatly increases the chance that they’re number one going to default, and then eventually get foreclosed on.

Adam Taggart 0:53
Welcome to Wealthion. I’m Wealthion founder Adam Taggart, we’ve got a bit of a treat in store for you today, folks. I’ve got such a busy slate right now recording upcoming interviews with experts like Darius Dale art laffer, Stephanie Pomeroy Katie Stockton, Lucky Lopez and a number of others, that I asked Amy Nixon to step in and guest hosts for me today. You may remember Amy from her previous appearances on Wealthion, most notably for her warnings about the Air B and bust, which have since proved very prophetic. Today, she sits down with housing analyst Nick Gerli, to discuss the latest with the US housing market with a particular focus on the rising surge in foreclosures, and how they may be the trigger that accelerates price declines from here. Enjoy.

Amy Nixon 1:40
Hi, welcome to Wealthion. I am Amy Nixon. Some of you may have seen me before on this channel as a guest. Today, Adam has asked me to step in as a guest host. This is a new experience for me. And I am very honored. And also feeling a little bit like I’ve just been tossed into the pool to learn how to swim. So I’m hoping to wade my way through this interview. And I am buoyed today by how great our guest is. Nick Gerli has been on this channel a lot in the past year. And I am definitely excited to welcome him back. So Nick, welcome back to Wealthion.

Nick Gerli 2:18
Great to be with you, Amy. We got a lot of stuff to talk about in the housing market right now in 2023. So I’m excited to be here.

Amy Nixon 2:25
Yes. So I know you were on several months ago. But now we are definitely well into the spring 2023 housing market season, whatever that looks like throughout the country. And this is definitely a great time to check in. I’m going to start with the question that Adam usually opens with, which is what’s your current assessment of the US housing market?

Nick Gerli 2:45
The US housing market is frozen right now we have simultaneous collapse in homebuyer demand. But we also have a collapse of new seller listings because a lot of sellers are scared to list their homes into this down housing market right now. And the result is very low levels of inventory on the market. And the result is declining prices in a lot of different cities in America, but prices that are also going up in other cities. Okay,

Amy Nixon 3:12
so it’s one of those situations where depending on where you’re at in the country, you can look at this housing market and be like, wow, you know, it’s competitive where I am, there’s bidding wars. And if you’re in a different part of the country, you’re gonna be like, hey, there’s some city inventory. And it’s not looking so good. And I know I personally use your revature app to actually pull data for specific zip codes in Dallas, and you could have two zip codes five miles apart, that have a completely different housing picture. One of them’s got inventory up 300% year over year, and they’ve got new builds that are cutting prices, another zip code inventories up maybe 10%. And there’s bidding wars, there’s only a couple homes for sale.

Nick Gerli 3:51
That’s right. So what you’re describing is the bifurcated housing market we’re seeing in 2023, where certain cities in certain zip codes, neighborhoods are crashing, and other ones are tight. And just to you know, zoom out a little bit. You know, there’s a general trend geographically that’s occurring in the housing market right now, where I call it kind of the West Coast crash where home prices on the western region specific regions in mountain areas in America have gone down the most. There’s certain cities like a Boise, Idaho that have seen a nearly 20% decline in median sale price from what it was a year ago. And so that market, Boise is definitely in a crash. But if you were to go, for instance, to Southeast Florida in Miami, home prices are still going up. And as you said, this also applies within different neighborhoods. What we’re seeing is that areas that are closer to the city to a more urban location, that have a lot of investors, those type of zip codes are seeing prices go down the most, whereas let’s call them wealthy, good school districts suburbs. They’re still very competitive and prices are still going up.

Amy Nixon 4:57
Okay, and I’ve definitely seen that with Wealthion good school district suburbs because we have been in the process of looking for a home because our kids school districts got rezone. And that has been our experience. But again, when I look at zip codes just a couple, a couple miles over, it’s a different picture. So that’s a great explanation of sort of where we’re at in the housing market. And I do want to switch gears a little bit and ask you about this foreclosure news that came out recently, it’s sort of been making a lot of headlines. And it’s interesting data that can be interpreted a lot of different ways. So I just wanted to get your interpretation of what that foreclosure data is.

Nick Gerli 5:35
Yeah. So there’s a recent article from Bloomberg as well as from Adam data solutions, it shows that there’s a big increase in foreclosure filings and the inventory of foreclosure homes in America, it’s up about 30% year over year, the highest level in three years. And this is causing some people to ask the question like, are we going to see another de Lucia foreclosures are we going to see another mortgage bust. And I think there’s actually a high likelihood that we do see a big increase in foreclosures going forward. There’s right now there’s some very concerning things going on. With lending practices in lending standards. In the US housing market, particularly the government is starting to incentivize risky loans for low income, low credit households through a variety of different mechanisms. And we’re starting to see the debt burden and the interest cost for homebuyers in today’s housing market, it’s at the highest level ever, according to data from Fannie Mae. And so when people are having to spend such a crazy amount of their income on their mortgage and on their interest in debt cost, that greatly increases the chance that they’re number one going to default, and then eventually get foreclosed on.

Amy Nixon 6:47
Okay, and I think that’s really interesting data to look at too, because people like to make a lot of comparisons back to 2008. And how different this isn’t in 2008. But what’s happening now sort of feels like late stage cycle behavior, which was happening more in 2006, maybe early 2007, you saw foreclosures, I found the chart that was just up, they were very, very low, then and in a very short period of time, very short, we saw how fast they can spike up very high. And a lot of people are just focused on well, we don’t have the subprime loans, we have these strong credit scores. Well, first of all, if you lose your job, then it doesn’t matter what your debt to income ratio is, because your income is gone, that’s been removed from the picture. So you’re not going to be able to make your mortgage payment, and you’re probably going to have to sell your home. And even if you’re underwater or not, you’re going to have to sell the home because you need the liquidity because you need to buy groceries and live your life before you find another job if you’re able to depending on how severe the recession is. And the other thing I like to look at when I looking at this foreclosure data is we have to think about I think about the foreclosures as what I remember a Donald Rumsfeld quote about it’s one of those things that’s called unknown unknown. We know that there is foreclosure data out there. We don’t know exactly how many are sort of in the works. We don’t know how backlogged they are from three years of moratoriums, we know that there are bad loans from, say, some of these private lenders that have done these DSCR loans for short term rentals and those kinds of things. Like we know those facts, and we talk about those and analyze them. But oftentimes, when there is a massive turn of events in the housing market or in the economy, it’s from something that’s called an unknown, unknown. And that’s something that we just don’t know that we don’t know. And those are black swans, basically, those are referred to as black swans. And I think when you’re in a macro cycle, like we’re in now, where liquidity is draining from the pool, we start to see, you know, those unknown unknowns can rise to the surface, and they’re gonna surprise everybody, whatever they are, and they’re probably not the things that we’re talking about right now.

