Video Closed Captioning:
good morning good afternoon good evening
folks Michael Zuber one rental at a time
and as promised and as shared yesterday
we have the author and the returning
guest Mr John wake who wrote the article
uh the fundamental reason why home
prices Must Fall or will fall this fall
how you doing John good glad to be here
Mike yeah I I just have to say
um
I really appreciate how data
you let Data Drive you and you also take
economic kind of principles and you kind
of layer that over the housing market
you have a very unique both experience
and data aggregation uh really
appreciate what you do and I had to read
that article because I don’t see the
market that way this fall but uh cool I
appreciate the opposite opinion so uh
nice nicely done it was a great article
yeah I’m a data geek I got a master’s in
agricultural Economics work for USDA for
a while worked at the American Embassy
in Paris for a couple three years and
then uh came back to Arizona but I like
numbers I like to find out hey what’s
the secret buried in a pile of numbers
is what I like to find that’s exactly
that that’s
yeah I’m looking for the dull needle
inside a pile of sharp needles right I
want to find the one that’s dull because
that’s just it’s like a fun treasure
hunt for me yeah so I like that uh but
before we dig into the article I would
be remiss if I didn’t talk about the
Arizona Phoenix housing market you were
on I think three or four months ago when
inventory was almost straight up we were
at numbers not seen since I don’t know
2018-19 all hell broke loose
um what’s going on now
oh yeah wow okay so the the market
has actually gone down so this is
Phoenix was for gosh a couple years was
the fastest appreciating Market in the
whole country and uh it peaked in May at
5 15 just looking at single family
non-distress sales median through the
MLS was 5 15 in May and now it’s 480 in
August so that’s uh what is it that’s a
six percent
uh fall in three months so that’s a ton
that’s so different than in 2005 2005 it
peaked but then it was flat for a year
more or less and then started falling in
the fall of 2006. so this is this is
different than the fact that it’s
happening so fast but
um it’s a concern but the the real
mystery though is very different from
2006 was is it it’s the
the inventory was skyrocketing for a
little while and now
it’s flat I mean it’s high it’s higher
than it was in 2018 but it’s not going
up anymore where in 2005 holy Macker it
was just like a rocket for like two
years
yeah I was a very active buyer my market
was very much like Phoenix it was just
like in my market every Monday new stuff
would come on it became a process right
every Monday it’s a new book a new a new
set of properties new foreclosures it
was it was yeah it was it was a process
and I I seen in my market kind of the
same thing right we had that post July
August kind of oh my God honey we missed
the peak let’s get out now
inventory flattened and actually in my
market it’s down now I mean it’s not
down a lot but I think it was we head
into winter active listings are actually
going to come down do you do you think
Phoenix might see listings come down or
no idea I don’t think so because
traditionally the seasonality as they go
up in the fall so you would have to go
against seasonality which I don’t see
that happening
um and then the last question about
Phoenix uh was
um I believe you shared with me I think
Open Door had something like 1800 or
2100 or some just like more than 10
percent of the market was open door
listings is that’s still do I remember
that correctly or maybe I’m confusing I
don’t remember the number but it’s huge
and they’re really trying to get rid of
that inventory they’re cutting as much
as somebody was doing a research they
got they found one where they cut the
the list uh they sold 20 less than they
paid I mean that’s an extreme but
nevertheless there tend to sell less
than they make a little money on their
their fees so they’re not losing money
because they have fees of what six
percent eight percent I’m not sure so
but nevertheless they are on average
selling below what they pay paid for the
house and they still have a ton of
inventory out there yeah I think I think
that’s one of the things there are
definitely markets I think Phoenix might
be the top of the top uh markets that
are dominated by eye buyers and I buyers
got to figure it out
um my people are telling me they’re not
buying nearly as much uh obviously have
a problem selling are do you think
they’re still actively buying or do you
think they’re trying to lick their
wounds and try to figure out what’s what
they’re still buying but way way less
than they were it’s a tiny tiny bit Yeah
but one of the things that happened back
in the in the summer was we had a lot
there was a big boost in homes hitting
the market and that’s not happening
anymore I think it was a lot of the
flippers Etc were just like hey let’s
give it this inventory so that was
hitting the market and they weren’t
