A Coming Surge In Inventory To Drop Home Prices By Up To 35%? | Reventure Consulting

Nick Gerli 0:00
The housing market as a whole will trend more and more to doing what the builders did in terms of big price cuts as 2023 progresses because inevitably, we are going to see more new listings and more new inventory.

Adam Taggart 0:17
Welcome to Wealthion. I’m Wealthion founder Adam Taggart. Home prices in the US peaked a year ago in June. Since then, transactions have noticeably cooled as mortgage rates have skyrocketed. And while prices have declined in a number of markets nationwide, the correction so far has been quite mild, or the housing bears wrong? Or are things going to get noticeably worse from here for an update on the state of the US housing market housing analyst Nick Gerli, founder of Revenger consulting returns to share his latest outlook with us, complemented by a number of his excellent charts. Nick, thanks so much for joining us today.

Nick Gerli 0:56
We’ll be here out and we got a lot of stuff to talk about the housing market right now. And 2023.

Adam Taggart 1:00
We do and you know, Nick, it’s always wonderful to have you on the program, we’re gonna have lots to go through here, you sent over a ton of charts that are going I just can’t wait to dive into with you. You and I have a lot of conversations on the phone two that our audience isn’t privy to. But you’re one of my favorite guys to talk with both on and off air. I love your curious mind. I love how you’re bringing a lot of data to the housing discussion that not too many people bring. So let’s just dive right into it. Before we do though, let me just start with a general question. I like to ask you every time you’re here on the program. What’s your current assessment of the US housing market right now?

Nick Gerli 1:37
Yeah, great question. Um, the housing market is in a frozen state. Right now, homebuyer demand has collapsed to the lowest level that we’ve seen in 15 to 20 years measured by mortgage applications and home sales. But at the same time, the number of new listings hitting the market has also collapsed to the lowest level we’ve seen in 15 to 20 years. So the result is not very many people buying but prices haven’t gone down as much as people thought they would, because there’s a lack of inventory. So the housing markets in a frozen state through the middle of 2023. But I think in the second half of this year, it’s going to become unstuck. And we’re going to see inventory increase substantially and prices go down further.

Adam Taggart 2:16
Okay, great. So you’re kind of delivering the punchline right up front, but this frozen status is going to be the US the Feds words, transitory, in your estimation, and we’re gonna see some shoes drop later on this year. That’s correct. All right. Well, look, as I mentioned, you sent over a ton of charts. Let’s start with the first one here, which is showing the pricing of 30 year fixed mortgage rates. They’re now back up above 7%. I think the last one I saw was like 7.22%. So my big question for you is, we’ve got this frozen market. How long can houses housing resist this pole of gravity that high mortgage rates like this, just inexorably have to enforce on the housing market? I guess maybe already answered that question saying you think it’s going to start happening in the second half of this year. But it mean, there’s a lot of people out there that are saying like, hey, prices haven’t come down, you know, maybe they’re not going to come down? I guess I don’t think that’s possible.

Nick Gerli 3:20
Yeah, I mean, one area, I would just point those people to to look at what homebuilders are doing. Because the homebuilding markets very interesting. It’s one where the demand has actually gone back up. And the reason that demand has gone back up for builders is they have cut the price, they’ve cut the price by 15%, from peak, and even more than that in certain hard hit markets. And so the builders reacted very quickly to this downturn, they realized they needed to cut the price to move, demand and sell homes and they have and to me, that’s a signal of what the broader housing market is going to experience where you know, prices so far are only down 1%, nationally, year over year, they’re down up to 15%. In a market like Austin, Texas and other cities like Miami, they’re still up. However, the housing market as a whole will trend more and more to doing what the builders did in terms of big price cuts as 2023 progresses because inevitably, we are going to see more new listings and more new inventory. You know, we’re in this situation where over the last 12 months, sellers have gotten very stubborn not wanting to sell their home, not wanting to trade their 3% mortgage rate for a 7% mortgage rate. And that’s understandable. But at some point as the recessionary headwinds get bigger and bigger, and as people delay listing their homes longer and longer, we’re going to see a surge of new listings and inventory, which I believe is already starting to pick up right now when I’m looking at some of the live inventory data over the last month, and that surge in inventory is going to come with no surge in demand. Because those 7.2% mortgage rates are so high. That combined with sky high prices, the average home buyer in America can’t afford it literally can’t qualify for a loan. This isn’t a matter of choice for Are most homebuyers in the US housing market in 2023, it’s a matter of I literally cannot afford my house, if I’m going to buy it. And if I, you know, still buy it anyway, I’m going to be house poor. So when that surge of inventory and new listings inevitably hits, we are not going to see demand go up to make up for it. And that’s when you’re really going to see the shoe drop on the housing market, and prices go down more substantially. And something actually very similar to this happened in the beginning of the 2007. downturn.

Adam Taggart 5:30
Okay, great. You’re going right where I wanted to go, let’s put up two charts that you sent over here. The first is a chart of mortgage applications to buy a house. And we’re seeing that those are basically just plummeting right now. Lowest we’ve seen since I think the mid 90s. Same with home sales in America, they’ve just fallen off a cliff, basically, in the past year or so. And, you know, I’m assuming the there’s a little bit of a recent spike in that. You tell me, is that just a little? Is that a reversal of trend? Or is that just sort of a last gasp before we make it through the spring selling market, and then you expect things to fall further.

Nick Gerli 6:15
In terms of existing home sales, they I guess, bottomed, you would say in December, they went down a lot in November in December, which is probably what you’re looking at. And then they rebounded in the beginning of 2023. And then have just stayed at this really low level, around 4.3 million existing home sales on an annualized basis. That’s a horrible home sale figure. Like I want people watching us to understand that the amount of transactions in the housing market right now the amount of people buying is literally at lows comparable to what we saw in 2008, which you can see on these graphs, very important to understand that because a lot of people have this perception that people are still buying, like I hear people say that and no, they’re not people are not buying in this housing market, the data is there to see it. The perception is though, that people are buying because the new listings have been so low sellers have been hesitant to list. But as I said a second ago, that’s not going to last for much longer, I expect the listings go up and those buyer demand figures that were showing on the screen, those are just going to stay low, especially so long as more good rates stay in the high six to 7% range, it’s just not feasible for buyers to enter this market.

Adam Taggart 7:25
Okay, so there’s charts we just showed there, visualizing your point, when you say we have this frozen market, right? We’re just transactions really aren’t happening, right? Very, very low transaction volume. Okay, so many questions on this. So we’ve got this frozen market. Large part of that’s because mortgage rates have become so expensive right now that literally in a fourth and an affordability standpoint, housing is the most unaffordable it’s ever been for a new buyer, right for someone entering in the market for a first time, right? So you kind of gave this example of like people either don’t want to buy at these crazy, poor affordability levels, or they can’t, they literally can’t get approved for the loan, as you said, Because last time you and I talked on this channel, you were telling us about how you know banks have been tightening their lending standards, and people are just getting a harder and harder time qualifying for these more expensive loans to buy a house. Alright, so

Nick Gerli 8:30
let me just jump in with like another way that people can think about this in terms of what first time homebuyers are facing. Right now with mortgage rates of 7.1%. The average payment for a first time buyer for the typical house in America is around 27 2800 a month. For first time buyer on average further mortgage taxes and insurance 2800 a month. The average rent for an apartment is around 1850 a month. So right now it’s around 50% more expensive to become a homebuyer than to remain a renter in America. And I know not everyone wants to remain a renter. Some people want to become homeowners, but like the expense in the cost of becoming a homeowner is so much higher today than it’s ever been. And it’s that relationship to rent, which really cues you in on how overvalued the housing market is. And so yeah, it’s overvalued relative to how much money people make, like people can’t qualify for loans on their income, but it’s also overvalued relative to rent. And so it’s overvalued in all these different ways, which is yet another indicator that you know, prices are going to need to come down more in the future.

