Last week Danielle DiMartino Booth was on this program and gave a special shout out to the excellent work analyst Melody Wright is doing to reveal the true state of the US real estate market.
So I’m thrilled we have the good fortune to sit down with Melody herself today, to hear her latest assessment straight from the horse’s mouth.
Transcript
Adam Taggart 0:00
In terms of in terms of the storm that is coming to the real estate market here, what would category number would you give it? Are you expecting a Cat1 a Cat5?
Melody Wright 0:13
Well, I’m gonna be called a Doomer. But you know, I’ll go there, I’m expecting a Cat5,
Adam Taggart 0:18
5, okay.
Melody Wright 0:20
this is worse in my opinion than the GFC. And I actually, I kind of feel like, we’re just going to play that out. And the reason we got out last time is because the institutions came in and bought up a lot of these homes. So and then rented them out to people, you know. So I do think is probably going to be a Cat5.
Adam Taggart 0:44
Welcome to Wealthion. I’m Wealthion founder Adam Taggart. Last week, Danielle DiMartino Booth was on this program and gave a special shout out to the excellent work analyst Melody Wright is doing to reveal the true state of the US real estate market. So I’m thrilled we have the good fortune to sit down with Melody herself today to hear her latest assessment straight from the horse’s mouth. Melody. Thank you so much for joining us today.
Melody Wright 1:09
Thank you, Adam. I’m very happy to be here. And thank you for having me,
Adam Taggart 1:13
It’s a real pleasure. I’ve been following you on Twitter for a good while now. And the moment that Daniel, you know, basically called attention to, you know, some of your latest work, which we’ll talk about in a second. How could I not reach out to you to invite you on? Thank you for coming on on short notice. I’ve got a lot of questions here for you. But if we can, let’s just start with a very general one, feel free to answer it any way you like. What’s your current assessment of the US real estate market?
Melody Wright 1:42
Yeah, so it’s a complicated answer. Right. And I think that my last substack post was called the messy muddy middle. And so to answer that, you know, I’ve been I’ve been here before I started a mortgage in 2006. And so I kind of wrote out 2007 2008. And it feels very familiar in terms of we absolutely thought that the housing market was going to be turning around, based on all the data that we were looking at at the time, and we had a lot of hope, up until probably late 2009, and 2010. And even in 2010, when there was a refi boom. But right now, what’s happening is we’re in the middle, and I’ve referred to this often as in the suit, meaning that there’s different metrics that are going to make things look rosier than they are, you know, for instance, home prices are going to look higher, when the only people that are able to transact are the ones that can actually buy those higher, you know, priced homes. And so we’re getting, you know, one day we get a survey that says builder confidence is down. The next day, we get a report that says, you know, new home sales is up, you know, we get a report that says pending sales is up, and then we get existing sales are down. And so we’re kind of in this in between space, where pretty much anybody can jump on to something and say, you know, things are going well, or things are not going so well. We kind of have both stories. But to me, and I’m not really interested in predictions. I’m interested in the path. And what I can say to you is that the path that we’re on is not good. And and the reason I can say that is not only due to all the research that I’ve done, not only due to kind of my experience in mortgage finance and housing. But because I went out on the road in February, I kind of woke up one day, Joe from Bloomberg was like the housing markets turning around, I’m like, Are you crazy? I mean, there’s no way we’ve just, we’ve built so much inventory, you know, on the multifamily with the bill to rent with the short term rental. But nobody was really looking at that whole picture. I mean, you know, Nick Gurley was looking at the demographics, and some of that picture, but it just felt like there was just pieces missing. And my understanding of mortgage kind of helped me really understand how this machine works. And so I got up. And I really, within about two days made the decision to get in my car, and drive to Austin and Nashville, and Charlotte and Orlando and other cities, and just tour these new build sites because I just, I couldn’t understand it. I was looking at the permits, but I was also you know, reading IVs elements, surveys, I mean, I am a huge fan of hers. And I was just like something’s not, you know, adding up here. And so when I got to Nashville, when I got to Austin, I was like, oh my goodness, like how can there be this many new build sites? This many subdivisions in our permit data, doesn’t really tell that story. You know, Ivy’s not seeing all of it. She was seeing a lot of it at the time. And I just went out and had to see for myself. And so I can tell you absolutely. That based on what I’ve seen on the road from these new build sites that the path is not good. And most of these are priced in a way that your ordinary American cannot afford it. So as as if everyone in these cities and Charlotte Austin Nashville, built for the super rich built for the luxury, and the same was in the multifamily that you would see, you know, huge multifamily complexes empty, but luxury and so you know, what I came back, I’m like, we’ve got inventory, we don’t have affordable inventory. And then, you know, that was kind of in February, and I took a little break, and started watching the news again, and then you kind of had the builder start to get some momentum with these new home, new homes. And I had kind of already said that myself, we had pent up demand, you could see it. But everybody was surprised for some reason. And then I went back out on the road to Phoenix and Las Vegas, which was just very shocking. I call it an infestation, a swarm of these spec homes, they’re just everywhere. And one of the reasons why some of the other analysts don’t know this is because you had private builders, the people that don’t respond to IV survey, and kind of like glob on to the big multi, the National builders, you would go on to these things called mega sites, Adam, where they would have, you know, Linaro toll, and then your smaller builders all in one site, it was just, it was one of the most overwhelming experiences to come back. And just no one else sees this, hardly anyone else. And so I can say that the housing market, despite what all of our data is saying, and I can give a lot of reasons for that, you know, we’ve seen that responses to surveys are way down, you know, that’s, and a lot of these a survey consists of construction is a survey. And that’s how, and then you have your permit offices that during COVID were very delayed and recording at even before COVID. Like in Los Angeles, it could take you a year to record any document, you layer on COVID, it took a lot longer. And then I recently learned that a lot of the builders don’t consider it complete until they record that certificate of occupancy, which is after they’ve sold it. And so it’s a spec home. That’s not going to happen until someone actually buys it. And so, you know, this is why I think we we have this really disconnected view of what’s actually happening out there. So I know that was a long answer. But it’s not good. There is too much inventory. But it’s not it. We have structural issues, because everything that’s being built is for people that don’t exist, meaning we don’t have enough Americans to afford what’s out there on the road, what and what I’ve seen, so
Adam Taggart 8:00