Nick Gerli 9:01
Sure. And that’s a great point, Amy, it sounds like you’re describing like risk factors, hidden risk factors. And the way that you assess those hidden risk factors and how damaging they’re going to be to the housing market, for instance, is by looking at metrics like debt to income ratio. And, you know, this data to me is pretty crazy. There’s a couple of graphs I can provide you guys, but the first is a debt to income ratio for all home purchase loans, you know, going back the last 25 years. Right now we’re around a 40% average debt to income ratio, which to be clear, that means that a homebuyer taking out a mortgage is having to pay 40% of their gross income on their debt interest costs, which leaves them very little room for error. And you can see this is as high as it was in 2007. So the notion that there’s only good loans in the US housing market, it is not true. That is definitely not true. The government has made it a bit easier for people to get loans by increasing debt to income ratio. yours over the last five years. Also, things look really bad. When you isolate to FHA homebuyers, those homebuyers who put three to 5% down for a first time homebuyer loan, they’re paying 45% of their income to debt costs compared to 41%, in oh eight. And so it’s just so important that people understand this because the narrative is so strong, that there’s no bad loans that so many people are just missing these risk factors that you’re discussing. And to be clear, credit scores are higher than they were 15 years ago, banks and lenders do check income more than they did 15 years ago. So certain aspects of the credit process are better. But the fact that so many households are stretched thin on their payments, suggests big problems when that black swan event comes. And ultimately, the thing to look out for is an increasing unemployment rate. Because when the unemployment rate starts to go up, it creates the scenarios you were describing, about people having liquidity needs, and all of a sudden needing to sell their house not even get foreclosed on. Right. Some people might just be forced to sell their house as the recession gets worse, and as the unemployment rate goes up.

Amy Nixon 11:13
Right. And I think that, you know, that’s, that’s something that I have thought about a lot and especially with the debt to income ratio, that’s another thing that there’s a little bit of nuance in there that people don’t discuss, what does that include, and what does that not include? Because there are what I would call consistent regular, almost debt like items and people’s budgets that are not included when a lender is looking at your debt to income ratio. And an example is childcare. A lot of couples that have a couple of kids are spending 1000s of dollars a month on child care lender doesn’t even consider that at all and your debt to income ratio. But the reality is you cannot cut that expense out. And there’s all other sorts of fixed expenses like your food, utilities, utilities, just the maintenance costs on your house. And what we saw in 2021, people were bidding to the very edge of that affordability, they were taking on these 45% debt to income ratios. And then over the next 18 months, inflation exploded, their incomes did not. So suddenly, all those other fixed costs that were in line items in their budget, are now way higher than they had anticipated, which once again, if they lose their job that adds additional selling pressure, they’re gonna run out of their emergency savings funds a lot faster, because all of their other fixed expenses went higher.

Nick Gerli 12:40
That’s a great point. I mean, the personal savings rates near record low, inflation adjusted incomes really haven’t grown at all the last three or four years. And you know, all the things you’re describing AMI, or you know, there’s pressure on people, and eventually that pressure is going to lead to more homes on the market either through for sales or foreclosures. And this will be good news, because right now, the overall inventory levels on the US housing market are still historically low. According to realtor.com. There’s about 560,000 homes actively on the market. That’s up from what it was a year ago, which is good news, it’s up by about 50 or 60%. But it’s still down about 50% from its pre pandemic levels. So we still need to add another 500,000 homes on the market to get back to pre pandemic inventory levels. And when that happens when inventory gets back to pre pandemic levels, such as what has happened in Austin, in Boise, in Vegas, in Phoenix and cities like that, when inventory gets back to pre pandemic levels, prices drop a lot. So that’s the other thing for people to understand. As the inventory levels inevitably increase as the recession gets worse, it’s not like they even need to go up a crazy crazy amount in Austin inventory is just back to what it was in 2019. And prices are down close to 20%.

Amy Nixon 14:04
Okay, and I think yeah, that’s another really valid point. Because a lot the inventory thing, it feels like, I keep going back to the to the frozen concept of the housing market. The housing market feels frozen right now, to me, it kind of feels a little bit like Leo, at the end of the Titanic, you know, in this icy water, it’s clean to this door of low inventory. That’s what’s keeping it afloat. And you’ve got all these bullish real estate people sitting on top of the door, believing that this is going to be enough to pull through but all of us watching movie know that it’s six, he said he dies in the end drown. How’s the markets going down? You know whether or not we’re going to be able to whistle in the Fed and they’ll come in with their lifeboats and bail out these real estate investors so that their investments can go on and on. I don’t know. But it’s one of those things where We’ve had the most possible bullish setup for housing for almost three years. And the macro conditions have changed now. And we’re looking at different conditions going forward. And none of them are bullish on paper. And I actually, there’s a tweet that you wrote last Friday that I wanted to read, because I loved it. And I wanted you to sort of expound on it. I’m gonna just read it to you. And you can maybe explain what you meant exactly when you wrote this, because I think it’s really true. You said, when I talk to real estate investors, most of them are still thinking like it’s 2019 or 2021. What did you mean by that?