Adam Taggart 9:32
Great. And we’re going to talk about how it’s sort of overvalued relative to other things you could do with your capital, especially if you’re an investor looking to invest in real estate. But we’ll get to that in just a moment. Hey, that differential between buying and renting costs in the buying costs. Were you just factoring in the cost of a mortgage or was that sort of an all in cost where you put in maintenance and property taxes and all that stuff?

Nick Gerli 9:55
It’s an all in cost including property taxes and insurance.

Adam Taggart 9:59
Okay, but still on a on an ongoing basis, it’s still much more expensive to buy right now than that rent. So anyways, we got this frozen market, you talked about how the that most of the trends are, the real activity that’s happening right now in this market really is on the new home side versus the existing home side. And the reason for that, I just want to make sure that I understand this correctly, and our audience understands it correctly. I talked about this the other day, but in case folks didn’t see it. In the existing home market, you have a lot of people who, quote unquote, can’t afford to move, right, where they’re sitting on a cheap mortgage, and they’re doing the math and they’re thinking, Okay, if I sell my home today, well, I still have to stuff to live somewhere, right? So if I go buy another home, given today’s mortgages, geez, I may actually be spending more for on my new home than I’m enjoying in my current home. So I just need to just hunker down here, and hope that housing prices, you know, make it through whatever’s coming. And then you know, recover. Right? So you got a lot of people that are basically just saying like I actually can’t afford to sell my house right now. On the new home side, you’ve got builders who are basically using that to their advantage. Right. So transactions have frozen on the existing home sales sites, prices haven’t come down that much on average, right? You said about 1%? Nationally, on average? No, I know it differs in certain markets. So the builders who are bringing new inventory on are saying, Okay, well, we’re gonna undercut the current market value of existing homes, so that we can sell our inventory. And, you know, they’re, they’re finding a sweet spot here where they can be moving a good deal of inventory, still capturing a good deal of today’s pricing. And of course, for the buyer who’s out there looking to buy a house, they’re saying, okay, look, I can buy an expensive existing home, or I can get a brand new home with a lot of issues, I don’t have to worry about it, right, don’t have to worry about you know, termite damage, or you know, just all the things you have to worry about with a house that’s a decade’s old, you get a brand spanking new home for a lower price that I think is helps explain why people have been thinking, hey, we’ve got this cooling housing market and get home building stocks are trading near all time highs. It’s because you’re making a lot of cash right now from the sales is did I summarize that correctly?

Nick Gerli 12:13
You did Adam and I want to be clear that they’re making a lot of revenue from from those sales, their income is actually gone down significantly over the last year, a lot of their stocks, their income is down 30 to 40% over the last year, but their revenue is holding up stronger, because they’re moving the inventory. Another reason another reason that people are flocking to new homes is because builders are offering mortgage rate by downs. So a lot of builders are allowing people to buy at a 6% mortgage rate or a five and a half percent mortgage rate when the prevailing rates 7% salutely, Dr. Horton, America’s largest homebuilder on their website, you can go and look at this, they offer special mortgage rates as low as 5.5%. And they’ll buy down the rate for you for the whole mortgage term. And they’re not always going to do that. But on a lot of different homes in different markets they do. And so in some cases, like if you’re a new homebuyer, you’re getting a 15% discount to what it was a year ago. And in addition, you’re getting a five and a half percent mortgage rate. It’s a it’s like a completely different market, when it’s going on the existing and resale market, which by the way, new homes comprise 15% of sales 15% existing homes comprise 85% of sales, even at today’s reduced level of existing sales. And so what’s going on in the new home sale market is telling you what’s going to happen into the future of the housing market, both prices and mortgage rates need to come down for demand to return. And so rather than interpreting the success of builders and the increase in building stocks as a sign the housing markets recovering, it’s telling you what’s actually going to happen to the 85% of the market that hasn’t adjusted yet.

Adam Taggart 13:48
That is a fantastic point, right? It’s giving us a preview of the future. It says hey, if you want to move a house, you got to give a price discount in in B hopefully, you know, a deal on the mortgage as well. TBD whether the market is going to give, you know a cut on mortgage rates anytime soon or not. And if it doesn’t, I guess that just means the price discounts are gonna have to be that much bigger to move into it. And that’s where I’m kind of go you’re not because I’m saying this. That’s where I’m going here, which is we sort of talked about how homebuyers are not willing to sell right now we, in earlier conversations, Nick have called this sort of like a, like a high noon standoff between buyers and sellers, right, who’s going to flinch first. But even if, you know, even if home sellers blank here and start being willing to put their homes on the market, there’s no guarantee right now that buyers want to buy at these prices. I mean, they clearly don’t want to two from an affordability standpoint. Many as you’ve said a growing number can’t even afford to buy they can’t get the approval for the financing to do so. So you know I mentioned earlier to lowest affordability we’ve ever had for new buyers here right now. So my question is, is, you know, the marginal buyer how housing is priced at the margin, right, whoever’s willing to pay the most for the house gets it, right. Are we seeing a pretty substantial like resetting of where the marginal buyer is? So in other words, you know, the seller might say, okay, you know, what I, you when I’m going to put my house on the market, I want it for x, the price it’s been at, is the new marginal buyer saying, it’s going to have to be a lot lower buddy, for you to get me interested in this.

Nick Gerli 15:35
100%. Yeah, and this, I’m telling you, this is happening as we speak, we’ve seen a big shift in the housing market the last month, where, okay, in the spring and early summer, there was a rebound. Due to the low inventory levels, and prices started going up a bit. That’s now shifted back in the last month, price cuts are now increasing again, and inventory is now going up again, and I’m hearing a lot of reports about empty open houses, especially here in Tennessee, where I am. So this is already shifting back. It’s already happening. And I think the mainstream will catch on to it more in the next month or two. The one point I want to make about inventory, though, that so everyone understands this is you know, some people get stuck on, how can inventory increase, it’s so low understand this right now, there’s about 650,000 homes for sale in the US housing market, compared to 100 million homes total. So there’s about point 6% of all homes are listed for sale. Now that’s low inventory. And a normal market is about 1.2% of all homes listed for sale. So all that needs to happen is a 0.5% increase in inventory in new listings, it’s not a very big shift that needs to occur to cause a massive movement in inventory. And that’s actually the risk of low inventory is it all of a sudden, it can explode, and it can boom, and I just want to throw out some numbers for people. Right now in America, there’s 12 million vacant single family homes, 12 million vacant single family homes, there’s 1.4 million, Airbnb and verbos. There’s lots of vacant inventory or investor inventory, there’s 17 million single family rentals, according to the US Census Bureau. So the point I’m trying to make here is not saying that all those people are going to sell, but saying that if there’s only a little bit of distress, the inventory levels on the US housing market could double very fast and faster than people think. And I think we’ll see that trend play out in the second half of 2023.

Adam Taggart 17:34
Okay, that’s a great point. I will put up your inventory chart as you were talking there. But as you said, right. We basically only need about 0.5% of of inventory to come online to basically get rid of the entire there is no inventory constraint that people have been saying has been driving prices higher for, you know, a long period of time. And then the numbers that you just mentioned there. So 0.5% of the single family housing stock in America translates into roughly four or 500,000 listings, right? Yeah, around 500,000. Yeah, so let’s, let’s say 500. So half a million listings, right? In those stats you just mentioned, right 12 million, currently vacant homes, 17 million rental investor houses a million and a half Airbnb supply. And then just you add on that we get into, you know, tougher times, just traditional mortgage defaults, right, and foreclosures that just add additional inventory onto the market that’s already, you know, a potential pool that’s well above 30 million. So we just need a relatively small fraction of that, right, just just a half a million of that 30 plus million to come online to basically remove all of the inventory constraints that have been driving this market.