All right, great, great answer, give me a lot of things to dig into. So first, I just want to reiterate your point about kind of being in the soup, where it sounds like, you know, there’s almost a survey out there for anybody that wants to make any kind of narrative about what’s going on to the housing market right now. Right? Some things you can tout as Oh, the markets recovering some things you can tout as oh my gosh, it’s going to hell in a handbasket. So you’re just saying it’s a confusing time, which is why boots on the ground intelligence, like what you’re providing my opinion is so valuable, because it’s not about someone survey or you know, a headline, you’re actually going out there and you’re just looking at units and saying Are they occupied or not? And I will say, I’ve had discussions around what is what what could happen with inventory with a number of folks on this channel. I haven’t heard somebody say declaratively like you have, we have too much inventory right now, of course, the narrative for so long has been we have way too little inventory. And Nick Gerli, as you mentioned, you know, he has been putting up charts that show that we have, I think more units under construction per capita than I think we’ve had in decades. Yeah, exactly. So that sort of speaking to perhaps a coming easing of this quote unquote, inventory problem. But what I hear you saying is, okay, we don’t have an inventory problem in terms of at least number of units that are out there currently. And then you and I can talk about the potential of additional units to come onto the market through things like a short term rental market and stuff like that. But you’re saying No way. We actually have plenty of units right now. The problem is, is they’re not affordable to enough people and there’s a stat that I pulled off of your Twitter feed earlier today. It said that only 23% of homes in the US are affordable to middle income buyers and that’s coming from the NAR the National Association of REALTORS I was really shocked that they’d be willing to share a stat like that and apparently See that 23%, which is a very low number. That number was 50%. Just last year. So we’re having a real plummeting in in affordability. So I guess my question for you is twofold. If you can just take a little bit more into clarifying your assessment of inventory right now to address the people who say, wait a second melody? We’ve been hearing for years, we have too little, you’re saying we have too much. And then secondly, I mean, the laws of supply and demand come in place here where you okay, you got a lot of units, apparently that had been built, but are sitting empty and aren’t selling you a lot of people who want to buy but can’t afford? Sounds like price adjustment should shouldn’t be what solves that problem?
Melody Wright 10:44
Absolutely. But everybody’s in the extend and pretend, you know, I think that so what I feel like we’re riding on right now is a wave of narrative and what’s happening. And you know, I don’t want to come out and say people are doing wrong things. But I will say that there’s vested interest out there, right. And so having a spec community and not filing that certificate of occupancy or not listing it for sale, you know, then it doesn’t really exist, right. And that’s what I’m starting to see on the road.
Adam Taggart 11:19
Meaning if a home sells for a lower price, but they never submit the certificate of occupancy, nobody really knows.
Melody Wright 11:25
Or if they just hold it off the market completely. And they don’t look it because and so there’s an I think one of the hardest things about all of this is there’s not one scenario, you know, a lot of people look back and say subprime caused the last crisis. That’s that’s not accurate. It was, you know, it was the kindling that started the fire. But the real foreclosure crisis came to your prime borrowers after you know, credit quality degraded due to affordability issues. And the Feds written a ton of papers on this, you know, that I won’t make that we won’t go there right now. But, but honestly, these spec homes I’ve started to realize this is so typically what you do is you build custom, like someone comes and says, Hey, I want to build a house. And maybe you choose a model, and then you write a contract and you build it. But these spec homes that were being built for built to rent, and and for short term rental, there weren’t contracts. And so these builders don’t like if they never file that certificate of occupancy. It’s almost like they don’t exist, or they exist. If you’ve seen that permit data, where it shows kind of starts and completions, and then the pig and the snake, which is the all in progress? Well, I think it’s that’s where they all are, except I actually believe that probably some of those permits weren’t even filed. There’s some lawsuits out there right now about that. But I think they exist, Adam, but we don’t know about it. Like when I was in Round Rock, Texas, for instance, that’s a suburb of Austin and got a lot of interest because Amazon was going to build a warehouse there, they cancelled those plants. But I would I would drive a mile down the road. And there would be a new build site, a new build site, a new build site, you take a write another one and another one. And then I would sit down with people while in Austin, you know, people that work in the hotel, wherever and I talk to them. And they say no, those are all sold. I’m like, No, they’re not. You know, you go to the website, they’re not also, we heard back in the back earlier in the year, it was a Twitter user named Raleigh fans. And he said kind of what was happening is they as he worked as in new in New Home Sales, is that they would just find whoever they could write a contract, because that’s all that you have to do. And those contracts mean nothing. That’s not underwriting that’s just write a contract, write a contract, make it look like you’ve sold it, it goes on as sold on the lot. And then you know, it doesn’t matter if they can qualify because we just have to make our numbers each month. And that’s kind of an again, this was an anonymous account. I’m still in touch with him. He’s at a major national homebuilder right now. And the other thing that he told me that they do and I’ve also had this confirmed with other realtors and things like that, is they’ll put different color stickers on the home saying sold, but in reality, they know green means sold and red means that it’s not really sold. And they’ll do things what’s called salting the lots, they’ll make it look like people are actually those homes of so one thing someone often that they did. So firstly, you always have the construction people and the people work in the office will kind of drive in and they’ll park in the house like at each of the houses to make like and they’ll pull the garbage cans down like this, the recycling cans and the garbage can to make it look like someone lives there. But you typically could tell because there’ll be a light on and this was another thing that people told me is like there’s is always some way to distinguish which ones are sold and which ones aren’t. Now, again, who’s at fault here? I don’t know. I mean, at the end of the day, this Some people would just say this is it’s just a marketing gimmick, right. But it all adds up. And then I kind of go back to technology systems. So technology and mortgage and at these builder sites is abysmal, like it is. It’s terrible. It’s maybe Excel spreadsheets where people type things in. And so half the time you don’t know what’s actually going up to corporate, right, like, and honestly, so I think that there’s a combination of people that have no idea what they’re doing filling out these sheets, and then there’s people that probably know what they’re doing that’s filled, because, you know, it’s when your paycheck depends on it. It’s important to take, you know, the rosiest view of everything right. And so I’m not saying people are doing thing, anything wrong. But with that, I will tell you that I came back completely mystified how anyone could say that there was an inventory shortage, and a reporter from a very large publication called me and said, we’re going to do this story. And we were working on it. And when we were talking to the builders, we were talking to a technology platform out there that said they had every new build on their platform. But I called them from Austin. And I said, Wait a minute. Alright, let’s talk about Sweetwater. What about that? Oh, yeah, well, okay, what about out in Maine? Or? Oh, yeah, yeah. So basically, they they started the conversation saying every single one of those homes are going to be occupied. But every time I brought up one of these subdivisions that I had seen that, by the way, Sweetwater out in Austin, Texas, I mean, these aren’t 400,000, these are over 600 to a million and more, and they just kept building them up in the hills. They they would admit, that was an issue. And so it’s like almost it, I think that when we look at things in aggregate, it’s very difficult to really see what’s happening below. And, and I pressed them specifically about local private builders, and I got no answer. So I did a lot of as I was out there trying to call people in my industry, trying to understand what was I missing, you know, and, and honestly, what I came, or what I concluded was, I’m not missing anything. We are missing a ton, just by things like for technology, delays due to labor shortages, and things like that. And I think we’re all going to be hit like a Mack truck when this stuff does start making its way to to the listing sites because of the credit crunch, liquidity shortages, et cetera. And I think we’re already starting to see that so.