Nick Gerli 15:42
Yeah. So what I meant by that is that real estate investors, homebuilders, flippers, they are still operating as if the Fed is going to rescue them, they are still operating as if they’re going to get a big rate cut, and there’s going to be no bad recession. It’s the only explanation for their behavior. Because what I’m seeing right now on the ground is kind of concerning me, I’m talking to investors, some home flippers, especially what they’re doing is they’re actually like selling the house and providing what’s called seller financing at like a 5% mortgage rate. When the 30 year fixed mortgage rates six and a half percent, home builders are doing this as well, they’re buying down mortgage rates from six and a half to 5.3%. And having to spend money to do it, like the profits for these invested in these builders are going down. And the reason they’re doing that is because they want to keep the sales volume up. They want to keep the appearances like demand is still strong. And they’re essentially rejecting the Fed rate hikes. They’re saying we want to do business at a 5% mortgage rate, not six, five, so we’re going to do it. And they’re thinking that that they can do that, because they think Powell is going to rescue them in three to six months, oh, will only need to, you know, lose some money on these flips, or only need to have reduced profits for three to six months. But really, what you realize is they’re not thinking in terms of Wait a minute, rates are gonna stay high for longer. Wait a minute, all the leading economic indicators say there’s going to be a bad recession with higher unemployment, which is going to mean more evictions and more foreclosures and more mortgage defaults. No one is really still thinking in those terms. And it’s going to take, unfortunately, it’s going to take, I believe, a meaningful increase in the unemployment rate, to start to wake some of these investors in these builders up to the reality of what’s going to occur in the macro economy in the housing market over the next one to two years. And I think when that happens, then you’re going to start to see panic, you’re gonna see capitulation, you’re gonna see mass selling.

Amy Nixon 17:42
Okay, and I think that’s, that’s I, that was a great explanation of that tweet, because I am seeing the same thing we, it feels like we’re sort of still operating on this paradigm of what we’ve had over the last 15 to 20 years, which has just been totally bullish conditions for real estate investments. Real estate has been a great investment in an environment where interest rates just keep going down and have been expected to go down in the future. And a lot of people aren’t really thinking about the fact that what if what if Powell is really, really serious about holding to these high interest rates, and if nothing is breaking, and unemployment is still staying relatively low, it’s going to be higher for longer and real estate then is no longer a very good investment. When you look at the cap rates. It’s just, it doesn’t make sense. And at some point, I you know, and right now, we’re seeing this a little bit in the care market and Dallas, there are, there’s a certain sense that if everybody just holds off, and nobody sells, then we can just sort of keep the status quo. And let’s see how long we can do this for. But eventually, when you’re in a high interest rate, environment, time is your enemy. It’s going to work against you. And like you said, there’s going to be capitulation when people start jumping in and starting to sell and that is already starting to happen a little bit with multifamily. And residential is probably going to follow suit.

Nick Gerli 19:10
I agree with you. And one thing that we need to define for the viewers here on Wealthion, is that a lot of people think that the big real estate investors are these kind of all knowing all powerful entities. But you hit on a point which I want to reference is the cap rates right now, any real estate investor that buys into the US housing market and uses debt to do it, which they pretty much all do in the background. They’re losing money. You know, their debt cost is anywhere from six to 7%. For most investors, and the cap rates and the returns they’re getting on their rental properties are four and a half to 5%, which is called which is called negative leverage, and basically means after they pay their lender, they’re losing money. And this is another example of how the investors just kind of aren’t taking the situation seriously. And a chart I’m actually going to pull up I’ll send to you guys we can talk about here is new issuance volume in mortgage backed securities for the big Wall Street homebuyers. This is something that is concerning me. This is a graph showing how much money the Wall Street investors were able to raise going back to 2017. And you see the big boom and all the money that the Wall Street homebuyers raised in 2020 and 2021. And then early 2022, during the pandemic, but then as soon as Powell started hiking rates and rates went up, what do you notice, all of a sudden new issuance volume, the money that Wall Street homebuyers raised to buy homes, has plummeted over the last three quarters in the first quarter 2023, they raised 600 million, which is essentially nothing. And so at some point, these Wall Street investors are going to run out of money to buy new homes, maybe for now they’re still using some of this money they raised here, but there’s no new money coming in, which is very concerning sign for their ability to keep their business going and echoes the sentiment that at some point as rates stay higher for longer, they’re going to sell off.

Amy Nixon 21:00
Yeah, I definitely. And we’re starting to see that again, with with care. It’s just there’s especially when you look at multifamily care, there’s a ton of multifamily under construction right now. And there’s also a floating rate debt, a bounce in that market. It is a different mortgage lending environment. I know you know this, because this is your background. It’s a different type of lending environment than what you would see in residential single family homes, there is more floating rate debt issue. And again, as time goes by, there’s going to be distress on some of these properties that have floating rate debt, their interest on that on those properties, it’s just going to keep going up and up and up, and they’ve got to pay it. And as it’s going to distress over time, like you said, and that’s why we’re seeing some of these headlines with defaults. That was just a property in Houston, big foreclosure in Houston for multifamily, and there’s been other defaults in the CRA space, again, because these these kinds of loans are ones that actually have floating rate debt, which is a totally scarier thing, and more like what we did see in 2008. Yeah,

Nick Gerli 22:08
that’s a great point. And so, you know, the consistent thread for the viewers out there, right. It’s like we talked about how the foreclosures are increasing for regular homebuyers. The foreclosures are now also increasing for big Wall Street landlords who buy apartment buildings. And so this is what higher interest rates do write to the economy, they increase the debt levels, and they increase the interest burden to a point in time where people and corporations can afford it. And the longer that the interest rates stay high, the more we’re going to see this, which inevitably, the net effect is going to be more inventory on the market for sale for rent, and it’s going to push downward pressure on prices and rents, which is problematic, because if we zoom back to the residential market for a second, home buyer demand is still absolutely in the tank. You know, there’s this notion that there’s a supposed recovery occurring. But when you look at the fundamental data on home sales from the National Association of Realtors, what do you see in March, home sales were 4.4 million. I mean, that’s basically the levels we saw in Oh 708 Going into the last crash, that’s 30 35% below the peaks that occurred during the pandemic. So there’s no substantial recovery and sales, mortgage applications to buy a house are at their lowest level in 25 years. So what happens to the housing market as this demand remains subdued, and then we inevitably get for selling and selling pressure that increases inventory on the housing market, that’s not going to be a good combination. As 2023 progresses.