Nick Gerli 18:54
Correct. And so, you know, that just shows you how many things are actually are in the background and what I would call shadow inventory. Now, what does need to happen to unlock that inventory is there there doesn’t need to be some kind of level of little economic distress, or let’s just call it liquidity needs, right? Where maybe people who bought third and fourth Airbnb properties, all of a sudden the revenue goes down, and then like, they lose money, and they have a liquidity need, and need to sell that house, right, or someone loses their job, and they need to maybe sell their house and they’ll rent like there needs to be some level of economic distress. There’s one thing I have learned over the last year tracking this very unique housing market is that sellers will remain stubborn, you know if they don’t if they can, right and so there needs to be some level of economic distress, which I believe is starting to build. You look at the Airbnb market, there’s been big declines in revenue for Airbnb owners. You look at the long term rental market for the 17 million single family rentals. The vacancy rates for those rentals are surging and the rents are now starting to go down in many markets, which is putting a lot of pressure on landlords. So this, this distress and let’s call it the pressure, the pressure is building in the background more and more on a lot of owners in the US housing market. And we haven’t quite seen that pressure valve explode in a way that, you know, you and me and everyone else can immediately see it, but it’s building in the background. And that’s something that eventually is going to get to a boiling point and cause people to liquidate their homes for cash. And ultimately, that’s going to increase the level of inventory.

Adam Taggart 20:29
Okay, so let’s, let’s actually dig into each of those potential shoes that could drop. First here, let me just start with what is happening, could you give a brief nod to this, you know, prices nationally, down roughly 1% or so on average so far. But in many markets, especially kind of the ones that have been traditionally the hottest over the past couple of years. We’re seeing much bigger price declines. So I’m putting up a chart here that you sent over of cities with the biggest sale price declines. We’ve got Austin at the top. This is year over year from May of 22. To June of this year. Over that period, Austin was down over 14% Boise down about 13%. superville. Tennessee, no, no, if I’m pronouncing that right, yeah.

Nick Gerli 21:17
So severe Ville, Tennessee, which is actually also one of the big Airbnb bus markets is down. Also similar mountain.

Adam Taggart 21:24
Yeah, they’re down tech 12 and Oakland Avenue, I live down 12. And everybody else can see the rest. So first off, you know, this isn’t academic anymore, that okay, price declines are coming, we’re actually beginning to see pretty, you know, stinking double digit price declines in a lot of these popular cities. Alright, so that’s, that’s already going on right now. Now, what you’ve said is, is, look, there’s a number of other things that could could happen, that could really get the momentum to the downside running here. One of them is let’s start with rents first, right? Declining rents. So rents have been on fire for much of the past couple of years, especially when the pandemic hit, and prices of everything went to the moon. Rent inflation was just ridiculous, right? That’s what’s been driving a lot of CPI, you know, when you when you look at how CPI inflation is, calculated, shelters, a huge part of that, that’s based off owner equivalent rents. And that’s one of the reasons why CPI got as high as it was and why it’s been so sticky. But we now are beginning to see data that show it is showing that rents are actually starting to come down in parts of the country. And this stat really surprised me, Nick, you’ve got a chart here that says 57 of the 100 largest US cities have negative year over year rent growth through June of 2023. So that’s, that’s the majority of the top 100 cities. I’m guessing that’s probably surprising to people. Because whenever I mentioned stats like this, people are like, Oh, it’s not happening where I am right now. Now, remember, it’s not that every rent is rewriting down downwards, its rents that are usually coming from a property turnover, right? They’ve lost the tenant, now they’ve got to bring in a new tenant, and they’re having to lower the rent to get that person in. So So tell me, tell me, you know, rents are so important because in theory, housing supposed to be priced at what local incomes can support, right? And, you know, it’s really supposed to be a function of the discounted cash flows of what the property could be rented for. And if rents come down, in theory, the price, the fair price of the building has to come down along with it.

Nick Gerli 23:35
Oh, 100%. You just nailed it, Adam, I mean, housing values, over 100 years in the US housing market, a function of two things, incomes and rents. And we know now in both cases, incomes and rents aren’t supporting current valuations. Now, rents are going down. I mean, that’s a huge deal. A year ago, a little over a year ago, no one thought that was going to happen like everyone thought, because mortgage rates were going up, people thought that was going to increase the demand for rentals and cause rents to keep going up. No, that didn’t happen, which is amazing to think about. Mortgage rates are 7%. People aren’t buying, but they’re also not renting. housing demand in general is contracting, which is scary. And the real issue here is a multifaceted one. Declining rents first really hits investors, the 17 million investors single family homes in America, according to US Census Bureau, like they will now be experiencing lower rents when they have that tenant move out and a new tenant move in at the same time, their expenses are going up. Property taxes in America for the biggest landlords are up over 10% year over year in some markets like Austin, the property taxes have gone up 35% Over the last couple years. And so these landlords are facing lower rents, increasing property taxes and oh yeah, by the way, if they use debt to fund their purchases in their portfolio, their cost of debt has gone from three to six and a half percent. And so this is turning into kind of a like a like a little bit of a disaster. stir

Adam Taggart 25:00
for a lot. It’s kind of like a perfect storm against these guys. Yeah. Yeah, it’s

Nick Gerli 25:04
a perfect storm. And again, we’re not really hearing too much reporting about this because we haven’t seen fire sales yet. We haven’t seen landlords kind of like go and sell off their entire portfolio yet, but I can tell you this is building in the background, a lot of them are now like making no money on their rental or potentially losing money after paying their interest costs. And so yeah, they do that for a little while. How long can they do it for? I can’t tell you exactly. But I feel pretty confident in saying some of those 17 million investor landlords are going to be inclined to sell onto the market in coming years. Additionally, again, the importance of rent also filters through to man to buy homes. We talked about before the first time homebuyers making that calculation of should I buy? Or should I rent? Well, if the rent is flat or going down, and the cost to buy is 50%. Higher, it’s going to be an easier decision for people to stay as a renter. And there’s a metric I like called the Home Price to rent ratio, which I can send you that graph as well. And it shows you kind of the how much price is trade relative to rents. And right now the housing markets about 25% overvalued in terms of prices compared to rent. And so there’s, you know, at first, maybe investors weren’t worried about that, because they said, Oh, the rents will catch up. They said the rents will grow faster and catch up to the level of home prices and make the housing market not overvalued. But that’s not happening. The rent is going down, which is making the housing market more overvalued. And ultimately, this is a scary trend for people who are bullish on the housing market. Declining rent suggests that home prices will be going down by more in the future.