Adam Taggart 17:53
Okay, so we’ve got, we’re gonna say this politely, where we get a ton of dust in the air, that’s making it really hard to assess the true nature of what’s going on in the housing market. You know, there may be some fraud hidden in that dust, I know that you’re not necessarily going there yet. But I have the sense reading from what you’re saying wouldn’t entirely shock you. Right. Okay. And I think that that’s going to be a big theme of this discussion here is there’s a lot of data we can’t trust so you know, for those like you that are really digging beneath the surface, what are you finding as you dig real quickly, though, because I just gotta get my brain to understand this. So in the cases in Austin, that you talked about, where they’re building these spec homes and again, just to remind folks what a spec home is you said usually consumer comes to a builder says I want to buy a home that you pick it off some sort of you know sheet or whatever the builder says great, I’ll build that home for you he builds it you buy it right that’s the contract for a spec home is where the builder doesn’t have a buyer yet he builds the home making the bet that he’ll then find a buyer once the home is built right. So you’re saying there are a lot of these spec homes generally tended to be built on the higher end of the spectrum from an affordability standard or a pricing standpoint ability
Melody Wright 19:08
yeah price.
Adam Taggart 19:10
And you’re saying that the companies that are building them for one reason or another are kind of telling it up the chain inside the company oh, these homes are sold when they don’t really have a real buyer for them. And there’s there’s some you know, let’s try to fool the person driving down the street by parking your car there pulling out the garbage cans, etc. I guess I can see how that could work where you know, for a little while, right where you’re making your boss’s look like you’re hitting your numbers and they’re able to tell on their next earnings call. Oh, we’ve got a sell through rate of whatever. But at some point, the money doesn’t come through. Like when when does the jig up? Like when when does this fall apart? Because the financials aren’t matching with the narrative goes,
Melody Wright 20:00
Well, yeah. And I think too, it’s really important to understand all the players. And I think what a lot of people are missing are these private builders that bought that I’m sorry, that built specifically for things like built to rent and short term rental, you know, so let’s take the institutional is like American homes for rent, you know, they went out and said, Hey, I want like this many homes and these areas, they’ve now become net sellers of those. And so there’s it, there’s just a lot of different players in the market. And I think, like in this, the example that you give, you know, I don’t think the national builders like that wouldn’t work out for long, just like you’re saying, I mean, they have to repay the money doesn’t come in? Well, I can I talk a lot about the drug of gain on sale. And what that is, is, essentially, in our industry, you can book your revenue very early on like it that initial kind of application. And it just becomes a drug that papers over any other loss. And what happened in late spring is our financial media decided they wanted to help the builders, and like a specific reporter, I won’t name names came out with a big series of articles in Bloomberg about, hey, go out and get a new build, because you’re going to get a 15 to 20%. net reduction in price, you’re going to get all kinds of incentives, like they’re going to pay your solar for a year. And so I think, as we had the tenure, and the tenure is very important, and across the world, right, but very important in the housing space, we had the tenure start running up. And I thought for sure it’s over for the builders, because the way they do modeling within those organizations. And so then we got a little bit of that relief in the spring, then you had kind of these articles come out. And I think it was able to kind of like, slow the the crisis down as well as just so you this was something I had to I came home and I looked at every builders balance sheet I was I thought how on earth could this be possible? I know a lot of these people, okay, from the industry. And they do this song and dance where they’re like we learned our lessons, you know, like every single earnings call is the same and our balance sheets are strong, none of you have to take a 50% Write down, they’re not nobody’s balance sheet is that strong. So you know, I basically just kind of realized what they’re doing is cost modeling. And so if a project that’s complete, is not making 10% margin, then they have to fair market value it. But otherwise, they can just let it sit within the models. And so if they’re not selling it at all, then they don’t really have to make a decision about fair market value. And so it’s very difficult when you go into their queues and Ks, trying to find these little projects where they are, you can’t find it. And so I think they’re able to paper over a lot of stuff in aggregate, because there’s just no need if you think about, so I’m just going to give you a theoretical, I can’t prove it right now. But I’m a big national builder, I’ve got a massive spec site. Maybe one that I just visited out there, I haven’t sold any homes. But in reality on my balance sheet, it’s just land right now. I mean, I’ve got expenses happening in SGA, or whatever. But nobody really knows that all those houses are built. And so I’m not doing any type of fair market value. Because if I’m not selling, I can use my cost model and so on. And I know this may sound like a little confusing, but it comes into how do you you know, how are they really valuing these things? And so that that’s an explanation where it’s not it’s not fraud. It’s just they can almost pretend like it’s just land and they a lot. I’ve been told by people in the industry, they especially do that near the end of the year, because that way, they’re just taxed on the land versus on the house. Yeah.
Adam Taggart 24:08
On the house. Interesting. So it is a little bit of a counting show game, if you will. Presumably there’s an end date on that though, right? I mean, they they have they’ve spent the cost to build this thing, right? Having it just sort of sit there, not generating income, depreciating, needing maintenance, stuff like that. They can’t do that forever. That’s not a profit. That’s not a way to run a business. Right? Yeah.