buying more so the thing that’s keeping
the mark even though we have really low
sales now we have really low number of
hitting the market now here’s this
here’s the mystery for the Phoenix
market right now is you look at really
low number of homes hitting in the
market
but it’s the expensive homes like if you
look at like from 2 000 square feet and
less holy mackerel we’re off the charts
we’re way more homes listed for sale
under 2000 square feet than in 2018
which was a kind of a normal Market but
if you go to stuff that’s like super
large like 5 000 square feet and above
that’s where it was a little bit more
than last year it hadn’t really changed
so there’s something a bifurcation going
on there in the market but if you have a
house that’s under 2000 square feet you
got unbelievable amount of competition
right now
so I I actually think that is and again
you’re the guy that knows Phoenix I
don’t but I I believe that if you were
to kind of layer over the percentage of
what uh eye buyers in this case Open
Door own I’m gonna guess they own a lot
of homes Sub 2000 and not only out of 5
- I think it’s a Compound Effect I
think open I think open doors got a hard
pivot they got to figure it out
um they bought too high they bought too
expensive and and uh we’ll see if
they’re still around in a year or so
because it seems there is one scenario
this is maybe uh there’s a little slight
scenario but let’s say you can’t it
turns out that we got a ton of inventory
a year from now and if you want to sell
you’ll just say okay I’ll just sell Open
Door make it easy because now you’ll pay
their their fees I assume their fees are
going to go up let’s say you pay their
10 fee it’s not going to find better
margin yeah yeah it’s not gonna be 10
now but it’s like let’s just move on
with our lives we got other things to do
let’s just sell the house yeah uh again
I’m not saying that’s going to happen no
no yeah that’s a possibility yeah one of
the things that I’m seeing out there
again I know my Market Fresno California
and then I look at National numbers I
don’t know Phoenix any of these other
markets but my general feeling is phase
one of the housing crash in transactions
was demand destruction kind of easy to
see right rates go from three to six now
from six to six point seven who knows
where they go that’s that’s easy for
people to see because you got a yes
answer at three you get a no answer at
six what I really expect a surprise and
shock a lot of people is some Supply
destruction Now Phoenix is weird because
it’s it has an eye buyer domination but
when you look across the country
uh with rates now over six seven what do
we got like 85 or 90 of loans below the
existing rate less there’s just less
motivation what I see coming John and I
want your feedback is a very very very
slow winter
people are going to go you know what
we’ll just sit tight I’ll wait to the
spring we’ll listen in the spring it’s
usually better you know I just see the
next six months being
way slower than traditionally speaking
does that kind of feel okay or my off
yeah that feels totally okay and also
for those people because of the low
right how many people are gonna when
they sell they’re gonna rent it out if
they can’t afford to buy another house
so that is another little squeeze on the
supply because uh yeah keep that keep
that three percent and rent it out and
why wouldn’t you I mean it’s it it I
mean this with all seriousness that
three percent mortgage 30-year mortgage
could be the best asset some of these
folks ever own I mean it really can’t
right in a world of seven and eight
three sounds a lot better another thing
people don’t talk about but it’s so
obvious is with high inflation you
that’s great you’re you’re a real
mortgage payment just went down eight
percent this year you were thinking my
uh so holy mackerel yeah so I think
there’s not just this year for the
entire rest of your mortgage has gone
down exactly you expected more than you
had right yeah so later I have a shirt
that actually says I use inflation to
get rich ask me how this is an example
right you just have you have fixed rate
debt inflation just eats away so you’re
paying off the debt with cheaper dollars
you know it’s a whole thing that you’re
aware of but yeah my son bought a house
in Florida this summer and I said hope
for inflation exactly just hope for
inflation and I also told them don’t be
surprised if 10 years from now it’s the
same price you paid as long as you’re
okay with that and you can handle that
yeah it’s yeah like Fort Myers there’s
it’s it’s amazing to see markets repeat
kind kind of the same run-up that they
did last night I think Fort Myers is a
great example it it went up 73 the last
you know the last time and it’s up 73
this time and we’ll we’ll see if it
comes down uh that was actually by John
Byrd’s real estate Consulting uh as you
know a great follow on Twitter oh my
gosh as you are
um so back to the final thought about
because I think we’ve entered phase two