Adam Taggart 26:40
Well, yeah, you just kicked out I think two of the biggest. I think there’s sort of three big elements of the stool that housing bulls would talk about, right? They’d say, Well, look, you know, mortgage rates are really low cost of capital, you know, super low, as long as that’s true housing is going to keep going up. Alright, well, that that leg has been removed completely from the stool right now with seven plus percent mortgage rates. This second one was that Alright, well, there’s inventory, right? Well, we just had this chronic lack of inventory, you just addressed that and said that that might not be lasting for too much longer. But then third is been, hey, rents are going up. And you know, that’s because I’d mentioned earlier, like rents are basically the base function for how your price real estate, right? Well, now with rates rents going down, that third stool is being that third leg of the stool is being removed. So yeah, it mean, it’s just, these are pretty conservative, and

Nick Gerli 27:39
it’s going to, this is a trend that’s going to accelerate more into the future, I should say decelerate more into the future. Because right now, apartment developers have around 1 million apartment units actively under construction or permanent. Additionally, there’s around 850,000, single family homes permitted, or under construction, so close to let’s just a 1.9 million, 2 million units in the backlog and in the pipeline to be delivered over the next 12 to 18 months. So there is more new construction, more inventory, especially on the rental side coming down the pike, and it’s gonna be coming down the pike, just as already, the rents are going down and the demand is going down. And you know, you throw some type of recessionary environment or event on top of that. And you get a situation where you can see heavy deflationary forces in the housing market.

Adam Taggart 28:29
And my guess is, that’s why we’re gonna see cities like Austin, Boise, etc, the ones that have been really hot for the past bunch of years to get hit even harder going forward from here, because that’s where a lot of the developments been, right? The developers flocked to where people were buying, right. And once you started development project, you want to finish it, right? Because you’ve got all this embedded investment in there, and you just want to get whatever you can for it. So you know, these these construction projects, the builders want to get them done that, you know, a half built house has no value for them, right? So it’s a pretty sure bet that these construction projects that are in the works are going to get completed because the there’s an incentive for the builders to get them done. But of course, that dumps more inventory on these markets. And it may be dumping the inventory on right at the worst time, like you just said,

Nick Gerli 29:14
Yeah, and I just want to also zoom out and say like to everyone watching this, this is like this housing markets weird in certain ways. Ultimately, this is typical, like, this is how the housing cycle works. And this is totally if let’s say a 16 to 17 year housing cycle in America, and we are now kind of exiting that housing cycle where, you know, there’s that boom, right? That boom we experienced over the last two and a half years. And then inflation gets hot. Builders react and say, Oh, my goodness, we got to go crazy because of all this demand and rising values. But then the Fed increases interest rates significantly. There’s a recession in the offing. Demand starts to go down organically and then the supply hits like this is a prototypical roadmap for how a housing downturn works, whether it’s now or whether it’s 2008, or in the early 90s, something kind of similar happened to this. Also in the late 70s, something similar happened to this. So, you know, this is pretty typical for the how the housing market

Adam Taggart 30:14
operates. Okay, so yes, there’s some idiosyncrasies here that make this one, you know, everyone’s going to be a bit unique. But you’re saying, looking back from a high level, this is all pretty much history rhyming here. One thing Oh, that that is going to be a little bit different this time, or could be very, could be a different element this time. You’ve mentioned that super briefly. But as Airbnb, right, we didn’t really have all these Airbnb rental units beforehand, because Airbnb didn’t exist until this cycle. And you had a bunch of people really piling in to Airbnb to putting properties on Airbnb or buying a single family home with the intent to make it an Airbnb. Piling in, in those last years, when rates were still really low. Now rates have rerouted and people are now not enjoying cash flows from these properties. There actually net cash drains, right. So you got a bunch of kind of novice investors that have come in and bought 1234, several units that are now basically hemorrhaging money. Those aren’t tight hands, right? Those are people who are like, well, I bought this thing to make money, again, was a little bit of a get rich quick screen scheme. It’s looking like a get poor, quick scheme now. So I’m just gonna dump these things, right. So presumably, that could be another thing to kind of create a downward flush effect, right? Where you just get a lot of these loose handed novice Airbnb investors just just doing whatever it takes to get out. Are you worried about that?

Nick Gerli 31:50
Yeah, for sure. And this is gonna be a very market dependent situation as Airbnb collapse. And basically, again, we kind of go back to the same cities and over and over again, but the ones that boom the most during the pandemic, Phoenix, Austin, parts of Tennessee, these areas had Airbnb inventory go up anywhere from 40 to 100%. Over the last 18 months, wow. 20 100% Like literally, yeah, that can Phoenix, the Airbnb supply that close to doubled in 18 months. And so what’s amazing about that, is that even if demand were to stay the same or go up, it could even go up. If you if you double the supply. Well, then the per owner, you know, the per owner revenue is going to collapse. And this was one interesting thing. I did a tweet on the Airbnb collapse and Airbnb, they came out and said, Oh, well, no, there was no collapse, like our bookings are still up. And yeah, that’s true. But the problem is that that supply has increased way more than the bookings. And it’s really causing big issues for owners and a lot of markets. And you know, the other metric I’m looking at is not just how much the Airbnb revenue has gone down. But it’s what’s the multiple of Airbnb to homes for sale. So in Phoenix, there’s two Airbnb Airbnb is for every one home for sale. So that’s creates a huge situation where yeah, if only handled Airbnb owners have problems, you can put a lot of inventory on the for sale market. In parts of Tennessee, that town severe, though we talked about before prices are down 12%, there’s 10, Airbnbs. For every home for sale, you’re kidding up.

Adam Taggart 33:30
Wow, you could just have 10% of the Airbnb market go on for for sale and you’ve doubled your listings.

Nick Gerli 33:38
Correct. And it gets even, it can get even more granular than that, like if you were to look at a heat map in a city could be Phoenix or Dallas, or Atlanta, or even Boston, you were looking at a heat map of where the Airbnbs are located within an urban area, they tend to be concentrated also like in that same type of area, little closer to the urban locale, you know, or let’s just you know, younger area universities. In some of those zip codes. There’s likely four or 5678 times the amount of Airbnbs as there are homes for sale. And so this is something this Airbnb downturn that could for certain cities, in certain neighborhoods, collapse those housing markets very, very fast. Additionally, we could see, rather than these owners, Airbnb owners selling we can see them rent like do a long term rental, which I think is something we’re already seeing, like on Zillow. Right now there’s lots of rentals that are fully furnished. If you see a fully furnished rental on Zillow, chances are I was an Airbnb. Yeah. And that might be one reason also, we’re seeing a big increase in vacation rentals and the rents go down. So these Airbnb owners in a sneaky way can cause the downturns to get worse on both the for sale side and the foreign side.

Adam Taggart 34:47
Oh my gosh, that’s so that’s that’s really important to note there. So a couple of questions before I get to it. I just got a note. I just looked at the weather forecast for Phoenix right now. So it’s currently 110. They’re projecting 115 for the next couple of weeks, right? So if you’re doing an air b&b, expecting people are going to come and just, you know, enjoy themselves. I don’t know who wants to travel to a place where it’s 115 for the foreseeable future.

Nick Gerli 35:18
You got like three months out of the year.

Adam Taggart 35:21
Yeah. I mean, it’s just It’s bananas. Alright, so I’m talking about the rental market for a moment. So that’s what I hear for a lot of Airbnb people. They say, Well, if they’re not making money off the short term rental, then we’ll just switch it and we’ll flip it to a long term mental. Of course, you’re going to then ask well, what does that do to the long term rental market? And if you push this inventory on Yeah, very clearly, you start to flood the market with inventory and rents would come down, right, maybe maybe that’s a factor we’re already seeing and why rents are coming down in those I think it might be.

Nick Gerli 35:55
And just to address that point that some people make like, oh, yeah, the Airbnb owner will just rent it out. No big deal. Okay, if that happens, they’re now starting to compete with the Wall Street landlords, like on the long term rentals, you know, and there’s, there’s only so many games of Whack a Mole you can play here with the housing market, right? And this idea of, oh, I’ll just rent it out. Oh, just Airbnb it that’s getting eviscerated right now, this aggregate housing demand is declining. And so yeah, if they do put those, I’m sure they will put some of those Airbnbs on long term rentals that pushes long term rents down more, and causes issues now for the 17 million rental landlords. It basically the housing markets running out of moves, right, we’re running out of moves here to say housing market.