Melody Wright 24:30
Yeah. And that’s like when I saw the tenure starting it’s little March this time. I’m like, I don’t see how this isn’t. The kind of the runway is out, you know, they can’t take on their margins are getting crushed. They can’t keep doing this, you know, they can’t keep sustaining it. And so, I really do believe that we are rounding the corner to that runway being completely, you know, it’s over. And so, you know, we had new home sales down last month, right and so I think that likely this is an also I tweeted something a couple of days ago from a builder that I know, are someone in the building industry that he heard in Texas last two weeks, people are like there’s been no traffic zero, like. So I think that what people don’t understand is that when the narrative starts to fade, because I feel like we’re all living on narrative right now, either as the stock market looks good, but you know, consumer sentiment has come down, like, the narrative is petering out, we’re rounding that time of the year, when everybody has to take stock. summer’s almost over, I’ve got urine in front of me, I can’t go to my show shareholders investors, you know, I’m gonna have start making decisions about what that year end looks like. And so I think that we will likely start to see by October or November, this is, you know, actual distress at the builders. But I do think likely it, you know, when I say the narrative is just the soft landing narrative, you know, it’s the stock market up narrative, it’s all of those things that I think are just keeping everybody’s hopes up. But I think that as we go into the fall, you really can’t pretend anymore, because you’ve got urine looming in front of you.
Adam Taggart 26:17
Okay, so I hear you saying and to use in terms of the builders, it’s time to film the runway, because it’s not going to be a soft landing, we’re going to start preparing for a hard landing here. And in one quick thing about the builders 40 move on from them. They have been kind of feasting of late, because the transactions that have been happening, you know, we’re in the sort of frozen housing market, which has much less transactions this year than it’s had in previous years. Right. And I’ve talked in this channel with many folks before about this kind of, you know, high noon standoff between sellers and buyers right now. Yes. Well, the most of the transactions or a lot of the transactions have been happening had been on the new house side, and that’s because the builders have been you alluded to this earlier, they’ve been providing incentives, they’ve been providing mortgage discounting, to move inventory. Yep. Yeah. And what they are doing to a certain extent, is that they are kind of pulling future demand into today, which, at some point, that runs out, right. Yeah. And also, secondly, I kind of feel like they’re giving the housing market and they’re giving it the answer of how to have this standoff is gonna resolve, right, we have this affordability issue, buyers have gone on strike sellers don’t want to sell. And basically what the new home sales market is telling us is, well, the way you resolve that, basically, is either by substantially cheaper mortgages, which of course everyone’s praying for, but if the Fed goes higher for longer, that’s not coming up, or what else, you have to reduce prices, right? And I think I saw a chart and you tell me if I’m remembering this correctly, but I think I saw a chart, like two months ago that was showing like, it’s rare. But but now the average price of a new home had dipped below the average price of an existing home. Is that accurate?
Melody Wright 27:58
So I think I’ve seen that chart as well, Adam, but I don’t remember it clearly. But I think that, you know, that’s absolutely true of you take into consideration the rate by by down on the incentives, you know, so, but I do I remember it as well, I just don’t remember where I’m
Adam Taggart 28:15
okay. But But yeah, so that’s that’s sort of an embarrassing moment time. But it’s because, you know, these houses are moving because they’re cheaper on a relative basis, and the mortgages are more affordable. And so that’s probably a telegraph. One of those two things is coming to the full housing market near us. What’s also interesting is we’re seeing a similar dynamic, where we’ve seen a similar dynamic this year in the the auto market, where, yeah, where, you know, the new car inventory hasn’t been moving as much. So dealers are bringing down, you know, all sorts of discounts and incentives and stuff like that, where new car demand has gone high, mostly because that’s just where the cheaper cars or you can’t. Yeah, so anyway, so it’s been it’s been we’ve sort of turned the markets on their head this year. All right. So we’re filming the runway for the homebuilders. Back to your theme of, you know, data that we having data that we were not sure how much faith we can put in it. There’s another sort of expos a that you did recently. And I’m probably going to murder the setup for it, but I’ll let you take it over. Were there? Well, I think it was one particular sort of development or housing unit area, and the MLS listings, were saying there was a certain level of homes for sale. But when you went there, and you actually looked at what was going on, you saw that there were vastly more units for sale than what was being reported. And of course, the media, which sort of sets the narrative for the masses is keying off the publicly available data like the MLS listings. So it’s kind of reporting data that doesn’t really match reality. So give us the full story on that.