Amy Nixon 23:40
I think the demand piece is so key, because everybody’s focused on the supply, the low supply is just keep hammering this home. But if you’ve got equally or even lower demand, low supply doesn’t matter. And we’ve already been seeing this supply is crazy low right now on historical basis, and prices are still falling in a lot of the country. And if you think about that, and extrapolate it out, it’s really scary because even if we get a little bit higher of inventory, think of how much prices are going to continue to fall. As long as these interest rates are pretty unaffordable for the average person, it’s only going to lead to further price drops. And we may find ourselves in a scenario where we don’t need it to be like it was in 2008. We don’t need to have mass foreclosures. We don’t need to have record high inventory for prices to just collapse down to what is essentially affordability is the key for prices to come back down to an affordable level where a normal us homebuyer would be like okay, I can step in. This matches my income for the region, and we are so far off of that right now.

Nick Gerli 24:53
It’s such a good point. It’s all about affordability. It’s pretty simple when it comes down to it. When you look at My one of my favorite metrics to look at is inflation adjusted home prices. And you compare that to how much incomes have gone up.

Amy Nixon 25:07
Oh, gosh, yeah, this man, this is crazy graph. Yeah.

Nick Gerli 25:11
So what you can see is that inflation adjusted home prices have grown 92% Since 1970, while inflation adjusted family income has only grown 24%. And you see this cavernous gap prices have grown four times more than incomes. But what do you notice if you go back through history, this was not like the standard occurrence. If you go back in the 70s, and 80s, and 90s prices, the yellow line incomes the blue line, they moved roughly in lockstep with each other roughly at the rate of inflation. But then something changed, and the early 2000s prices and started booming in that first bubble, and then they crashed, then they started booming again. And now they’re starting to go down. And really the the thing that explains why prices started booming in the early 2000s is interest rates. It was in the early 2000s that Alan Greenspan cut interest rates down to 1% by oh three. And that ushered in a 20 year period, where the federal funds rate averaged only about 1%. And this graph is pretty clear. That’s what caused home prices to go up. Now that rates are coming up, prices have started to come down. However, as you said earlier, Amy, we’re recovering from 20 years of interest rate suppression. 20 years of the Fed baking into people’s minds that everything’s going to be good, we’re going to save the day, prices will keep going up. And so we’re now only entering let’s just say year to have rates being higher. And so it’s going to take some time for reality to set in on homeowners and investors and sellers and flippers in Belize is going to take some time for that reality to set in. Both from just a purely behavioral standpoint and understanding what the expectations are. But then also, you know, the longer the rates stay higher, the more distress there’s going to be in terms of defaults and foreclosures.

Amy Nixon 27:04
Yeah, and we talk a lot about there’s a lot of talk on this channel about the policy effect lag. And again, this is another one of those things, because you got a lot of people in the financial media space, and they’re looking around and they’re like, where’s this housing crash? All you people are talking about? I don’t see it? Well, we’ve already seen like you said, in certain regions like Boise prices are not 15%. That is with, I would say, I mean, it’s been about a year since the very first rate hikes started, we have only probably seen maybe a third of the impact, the like, on the economy of what these rate hikes have done. And just with that little bit, prices have started to collapse in particular regions of the country. And the fact that these other regions are just sort of hanging on like that is not bullish. We still have at least half of these rate hikes to sort of work their way through the system. That’s it, like you said, I mean, higher for longer is going to be scarier for longer for this housing market. Oh, 100%.

Nick Gerli 28:12
Right. And that lag is such a good point. Is it just like think about that lag, right? It’s like it’s not like every consumer or business immediately takes out a loan at a higher interest rate. You know, it’s like some people will buy a house six months from now, some people will buy a car three months from now, certain businesses in nine months will refinance their debt at the higher interest rates. So yeah, that lag is such an important thing to understand. And, you know, let’s just actually talk a little bit about some of the markets where prices have gone down the most just to really clarify for people here, you know, a market like Boise, Idaho, as you said. It’s down 16% on median sale price year over year, according to Redfin, it’s down close to 20%. From peak, Austin is down 15% year over year close to 20%. From peak, Reno, Nevada, Oakland, they’re down over 10% Sacramento is down 10% San Francisco, Seattle, Anaheim Phoenix are down 9% Las Vegas is down 8%, Provo, Utah is down 8%. La is down around 7%. And so we are seeing these price declines hit and not maybe so coincidentally, those are the more expensive markets where the layoffs have started first, you know, in those more white collar tech driven industries, which is a cue folks to if the unemployment rate starts to go up substantially in America, you’re going to see the price action in those markets start to be felt in other cities, because when people get laid off, ultimately, whether they have a three and a half percent mortgage rate or a five and a half percent mortgage rate, they need the money, right and so they’re gonna be forced to sell. Conversely, there are cities where prices are still going up, and they’re primarily in the southeast in the Northeast. If you go to Metro like Hilton Head Island, South Carolina also if you go to Savannah, if you go to parts of Florida like Panama City and West Palm Beach and Miami, prices are still Going up, but my overall model for understanding how much prices are going to go down in your city, which is what I know a lot of your viewers want to know, like, how much can I expect values to go down in my city is to understand it through this lens. Number one, if you’re in a city that boomed during the pandemic, the likelihood of price declines is just much higher in general, because the affordability in those markets is worse. Number two, if you’re in a city where there’s a lot of homebuilding, the builders are being very aggressive in kind of discounting the prices offering mortgage rate by downs, and they’re still building a lot of homes 1.7 million housing units under construction. So if you’re in a city with a lot of building, that also increases the likelihood of price declines. Oh, and the third thing you want to watch out for is the exposure to this recession to this downturn. You know, if you’re in a city that runs off tech, if you’re in a city where the all the realtors bragged about how many wealthy tech people from California were moving in, over the last two to three years, well, that’s going to be an area that’s not going to perform so well as the recession gets worse. Okay,

Amy Nixon 31:01
so given that information, do you think it’s possible that? And this might be a tough question, but I know a lot of people are the viewers are probably wondering, even if we have a recession, is it possible that certain parts of the country Chicago jumps to mind, certain parts of the East Coast come to mind to me that just their affordability metrics didn’t get really, really whack and they didn’t have massive price jumps during the pandemic? Is it possible that some regions of the country could pull through this housing bubble correction, without having prices fall very much or even being flat or slightly up?