of this of the housing crash in
transactions and it’s what most people
are missing you see it but I think most
people miss it certainly all the novice
YouTube Real Estate predictors and that
is Supply destruction we haven’t really
experienced an environment since the
early 80s like 8081
uh of Supply destruction in 8081 The
Lending environment was totally
different but again when you double
interest rates which happened in the 80s
81 you do get sellers who can’t sell
right and you do silent seconds and you
get creative so oh yeah I think the next
couple years will be land of creative
financing because remember assumable
loans exactly the 80s baby the 80s yeah
exactly uh because we still did two
million transactions right housing
transactions went down 50 when rates
doubled
it was because of a sumo Malone silent
seconds all of these things but I really
think what started in September so it’s
only I don’t know a couple weeks old now
and it will go through March is Supply
destruction and I think most people are
missing it and that could and we’ll get
to your article next keep prices
relatively flat you take demand down 50
but you take Supply down 60 percent
and again these are just made up numbers
you know it’s not all equal I think too
many people are expecting Supply to keep
running off because that’s what happened
last time we joked earlier right once
Supply hit it just kept building and
building and building I just I just
don’t see it at least for the next six
months when we get to march in the
spring selling season we’ll see where
we’re at in the economy we’ll see where
rates are you know this is what I’m
thinking how does that feel
yeah well on the one hand I was talking
about how the price is fell in Phoenix
so quickly so I was thinking things are
going to happen faster this time the
cycle is going to be faster because of
information on the internet and all that
but on the other hand what you’re
talking about slows down the cycle so
much if people don’t have to sell you
don’t have all these investors in 2005
they were buying they weren’t even
renting it out they were just going to
hold it for a few months and they were
flipping paper yes and and so they had
all this and winning and winning oh they
were doing great and so they had all the
supply hitting once they saw it but now
the it seems like rent it out so that
you buy it and then rent it well there’s
some flippers and I think a lot of the
flippers that were out of the market now
the number of flipsers gosh is is way
down yeah I think I think there’s um
I think there’s I just think I just
really I’m actually calling it uh
I don’t know what I’ve called it
whatever whatever’s worse than a winner
it’s a snowstorm a frozen tundra we’re
gonna you know I think we’ll be under
four million annualized transactions
here very soon and obviously we peaked
at nearly eight million I think seven
nine when you add new and existing it’s
just going to be a really really slow
and again when you when you do all of
this price will just be I see prices
being relatively flat through March and
then I have no idea
you know post March so Mike you’re
saying winter is coming I’m saying
winter is coming but housing depression
yeah
yeah winter is coming in winter it’s
it’s it’s it’s very interesting John
that’s a great prediction on my part
thank you for pointing out the obvious
yeah I I’m just I’m a little biased on I
tend to run bearish anyway but to be in
Phoenix I
shapes my fear that prices could really
start and we can eat this
feeling that once they keep going down
for a certain amount of time then people
start changing their ideas about the
market no that’s exactly right and
that’s this is a great transition to
your article right I’m going to bring it
up just so people realize I actually did
a video yesterday where I read the
entire article I talked about all the
great things all the economic nuances uh
but let me bring it up just so people
can see and we’ll talk appreciate it of
course no I think I think you do a great
job and you’re giving me new things to
think about so I appreciate that uh so I
found it on Yahoo it may be other places
obviously it’s probably unfortunate but
I found it on Yahoo
uh but this is the article you’re
familiar yes John
just making sure they didn’t like sneak
it in on you
um but why don’t you talk about
basically your theme for this article
because I think there’s lots and lots of
things that are nuanced and important
uh a couple of things that nobody has
ever said that paints the 08 through 10
crash in a new light for me but also at
least on a national level
I don’t see Happening by the Fall which
is obviously we’re kind of into but but
let’s talk about your premise and what
were your important nuances in this
article because there’s so much here
yeah I just looking around on the
internet I knew that there was a this
idea of price expectations then once
prices start going up
then people think they’re gonna go up in
the future so they’re willing to pay
more and they’re willing to buy more and