Melody Wright 30:00
Yeah, so when I got back in February, I was confounded. I just was so confused. So I started really digging into Zillow. Redfin realtor.com. What are the differences between the three? And what I assume came to find out find out is that essentially there’s over 600 individual MLS sites in our country. And most and no one has a connection to all of them. And when you look at Zillow and Redfin in comparison to realtor.com, which is what the Fed uses, they actually use realtor dot coms numbers, by the way, they’re owned by the same people as Wall Street Journal. They use those numbers, you can see that Zillow and Redfin don’t have as many listings, and it’s because they have the aggregators that they choose. So out there, you can choose certain people that are aggregating these individual MLS sites. But then you start digging even further, and you realize, okay, even if you had all 600, you still wouldn’t have all the listings, because you when you start to talk to people in the industry, you realize, typically the MLS only has about 70 to 80% of listings, because there’s things called pocket listings. And then we heard about these, these folks that were really these brokers and mortgage that were really, they hired a builder built those for themselves, they never made it onto the listing site, they, they would sell these thing, things on Facebook, like hotcakes, like I have a great Twitter space out there of a guy, this happened to like, one property went, got sold an hour on Facebook, that never made it to an MLS listing site. And so there’s just a ton that we don’t understand, and it does come back to the data. So that’s I just wanted to lay that out there. Cuz I want people to understand that is, especially if they’re looking for a house, they need to go to realtor.com, they’re gonna have more listings there. But I was gonna get to kind of like what happened recently where I could, you know, really see this as an illustrative example, which is, I went to a community, that’s a 55 plus community that had been featured in a local news article, I’m down here in the Miami area, working with a client. And what had happened is that all the residents of this massive community over 9000, people based on what they say on their website, got a letter that said, you know, your costs, your HOA fees are going up due to skyrocketing insurance costs. And police had to be called, I mean, because everybody kind of stormed the office building, saying they can’t afford it. And they got on the news channel saying, you know, I can’t afford this, I’m going to have to list my house. And so I went to that community. And I went to the listing sites to see what I could see that was for sale in that community. And it was about 16 that I could find on the one that has the most. But then when I went to that community site, they had over 100, most listed of around 130, most listed for sale, some listed for rent. So right there was kind of a case study of for existing homes, that you know, these folks because at the end of the day to people that have a home and are listing it for sale, they they also have a vested interest, right, and maybe not making it as public as possible. Because the more that are listed out there, that’s more competition for them as well. And so if I can not even have to pay, it’s just a tiny amount of money. But still, if I don’t have to pay to list it on the MLS site, why don’t I just do it on this local because so many people want in this community, theoretically, like I should be able to just sell it without it getting to a site. So that was one recent example of with existing homes. And then the same trip, I just went right down the road to a new build site. And there were all these homes almost completed, you know, just one little thing not done, but a lot of them were completed, I went to the listing sites to look for those new homes, they were nowhere to be found. There would there was one listed one car, say like a little car with like a little, you know, rendered photo listed for rent. And so it made me think that likely this community was probably a built to rent site. But that was it. And there were there were a lot of homes there over, you know, over 20 homes. And so and they’re not these were not showing sold, et cetera. So, you know, that’s it within one day, six hours, I had two case studies of how number one it’s, you know, not only exist like existing homes aren’t being listed, and then new homes are not being listed. And so it was just a really, you know, but then also the case study of fixed people on fixed income are not going to be able to afford these insurance increases. So
Adam Taggart 34:59
sorry All right. So a lot wrapped up in that example. But but to the net net, you know, you saw 16 units available on MLS, right for this development community, or sorry for this 50 Plus community when there were over 100 listings in reality, right, so we’ll call that maybe, you know, seven, eight times as many units aren’t being reflected on the MLS site, you then went to the private build part of down and none of those were listed. Right. So we can almost say, you know, roughly the MLS was was only reflected about 10%. of reality of the places that you checked out. Right. Yeah. So yeah, right. And maybe that’s an extreme example, maybe, maybe the reality is somewhere in the middle, even if it’s only 50%. That’s still a pretty dramatic,
Melody Wright 35:54
percent even right. So yeah, yeah. Okay, so
Adam Taggart 35:57
we have all this inventory that’s not being reflected. So first off is just hey, we got to be very careful as consumers of information around the housing market to really understand that there’s a lot of incomplete information out there. And I think you said, if I heard you correctly, that almost nobody really has like a total view, because there’s all this, these different pocket inventory and stuff like that, right. So we just have to, you know, we have to take with a grain of salt, anything we see, because we know it’s not going to be perfectly complete. But obviously, lots of inventory. That’s, that’s not being reflected. And there’s so much wrapped up in I guess the thread I want to pull first is the spec homes that you saw, that weren’t listed at all that were being built as built to rent, you know, presumably, that’s being built by some relatively deep pocketed company, who’s building all those? Right? So in the past number of years, but certainly recently, right, we’ve had this really big surge in corporate capital coming into the residential housing market, right? With some really deep pocketed players like Blackstone and some of these really big private equity firms. And then then just a whole range, you know, so it’s not just mom and pops having one or two units. It’s it’s deep pocketed corporations that have hundreds or 1000s. Right. Now, rents are starting to come down. And if we have, if we have all this inventory out there, you’re saying that that is even more than what we’re being told in the official data. I mean, obviously, home prices and rents should start coming down even further, you talked about the trajectory not being good. You’re nodding vigorously as I’m saying this, but I assume you are looking forward and saying, Oh, my gosh, all this sort of shadow inventory that’s eventually going to have to come on the market. As these people, these companies just have to start getting something for their investment. It’s really going to be pulling prices, sale prices, and rental prices down from here. You’re nodding so I’m gonna let you respond to this in just a second. But one of the concerns that I’ve been flagging, and I’m curious to see how much you may share it is, you know, I think the the institutional and corporate investors have really helped push the price of real estate up because I can’t believe we’ve mentioned this already in this conversation. But as I like to remind people all the time, housing is priced at the margin. Right so you know, one house in a neighborhood sells it reprice is comps for all homes in the neighborhood, right? So these guys are the deep pocketed all cash investors who can come in, buy inventory at a higher price than than the average consumer can, because they’ve got deeper pockets, they’ve got the ability to borrow at cheaper rates. And they have the ability to enjoy economies of scale across their portfolio. So I can, if I don’t get the best deal on this house, I’m buying, that’s okay, because I’m making money on this other part of my portfolio, right? So they’re taking care of like a long game, and they’re buying and volume, right, and that that’s all helped push stuff up. Personally, I think it’s, it’s a societal, bad idea to have a meaningful percentage of your housing stock owned and operated by corporations when in other words, in a better world, it would be owned and maintained by individuals. But the concern I’m getting to the risk I’m getting to is when when when the market flips, and all of a sudden, these guys are not making money on their 1000s of units. In fact, maybe they’re starting to really hemorrhage money on a lot of their units. For them, it’s just business, right? They’re not living in the house, right? They just eventually, you know, somebody somewhere up and corporate says, Wow, that division is just losing too much money. We just got to start chopping off limbs, get rid of that stuff. And all of a sudden you could see hundreds of homes in a concentrated jig. Africa region, hitting the market within a short period of time, and then just cratering price because all of a sudden supplies gone through the roof. How big of a risk is that? Do you think?
Melody Wright 40:10
I think it’s a fairly big risk. And I think that there’s a little bit of shenanigans going on right now. You know, we were seeing like Blackstone others being net sellers of a lot of this inventory. And then there was this big deal announced where they bought Blackstone bought some Starwood. But that was an all in the family deal. And what I mean by that is that these guys also understand what’s happening, right. And they need to keep this as close as possible. And Starwood had already taken an $80 million, write down on that at the beginning of the year. And then let’s let’s talk in November, what the actual purchase price ends up being. But and they had made pretium, buy back some of the homes because it was originally a Pentium deal. So they did a whole little all in the family. But these guys are already net sellers, like whether, you know, there’s some moving around of things, but they are and so they are already
Adam Taggart 41:06
I’m sorry to interrupt, but I just want to underscore that for people because that I think is a really important observation. You’re saying that the institutional buyers who have been so influential and pushing prices up in recent years have now flipped to being net sellers?