Adam Taggart 36:41
Okay, and maybe, you know, that’s that’s good context for why people have been saying, what was the housing market really going to crack? Because, Nick, you’ve been warning about this forever? And look, prices are only down 1%? Right? You know, where’s this big crash that you’ve been, you know, ringing the bell for. And the point is, is is, you know, just like a household, I guess, right, you can, you can start having money troubles, but you start putting it on a credit card. And when that get max that gets maxed out, you start borrowing from family, and you can then start cutting expenses. And there’s all these things that you can do to try to continue your current standard of living. But as you take each increasingly desperate step, you’re basically shortening the runway between you and the day where you just say, I can’t afford it anymore. And now we’re going to do something really drastic. Right. So it seems like the housing market is in its own version of doing that.

Nick Gerli 37:38
Yeah, that’s a great point. It’s running out of moods. And just to also address the point about, you know, I understand a lot of homebuyers are frustrated, you know, maybe they’ve watched me or they’ve watched other people predict a housing downturn for the last two years. And yeah, they say, Oh, it still seems expensive. And you’d be right it is. But also understand, this is what happens in housing downturns, they do not happen quickly. Even if you go back to the crash in 2008. That crash started in a very slow motion wave 1006 When home sales collapsed, and home prices, went down a bit and then recovered a bit and then went down a bit in 2006 2007. This is very normal, this type of behavior in the housing market for the beginning of a downturn, what would be abnormal is for prices to just go down by 30% in a year, that’s something we have never really seen happened before in the history of the US housing market. So just also, people watching should understand that this trajectory of how the housing cycle is playing out in the initial stages of the downturn is very normal, similar situations occurred in previous downturns. And so, it’s very important to understand that as well.

Adam Taggart 38:42
Okay, I do think something is different this time around is the extent of the investor presence in the single family home market. Right. And we’ve always had landlords. But you know, it’s only since like the turn of the millennium, where people really started looking at the housing market as Oh, this is this is a way to kind of get rich, right and know what tons of books and, you know, influencers have built their brands on how to become a real estate investor. And in addition to the individual Mom and Pop investor, we’ve now had institutions really get in the game. You’ve mentioned them a couple of times in this discussion, where they’re, you know, they’ve got portfolios of 1000s 10s of 1000s of properties, right, so maybe even more and we already talked about Airbnb. So it’s interesting is you have these different players who aren’t living in the house anymore. Right. So again, you know, their their potential willingness to withstand cashflow losses, and the property may be lighter than what we’re used to in the past. Right so we talked about Airbnb where, hey, I got in there, you know, one of the Just people that bought into Phoenix in the past year and a half and drove doubled Airbnb inventory. Shoot, that house didn’t turn out to be the moneymaker. I thought it’s no money loser, Well, geez, let’s just get rid of it. Right. So there’s that person. But then you have the potential danger of some of these big institutional players owning 1000s of properties. You know, at some point they’ve missed, they might just make a corporate decision of like, alright, you know what, we just got to get rid of properties below $600,000 In Phoenix, and let’s just, we’re making that call, we need to do that to, to, you know, meet our profitability targets or whatever, right? That could be hundreds to 1000s of units, just bang hitting the markets in a very short period of time, and just cratering price. So we’re not there yet. But I’m just curious, how much do you worry about the institutions getting into trouble and what their volume could do to this market?

Nick Gerli 40:55
Yeah, Adam, that’s a great point, the more you concentrate the ownership, right, especially in certain cities, especially in certain neighborhoods. Again, this is very city and neighborhood situation with where the investors are there, not so much in Milwaukee, and the nice suburban Milwaukee, but they’re definitely in Phoenix in kind of a middle income, suburb and Phoenix. There’s lots of risks there. And I’ve paid a lot of attention to just listings on Zillow, and I just talked about one in a video I just did on my YouTube channel. I found one in Nashville that was purchased by a Wall Street investor over a year ago, for 340,000. And they have not been able to find a tenant in over a year for that for that property. You can see all the rental cuts that they’ve had to do on their Zillow listing, and then they tried to sell it in January of this year, they couldn’t sell it, they put it back on the rental market. And that’s happening, right. And again, it doesn’t need to be like these companies go bankrupt. It just needs to be like, oh, let’s get rid of 10 to 15% of our worst performing property just to hurt him enough. Yeah. Right. Like and that will cause massive, massive issues. And one just to zoom out one one broader thing with these institutional investors I want to draw attention to you know, lots of people think that these big bad behemoths that just gonna keep buying forever, but their purchases have collapsed over the last year. Redfin reported earlier this year that their purchases were down, I think it was close to 50%. Year over year in the first quarter, certain cities that were down 60%. So the investor buying has collapsed, if you look at their ability to raise capital, in the mortgage backed security market thus far, in the first half of 2023, Wall Street investors have raised a grand total of 1 billion to go buy homes. Last year, they raised, I think it was 7 million and in 2020 was 18 billion this year, they’ve only raised 1 billion. And so the capital is dried up. It’s not there anymore to go by. And that’s the prelude to the situation we were just talking about, okay, they’re not buying anymore. What’s next, while the rental operations decline, the vacancy rates go up, their cost of capital is higher now due to higher interest rates. All right, the next step is let’s get rid of the low performers in the portfolio and sell.

Adam Taggart 43:08
Alright, so that is sounds like it is a very real risk for us to be keeping in mind here, I want to put up a chart here that you you sent over showing mortgage rates versus cap rates. So you know, for all the parade of issues that you talked about declining rents, increasing property taxes, higher mortgage rates, etc. It’s just the return on investing in retail real estate is getting a lot worse. I mean, we just sort of been talking about what could happen from that if it really begins to bite these guys. But one other factor is, you know, for an investor is is okay, well, wait a second, if I have capital, yes, I could deploy it in the housing market. But where else could I put it? Right. And when you compare a safe investment, like a treasury bill now yielding over 5%, in certain cases, you can say, wait a minute, I’m gonna get an equivalent or better yield with zero risk and not having to do anything versus having to, you know, risk getting a lower yield and have to deal with all the crap that’s involved in being a landlord and all the risk that’s involved with it. So how big of an issue is this? This Tara, you know, that used to be Tina, there is no alternative, you know, to be in stocks and housing. Well, now there are reasonable alternatives. Tara right. You can park your money and safe bonds and basically sleep all at night.

Nick Gerli 44:34
Yeah, I mean, it’s a big deal, right. One year US Treasuries now. 5.4%. A 10. year US Treasuries now 4%. These are higher than the cap rates and the returns for buying real estate in many markets in America. I want people to think about that. Like literally, someone watching this channel could buy golf on their Schwab account and buy a one year US Treasury for 5.4% and they’d be earning more than a Wall Street landlord and fee Next Vegas, Atlanta, or Miami. That’s crazy. And, you know, the way that the investors that I talk to a lot of investors, the way that they kind of justify that is they say, Oh, I’m in it for the long term is what a lot of people say. And they say, Well, I don’t care about losing money and opportunity cost of capital or on my debt at first, because I want to be in it for the long term. But ultimately, what underpins that whole assumption of being in it for the long term is that rent is going to go up. If the rent goes up enough in the future, these investors can out earn that can out or in the fact that they’re not making money from day one. If if rents now going down, and you can get more money in treasuries than by buying real estate, that’s somebody who’s just gonna suck the demand out of the housing market. And it is in terms of the investor capital.