so that causes prices to go up even more
because their expectations are so
positive and then so it becomes this
feedback with where prices just take off
on their own having nothing to do with
the other fundamentals is just they see
everybody else and then there’s kind of
a heard Instinct thing going on there so
I looked since I started looking into
that and holy Michael there was a ton of
academic research papers and they often
call it different things they had
different names for it but the whole
idea is it’s irrational so there was a
there was a whole idea like in the 70s
that the markets are rational and it
seems to but it turns out that they
would tend to be irrational the same way
it’s like you would think okay if price
is going to be up five percent next year
and you ask people now like half the
people will think it’s going to be five
percent or above and half will think is
five percent or below so that is
normally it’s on average it’s irrational
that’s not the way it works when prices
are going up every there tends to be
everybody not everybody but on average
people tend to override
your prices and when they and even in
like 2006 and seven people still thought
price were going to go up and uh and
even after the bottom on the other side
when prices were down from the 2012 to
maybe onward they thought prices weren’t
going to go up as much as they did they
had this they saw him go down so much
that they had this bias that prices
wouldn’t go up as much as they actually
did so anyway it’s a lagged effect They
Call It extrapolating Whatever the
prices are now people just extrapolate
those price turns out into the future
whether it’s up down or sideways and so
that’s kind of the idea that that can uh
take on a huge effect and it could be um
I think like the price effects like now
could have an effect for like two or
three years it has it’s really slow for
people to change it’s an emotional thing
it’s more how often how long does it
take people on average to change their
emotions towards the market
yeah no it was it was great it was it
was something that was very nuanced
something I had never thought about I I
have an econ degree master’s degree I’ve
been in the housing market business for
a long time I’d I’d never seen it when I
read this and I’ve read the article a
dozen times because I knew we were going
to do this discussion
every the more and more I read it John
is more and more I understood why 06 to
10 or whatever year time frame you have
why that was so bad
because what we had in that environment
people talk about you know bad lending
and you know 103 mortgages all those
things are true
but that your article points out a lot
of it was consumer psychology
right when you when you saw prices go
down and then I believe you saw your
neighbor
sell it short and get out from under it
right the Strategic default went from
being this this horrible thing to like
hey a badge of honor and that really led
to year after year after year of just
kind of growing and then
you know it just came all the way down
and then to your point I was buying this
whole time
and then in 2010 when you were buying
properties for less than land value
everybody thought they’d go to zero I’m
like what are you guys thinking this
fundamentally can’t go much lower right
the math doesn’t work and you know you
you had people calling for housing
crashes since 2011 and 12 and I’m like I
mean you this at some point this is just
illogical
yeah so
um there’s a thing uh you know Howard
marks I can’t think of where his company
he works with he’s a famous guy who
writes and that his letter he’s like a
hedge fund he said quote so the change
in an asset price is based on a change
in fundamentals and or a change in how
people view those fundamentals so it’s
how they view the fundamentals can
change as well as the fundamentals and
have a similar effect so that’s why they
they can go off way too high or too low
for like years at a time so uh
yeah so I’m just worried I hope this
doesn’t happen because I I it was so bad
you’d sell a house to somebody and then
if you notice a few years later you got
foreclosed on that’s horrible
yeah yeah it’s not a good feeling yeah I
mean as a real estate agent to help
somebody get in and hand them the keys
and you take the picture and then two
years later they’re in a bad spot that
I’m sure that doesn’t feel great yes I
don’t I hope that doesn’t happen but
when you look at some of the things like
the income ratios like how expensive it
is it’s like prices are like 40 higher
than they were two years ago how can
that it’s not just it’s not it’s not so
it’s it’s
there’s two things that I think are very
true today one is
it’s unaffordable in most of the country
record on even in my mark my market
bought it so we have an affordability I
don’t know what Phoenix is mine is zero
to a hundred right anytime it gets below
25 I get nervous
um and frankly if it gets below 25 I
might sell stuff
for most of the last two years it was
over 40.