Melody Wright 41:20
Correct? Correct. Besides that one deal that I believe was an all in the family agreement, and was also kind of a it was a crappy deal. And they pushed some loans back and they got, you know, they kind of got together. And this happens, like I personally, my company was bought by Cerberus. Back in the last crisis, I know them very well, they own first key, which are these built rents, kind of single family rental business. So you’re absolutely right, Adam, they don’t care at all, like, you know, they’re gonna, they’re gonna come in are gonna slash and burn. And in my case, I was working at a top five originator and servicer back in 2006, when Cerberus purchased a majority stake, the government bailed them out. So you know, they don’t care. And they, they understand these markets fairly well, although they get caught upside down. But they usually figure out a way to get out to your point. Whereas your regular consumer, one of my biggest concerns, when Bloomberg was pushing all those stories about the new builds was that what I had been seeing is these all these in the mega sites, like all these empty homes, and you’d see one lone site with a for rent sign out there, like like, that was complete amongst all this construction. So just had all these nightmares about this young family like buying in one of these mega sites, and it going completely, you know, no, no other, you know, home being sold for like years, because that’s what happened last time as well, you know, and I want to mention a quick story. So when are, you know, you can go back, so Linari got rescued, alas cycle, through kind of this tax thing. And there’s a great article about how they learned their lesson, they were going crazy. They had a schedule of delivering, like 35,000 homes and most on record, and they just got out of control. This is what will like the quotes in the article, were saying, like, we’ve learned our lesson, they’re set to deliver almost 2.2 times that many homes share. And we don’t have the demographics to support it. And so, what I want everyone to understand more than more than anything else, is that no one learned their lessons, no one. And, and they may believe they learned their lessons. And I can tell you, because I talk to these people every day in my industry, they don’t understand there’s a lot of things happening. Like, for instance, the credit scores look inflated. We know this, you know, like, due to things like since the GFC medical debts not really considered anymore, that, you know, student loans are on forbearance, you know, mortgages were on forbearance, not being reported to credit. So credit scores look fantastic. But, you know, that’s not a true indication. And this is So Adam, one thing you may not know, is that the GSEs have this thing called automated underwriting systems. And so you you feed that information into it, and it spits back to you whether it’s approved or what the and so in many ways, it’s certainly
Adam Taggart 44:33
for the folks that don’t know what the acronym stands for can just define GSE
Melody Wright 44:37
government sponsored enterprises. They, so this is Fannie Mae, Freddie Mac, that essentially we’re taking control of, you know, during the crisis, but they
Adam Taggart 44:48
basically help lower income families get into houses by giving them mortgage support.
Melody Wright 44:54
Well, and at this point, what happened after the GFC is they became the only source Word of people backing in aren’t in our huge securitization. So, so the housing industry runs on securitization, you know, the GFC, there was a lot of private securitization with Fannie Mae and Freddie Mac with a piece of the pie. What’s now happened is it’s all GSE, with a tiny bit of what we call non qualified mortgages are private, because everybody who said no more private mortgages. And so now, it’s not just first time homebuyers. It’s people with jumbo loans. It’s everybody, like they own a massive portion. I think it’s somewhere like 90%. But I don’t have the numbers in front of me. It’s just
Adam Taggart 45:36
very similar to sort of what’s happened with education debt, right? Where they pushed out the private lenders, and it’s pretty much now just the government.
Melody Wright 45:42
That’s right. That’s right. And so what’s going to be very interesting this time we call it government sponsored, subprime. Ultimately, what the Fannie, the list of the GSEs, were also like kind of saying, Yep, you gave us the data, here’s your pricing, this is approved. But it’s based on things like these inflated credit score. So it’s gonna be very interesting. And you’re already seeing the narrative. David steamin, Stevens, former head of Mortgage Bankers Association coming out about all the reach purchase requests that the GSEs were doing. And so this is the other thing, you originate the loan, you sell it to them, but they have the ability to send it right on back to you saying you didn’t get your eye, you didn’t cross your T. And that’s starting to happen, which happened at scale, which is actually what crushed my company to some degree, why we went bankrupt, it started to happen, and everybody’s freaking out. And they’re saying, but that’s not fair. GSEs, you’re not being a good partner. And all of this, no, that’s how they keep making money through through and they made money in the last default cycle, Adam, and they’ll make money again, they were the ones that push all of that real estate owned that was in foreclosure to the investors believe it or not, they started those auction programs started backing them. And so there’s a lot of history here and a lot of things that people don’t understand. It’s a very complicated market market. And so, you know, back to the Linaro story, they have not learned their lesson, whether they think and people in the industry think that we’ve all learned our lessons, but there are certain dynamics that are that show, we absolutely haven’t, and a lot of people are just not paying attention, like they didn’t last time. Okay. And
Adam Taggart 47:31
you know, it’s not that different from like, when I talked to folks like Matt Taibbi or Gretchen Morgenson, you know, who spent their careers covering Wall Street, where, you know, it is disappointing when you talk to them, because they’re just like, yeah, Wall Street learned nothing from the global financial crisis, it’s, it’s still doing all the same, you know, bad things it was before. Sounds like the same is true in the lending space here. Alright, so you said this is really complicated. And it is, and I really appreciate you, you know, shining your your bright light into this space for us and helping us understand a little bit better. So, in terms of just, you know, trying to simplify the key takeaways for viewers here. I’m intuiting, from what you’re saying that you don’t feel very optimistic about where home prices are headed from here. So how do you how do you generally see this playing out? Will there be a material correction in the market? I have trouble imagining there wouldn’t be one given from you know, what much of what you’ve said? And if in whether whatever size correction, if any, you see, what’s the timeline, you think it’s going to play out over? You know, is it going to be sharpened severe? Or should we be girding for like a multi year just grinding, grinding, grinding down process?
