If you wanted to buy a home in 2021, you probably found it a frustrating experience, rife with a shortage of options and intense bidding wars. Well? Bad news: So far, things are even hotter in 2022. So what's going on? Where are all the homes disappearing to? Why is there nothing for sale? Why are people happy to place higher and higher bids? On this episode we speak with Mike Simonsen, the CEO and founder of the real estate data provider Altos Research, to explain the acute and long-term trends driving the market. Transcripts have been lightly edited.
Joe Weisenthal:
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway:
And I'm Tracy Alloway.
Joe:
So Tracy, it's a new year, well already a bit into the year, but it's a new year. And yet many of the big stories from last year remain the same, if not even more so. I feel like many of the things we were talking about last year have only gotten more intense.
Tracy:
Yeah, I think you're right. I mean, we spent a lot of last year talking about supply chain issues, a possibility of shortages, the idea of the bull whip effect, where you sort of get a small disruption in one supply chain that then ends up cascading through the entire chain and also causing very, very big swings in supply and demand.
And that feels like it's definitely getting more attention. And then of course the secondary effect from all of that is this question of inflation and price increases. And how is that feeding through to the broader economy? So we, we talked about it last year, but we're talking about it even more in 2022.
Joe:
Right. And of course, one way that people experience inflation or feel inflation, regardless of how it's captured in statistics, is everything related to housing and shelter. And by all accounts, it appears that everything that you just mentioned is getting more extreme with housing. I saw one survey that said like a hundred percent of home builders are experiencing supply disruptions, which is up from like 98% in December. Apparently it takes three weeks at a minimum to get a garage door. (I think we might have an episode coming up on garage doors, by the way). Housing just seems to be completely nuts this year already. And we're just a couple weeks in.
Tracy:
Yeah. So I remember we did do an episode last year with Ali Wolf. And when we did that, I sort of declared my complete lack of knowledge when it comes to U.S. housing, because I'm based in Hong Kong and I've never bought a house in the States. But now I have to declare, I guess, like the opposite personal interest. I'm trying to close on a house right now in the U.S. And let me tell you, going through the market for the past three months has been absolutely insane. And we've had like three instances where we've made an offer and gotten gazumped by other buyers and not by a small margin, but by an absolute massive margin compared to the listing price. It's just been really difficult to get anything at the moment.
Joe:
I just looked up the word gazumped, which is British English, which is why I'm not that familiar with that.
Tracy:
Oh, sorry!
Joe:
According to Dictionary.com [it's] “raise the contracted price of a property after having informally accepted a lower offer.” So you have indeed been gazumped and, in fact, it's perfect because we are going to speak with someone who has been tracking the gazumping phenomenon that is widespread in the U.S. housing market or, more specifically, bidding wars have been breaking out across the market. So Tracy, I think this episode is going to be very good for you. Maybe you'll even get like a little like a home-buying strategy out of it.
Tracy:
Yeah. I need answers. Why none of these offers are attractive to people, even though it seems like a lot of money to me — obviously. Yes, I wanna know why.
Joe:
All right, I can't wait. Let's do it. We are going to be speaking with Mike Simonsen. He is the CEO of Altos Research, which puts out and gathers tons of data on the housing market. And he's been putting out lots of videos on exactly this phenomenon, the boom and bidding wars, rising prices, declining inventory of homes available in the United States, what's going on. Mike, thank you so much for coming on Odd Lots.
Mike Simonsen:
Joe and Tracy. It's nice to be here.
Joe:
So Tracy's experience of getting gazumped left and left and right, everyone's experiencing that these days, huh?
Mike:
Everyone across all price points, basically all geographies across the country, it's been a pretty consistent phenomenon.
Tracy:
So remind us what exactly is going on. What is driving this? Because obviously you have some of the pandemic trends where people want to move out of cities and they want more space and things like that, but you would've thought that almost two years on in the pandemic that some of that trend would be fading away. And yet it seems like demand for housing is still incredibly strong.