the last month reading was 31. and it’s
going to get worse because rates have
jumped to full point as you know it’s
rate price and incomes it is bad and
getting worse I’m not confused
but again
what I see just in the short term short
term for me is six months is I believe
what we are going to see this cycle at
least for until March is home owners
which is the second part of a
transaction right there’s demand that is
horribly low
but the supply is just not going to show
up because again unlike 06 which both of
you and I went through
it’s almost like a Tina trade there is
nowhere else right where are they where
is this homeowner going to go they can’t
buy anything else what are they going to
do rent a rent payment is above their
mortgage payment how does that logically
make sense
I just think there’s a lot of people in
a scary economy where the house is the
asset the three percent mortgage is the
asset you know people will let go of
their car loans right they’ll let their
car go before they let this house go
because unlike last time the value is
not cascading down rents are up not down
it’s it’s now who knows what happens in
March in March you know interest rates
are nine uh unemployment’s nine you know
GDP is down four percent it could get
ugly
but I just don’t see it this fall I
think this fall people just retrench and
go I’m scared and when people are scared
they do nothing that’s what I think’s
going on right now yeah oh they’re
confused it’s like they’re confused 2020
it’s like what’s going on I don’t I
couldn’t figure out what the heck was
happening for months and months what’s
yeah with the market
yeah and I think we’re gonna get a lot
fewer foreclosures one of the things
that really killed the market last time
was the foreclosures that oh my God they
would just sell it for anything they
didn’t care it was great if you’re an
investor if you if you if you’re an
investor in 2005 you’re probably out of
business by 2006 but nevertheless the
second this next group of investors did
really well by buying them at the
courthouse steps and then uh but I don’t
I think we’re better at that now this is
a yes it won’t allow that to happen and
you saw the moratoriums on foreclosure
more times they would just say oh we did
that two years ago let’s do it again
yeah so why don’t people get those
foreclosures really so we’d be more like
uh the Savings and Loan bubble where it
went down for a couple years and it was
flat for five yeah the other the other
the other thing about I think you’re
right I this is not going to be a
national thing
um because again we’ve we just banks are
different
right they know about uh forbearance you
know the the believe me if unemployment
goes from 3.7 to 10 forbearance will be
a thing again it just will it’s they’ve
already proven it work why not do it
again yeah before it was Unthinkable in
- no it’s like oh I don’t know yeah
okay sure no problem so I agree with you
uh I do like your comparison the SNL
crisis and again I’ve done plenty of
research on this the thing I like about
the SNL comparison savings alone
comparison is
um it was very regionalized it were some
markets were hurt much more than others
and I think that
absolutely happens in Phoenix and or
Vegas might be the P the tip of the
spear but I don’t think you extrapolate
what happens in Phoenix to the country
in my opinion
yeah it’s the worst case scenario for
some reason I assume it’s because the
number of investors just really we got a
fixed supply of homes you just added
five percent more buyers who are
investors or 10 more
well I think I think exactly what
happened over the last two years is
um back to your mindset of investors
right the getting was good
more people came and then you started
seeing increasingly newbies overpay and
frankly I think open door was the main
criminal I know people in Phoenix
whose whole model was to flip to Open
Door ah when you know there’s a sucker
at the poker’s table you take their
money
open door was the sucker I know I know
people that made Seven figures two years
in a row doing nothing but selling to
Open Door wow if you figure out their
business model
go take their money you just I know a
guy who was trying to analyze their
algorithm and he found I guess we figure
out their alcohol you just figure out
what they’re again I call it a buy box
I’m sure they call it something else
what was open door looking for three or
you know four or five bedroom houses two
and a half baths single level you know
whatever it was
just go get Open Door what they want
and they made a lot of money doing that
and now but now is the reverse now I
believe there are some markets I believe
because open door to me
is a bank like last time banks are not
emotional there’s somebody like me or
you sitting in front of a computer with
an Excel spreadsheet with all the lines
APN number this APN number that how long
it’s been listed oh by the way what’s
our cost basis sell it we have reserve
for bad debt we’ve got to get 1700 off
our books sell it take any price
I think that’s what’s happening but that
ends as long as they’re not adding new
Supply
that 2100 that ends it will be painful
you’re going to get a big drop six
percent three months maybe it goes nine
or ten but eventually you won’t have
open doors anvil
pulling the market and again then you
just get to a very slow Market because
buyers is unaffordable Mom and Dad
aren’t selling it’s it’s weird
environment not getting back to this the
article let’s say the price has been
flat for six months or nine months now
people aren’t confused anymore thinking
okay this is temporary now they’re
thinking oh they’ve been flat or down
for six I guess the TR so they’re
emotionally they’re thinking okay prices
aren’t going to go up anymore they’re
not gonna might go down and then after a
while they think oh they are going to go
down then what do you do that could
change the whole psychology but that’s a
slow train to change people’s yeah I I
yeah it absolutely is and again I think
we have six months of retreat confusion
you know what’s going on uh I think the
big question for me is going to be
interest rates next year because again
consumers have a very you and I have
great memories and experience and we try
to tie things together the average
consumer they’re going to be very
quickly conditioned to seven percent
mortgage rates
right that will just become standard and
then let’s just say that bed pivots in
September or January of 24 and suddenly
mortgage rates are 5.8 percent
that will feel like a gift yeah it just
will right if you’ve been waiting this
long and you got used to seven 5.8 feels
better and then you know buyers but
again who knows what rates be for all I
know they could be 9.2 next year but
those are things that the consumer the
consumer’s memory is
not great they forget things pretty
quickly
yeah oh my gosh I’m thinking of like
first time oh this is a trait this is a
Trope but people were happy when I got
we paid 9.9 on our first house in 2000.