Adam Taggart 45:55
All right. So, you know, that’s just one other weight weighing on the housing market here, right is the fact that like, hey, capital, just like we’re seeing with banks, right, where people are saying, wait a second, you’re telling me I can get a much better return on my cash, if I just take a few minutes and with a few mouse clicks, buy some T bills with it, or put it into a money market fund at my brokerage account, right, I can go from earning next to zero on my cash to five plus percent, right, money is fleeing deposits are fleeing banks. Now for that reason. My capital that’s in the retail housing market is now asking itself that same question, hey, I can stay here with these lousy cap rates in this increasingly, you know, declining macro environment for my, you know, investments here. Or I could just sell and park it in something that’s just going to treat me better with zero risk or much less risk, right. So the big thing to worry about one thing that we haven’t mentioned yet, and I just want to spend a brief moment on it, but as especially as we get to the institutional side of things, is their commercial real estate investments, right? If you’re an investor, and you’re investing in real estate, and okay, I’ve got this portfolio and retail, but I’ve got this portfolio over here and commercial. I mean, the commercial side looks terrible. I mean, we’ve been talking about the storm clients and retail but but they look like sunshine compared to what’s going on a lot of the commercial real estate, especially the office space world, right?

Nick Gerli 47:22
That’s right, Adam. So commercial real estate, what we mean by that office buildings, retail strip centers and apartment buildings as well as industrial, the value of commercial real estate is down 11% Over the last year, according to Morgan Stanley, so that’s even bigger than the decline in the housing market, although pretty close, actually, to what the decline in homebuilder, home prices are. But yeah, we’re seeing the commercial real estate market decline, especially in apartments and offices. And this is a trend that has the potential to really impact the broader economy through contagion effect. And what I mean by that is, there’s lots of commercial real estate debt floating around the economy, particularly held by banks, there’s 3 trillion in total commercial real estate debt held by commercial banks in America, 2 trillion held by small banks. And so what we’re now seeing is that because the values are declining on the commercial real estate, and then the interest rates are going up, doubling in some cases, we’re now seeing the landlord start to walk away from office buildings, from certain retail strip centers from third party apartment buildings, we’re starting to see them just say, hey, this isn’t worth it to me, my revenue is declining, my cost of interest is going up. And now the banks are starting to take over and foreclose on these commercial real estate properties, which is causing them to have to write down the value of the asset on their balance sheet, which could potentially cause a worsening credit crunch in the economy throughout the second half of this year and into 2024. So this commercial real estate space, lots of stuff is going on. It’s a very big market, trillions and trillions of dollars. So it’s definitely something to watch out for.

Adam Taggart 48:52
Yeah, and I guess, you know, when I think of that, I mean, there’s a lot of potential risks, right, there’s the contagion risk you’re talking about, right. And, of course, if that contagion risk really gets out into the economy, well, that can then slow economic growth to the point where companies are laying more people off. And then people have even less money to be able to use to afford rents and home prices. And that just drags real estate down even further at a big macro level. But even on a more micro side. If you are a big investor, like I said earlier, who’s got a big real estate portfolio and you start taking big losses on your commercial portfolio, what you might have to sell part of your retail portfolio just to raise cash to keep the business going. Right. So it’s just one more reason for these guys to perhaps have to liquidate a fair amount of their retail portfolio almost irrespective of how those those houses are performing for them, but it’s just because they need the cash to stay alive. And of course that will bring prices down even lower on the retail side.

Nick Gerli 49:53
Yeah, that’s a great point. It just increases the just the broader liquidity needs right for these Real Estate Investors liquidity needs in the economy, those just get more and more heightened when you layer on something like commercial real estate crash that impacts the banks.

Adam Taggart 50:09
Yeah, so this is, you know, it’s it’s, it’s always fascinating talking to you in general, Nick. But what’s fascinating talking about this housing market is there’s a lot of it, as you said earlier, that’s kind of like playing out according to script from what we’ve seen from from previous housing, market corrections. But there are layers to it, you know, especially when we dive into things that are kind of different this time, like the high percentage of institutional investors that, you know, add additional context to this one. But in most of these cases, whether it’s the big institutional investors, the Airbnb errs, whatnot, as we as we peel back these layers, we’re like, alright, you know, these actually are our, you know, these are factors that are likely to make things even worse, like, we haven’t really touched on much here, where we’re like, oh, this could be something that could really rescue the housing market, or this could really support it for a much longer period of time. And most people think, before I move on from that point, are there any kind of bullish arguments that we haven’t touched on yet that are worth talking about?

Nick Gerli 51:08
Yeah, I mean, to be honest, no, but I’m gonna, I’m gonna give a hypothetical, I’m going to play devil’s advocate, and say what would have to happen for the housing market not to crash and to sustain its current value or to keep growing and ultimately, it all comes down to wage growth in rent growth. The only way this housing market has any chance of sustaining itself is if it outgrows the bubble that it’s in. And what I mean by that is wages and incomes for Americans, renters and homebuyers the wages and incomes start going up a lot 567 8% wage growth, that the incomes grow really, really fast. If that happens over three or four years and incomes growth 35% in three or four years, well, then, affordability was just restored to the housing market without prices having to go down that much. Similarly, if rents were to go up by 35%, over the next four years, that would be a huge inducement for first time homebuyers to take the plunge into buying even if mortgage rates are high. So the only way for this market to sustain itself is to outgrow the bubble. That’s what it did in the 70s. During the period of great inflation in the 70s. Wages were going up seven 8% per year, for over a decade, rents were going up seven 8% per year for over a decade. That’s why home prices did so well in the 70s. That’s the only way this housing market doesn’t crash. And the concerning thing is seeing those things happen. We’re seeing the opposite of them happen. Rent is now going down, wage growth is decelerating. And so short of being some miraculous recovery, in those two things, wages and rents, home prices will be going down to deflate the bubble.

Adam Taggart 52:48
Okay, and I presume you expect that to happen under sort of the status quo conditions that you’re watching, you’re monitoring right now. I presume that if we actually tilted into a recession, one that actually had substantial job losses tied to it, things would just be materially worse. So that Correct?

Nick Gerli 53:08
Correct. Right. So that’s a great point. You know, one of the reasons the 2008 downturn was so bad, particularly in certain markets was how much local economies got destroyed. For instance, in Miami, in 2008, home prices went down 50% in that downturn, why they go down? 50%? Well, a couple different reasons isn’t a big bubble. But the unemployment rate in Miami went from two and a half percent to 11%. Yeah, in that recession, right. So if your unemployment rate goes from 3%, to 10%. I mean, that’s lots of unemployed people who have liquidity needs, you need to probably sell their houses to satisfy those liquidity needs. So of course, yes, you’re great. That’s a great point, the macro economy in the health of the macro economy really impacts the speed and the depth of the declines alternative, like say, somehow a recession is avoided, the unemployment rate doesn’t go above 4% What I could then see happen is like, just like prices go down incrementally for a long time. Something like this happened in Southern California in the early 90s. Prices in LA went down by 25% over almost seven years. And but it wasn’t like a massive crash in any particular year, it was like two to 3% each each year. And then as the prices went down the wages caught up over seven years. So that’s also an outcome that could happen where it could just be like, like a slow slog downward trend, but I me personally, I have think the economy is probably going to tilt towards recession and so there should be more for selling but yeah, we’ll have to see what happens.