Mike:
Yeah. So the biggest theme of the last few years, it has been record low inventory, tight inventory, few homes for sale. That's partly a pandemic phenomenon, but the interesting thing about that is that we have been losing available inventory of resale homes for a decade. So as we came out of the housing bubble crisis, rates started falling and we have had each year, basically each year for the last decade, we have gone from a million homes in January to right now we have 284,000 single family homes on the market.
And it's been it's been a decade-long phenomenon for a few reasons. And then we threw the pandemic on top of it. The top theme was record low supply. We have high demand too. So we have a booming economy. We have cheap money. We have a lot of these other factors driving it. And then we have demographics where the millennials are now in their mid-to-late thirties -- their peak home-buying years. And they're the biggest chunk of people ever. So now we have tight supply on top of surging demographic demand, and that is a recipe for, you know, your bidding war problem.
Joe:
So this is very interesting. And if we could back up to the pre-pandemic level, what were the trends that drove the persistent decline in inventory? Where did they all go basically?
Mike:
Where'd it all go? As interest rates have been essentially 4% or lower for a decade, money's been super cheap. It's been a really good time to own real estate. It's been a good time to own investment property rentals. So two big phenomenons happening. One of them is, it's like a doubling up. The homeowner goes to buy the next home, move up or move down. And because mortgages are so cheap, it's a really good time to keep the first one as a rental unit. And so each year I go to buy a next one and I keep my first one. And so that's one big phenomenon. And all of a sudden I'm a real estate investor. And at the same time, institutional money's been cheap. There's a lot of news about the big private equity funds buying up homes, but it's actually the individuals who are driving most of it. So in the last decade we've taken 8 million homes out of the resale cycle and moved them into the investment rental part of the pool. And that's, you know, 8%, 9%, 10% of all of our homes, not 10%, but you know, 9% of all the single family homes.
Tracy:
So this is something that I wanted to ask, but how do you actually differentiate between different types of demand? So obviously you have people who buy a house because they want to live in it. Then you have individuals who, you know, maybe buy a second property or do something with their first property and turn it into an Airbnb or something like that and rent it out. And then you have the big institutional buyers like private equity. How do you, how can you actually track who's buying what and why?
Mike:
The way they track that [is]] when you read the numbers of like, 20% of purchases are investment properties. The way that that is estimated is by looking at the title. When the title on the property -- the address that that title gets sent to -- is a different address than the home, that's then 'aha,' there's an investor owning that property. But it can be institutional or individual.
Tracy:
What's the split like right now? Like, do you know the numbers off hand?
Mike:
Something like in the 20%, low twenties, that are investor properties.
Joe:
So I want to talk a little bit more about this phenomenon of the individual homeowner, not the institutions. And of course that obviously plays a role, but the individual homeowner essentially getting into the game of de facto real estate speculation, maybe they become a small time landlord by having their old home that they then rent out or something like that. But talk about the emergence of this phenomenon of, okay, maybe I moved down to Austin because it's warm, etc., but I keep my house here and rent it out or vice versa and how this trend emerged and how big that's gotten and how unusual that is compared to, I don't know, the old days whenever that was.
Mike:
So it's always been, you know, in many markets, it's been a pretty good deal to own some rental real estate. You know, you look at the blue collar folks in San Jose. I live in San Francisco and, you know, Silicon Valley, San Jose. If you are an electrician in 1980 and you happened to buy an investment property, you made millions of dollars over time, you know, vastly more than what you were making from your salary. It was a really good opportunity. And that was even when interest rates were super high. So over the time you finance lower. And so in the last decade, we've had 30-year fixed rates [at] 4% or lower. So these are not like the 2005 bubble investors where I'm buying a house with a mortgage rate that's gonna explode in two months. And, you know, in after month three, I'm not gonna make my payment anymore. These are people who have 30-year rates locked at 2.7% in a 6% inflation environment, it's a really good deal to be owning these houses. As a result, therefore they do it.
Tracy:
Right. This is something that I've been wondering about because it just feels like there's so much money available for housing at the moment that even if you put in, you know, I've heard stories about people putting in all-cash offers and even with the cash in hand, they will get outbid by someone else who has taken on like a very, very large mortgage. But because interest rates are so low, it doesn't really matter that much to them.