Nick Gerli 31:38
To answer your question? I mean, yes, that is definitely possible. And that will happen in areas in the Midwest and Northeast, where like you said, the affordability metrics are more in line they don’t build many homes are not going to see home price declines that are as large and to clarify this point. For people, I think it’s helpful. Let’s go back to the last crash in 2008. Understand what were the areas that went down a lot and what were the areas that didn’t crash. And here on the Revenger app, which is a program I developed. You can see how much prices went up or down in the last downturn. And the thing I’d like to point you to is a market like Oklahoma City, in the last crash prices in Oklahoma City actually went up, prices in a market like Pittsburgh went up more or less in these areas in blue prices held up very well in the last downturn. Whereas in somewhere like in Florida, prices went down, prices went down by 50%, all across Florida, they went down by 52%. In Phoenix, they went up by 53%, in Riverside, California. And so it’s really these, like, let’s call them boom town markets in the southwest and south east that crashed the most. And it was the more slow and steady markets in the Midwest and deep south that perform the best. And it’s going to be a similar situation in this crash. Because it’s all about affordability. In a market like Oklahoma City or Pittsburgh, a local homebuyer, at the median income in those cities can still spend less than 25% of their gross income on their debt to income ratio, like their debt cost less than 25% of their income, even with mortgage rates at six and a half percent. And so as long as that affordability is still there, you’re gonna see buyers, but the markets were you know, that cost and debt to income ratios above 40%. You know, the buyers aren’t going to come back either because they don’t want to or either, because they simply cannot qualify for a loan to buy the house.

Amy Nixon 33:34
Okay. And I when you go back to 2008. That’s another thing that I think is a really important point, because I was looking at that chart. And it’s great. I love your app. I actually use it last week when I did an interview with NBC to pull specific zip code data. And that is probably my favorite thing about what the Revenger app can do. There are a lot of markets that held up very well, in that first housing bubble in 2008 that are in the Sunbelt, like Dallas is one of them. Austin, you know, a lot of the markets right now, that feel very bubbly. There’s this propensity for real estate agents to say well in the last crash we held on but really what we have to look at are the metrics you’re giving us. It’s about affordability. And it doesn’t matter if your market did well or did not do well, in the last housing bubble correction. Like all that matters right now is what is happening in your market now in terms of affordability in terms of how rapidly prices rose during the last three years of the pandemic. A lot of these reasons saw in say I think parts of Austin it was almost 100% increase in home values and just a couple of years. And to think that just because you were sheltered in the last bubble that you’re going to get that again is the wrong way to look at it. You have to look at the affordability the ratio of median income to me The Home Price, and also a little bit the demographics because we did have a really unique demographic situation going on because of the pandemic.

Nick Gerli 35:08
That’s a great point. Right? So yeah, looking back into the last downturn, it’s not a one for one, not every city that didn’t crash last time won’t crash this time. And vice versa. Austin is a great example. Austin wasn’t in a bubble. Back in 2007 2008, the typical home price in Austin back then was like $200,000, or maybe even less. Today, it’s $600,000. Right. And so people can’t afford it. And ultimately, that affordability is going to rule the day in the in the housing market, especially as the recession gets worse, and the foreclosures keep increasing. And actually, one point I want to touch upon, is the housing shortage discussion. And the low inventory discussion. we’ve alluded to it a couple of different times throughout this, this talk. But there’s these people out there who say that, you know, we won’t have a crash, because inventory is low. And what really their implication is, is that there’s not enough houses for the people in America, right? That’s what a lot of people say, the National Association of REALTORS funded a study which said that we’re 5 million homes short. And this idea is also baking into people’s minds that the downturn won’t be that bad. But unfortunately, this notion of there being a structural housing shortage is just not true. And you can see that here on this graph, we’re looking at two different lines. The first is blue blue line, which is the ratio of housing units to population in America, which is point four three today. And what do you notice, we’re actually at the highest ratio of housing units to population that we have been potentially ever since at least going back to the 1960s, which means there’s plenty of houses for the people that live in America. Additionally, the green line is the ratio of housing units to employment. And you can see that we are above the long term average of housing units to employment. And so if there’s more than enough housing units for our population, and for our job count, why is there the perception that there’s a shortage and that has everything to do with what you were alluding to earlier AMI that for 20 years, and especially the last three years, everything in the macro economy that the government did was geared to creating a housing shortage, the government created a inventory shortage on the market, through suppressing interest rates through the foreclosure ban. The Biden administration just released a press release two months ago bragging about how they prevented 1.8 million foreclosures during the pandemic. Well, you know, maybe they did a good job doing that. But if we had had some of those foreclosures, we wouldn’t have the low inventory levels today. So, so important that people understand, there is no structural shortage of houses in America, there was a temporary shortage that was brought upon by government interference in the market in the short term and long term. And that government interference is starting to subside. And so as it continues to subside, and as the unemployment rate inevitably increases, the reality that there is no structural shortage of housing will start to become obvious. And both the for sale and for rent inventory on the market.