Adam Taggart 54:35
We’ll have to see okay, so you so hearing you sort of wrap all this up? To me it sounds like there’s really three key things to be looking at one is employment, you know, what happens with employment market. Two is what happens with mortgage rates right. So basically with with with rate policy, right, you know, just the Fed pivot and start cutting rates again. And then third you know, one thing that could change the game would be if we had massive stimulus again, monetary under fiscal, not necessarily expecting either of those in the very near future, because the Fed is still, you know, laser focused on its inflation fight. But once it feels like it’s got inflation tamed enough, if it feels like the economy is in a rough place, it could step in and start stimulating again, TBD if and when that’s going to happen. But apparently, that’s, I assume that’s something that obviously, you’re just keeping your eyes on the horizon for. Of course,

Nick Gerli 55:28
obviously, the government did a lot of things three years ago, during the pandemic that artificially juiced the housing market, they could, theoretically always do those things again. But in terms of the Fed, the one thing I would just say with that is like, there haven’t been too many times in US history where the rent, asking rents have started going down while the Fed is hiking rates, that this is that that’s actually kind of a unique situation that the Fed hasn’t pivoted yet. And so my fear is that they kind of keep ignoring these like declining rents, deflationary forces building a vacant inventory, and they’re hiking into that. And so, yeah, I mean, that’s a scary situation we’ve that we haven’t really ever seen before. And so that’s basically at the heart of the issues the landlords are having right now. So we’ll have to watch and see. But it seems like our next six months at least, rates will stay higher for longer.

Adam Taggart 56:21
Yep. And we’ve kind of danced around it. I haven’t gotten into a deep with you here. And I’m not going to just because of time, and because on this past weekend’s market recap. Michael Liebowitz and I got into it in real depth, but but is the lag effect, right is we have hiked interest rates. So far, so fast, that, you know, they are beginning to cool off at least the transactions in the housing market, we see that, but the lag effect of those rates on the economy and on the consumer household, those things take time to materialize. And you can make a pretty good argument that we still have the vast majority of the expression of those lag effects in the economy ahead of us from here. And so that, again, is just going to turn up the gravitational pull downwards on housing. And, you know, if it’s just one of those things that people are saying, like, it hasn’t happened. So maybe it’s not going to happen. And, you know, since it hasn’t happened yet, it’s probably not gonna happen. That’s that sort of fallacious sometimes magical thinking. That, you know, I think a lot of people right now in the housing market are just saying that it’s kind of nothing burger. But you know, those are the kinds of things that so they that’s what they did start laying people off and all that stuff. Yeah. Yeah,

Nick Gerli 57:40
they did they did something similar in 2006, and 2007. And, you know, ultimately, Adam, the fundamentals are the best place that we can go to try to understand the direction of the housing, market incomes, rents, how do all those things compare to home prices? I would like to like if you don’t mind those, like leave with kind of offer people who do want to buy though maybe some, you know, things to look for in markets that would maybe be better to buy is I don’t want to just be totally negative, you know, and

Adam Taggart 58:07
that’s actually going right where I was going, which is what what is your advice to the various people out there? They’re looking to buy a house or I’m sitting on a house? What should I do?

Nick Gerli 58:16
Yeah, so for a homebuyer out there. You know, my general recommendation is to wait. And of course, your individual situation might vary. Maybe you’ve been waiting three years already and you just want to get it over with but just understand compare your if your first time buyer compare your rent, to what you would have to pay to buy a house and do the math Are you paying more to buy a house, chances are you will, that should be an incentive to stay as a renter, especially with all the macro economic risks. If you’re a seller who’ve been waiting to sell, I mean, I would recommend you sell because prices have managed to kind of stay fairly high only down 1% Over the last year I don’t think that’s going to last for much longer. So I know some people are waiting potentially selling by maybe selling rent for a little bit. I know a lot of people don’t want to rent but it could be a good way to get the highest price possible and then buy at a lower price.

Adam Taggart 59:07
center open this for you and I’ve talked about this in the past and I think you’re reiterating the point here which is there is kind of a first mover advantage here. Right so if you are a seller, right you and I have just talked about a whole bunch of things that could bring prices down further so rather than getting stuck where you’re sort of chasing the market downwards and like I missed my I miss my chance to sell in a wait and if it comes back up I’ll sell it again but oh gosh, it’s just dropped even further Right? Like if you get out now nationally price has been only about 1% Like you can you can get out pretty close to near record highs right and to your point you can park yourself like as a renter or whatever, and wait for the housing market to come back down and then redeploy your capital at a much better value. If you’re an Airbnb investor and you feel like I got a little bit of buyers regret on that great Get out now before that market potentially craters even further. So that’s how I see it. Do you agree that there’s kind of a early mover advantage here

Nick Gerli 1:00:03
100% Is once once the freefall starts, and we’re seeing this in a market like Austin, which is in freefall. Once the freefall starts, it’s very difficult to then sell your house, because then the inventory and the days on the market skyrockets, and, you know, sellers and then competing against each other, and it becomes a race to the bottom. And so there’s a first mover advantage. I’d also like to say if someone’s an investor out there or a home buyer looking to move, I do have some opinions on markets that would also perform better like one thing I’m looking in particular at, and I use my app re venture app program is developed to help homebuyers to do this. And I’m looking at markets with low property taxes, a low level of overvaluation, where the prices are more fundamentally supported, as well as tap rates for investors that are higher. To me, those type of markets will do better in this downturn, and lots of them in the south, deep south and south east. There’s also some markets in the Midwest, that I think are going to weather this downturn better that give investors cashflow, low property taxes, and likely aren’t going to see the same type of price declines. And so just want to put that out there as well. So some of my picks

Adam Taggart 1:01:12
are marketer to that fit those criteria? Yeah, I

Nick Gerli 1:01:15
mean, states like I really like states like Alabama, it’s not, it’s not a you know, a state that everyone like rushes to at first, but the property taxes there are super cheap. You know, the rental cash flows, there are pretty good. And it’s not as overvalued as, say, a Florida. So maybe Alabama would be one to look at. I’m also looking at parts of Tennessee, Tennessee is a risky one to certain markets are heavily in a bubble, but other markets are a little better. And then in general, the Midwest, I just like for stability, states like Iowa, Ohio, you’re not going to knock it out of the park in those states. But it won’t go down that much in a downturn.

Adam Taggart 1:01:56
All right, great. And when we edit this, Nick will put up the link to the RE venture app there. And folks, it’s a great app, Nick and I talked about that in a bit more depth though last time he was here on the channel. But Nick, anything else you want to mention about that app and what people can do with it, just to let folks know why they should go download it.

Nick Gerli 1:02:15
Sure, is basically a program and an app that gives homebuyers and investors access to all the data for your housing market for your city, even down to your zip code that you would ever need to know to understand whether it’s a good or bad time to buy, you could look at history of price trends and growth, you could look at how overvalued your housing market is you could look at what the inventory levels are this year compared to previous years. So you can see whether the inventory is low and you shouldn’t buy or there’s more inventory. And there’s more selection for you to buy. And so never before has there been a program that’s put all this data in one place and made it accessible to the average homebuyer investor. And right now it’s free for a limited time.

Adam Taggart 1:02:51
So it’s a really cool app is one of the early testers. I’ve just really enjoyed playing with it as it’s got, as it’s continued to evolve. I’m just curious with the feedback, you’ve heard from folks, how is it performed versus your kind of hopes for it? Yeah, so the initial

Nick Gerli 1:03:06
performance is great, we have over 50,000 users on the app who have created an account and who are using it. And so that’s great. And then actually in the next few months, we’re gonna be launching like a phase two, like a 2.0 version of the app, which is gonna be lots of improvements in terms of the UX more features more data points. And that’s coming in the next two months.