Mike:
So yes, exactly. There is a lot of money available for housing, but you know, really, it's a lot of money available in the economy. And one way you know that it's not over oversupplied to housing relative to the rest of the economy, is that the quality of the mortgages and the quality of the borrowers, the credit scores of the borrowers is increasing. It's actually at record high levels. So relative, you know, to the bubble time, those credit scores were declining and the loan-to-value was increasing. So the loans were all, obviously a lot worse at that point. And the loans right now are really good. It's not just over-lending to borrowers the way it was 15 years ago.
Joe:
So this is really fascinating to me that like credit scores and the quality of the mortgage, like we're definitely not talking ninja loans or any of the stuff in the mid-2000s, credit scores, high quality paperwork, lending standards, all very high. One thing I'm curious about, and I don't know if this requires a more macro assessment, but obviously you have to have a certain amount of wealth to be able to carry multiple homes. It's still not the norm, you know, to be able to keep your old house as a rental property, the emergence of people with very strong balance sheets. How much of a lot of this is at some level, I don't know, maybe inequality isn't the right word, but the existence of a certain class of people who just have a lot of cash and capital really having this sort of very big structural advantage in the housing marker right now.
Mike :
You might say that that certain class of people are the boomers.
Joe :
Ah.
Mike :
So, and there's more of them. That's staying put in their homes longer. They're owning their homes longer. All the laws are really designed to allow people to stay, keep people in their homes - you know, the tax laws and the mortgage interest laws. All of those things are designed for the existing homeowner. In California we have prop 13, which basically means your property taxes never go up. So if I bought a house for a hundred thousand dollars or $250,000 in 1992 in that housing recession in California, and now it's worth two and a half million, I'm still basically paying taxes on $250,000 - a little more than that, but paying essentially no taxes in California.
And so I'm never selling that home! I've got a tiny mortgage and no taxes. And so those things are all designed to keep people in their homes. And it is to the detriment of the first time home buyer, the people who can't get in. The mortgage payments? As mortgage rates are low, the payment is super low, so that helps. And it actually, as home prices increase, as long as the rates stay low or ratchet a little bit lower… the mortgage rate has more impact on my monthly payment than does the total purchase price. And actually Tracy, this is partly a function of why it's easier to overbid in a low-rate environment. Because if the home prices are accelerating by 10% this year, and I overbid a little bit, what I'm doing is I'm eating away six months of equity growth — you know, and home price growth — that I'm putting into a payment that's super, that’s a barely noticeable difference. And so that's why people, that's why the overbidding tends to accelerate in this kind of environment.
Tracy :
So I guess that begs the question, what actually happens to house prices and demand when interest rates start to go up? Because on the one hand, we can argue that low interest rates are causing some of the higher prices and people overbidding, and some of the tight inventory, but on the other hand, I guess it's not like the pre-2008 situation where everyone had adjustable rate mortgages and when interest rates started to go up, you know, suddenly they can't afford their home loans anymore.
Mike :
Yeah, it is very different from that time. And, you know, we looked during the pandemic, especially that March, April of 2020, we started – well, I started - publishing these weekly videos. We've been doing our data for 15 years, but we started publishing these weekly videos because we want to, say, help observe what's happening to all these people as we locked down in the pandemic and people lost their jobs, and we started the mortgage forbearance program. What we were trying to find out is, is there a big wave of homes that are gonna have to be sold or go into some kind of foreclosure? And it turned out that wave never came and it never came because it's a really good time to own. The laws allowed me to stay in my home if I didn't pay my mortgage for a year. And then I could start again, all of 2020, my home actually gained value. I ended that year with more equity than when I started. So I was in a better place after that year. So there was no - there's no wave of, you know, foreclosures or anything coming to market. So, you know, we were watching, you know, to see: is it gonna happen? But ultimately it never happened because it was a really good time to keep owning. And the money was super cheap and the laws were there so that I could renegotiate and protect my missed payments onto the end of my loan and essentially stay in my home. So that one? Off the table, no new inventory. But what we could see is that the low rates affect demand, but they also affect supply. And they affect supply in that phenomenon I was talking about in that, when I go to buy my next one, it's really cheap to buy, to hold my first one - to hold two mortgages at, at 3%, rather than one at 6%.