Amy Nixon 38:07
Yeah, and that’s, that’s really great. I think one of the most important things to look at when you when you see a chart like that, and you’re like, gosh, you know, there are so many homes built, raised, you know, based on the property shark country, like, where are they what happened, that’s when you have to look at what did these low interest rate policies do? They drove people to take their capital and seek yield. And real estate was a ripe opportunity for that. So that is why and especially when you get into the late stages of the cycle, you see sort of a frenzy of greed towards these assets that look like they’re going to give you these great yields. And in the last several years, we saw that with the I buyers, like the open door, the Zillow was doing it for a while where they just jumped in with all of this cheap capital, and started buying all these homes up and they were keeping them vacant, like literally, they buy one, and then they’d sit on it for six months. And then they tried to sell it for higher. And none of these I buyers that had the best technology, the best information of it up to date available on the real estate market, were able to succeed doing this in ideal macro conditions. So there’s no way it’s going to work in poor macro conditions. And then parallel to these big players doing this, you had these late cycle individual entrants, and that’s sort of what I talked about when I did my interview about the Airbnb bust concept. You have all of these people buying eight to 10 short term rental properties, thinking that the value of the home is just gonna go up, and they’re gonna get all this money from vacationers forevermore. And the reality is, as soon as the recession hits, those properties are not going to cashflow. They’re not going to look like good investments anymore. And that is why and we saw this again in 2008, how quickly you can go from low inventory to high inventory. When you have vacant properties, and oh eight, it was flippers who just bought three homes to sit on and flip. And in 2022 2023 is short term rental operators, it’s people that are hoping to rent out these properties. When they discover they can’t find a tenant who could afford the property. They’re going to dump these things on the market, and it’s going to come in an avalanche because it’s not somebody living in a home that needs it for shelter.

Nick Gerli 40:33
Yeah, that’s such a great point. I mean, it reminds me of the phrase, what is it History doesn’t repeat itself, but it rhymes. Right? It’s, yeah, it’s not exactly the same thing that was happening. 2008. But the same type of speculative fervor is occurring. And I love what you talked about, you mentioned vacant homes, it’s very important for people to realize in America, there’s lots of vacant homes right now. So to understand this, understand how many homes are on the market. So to understand this, look at this data from the US Census Bureau, the first starters is 99 million single family homes in America total. So 99 million total homes. Of those 14 million homes are vacant, according to the US Census Bureau. And that’s through a variety of different things that you’re talking about. It’s wealthy people buying a second or third home for vacation, it’s people buying an investment property that’s sitting vacant, most of the time, 14 million homes that no one is living in for sale inventory, according the Census Bureau 720,000 At the end of 2022. And so look at this, the for sale inventory is 5% of the total amount of vacant homes. So if only 5% of all the owners of vacant homes were to sell one out of 20, it would double the inventory on the market. And so again, this reinforces the notion that there is no structural shortage of homes, the homes are there, there’s 14 million vacant homes, but they’re not on the market right now, due to 20 years of Fed rearing to expect higher prices due to 20 years of Fed rearing to expect that the recession is not going to be that bad. But of course, we all know that that’s not going to last forever.

Amy Nixon 42:06
That’s her is actually really, really fascinating to me, because I when you look at 14 million, and you think about what inventory, we would need to get back to even those 2008 levels that people are always talking about, oh, you know, we’re how many visits like two to 3 million homes on the market short for being at those levels, that two to 3 million is a very small percentage of that 14 million of vacant homes. And again, those vacant homes are the type that can hit the market really, really fast. And if they’re held by, you know, sort of the aging demographic of our population. Again, if we’re in a recession, and prices start to turn down in a lot of the parts of the country, you’ve got older people sitting on maybe two or three extra homes, rental homes, vacation properties, that’s their retirement, they’re going to reach a moment where they’re like, am I going to see a Zillow estimate this high again, in my lifetime, when I’m still cognizant and able to cash out. And if they’re not that inventories coming to the market at all it’s going to take is what a fourth of that 14 million inventory to shoot our levels right back up, actually

Nick Gerli 43:20
120 and 14 and 120 is his old is going to take of the 14 inventory to cause inventory to explode 110 of it coming to the market would cause a 2008 level of inventory. So and I like to point you also made about maybe older Americans who own real estate or own multiple homes, and it is a retirement. And I actually Adam had some great data I don’t remember exactly. But shockingly high number of retirees don’t have enough money to fund the rest of their retirement and more and more the homeowner population in America is aging, especially in a state like Florida. And so those demographic factors, more of like maybe a long term factor for the housing market are also going to cause inventory to increase in the long run. And just you know, one thing also, to make this discussion really relevant and relatable to someone who’s a homebuyer out there. You know, you’re wondering, when is the right time to buy a home? I really think it’s important to ask yourself two fundamental questions. Number one, what is your max threshold for waiting? There’s some people have been waiting to buy for over two years. And for those people, I you know, I feel bad and have empathy. I’m also waiting to buy. And you know, it’s a situation where you don’t want to be house poor, but you don’t want to wait forever. So you got to figure out what your threshold for waiting is that’s going to be different for different people. But number two, you got to understand you got to figure out whether you believe that the fundamentals matter. The data that we showed you in this video on home prices relative to income on affordability metrics, like debt to income ratio, like does that stuff matter? Because what’s happening right now in the housing market has never happened in US history before and been sustained. And so that suggests that we are going to see this downturn coming Can you play out even if in the short term over a couple months, prices might go back up inventory will be lower? The trajectory is for lower prices, lower rents and more inventory to the future. And so you got to ask yourself, do you believe in those fundamentals? Or do you believe that this time is different? Because a lot of people are starting to believe that this time is different? And ultimately, you got to figure that out for yourself if you’re a homebuyer?

Amy Nixon 45:25
Yeah, it gets, it gets really tricky when you’re talking to a family or an individual who is facing this market. Because pretty much we’ve had an insane market for three years now, on some level or another, you know, whether you had to participate in bidding wars in the early half of these last few years, versus you had to face record on affordability when these interest rates hiked, and prices were really, really high. And I know, I’m glad that you shared with the viewers that you were waiting to buy a house, we, my husband and I sold the home. And we’ve been sitting on the equity trying to figure out what we’re going to do, because again, we’re in an area that got really unaffordable really fast. And we are in a position where we had to move for a school district rezoning. So we are going to be renting a home and sort of waiting out to see what happens. Because again, I think this is another this is a market that could take a lot of time. And nobody has a crystal ball. We can’t tell you Oh, prices are going to bottom in 2024. They’re going to bottom in 2025. We don’t know that. But we do know that typically, when housing cycles, and and they correct. It is a multi year long process. It would be extremely unusual for us to just have interest rates be hiked last June, and this correction to be over buy what March 2023? I mean, that seems a little bit far fetched to me.