it was it double digits right I mean 87
87 yeah I was gonna say it had to be 87
yeah
but again that again people get
conditioned and again I did a whole
research all the way back to the 1970s I
seen what happened in the housing when
rates double uh I’ve seen what happens
when you have 40 Years of declining
rates we are not in that environment but
again people will it will re what’s
happening right now is rates are
exploding so fast you have no time to
get recalibrated they were three they
were three percent January 1st they’re
now 6.7 or higher today that that is
that’s just causes people to pull back
demand destruction Supply destruction
the move-up market it’s
it’s just that the FED broke the housing
market in my opinion the FED is like
housing is The Whipping Boy for the Fed
that’s most leverage to the debt it’s
yeah absolutely the most sensitive to
their changes in interest rates by far
is housing so when it goes up they go
crazy when it goes down so they’re
trying and it’s the most important asset
and the biggest asset for most families
and the FED is just playing with their
their wealth I wish they could figure
out another way to try to save Wall
Street instead of messing up Oak Street
yeah oh I like yeah exactly punish Wall
Street but save Oak Street I like that I
like that that’s I’m gonna steal that
actually I’ll give you credit the first
couple times okay but then it will be
mine instead of Main Street yeah Oak
Street I like that
um but yeah so let’s so let’s talk about
kind of what you see because I love the
article I understand all the logic it
was unclear to me if you’re making a
call on the National Market or if this
was an intellectual exercise which was
awesome
it helped me it helped bring Clarity to
me about the 06 that I never had before
or 08 or whatever your time frame is
I I
don’t see it playing out this fall yeah
with negative numbers totally maybe
after March that’s absolutely possible
but again we’ve got to get from here to
there in my mind are you do you think
Pride National prices will be negative
this year
uh I think that could be going down by
December for example nationally and that
you know I could be wrong totally yeah
we’re just we’re just both guessing
clearly yeah and I should mention also
this whole idea of these um
expectations and how it causes booms and
busts Etc that uh that’s not for sure
that’s going to happen for example in
2006 Canada avoided it one they had like
minimum down payments and shorter loans
a lot of they had a lot more people that
own their homes outright instead of and
didn’t have as much debt but the real
thing was that oil prices skyrocketed
and there that was a huge part of the
Canadian economy is oil so their economy
was doing great and so they they went
down a little bit and that was it now
the problem now is their prices are off
the charts
a few months ago yeah really yeah yeah
Canada and New Zealand are the two
markets that I think are legit going to
be a crash for all of the reasons you’ve
just talked about but most importantly
me their debt structure their debt
structure relies I think it’s like 90 of
them are five-year arms I’m like yes
imagine yeah oh my God they’re gonna get
oh my God that’s really gonna hurt with
New Zealand and also with Australia they
had this big boom with China they were
exporting whatever they exported to
China so they had a big boom right when
the housing market so they didn’t come
down that much plus they had another
program where they would do like uh like
tax credits for first-time home buyers
and that helped too so they didn’t get
the correction which was great until
people thinking hey prices never go down
here so they became even more
okay with paying Crazy Prices for houses
and we they might be getting an enormous
correction this time yeah the other
thing I’d love to hear your opinion on
um sort of as an experienced Economist
and and you know somebody who’s deep in
the housing information
um there’s really kind of three metrics
that
I look at and I’d love to see your order
of these uh one is obviously there’s
year on year metrics year on year price
you’re on your a lot of housing
statistics are year on year because of
seasonality and all of that then there’s
month on month right when do we have
Trend reversion things is it is it fat
is it faster right all of that and then
for me what I try to talk about in in
and teach frankly is forget all like if
you’re just a mom and pop investor
forget all of that stuff Let The
Economist play with month on month and
year on year you get your buy box right
and oh by the way your buy box is not
Phoenix it’s some zip code some asset
type some size it’s really small all you
should be doing is looking at that every
day and tracking what’s going on in your
buy box every single day inventory price
drops closing you know cancellations
expire
focus on your buy box because who cares
what’s going on across the country year