Adam Taggart 1:03:25
Awesome, awesome. And it’s been fun to watch your journey you do exactly what I think good entrepreneurs do is you involve your audience in the product development. So you’ve listened very much to what people say they want, roll it out, see what they have to say. So just folks, if you haven’t downloaded this app, and you have any passing interest at all, in the real estate market, go get it. As we wrap up here, Nick, the big last question for you. And then a couple other follow up ones, but the big, the last big one is, you’ve been on this program before and you have your own YouTube channel, where you’ve given some you’ve kind of boxed in your predictions of where you think things are gonna go price wise. Given where we are today, versus our last conversation a few months ago. Has anything changed your general outlook? Or have you just become more confident in it? And and then if so, what are you expecting right now in terms of the size and the timing of the correction versus where prices are right now?

Nick Gerli 1:04:32
Great question that not much has changed in terms of my general outlook. You know, the fundamentals have all kind of stayed the same in terms of saying this is a massive bubble that prices need to go down by a lot. So my general outlook hasn’t changed. Potentially, I’ve evolved some of my outlook on the speed of the downturn kind of understanding that sellers are stubborn, so there needs to be kind of a more forced nature and liquidity needs for sellers to actually sell in liquid To date, and you know, so I kind of am open to thinking that there could be one or two paths in terms of the speed. You know, either it could be kind of like a 2008 2009 situation where the downturn is front loaded, like it was back then, due to a heavy increase in inventory and forced selling, where, let’s just say 80%, the price declines came in those two years. Conversely, we could see something also more like the early 90s, were in a lot of different markets, which we saw a slower, just long, gradual downturn of six years, let’s say, where prices didn’t crash so much in a given year, but just went down for a long time. Because there wasn’t the same type of economic turmoil that caused prices to just drop like they did in 2008. So I think both of those outcomes speed wise are still possible, and will be related to the depth of the recession. And you know, the bank liquidity crunch and all those types of things and ultimately, how much the unemployment rate goes up.

Adam Taggart 1:05:57
Okay. And in terms of magnitude, where do you what do you think in from here?

Nick Gerli 1:06:03
It’s a great question. So, you know, the home builder price cuts around 15%. You know, I think nationally, 15 to 20% is a, you know, a decent estimate. If you look at the overvaluation levels, they’re closer to 25% in terms of overvaluation level to rent and income, but I’d say 15 to 20%, nationally, and then certain markets Yeah, 30 to 35%. In terms of the remaining decline.

Adam Taggart 1:06:28
All right, great. And All right, well, as we wrap up here. And we can cut this out, if you want to totally refute, Nick, but I know you’ve had a really interesting past couple of weeks around the Airbnb data, you were invited to analyze some data from a data collector there you did your job and analyze the data extremely well. There’s sort of a competitor who looks at similar data, who has a different interpretation. And as a result of this sort of back and forth, I think you’ve been on every major media channel known a man relatively recently. How’s that been going for you? And is there any part of that story you just want to share here with folks? Yeah,

Nick Gerli 1:07:15
so just to be clear, the data came from a company called all the rooms. And there’s two basically two companies, all the rooms and air DNA, which both track the short term rental housing market, all the rooms reached out to me over a month ago. And they gave me access to their entire data set. And they wanted me to explore it and to use it in social media posts. And, you know, I would imagine they wanted the promotion that kind of went along with that of saying that they were the data source. And so you know, data showed a huge decline. In Airbnb revenues in certain markets like Phoenix and Austin on the order of 40%. There was another data provider called err DNA, which says more like five to 10%. And I did a tweet that got 35 million views. And multiple news articles written about it in terms of this Airbnb collapsed and caused a big, big stir. So that’s been a very interesting thing to deal with over the last couple of weeks. Airbnb themselves came out and said that they disagreed with the data. They don’t think that there’s an Airbnb collapse, or at least not in that magnitude. I’ve asked Airbnb to provide own data for the cities that were in the tweet, so they can settle the, you know, settle the disagreement, so to speak. And I have yet to hear back from Airbnb. So you know, the one thing that’s kind of amazed me about this is how there doesn’t seem to be a consensus on what short term rental revenues are. In one data provider says this and other data provider says that I’ve talked with third data provider, which showed declines that were in the middle. And so to me, that in its of itself is kind of crazy that there isn’t this consensus. And I would hope maybe Airbnb could kind of solve that, and put the data out themselves. But I’ve yet to hear back from them on that.

Adam Taggart 1:08:56
Interesting. So fascinating time for you. You know, I know, it’s probably been a little bit surreal, getting caught in the middle where you know, you were given data, you’re crunched it, again, like I said, you did your job. And then there’s been this national dispute over the quality of the data. The fact that it’s still so opaque at this point in time just shows you that a lot of these investors that are buying into this market, they probably don’t have a great sense of the data either, right? So it just shows sort of, you know, everybody is flying a little bit blind here to a certain extent. So obviously, that can bode well. Hopefully, Airbnb comes out with their data, because I’m sure a ton of people would love to, to see their raw data on this. I think the fact that they’re not just immediately making it available, you know, does make you question a little bit, well, hey, if you’re saying the data is not right, but you’re not presenting your own data, how much can we really lean into your rebuttal here, but we’ll be really interesting to see how this unfolds. But anyways, kudos to you. Because A, you did a great job crunching the data, but b You’ve done a really great job, sort of navigating the whole media firestorm that’s come through it and hopefully it just has meant more awareness. As of Nick Gerli, and Revenger, consulting, and your app and all your good work. So in wrapping up here, Nick, if folks had been fascinated by this conversation would like to follow you and your work more closely. Where should they go? Yeah, so

Nick Gerli 1:10:15
there’s two main places to go. One is my YouTube channel, the Revenger consulting YouTube channel, do two or three videos a week on there covering the housing market economy. The other place to go is the Revenger app, www dot Revenger dot app. That’s the data website we’ve been talking about in this video where you can access data on your housing market. Additionally, there’s a blog on that website that I update two or three times a week with my thoughts and posts about housing market data. And so far, this is just a web application, by the way, not yet in the app store. But soon it will be in the App Store. So either read venture consulting YouTube channel, subscribe to that, or go to www.re Venture dot app.

Adam Taggart 1:10:49
All right, awesome. And again, Nick, when we edit this, I’ll put up those links that folks know where to go, we’ll also put them in the description of this video, if folks just want the URL to go directly to those pages, or there’s resources. All right, in closing things here, folks, buying a house selling a house, these are big life discussions, there’s a lot going on in this market in terms of where it could go as well. For a lot of people, their house is the biggest asset that they may they may own in their lives. We highly recommend, as we do every time on this channel, when faced with a big life decision like that, that you make it in partnership or with the guidance of a really good experience, professional financial adviser. And in the case of housing, one that understands the issues that that Nick and I have been talking about here. If you have a good advisor who’s doing that for you creating a personalized portfolio plan for you executing it for you as well, while keeping you well informed, great, stick with them. But if you don’t have one, or if you’d like a second opinion from wonder does consider talking to one of the financial advisors that Wealthion endorses to do that. It’s totally free. Just fill out the short form@wealthion.com We’ll help set you up with one of those, you know, these are free, like I mentioned, that don’t cost you anything. These advisors, there’s no commitment to work with them. It’s just a free public service that they offer to help as many people as possible, Nick, again, as always super fun, engaging, fascinating discussion. Really appreciate you coming back on to give us your latest update. Really looking forward to having you back on this channel again, in a couple of months. Just updating us where we are then in the story. Thanks so much for your time, buddy. It’s always a pleasure. Great to be with you, Adam. All right, everyone else. Thanks so much for watching.