Nick Gerli 46:55
Yeah, that would be exceedingly rare. And to your point about the duration of housing cycles, let’s just take a look at some of the data on that. Because you can see historically, especially if you go back to the most recent housing downturn peaked in 2006, inflation adjusted prices peaked in oh six. When did they bottom 2012 took six years for them to bottom. What if we go to a more let’s just call it minor housing downturn peaked in 1989. Prices peaked in 1989. In America, they bottomed in inflation adjusted terms in 1996. So that was a seven year downturn. Before that, in 1979, inflation adjusted prices peaked, where they bought in 1983, four years later. And so the historical data is very clear housing cycles last a long time. You know, four to six years is what you should expect, which is maybe uncomfortable for some homebuyers, because that’s a long time to wait. And so another important thing to realize, again, yeah, how long how long you want to wait, and how important is it for you to get in at the lowest price possible, there’s going to take some time for that lowest price possible to appear.

Amy Nixon 48:00
I think that’s great. And you know, one other thing those are, you know, we you just showed a chart of many, many US housing cycles over the over the course. But we are also sort of there, sometimes big overarching economic cycles that are going on, that have all those little cycles within them. And with housing, it’s really, really important to understand that all of these past cycles have not had the demographic challenges that the current one is facing, we could be looking at a situation like Japan, where our demographics just do not support, especially look thinking back to your chart of how overbuilt we actually are, or how many homes we do have per population, with our birth, and marriage rates dropping, somebody is going to have to buy all those homes, when the boomers go into assisted living or when they start to die. And if there are not people to buy those homes, home prices are going to fall, there’s going to be vacant properties all over. And you could be looking at a scenario where there’s a decade of flat or just trickling down home prices. And it’s not meant to scare people, it’s just meant to just make people aware if you’re buying a house to buy something that you can certainly afford, and that you would be okay living in for a decade, knowing that you may not make any equity money on it. It’s just going to be a way to secure shelter and secure that for your family and have a place to live, which is really what housing should be. It’s just gotten so worked over the years with a monetary policy.

Nick Gerli 49:34
Yeah, I kind of like what you just said, Amy. I mean, that’s what buying a house should be. It’s not an investment. It never was thought of as an investment until starting in the early 2000s. When there was interest rate manipulation before then, housing was viewed exactly as you said it something just basically a place for people to live. And actually, to your point about the demographic issues, I want to bring up some more data that people need be paying attention to birth rates, the number of households with a child I mean This is shocking to me. When I look at data from the US Census Bureau in 2022, only 24% of housing units were occupied with a household that had a child in the housing unit 24%, with a child under the age of 18. And 1965 42% of housing units were occupied with a child in that housing unit. And so when you look at this, it’s very, very clear the point you just made, the demographics do not look good for the housing market in the long run. Another one to pay attention to is the difference of households with children, which you can see in nominal terms, there’s fewer households with children today than there were 15 years ago at the peak of the previous bubble, but the number of people living alone is skyrocketing. And so fewer children, more people living alone, that’s not a good combination for demand to buy a four bed three bath house is 2300 square feet. If anything, it suggests there’ll be more demand for apartments in the future.

Amy Nixon 51:01
Yeah, and that’s this is something that I’ve talked about a lot on Twitter, we have got a housing market right now that is set up, that prices have exploded, and a lot of these really desirable areas with good school districts for the sort of suburban McMansions. And they’ve required, you know, to high earning Boomer or Gen X salaries, to get the prices to that level. And if you’ve got the up and coming generations like your data show, which is actually scarier looking on a chart than I thought, they’re not getting married as much, they’re not having children as much, they’re not going to have the dual income, nor the desire to buy a huge, expensive McMansion in the suburbs. So we may end up with a weird picture in the US where there’s a lot of vacant properties in these once in demand areas. And then you’ve got people wanting to buy maybe a condo in the city, or just rent apartments, because they’re not having kids, they don’t need the space, they don’t need the school districts.

Nick Gerli 51:58
That’s a great point. And just me personally, I’m 33, I don’t have kids, I feel like I’m waiting to buy a house, I feel absolutely no rush to do it. And I like renting. And I think there’s a lot of people actually out there like me, who I actually really don’t view renting is throwing money away, I’d rather maintain the flexibility that renting offers me than have to fix myself to a house and a big mortgage payment, probably in the neighborhood that I don’t like because there’s not as much inventory right now, for me, it’s an easy decision to stay as a renter. And I think there’s a lot of people out there like me,

Amy Nixon 52:30
I think there are and as someone who is both owned and rented in my adult married life, I can vouch that there are definite benefits to renting that people don’t talk about a lot. One of the biggest is the maintenance. You don’t have to pay for maintenance. And I think people underestimate that when they buy a home. They they underestimate how much it’s going to cost for landscaping repairs, and getting a new roof every you know, in Dallas every seven years in most places longer than that. But all in the taxes, the property taxes, especially in the high property tax region, do you’ve got to pay that overtime, and you have to look at it. And you have to look at your capital and say, Should I do I want to invest as capital in this house for my family that I really think I’m gonna live in for 10 or 20 years? And then maybe it’s a great investment for you? Or am I okay with renting, maybe you put that capital in the stock market, if you’d done that, back in 2012. I wasn’t I always joke, if we’d done that back in 2012, when we bought our home, we would have had much better returns. If we had just bought like Tesla or Apple or any of these stocks, then buying a home and paying the maintenance on it over the years and the transaction costs. You know, after all was said and done, it is not the best return on your money, it gives you security. But that’s pretty much about about all it can do. And that’s really like we said earlier, all it should do. It should be a place to live. That gives family security that should be the goal for our country, it should not be a speculative investment. All right,