on year or month on month it’s for you
day on day what do you think of that do
you look at year on year at all do you
look at month on month and then what
about day to day I don’t like you on
your that’s ancient history so but uh
month on month would be see what’s going
what I’m trying to predict the future I
don’t know what to expect in the future
is looking at recent Trends and then I
extrapolated that okay they’re going
down so let’s things are getting weaker
than the people thought they would but
what you said like there’s always going
to be opportunities people that have to
sell now and you whatever so you can get
that
um there’s going to be fewer them than
when there was like a zillion on the
courthouse steps every day but to
nevertheless take more work to find them
but they’re there yeah I know I think
there’s I you know I have a saying it’s
always a great day to do a great deal I
think where most people get it wrong is
they don’t do the work to figure out
average
right great deals don’t just land in
your lap you have to do the work you
have to have the discipline to
understand what’s going on in your
market and to me market is you know what
is average for me it’s yield cash on
cash right what is the return right cash
in versus you know down payment closing
cost repair expected yearly cash flow
that’s a yield calculation or a
percentage calculation you do the work
to find average you’ll say average in
Phoenix is one percent or should say
it’s negative two I don’t care whatever
the number averages always do better
than that and great means significantly
better so if average is two percent go
find a seven or an eight if average if
you’re in Ohio and average is 10 go find
fifteen or sixteen do the work do the
work don’t buy average deals especially
the next couple years because we don’t
know what’s going on don’t rush don’t
blow everything right away just I do the
work I am so afraid John that people are
being told a crash is coming
that they’re not doing the work and that
frankly scares me
yeah there’s always going to be
distressed sellers yeah you don’t judge
a seller’s motivation right they may
have owned the house for 20 years have a
lot of equity they want out they want to
go to you know New York with their kids
or whatever I I get this all the time
why would a seller do that kind of deal
don’t guess their opinion ask them
there’s always great deals to be had
On a related subject talking about the a
little bit of a change I’m talking about
there’s another theory called The
Leverage cycle and at the top of the
market there’s other things happens like
the one thing in that article that I
wrote was talking about how the lenders
are caught up in that too so when prices
start going up they start easing I mean
this is a lot in the academic stuff they
start easing too so you get this mix
between the the buyers or the the market
participants plus the lenders and so
they feed on each other but then when
they start tightening it comes down so
there was I’m thinking of the Burr guys
so those were the most optimistic buyers
and there’s a theory a guy where is he
from Back East some academic guy talking
about the most optimistic buyers set the
prices they’re the guys who set the
prices whether it’s stocks or
particularly in homes because in homes
you’re not just buying the house you can
pay more so it makes the pricing go up
faster because if you’re optimistic so
all those bird guys are now out of the
market if they were really because the
prices aren’t going up anymore so they
can’t extract it if they do extract that
they can’t get it at 85 15 down they got
to do 20 30 or whatever so they they’re
out so they’re done the the leaders now
for prices are people who are a bit less
optimistic so that that helps another
Factor within this whole price
expectation thing yeah and again that
again I read all of it I read it 12 or
13 times again that goes back to exactly
what happened 0.506 before the peak so I
don’t we haven’t talked about this but I
was declining tenants for my rental
units because of credit and income they
were being approved for houses with 103
mortgage oh 100 that’s oh that’s what
killed it that’s what killed it was 103
percent
and then people just will sell at any
price it’s not my job I’m just the
service I don’t got any skin a game yeah
exactly so that’s not happening now as
you know loan quality much better not
heading into this year 98 of loans are
fixed rate now I think latest
origination was 13 hours but the average
duration of an arm today is seven years
or before it was sub three lots of
different things in different in the
loan book today but what do you think of
that idea about Burr being there are the
the most optimistic Brewer out of the
market now I think that is genius I
think you’re absolutely right I’m just
guessing I’m not no I I so it’s funny if
you were to go to my channel and look
back a week I did a video about Burr and
bankruptcy