So in a rising rate environment we'll see fewer of those double up transactions. Some inventory will come onto the market. The last time we saw rising rates was 2018. The three quarters of 2018 started in the first quarter, peaked at about the first week of December of 2018. So rates rose pretty much all year long. And we could measure the cooling of demand and increasing of supply in a few of our metrics. So we track inventory you know, we track every home for sale in the country every week. And each year we have, year-over-year, fewer homes available on the market as more of them turn into investment properties. We have in 2018, January of 2018 to 2019 for example, was one year in the last 10 years that the January started - January 2019 - started with about, I dunno off the top of my head, but it's like about 8%, 10% more than the year before. So increased inventory by a fractional amount - 10%, not hundreds of per cents, not hundreds of thousands of homes, but tens of thousands of homes. And that was the one year it did. So rates rose all of 2018 and we could see it in that inventory rate. We could also see it in - we track a bunch of metrics, like the percentage of homes on the market that have taken price reductions, which is a really interesting indicator of demand, so that about a third of homes, when they get listed - rule of thumb, a third of homes - when they get listed are gonna take a price cut before they sell. Sometimes that's strategic. Sometimes it's accidental, but about a third. And when the market is hot, then a third of them over price, but only 28% need to - some of them get the bid - and only 28% take a price cut. Or it gets hotter, maybe it's 22%. And last May in the peak of the frenzy last year, nationally, we were at like 15%. So 35% think they're overpriced and only 15% have to take a price cut because they were getting their offers. And so you could track those price decreases. And so in 2018, 2019, we could watch the price decreases go from the low thirties - hot market - to 36%; during the bubble burst we could watch that go 40, 50%, 55% of the stock had to take a price cut. So that's a function that you could see, so you can measure it in things like price reduction. So that means that there are fewer buyers out there.
And so, you know, Tracy and your buying situation, you know, it's all of a sudden there are some of these folks who are listing and saying “well, let's see if we get a bidder.” All of a sudden they say: “we didn’t get a bidder”, and now their house sits on the market for a little while. Now you have the opportunity you have, you don't have the bidding wars because as rates rise then there's more purchase opportunity, more inventory opportunities for you, there's less competition, there are the people who are using the mortgage to overbid who are less likely to do that because now the payment is more impacted. So all of those factors come into play. And the way I look at it, you know, if you look at 2018, we had 10%, you know, increase of inventory in that year. So you could imagine that we would need several years of rising rates from 3% 30-year fixed to 4% to 5%. You know, we haven't been over five in a long time so… how that impacts things. But you could imagine it several years before we have this enough of a cycle to put many of these rental properties back into the purchase market. And I sell my next one, I sell mine and don't keep it because two mortgages at 6% is very different than two mortgages at 3%, right? So several years to build back to the old normal.
Joe :
So it's really about that cost of carry, literally. As that goes up in theory - and in practice, as we saw in 2018, that's what at least creates the new supply from at least existing home sales. What is the state of price increases in bidding wars that we've already seen at the start of the year? And how does that compare to, say, a slightly more normal year, like 2019, like pre-crisis?
Mike :
The biggest phenomenon of things like bidding wars, during the pandemic period, is that we’ve sort of lost the seasonality to the housing market. In normal season, the inventory comes on, starts to come on, for the Spring and February, really accelerates March, April, peak-May, June. And then June 30th inventory starts declining for the fall. If your house is on the market in August, and you haven't gotten an offer yet, now you start taking a price cut because school's starting. And so we have all of these seasonal factors. And then the holidays come and you have fewer listings, you have fewer people like, you know - you have some people like Tracy who are needing to buy, but tools way, way down in the holiday seasons.