Nick Gerli 53:59
I totally agree with you. And actually, I just want also I know we’re running long providing a lot of data on here. But I want to provide people some even more data just on that comparison of buying versus renting. Because I think a lot of the way people look at that is they say, how much would it cost for me to rent either an apartment or a small house? And then how much would it cost for me to buy in terms of my mortgage interest in taxes and insurance. And really the other concerning thing for the housing market right now is that in most cities, it is cheaper to rent. So this of this Phoenix for one example, the cost of buying on a monthly basis is 2600 a month for the typical home in Phoenix and prevailing mortgage rates. The cost of rent is 1800 a month. So what do you see cost to buy over the last year and a half is now way higher than the cost to rent when that wasn’t the case, historically. So now more and more homeowners or renters, I should say are feeling like wait a minute. Well, rents are starting to go down a bit in Phoenix. I’ll stay as a renter. You know Dallas is like another market. Well excuse me. Dallas is another market where you could see this historically cost the rent cost of buying Dallas for almost identical right when the pandemic started, not anymore cost of buying Dallas is way more than the cost to rent. And so you know, that’s a real calculation that, you know, first time homebuyers make. And that calculation suggests that we’re not going to see any type of recovery in homebuyer demand for a while, until that house payment gets down lower closer to the rent payment, which is going to happen through two mechanisms, prices are going to go down. And eventually, at some point, mortgage rates will go down, who knows when that’s gonna happen, probably is not going to happen in the short term, given what Powell is talking about, but we’re gonna eventually need to see to reestablish demand in the market to buy, we’re gonna need to see both prices and mortgage rates go down, it’s gonna take multiple years for that to happen.

Amy Nixon 55:52
I agree. And you know, one of the things that jumps out to me, when you put that chart up is, those two lines, like to converge historically. And currently, you’ve got the rental line dropping, and the home price line is way above it. So that’s pretty scary, because those lines like to come back together. And there’s a lot of people will be like, Oh, rents are just gonna have to go up, keep going up to meet home prices, we’re already pretty maxed out on how much we can increase rents, in terms of affordability, rents have exploded with inflation over the last week, that’s part of why the Fed hiked rates, I don’t think there is enough room for rents to just keep going up unless we enter a complete wage price spiral. And that’s going to be a that’s exactly what the Fed is currently saying that they’re fighting against. So that chart to me suggests that home prices have a long way to come down, to get back to those lines sort of coming back together, like they seem to want to do overtime.

Nick Gerli 56:55
Of course they do. And you You nailed it, right? They want to converge, how do they converge? Well, some people make the argument, like you said, rents are gonna keep going up. But actually the people who I talked to, and especially the the multifamily space and the apartment space, they are not bullish on rent growth. Over the next year to year and a half. The people who are actually are in the space, they see all the they see all the apartments under construction, they see the rent to income ratios, and they know that they’ve maxed out, like you said, on increasing rent, and then we’re in for several years of either, let’s just say incremental rent declines or stagnation. And so yeah, that’s the situation we have right now.

Amy Nixon 57:31
Yeah, and again, like we were talking about earlier, with the cap rates being where they are, over time, as the rents stagnate or even fall, it’s a it’s a painful, slow bleed for some of these investors who are holding these properties. And the properties themselves aren’t going up in value anymore. And also, the rents aren’t going up anymore. So at some point, when did they decide enough is enough, this isn’t a good investment anymore. flood the market with all these apartments. And as more being built to it, I think there’s going to be, especially in some of the class B class, the the less desirable properties, it’s going to be a tough sell, it’s going to be a tough sell for some of those. I agree. Okay, I think we’re actually getting pretty close to our time here. Is there? Is there anything that you want to wrap up with to tell viewers anything you want to close on? Yeah,

Nick Gerli 58:27
I would say if you’re a homebuyer out there understand that nothing is actually fundamentally changed in the housing market to make it better. Over the last two or three months, all this changes, the narrative is shifting into a more positive direction. There’s not as many sellers are listing their houses this spring. And that’s caused inventory to not grow by as much as we need to, which is resulting in a spring increase in prices, which is pretty normal seasonally, but just understand the fundamental data hasn’t changed. We’re still in the biggest housing bubble of all time, even though prices have come down. People can’t afford to buy houses, and the ones that are buying houses are doing so a debt to income ratios at all time highs, even as high as they were in 2006 2007, which suggests that we are going to have a big wave of mortgage defaults and foreclosures at some point over the next year or to maybe that wave is not as big, it’s not going to be as big as the one in 2007. But it doesn’t need to. All we need is a couple of million more homes to come on the market. And that’s something that’s going to cause inventory to double or maybe even triple, especially when you consider maybe some of the wealthy investors and second homeowners selling some of the 14 million vacant homes they have so understand as a homebuyer, the fundamentals still say it’s a bad time to buy. Ultimately, though, you need to make that decision for yourself and figure out how long you can wait.

Amy Nixon 59:38
Hey, thank you so much is where can people go to find more about you and your work?

Nick Gerli 59:44
Sure. There’s two main places. I have a YouTube channel here at re venture consulting, check out the Revenger consulting YouTube channel. I do seven meals a week, two long form videos a week. Additionally, go to the Revenger app. I showed you some of the data in this video www dot Revenger dot app. It’s a website where you can access all the housing data we talked about in this video, you can access that for your city for your zip code.

Amy Nixon 1:00:06
Okay, great. And like I said, I use the app. And I think it’s great. Nick, thank you so much for your time today. It’s been great talking to you. And for everybody else. If you watch this video, and you enjoyed it, don’t forget to hit the like and subscribe button. And also, if you listen to this conversation, and you’re sort of thinking, gosh, you know, if real estate isn’t a great investment, what do I have going on in my investment portfolio, you can head on over to wealthion.com. And you can have a free portfolio valuation by one of their registered financial advisors. And they sort of just sort of take a look, see how you’re positioned going forward into this sort of weird macro environment. And yeah, on a closing note, I just want to reassure everybody because every the changes weird things are different. Adam and his wooden wall, we’ll be back on the channel tomorrow. All right. Thank you, Amy. Thanks, Nick.

Transcribed by https://otter.ai