Melody Wright 48:53
Yeah, so I think there’s a lot of a lot of trains heading to the same spot. And one of that those is the election right. And so I think the election is going to muddy the waters in terms of I think affordability is about to become the rallying cry of many, many politicians, because it is the thing that their constituents are going to be complaining the most about, I mean, the affordability crisis. Just quick example, one borrower that I had a case study that I did in the in the sub stack, his mortgage payment is not it’s not doubled. It’s 2.4 times his monthly payment due to property taxes. So that’s an extreme example, but this is becoming an affordability crisis. And then you tack on the insurance issues, right. So I think that you’re gonna have government step in there’s a $10 billion HUD budget proposal right now that’s on the table for next year. There’s already all this homeowner assistance out there that from the pandemic that about 50% of it hasn’t been used by the states. And so what will happen appears we’ll get a lot of programs that will probably come into this space to help with some of this for the borrowers with mortgages and things like that. So distress selling from your regular borrower, that’s probably not going to be the catalyst of all of this, what I’m seeing what I think will probably be the start is going to be the super prime, who went out and instead of buying one property, they bought 10. And now they’re, and I’m seeing this all over the place in my local research, they had, you know, an interest only loan and the full thing is due next month, and they’re freaking out
Adam Taggart 50:37
and started. But is the example of this like you say, by 10? Is it because they Is this the short term rental craze? Is this buying, you know, nine properties to Airbnb out and have income coming through them?
Melody Wright 50:50
That’s right. That’s right. And the way that they were, you know, lintu, is they would, they’d say, What’s your average daily rate? You know, here’s your occupancy. But those comps, we’re not looking at any homes within their five mile radius. And so it’d be like, you can make $10,000 on a property next to a cemetery and a power station and an area where nobody wants to go,
Adam Taggart 51:15
they’re almost kind of like a liar loans. And it said, If I heard you correctly, they’re adjustable or interest only, right? I mean, that are getting crushed by the rise in interest rates, right? That’s right.
Melody Wright 51:24
And they’re only a little slice. I mean, right now, but what people don’t understand are the 30%, all cash purchases, they weren’t all cash, right. They weren’t all a bunch of peep. They weren’t just the institutional because the institutional started pulling back, think the end of last year, they were mom and pops that went and got loans on their crypto assets, loans on their equity assets, or they did a cash refi out of a really big, you know, property to go out and buy these homes, and they used all cash. So but it was levered. So that, that I believe there’s a lot of these assets, I think that were at first republic, I’ve heard some interesting stories about quiet asset sales from that deal. So I think the super prime are coming under stress with a credit crunch. Everybody thought they’d be able to refi. Right. But now they’re not being able, they’re not getting approved. And so liquidity is running dry. And so I think that actually the super prime might be the catalyst the investors that we call them all day, or stated income or Ninja loans last time, they’re called DSCR. This time, and there are responsible lenders out there doing these, but there are a lot of people that just went crazy. And but then if you have all the tools, the technology tools, in this space that people use, when they originate these loans, saying, Sure, yep, you’re gonna make $10,000 a month. But they were making all the wrong assumptions, you know. So I think I think it’s gonna be a longer grind, I really do, because I think politics are gonna get in the middle. And then I think I’m starting to see the distress right now. And borrowers, you know, doing what I call the death cross, from 30 days to 30 plus, and I call it the death cross, because they’re giving up on their credit at that point. And we’re obsessed with our credit in this country. And so we’re already seeing we initially saw FHA, VA getting under stress, like around April, May. And then Fannie and Freddie joined the party. But when you go and look at all the kind of the sites that report on this stuff, they’re just focusing on seriously delinquent is, is the lowest it’s ever been blah, blah, blah with us, because it got taken care of by the COVID programs, which are not going to be there when these borrowers get there and as to look at client books, and its complement combination of people who literally just can’t afford it because of a hardship and investors, which is exactly how it started last time, Adam. I mean, that’s what the subprime were, that was the investor class. And by the way, in my company, I know for sure, we didn’t originate to lower credit scores. And so it’s just that it was the same thing. Everybody thought they were gonna make a ton of money on rent, et cetera. And everybody’s having a party, right. And then the reality when these home prices carry with it increase costs that nobody was prepared for. It started it, it started in so subprime saying it was subprime kind of misses a lot, which is why everybody’s missing what’s happening this time.
Adam Taggart 54:32
It sounds like you’re saying, what’s going to happen is very similar to what happened last time. Just different trigger, and ironically, not coming from the subprime part this time, but maybe coming from the super, super prime. Yeah. So you know, generals always fight the last battle, right? So everyone’s looking at subprime, and really, maybe they should be looking at Super prime. And just make sure I understood you correctly. You’re saying we’re beginning to see a surge surge in delinquencies, meaning people not paying their mortgages. And, you know, it’s it’s at the early part of the timeline, right? It hasn’t hasn’t gotten out to the extreme, just because we’re now just beginning to see the wave. But you would expect to see that continue to propagate down. Right.
Melody Wright 55:16
Right. Okay. note on that, because I think one thing people don’t understand is how hard it is to actually put a loan into default after the GFC. And so many people think, oh, foreclosures will be here tomorrow. That’s it, you have to wait 120 days before you can even refer to foreclosure. And in most states have mediation programs and all these, these things you have to do before you can take it to default. So this is why I think we probably won’t see increases in foreclosures until end of q1, and maybe all the way to q2 before we really see the surge there in 24, because this process became overly regulated. You can’t enforce your note anymore. You can’t enforce contract law, Adam after the GFC and mortgage.
Adam Taggart 56:03
Okay, so Can my earlier question about sharp and sudden versus kind of rolling grind? Sounds like you’re you’re in more the latter camp there.
Melody Wright 56:11
Yeah, I think that certain things could happen, where it could go faster, and certain things could happen. And work goes slower. And so I’m kind of probably in the middle. But the the person, the logical person in me says it, it has it’s going to have to happen, and it’s going to have to start happening at the end of this year.
Adam Taggart 56:32
Okay. And of course, there’s a word you and I haven’t even mentioned yet, which is the word recession. Right, which is, if we go into a recession with a concomitant job losses and all that stuff, presumably, that just kind of adds gasoline to this potential dumpster fire, correct? That’s right.