Over the pandemics, the holidays of 2020, January 2021, all of a sudden we have all the ‘Zoomtown’ phenomena, we have all the remote work, we have kids out of school so we have all kinds of options to move in the winter. And so we lost a lot of seasonality. If you look at, in fact, a lot of the seasonally adjusted home price numbers that you might see, you'll see that they swing really big in the November, December, January time, last year and also this year, because demand has been unseasonably high, like it didn't cool down nearly as much. We can see that in a number we track, which is the percentage of homes on the market that have had price increases lately. And so price increases is a function of things like investor fix-and-flips. Like I buy a home, I put a little bit of money in, 90 days later it's back on the market at a higher price. And that phenomenon happens more in a lot of the Southern investment markets or ‘Sunbelt’ investment markets. But nationally you might see, in quote ‘normal times’, maybe two-and-a-half percent of the market is in some state like that: of price increase - two, couple of percent. It picks up a little bit after the beginning of the year. So it's maybe two-and-a-half percent because the markets cool in the fall; if it didn't sell, I might pull it off the market, I might do a few things to it and put it back on the market in January at a slightly higher price because now I'm leaning into the spring market. So there's some pricing strategy happening there.
And what's happening now? So normal might be two and a half percent - 2018, 2019 after that rising rate year, it was closer to 2%. It was lower that year because we could see less demand, you had less investment investor activity happening. And now we're at 6%. So we're spiking right now; we spiked big last year to peak in the second quarter, last year was about 6.3% in this week. So last year was slightly more frenzied, but it's spiking very quickly right now. And what that's a phenomenon of is, this fall it seemed like things were backing off a little bit - the peak of our frenzy last year was May. We finally started increasing inventory for the year after April 30th last year. Normally inventory starts climbing in end of January or early February, but it didn't, it kept declining week-over-week till April 30th. And that's because we were at our record low rates, all of the things were colliding at the same time. But it cooled off a little bit in the second half of last year, it's accelerating again right now.
Tracy :
So setting aside the houses that have been locked up by baby boomers - who seem to ruin everything - if we focus on new housing supply for a second: when prices go up and interest rates are extremely low, someone should be coming in and trying to respond to that increase in demand by actually building new houses. And of course - Joe already mentioned this in the intro, and we've been covering it for a year now - there are these supply issues that are obviously impacting the ability to build new homes, but you would've thought there would be some new supply coming onto the market, or at least some new supply planned in the future. What are we seeing on that front?
Mike :
So, the answer is we are seeing it. There are a lot of new homes in construction and the last decade, the decade post-bubble burst, we underbuilt for a bunch years. So the 20-year average, about a million-and-a-half homes - new home construction per year pre-bubble; post-bubble is half a million. And so we built a lot fewer, right? The homeowners had to ditch, or the home builders had to ditch their land. There was all kinds of restructuring that happened, and so it took them a decade to recover. And now they are back to building - or at least starting - plenty of homes or, you know, they're responding to the demand. So you get a lag time because of permitting and land use and construction time, you get a lag time between the demand and the new construction in housing.
But we've got it now, we've had demand for a long time, and so the builders know exactly: there's a lot of home demand there, demographic, the millennials, there is a lot of obvious demand. And so the building is happening. So the shortage right now is a function of historical construction. So if we'd had new construction, seven, eight years ago, now you're in move up time - that is in resale inventory now. But because it was constricted at that time, there's fewer of those in resale inventory right now. And so now we have this weird phenomenon - supply chain phenomenon - where we have all these homes in construction but they're not finished. Ultimately they're gonna come to market and that's going to relieve some of our inventory challenges.
Joe :
I wanna talk a little bit more about the bidding war phenomenon specifically that Tracy has personally experienced: (a) is there an actual definition of a bidding war; and (b) in a bidding war what is the mix? Is it people just raising their bid because, look, at 3% mortgage rate, it really doesn't add that much? Or is it people with tons of cash coming into it with all-cash offers? And if they have $10 million in the bank, because they've done really well, whether they bid a million for the house or $1,200,000 and try and get it right away, it's just not that big of a cost for them. Like what are these bidding war dynamics?
Mike :
So the bidding wars are primarily a function of the low supply problem. So we have, generational, big bulge of home buyers, millennials, and so there are more people competing for available homes. We could actually measure inventory per capita and we could actually see that, or homes available, flip it around: people per home available. As the bubble was bursting, you could see that that was a function of how likely a housing market was to crater down, so if you had more homes available per capita, then it was more risky, it was a higher beta market, it was more likely to adjust down. And so everywhere in the country is ultra-low right now and ultra-low per population.
And so a bidding war ends up being: “well, there's one house for sale and there's 40 people that wanna buy it.” What's interesting is you could look at a lot of the hot California markets; because of California's prop 13, we have chronically low inventory - it's like rent control for the whole state. So these houses don't come back on the market. So you get a Silicon Valley market like Palo Alto and it's 50,000 or 70,000 people, and there's 60 homes for sale. You take a similar demographic outside of Dallas and normally there's 700 homes for sale in the same size town. As a result really, well, one of the things as a result of property tax laws - because your property taxes are high in Texas and they're low in California. And so in the normal times you'd have the same population in Palo Alto, you’d only have to be available to 40 people because there's only 40 homes available, and in Dallas it has to be available to essentially the median income because there's 700 available. That's the normal time. What's going on right now is that that Dallas town is down to, you know, 140 instead of 700 or whatever that threshold is. And so all of a sudden, now you don't have to be affordable to the median income, you just have to be affordable to a much smaller chunk of population.
Tracy :
So on that note, if I could just ask a question completely out of personal interest: what should you do if you fall yourself in a situation where you've put in an offer for a house and suddenly people are putting in much higher offers? Is there anything you can do or are you just automatically doomed because you don't have as much money as the next person?
Mike :
Well I will preface this by saying I am not a realtor, and it's one of the reasons that you work with a really good realtor. They know how to structure the deal, when to make that offer, what are the other opportunities for financing. There's a lot of interesting alternative financing products that have come to the market in the last decade for home buying as a function of having a lot of capital - there are ways to make cash offers even when you don't have the cash. And so working with a really good realtor is really how ultimately you make that a success.
The guidance I give when people ask me that? You know, the challenges of the bubble came when you bought a house that either that you couldn't afford, or one that you didn't like but you felt you had to buy. Then you got stuck into a house that you didn't want to be in when the market was cratering. And so the way I look at it now is: if you find a house that you like and you can afford, then you buy the house. And if you look at the payment and you go “well, you know, it's 20% more than they're asking, but we can afford that payment and this is the house we want,” then that is the time to buy the house. If you can't afford it or if you don't like it, don't buy the house. Don't buy it because you think you need to, you know? So that's the way I frame our guidance when people ask me.
Joe :
So it really sounds like - I mean you mentioned, obviously, the rates issue and lower rates make the cost of carrying an old home more attractive, and then you've called out California specifically a couple of times because of how the taxes don't go up, contrasting that with Texas - it seems like, and I don't know that there's like a policy silver bullet but the issue is, when it's really cheap to carry a house for taxes and/or rates or whatever reason, that is a real detriment to supply.
Mike :
It is a real detriment to supply. It's like everything we do in this country makes it a really good deal to own your house and therefore people own it. And that is a detriment to the buyers who don't own yet.
Joe :
So one of the things, the conversations, that I recall taking place - again, very pre-pandemic when the market was probably warm or hot, but not crazy like this: you mentioned the boomers’ housing, and there were all these stories like “oh, boomer homes aren't what millennials want,” and maybe they're too far away from the city or, you know, too big lawns, or maybe they don't have a YouTube studio involved or whatever millennials are into for homes; they just don't look like the homes that millennials want or whatever. And that there's gonna be all this supply, and also that either boomers would downsize or move to a condo in Florida or eventually die as they get older - what happened to that? Because I thought there was all this stuff about like boomer inventory that was gonna have a really hard time hitting the market?
Mike :
Yeah, so we've been looking. You keep looking for the boomer inventory. And it hasn’t shown up, right? The boomers are finally getting to the age where maybe it really has to show up soon - either as they're getting into their seventies, eighties like that? Maybe we finally get to see that come to market. And so, you know, when we measure the U.S. market every week, and there's some leading indicators in that data, you can see where the supply’s gonna go, you can see 3, 6, 12 months. But when you look at five years, there's some real macro things that aren't in the data yet. Like, are there big shocks to the economy? There are those kinds of things that aren't yet visible in the data that we measure. So it's things like: when the boomers finally go do we have a generational transfer of those properties?