Melody Wright 56:48
And then then, you know, I think things do accelerate. And it could be, because I like to say real estate is local until it’s not. And what I’ve been saying recently, and it’s until the shadow banks choke, and what I mean by that, is the non bank sector, which does most of mortgage lending today, when they run out of liquidity, that could create all types of credit events that could accelerate all of this.
Adam Taggart 57:13
So can you just give an example of a shadow bank that does mortgage lending, just so people have understand understanding what you mean by shadow bank?
Melody Wright 57:20
Sure, it’s anybody that’s not a bank. So Mr. Cooper rocket, United Wholesale, let’s see, guaranteed rate those that was the kind of the top seven those guys those new RES is another name. And in the a lot of you won’t even know those names, because they’ll use a local broker, who will then sell that loan to rocket and U DUB, et cetera. And so those are the non banks. And they weren’t here the last cycle and the way that they are now. And they don’t understand servicing, which is what happens after the loan is originated, you know, the taking the payments, that kind of stuff. And so they have, that’s why they’re all complaining about these tiny little repurchase requests they’re getting right now they have no clue what they’re, they’re in store for, because I like to say to people, regardless if these people go to foreclosure this year, you still have to start the engine, you still have to send all the state notices federal notices, you have to review the bar. I mean, there’s so much the servicers have to do and that expense, just MT I, in my client books, we’re seeing expenses increase month over month, like from 10 to 25%, Adam, and just a couple of months. And so people, they just everybody’s focused on the Fed and their narrative. And they’re not even paying attention to their own metrics. And of course, everything’s delayed by 30 days or 60 days. And so the industry itself is asleep and not even seeing what’s going on.
Adam Taggart 58:49
All right, well, we’re gonna have to wrap it up here. But this has been fascinating melody. And folks, I’m sure melody folks are really enjoying this. But folks, if you’d like to have me invite Melanie back on again to pick this conversation back up, especially if her outlook really begins to build up steam here in terms of the developments on the ground. Let me know in the comment section below. So last question for you around this. You live in Florida. You guys just had a hurricane come through. Glad to see that you’re still around. In terms of in terms of the storm that is coming to the real estate market here. What would category number would you give it? Are you expecting a cat one a cat five?
Melody Wright 59:33
Well, I’m gonna be called a Doomer. But you know, I’ll go there. I’m expecting a cat five
Adam Taggart 59:38
and five. Okay.
Melody Wright 59:40
This is worse in my opinion than the GFC and I actually I kind of feel like we’re just going to play that out. And the reason we got out last time is because the institutions came in and bought up a lot of these homes. So and then rented them out to people, you know. So I do think is probably going to be a cat five
Adam Taggart 1:00:01
All right. All right. Well, we’ll leave it there. But that should hopefully, you know, tell people to pay attention to the space going forward. Okay. Well, look, Melanie, this has been fascinating. I’m going to send Danielle a text right after this just thanking her for giving me the the trigger to have you on here. For folks that have really enjoyed this conversation, perhaps weren’t familiar with you and your work beforehand? Where can they go to follow you? Sure. So
Melody Wright 1:00:26
I’m on Twitter at M three, underscore melody, me LOD y. Also on LinkedIn melody, right at sub stacked in three melody substack. And on YouTube and a sad little channel. I think it’s called just melody, right? And so those are the places and I really do my best to respond to everybody. I don’t block people. So you know, if you have a question, and if you have to make a decision, please reach out to me, because there are better decisions to make if you’re forced due to something that’s out of your control to make a decision right now. So
Adam Taggart 1:01:04
absolutely. And that big thing we talked about the channel too, is really making an informed decision with the supportive, informed professionals versus just making a decision in the moment driven by emotion, those tend to always be the worst ones. Melody when we edit this video, we’ll put up URLs to your your channels there. And we’ll put a list a full list of them down in the description beneath this video too. So folks, if you’re looking, where to go, that’s where you can find the information. All right, we’re looking wrapping up here, two quick announcements. One, just a reminder for folks that tickets are now on sale for Wealthion Spa conference on Saturday, October 21. Don’t worry, if you can’t watch the event live, everybody who registers will get a replay video of the entire event. Both the presentations and the live q&a Afterwards, is our best faculty we’ve had yet. I won’t run through all the names because I’ve done it in the past couple of videos. But to find out more information and register at the earlybird discount price, which I think is almost 30% off full price. Just go to wealthion.com/conference. And remember to if you’re an alumnus of our previous conferences, check your emails because you’ll have a discount code for me there, which will give you an additional 15% off that 30% early bird price. And again, just do what I needed to earlier. Melody melody has just dropped a lot of knowledge bombs in in this conversation here. And if you are a question I didn’t get a chance to dig into her that I will next time she comes on is alright, what should what should you be considering that if you’re a homeowner thinking about should I sell or not? If you’re an aspiring buyer, should you wait for the cat five to play itself out before getting into this market? Because better valuations will be ahead. There’s all sorts of considerations are you You are housing investor? And if you are should you be selling your property now? Or should you try to ride it through the storm right? Highly recommend that if you’ve got questions around real estate like that, recruit the inside of an expert. Reach out to melody directly or talk to your financial advisor get their advice. If you don’t have a good one, feel free to talk to one of the ones endorsed by Wealthion you see them on this channel with me every week. To set up one of those free consultations just fill out the short form@wealthion.com These consultations totally free. There’s no commitment to work with these guys. It’s just a public service, they offer to help people position as prudently as possible for what the future is likely to hold. And melody just gave us a lot to expect coming down the pike. Melody this has been fantastic folks. Again, if you’d like to see your back on please help encourage her by hitting the like button and then clicking on the red subscribe button below. As well as that little bell icon right next to it. Melody any any parting bits of words of wisdom for the audience here before we wrap things up?
Melody Wright 1:03:49
I think you just set it out. I’m pleased you know, everybody asked questions don’t make an emotional decision. You know, there are good decisions to make right now. So reach out to a professional or to me or someone and just you know talk it out. So I think that’s great advice and what everyone should be and question the data question the day.
Adam Taggart 1:04:10
It was a lot of reasons to do that in this one. Oh my god. Thanks so much. We look forward to having you back on again soon. Everybody else. Thanks so much for watching.
Melody Wright 1:04:18
Thank you