You know, we could see the ‘Zoomtown’ phenomenon that your Bloomberg colleague Conor Sen quoted - the label ‘Zoomtown’ – that says during the pandemic, people moved to the work remote locations. And in New York it was the Hudson Valley that exploded, in California it was the mountains like Truckee or places like Bend, Oregon. And so these ‘Zoomtowns’ happen. The phenomenon though, was it turns out that most of those - or a great majority of those - were second home purchases. People moved from San Francisco to the mountains - they didn't sell the San Francisco home. They just had another one. So those kinds of that ‘millennial purchase’ turned to be that way. There were some of those, some of that migration - especially out of places like New York and San Francisco at the time - were younger people who didn't already own, they were renters. And so it was a pressure on the rental market, much more than it was a pressure on the resale inventory.
Tracy :
So let me ask, I guess, the big question: bringing everything that we just discussed altogether, when would you expect the housing market to actually start to normalize? And what does a normal housing market actually look like now?
Mike :
So if we look at the last decade we could say, ‘normal’ being a million homes on the market, around the country, at this time in January. We're at 284,000 this week. That's single family homes. Getting back to that level of normal is a long way -- multiple years, multiple years of higher rates, of systemic changes. You know, one of the big phenomenons has been the institutional investors building and buying homes intended for single family rental units. And so if there's structural change such that that's no longer a good business, and those start to be sold? That's been a big phenomenon and therefore there is some, you could imagine, some risk in there if that falls out of fashion -- or, you know, out of financing as a business, then start to become actual resale inventory. There's a number of those phenomenon that have to happen in order for us to get back to an old normal. You know, rates have climbed a little bit in the last month, they're in the three point something percent now. I am unable to predict interest rates, like where do they go?
Joe :
No one else can either so...
Mike :
So if they go up from here, the first thing that happens actually as they rise is there's an an accelerating phenomenon where people are like, I gotta get in before, while it's still good, that actually accelerates demand first. And then it probably pulls demand forward. And so before it takes, you know, eight months or a year before people start to really impact it, like in 2018, it took all year. And so then it's a multiple year process to get us back to some level of inventory, some level of lower demand because money is more expensive. That combination of things, because everyone in the country has a 30-year rate locked-in at 3%, basically everybody, in a 6% inflation environment, there's almost no impetus to sell those homes ever.
They also have lots of equity. So there's nobody who is underwater in their home. In a few weeks, we will have record few homes anywhere in the foreclosure pipeline. So, there are always some, you know, deal went bad or divorce or whatever. The thing that triggered that, but will have record few properties in that because the market is so good. Everybody has strong credit, lots of equity and cheap money. So all of those Americans are in a really good position. And so there's no big catalyst for a lot of homes to come to market. So it's a multiyear inching more homes on back into the market. And then at some point it could be that it is the boomer transition, that those finally start to unlock from the boomer population and transfer to the millennials.
Joe :
You know, before we go — and that summation was extremely helpful — the one thing in my mind that I'm still very curious on, and if you have more stats about, you know, there's obviously tons of talk these days about the big institutional buyers who buy tons of homes and rent them out. And there's all kinds of anxiety about them. But as you've pointed out, there is this other phenomenon which I have seen extremely little discussion of, but it continues to come up about the person buying a home, or the family buying a home and not feeling the need to sell the first home. How big is that? Essentially the rise of the small landlord or the small real estate speculator. And how does that compare in terms of what moves the needle relative to the institutional investor, which gets tons of coverage all the time?
Mike :
The numbers I've seen on that are individual investors who own one to four units is about 90% of the market.
Joe :
Wow. So when you say 90% — of what market?
Mike :
Of those investment properties that are owned are owned by individuals.
Joe :
Just to be clear, the investment market in single family homes is overwhelmingly dominated by individuals.
Mike :
That's correct. And you can see in some markets, the big institutions are, you know, trying to build market share, but across the U.S. it is overwhelmingly individual investors.
Joe :
That's really interesting. Because it seems like the coverage, you know, the coverage is totally skewed. I mean, there's tons of talk about the big asset managers buying homes, but it sounds like in terms of like who's owning a house for investment and therefore rental, it's actually probably much smaller than the impression one would get from the media and just the general discourse.
Mike :
That's right. There are few easier villain targets than a landlord private equity fund. It makes a very good bad guy.
Joe :
No, it's super interesting. Mike, that was phenomenal. I genuinely learned a lot from that conversation. I recommend everyone go check out your videos and tweets always updated with the data. Mike Simonsen, CEO of Altos Research. Thank you so much for coming on Odd Lots!
Mike :
Joe and Tracy, it’s my pleasure. I really enjoy listening to the program. So it's great.
Joe :
Thank you.
Tracy:
Oh, thank you.
Joe:
Tracy, do you feel any better about having been repeatedly gazumped in your quest to buy a home in the United States?
Tracy :
Um, I guess it's comforting to know that I am not alone in this extremely frustrating experience. And I guess now that I am a homeowner or hopefully will be very soon, I guess I can take some comfort from Mike's prediction that it'll take a very long time for housing to actually normalize. But on the other hand, I can't shake off a suspicion — I guess everyone probably feels it after a major purchase — but I always feel like I'm probably buying at the top of the market.
Joe :
Yeah. I think that's like a phenomenon. Also, this is kind of news, right?
Tracy:
Oh, oh.
Joe:
Like this is a little bit hashtag personal news, right?
Tracy:
Oh yeah. Yeah. I'm going back to New York, which means Joe and I will finally be able to record these podcast episodes in the same room, which will be a lot of fun.
Joe :
I figured the announcement would be a little bit bigger, but I like how we sort of backed into it a little bit by you talking about the frustration of being a United States homebuyer.
Tracy :
Yeah. For clarity, I'm not buying a us house for investment purposes.
Joe:
You're not, okay.
Tracy:
I'm not one of those people.
Joe :
But you might, you know, when mortgage rates in 10 years or 20 years are down to 0.5% and you're ready to move and you're like, oh, it's pretty cheap to refinance the old home and keep carrying it. It might become an investment property, but anyway...
Tracy :
I will join the ranks of like baby boomer mini-landlords that milk everything for money.
Joe :
I did not realize a) quite how skewed that is because there is tons of attention paid to asset managers buying homes and how small they still are. And b) the long term structural issues, and it makes sense. When you're younger and you think about buying a home, it's like, oh, you're gonna move to a new town, but it's really complicated because you’ve got to sell the old home and you’ve got to get the timing just right to free up the money. And all these stories of like, oh, I gotta like sell to get my down payment. But in this market where there's a robust rental market, low cost of carry, you just buy the second home and so many people don't even have to worry about what they do at their first home.
Tracy :
Totally. The other thing, well, I guess the one question that we didn't actually ask Mike, which would've been good, is at what point do prices get so high that they start actually impacting demand because that feels like it's the only thing on a near-term basis that might, you know, take some of the heat out of this market, but otherwise yeah, the long term structural trends that he outlined were really interesting and definitely suggest tightness for years to come.
Joe :
And also, you know, just his point about, like, in rates this low, you know, you could lob in a bid way higher than the market and it just does not move that much in terms of where you — if you could make the down payment — it doesn't change the monthly payment potential.
Tracy :
Right. Well, housing just looks like a really good investment in the current climate with low interest rates. And now as inflation ticks higher, I mean, Mike made that point that if inflation is at 6% or something and your mortgage is basically at 0%, that looks like a pretty good trade.
Joe :
Yeah, absolutely. Well, it is a fascinating episode. I did learn a lot and Tracy, I wish you luck.
Tracy :
Yeah. Thank you. I will probably need it. Okay. Shall we leave it?
Joe :
Let's leave it there.
You can follow Mike Simonsen on Twitter at @mikesimonsen.