basically the same message
Burr is a advanced strategy sold to
novices I think that was the exact title
of my post Burr is an advanced strategy
sold to novices but it worked great what
are you talking about
it worked great in the most greatest
upmarket of my generation it won’t work
in a flat Market in heaven forbid a down
Market it’s gonna it’s gonna ruin people
that’s scary yeah it’s but again when
you look at the number the percentage of
Burr transactions
for like when you look at the the buyer
pool the last I saw it was I think it I
think they said 28 of buyers were
investors
rough and tough and oh yes depends how
you measure it but yeah yeah what it
close enough when I look inside that 28
this is just a wild ass guess
I would think Burr was
I don’t know three to five percent
because some of that 28 is really a
second home it’s not really an
investment
it you know could it be 11 sure it could
be but
yeah there are going to be a lot of
people in pain they’re gonna if you
borrowed money
to do a burr like you borrow the
purchase and the repair your toast
you know you’re gonna lose money and be
out of the game
um
yeah I think some flippers like the
other part of the market that I think is
really in trouble I think we talked
about this earlier is luxury right
luxury according to last research I saw
was down 28 percent
if you know whatever you define luxury
as I typically say 2x the median
um
that’s where the flippers got crushed
last time and I think they could get
hurt there again what do you think of
that
well here the the luxury prices are are
not selling but they’re not going on the
market it’s just like ah they’re being
pulled back yeah okay yeah so they’re
they’re really tight the supply of
luxury is surprisingly tight because I
don’t know why exactly that’s a mystery
to me too it’s like why aren’t they
yeah why aren’t luxury I guess they
think it’s a good investment or it was a
second home or I think they’re gonna
limp I think they’re just gonna hold on
and pray this is what happened last time
I knew a guy that was worth 10 million
bucks all Equity all paper wealth uh he
had a he this was in the Bay Area so he
had five or six million dollar flips
going on and this is Million Dollar
flips oh six not recently right so
totally yeah it was real money exactly
exactly but I remember one house he had
that he he didn’t want to take a 50k
loss it would damage his ego or he just
couldn’t and he could have afforded it
that one decision started a cascading of
dominoes where he went bankrupt and lost
everything so flippers sometimes when
you get stuck and you have this ego like
like if you like the last two years have
been the best years ever to flip
some of these folks don’t realize that
the market made them
and they’re going to let their egos
write checks that their ass can’t cash
and they could be in a lot of trouble
but it won’t be fast
it will be next year right they they’re
going to suffer through the negative
cash flow and you know rob Paul to pay
Peter and
you know it’s going to get really really
messy but there will clearly be some
losers coming out of this for sure yeah
but I think also because of the age of
the internet it hap things are happening
fast faster on the one hand but on the
other hand you have these other things
that are slowing it down I don’t know
how that shakes out but it I would be
cautious that things happen faster than
you expect on the I think that was very
well said a great and so far you’re
right everything kind of the last 12
months is happening faster the speed of
information consumption of it uh pivots
are faster the price in Phoenix the
price is going up we’re faster
yeah on the way up so it’s like holy
mackerel I hope they don’t go down
faster
than that 2007 and eight yeah so on my
daily financial news this morning when I
I talked about the housing market
because it’s where I spend all my time I
I said this is what I’m looking at today
the number one thing I’m looking at is
active listings
uh because again in my market and
nationally speaking don’t know Phoenix
at all it’s falling and
not a lot of people are seeing it yet
now it’s down slightly but I do think it
will pick up steam as more and more
sellers
decide not to wait and cancellations are
up cancellations are up three to four
hundred percent
which a lot of people aren’t talking
about as well right meaning mom and dad
put it out nobody came to the open house
they canceled uh I think expireds will
explode usually a contract is 90 days
sometimes 180 days I think cat expireds
are going to explode so I am personally
watching active inventory is kind of the
number one thing I’m looking at what
what about you yeah well in Phoenix it
was skyrocketing must Supply is one just
looking for a single family non-distrust
it’s with skyrocketing it hit about 3.2
months and it’s been there for like a
month at 3.2 it’s surprisingly that area
which to me is almost normal in my mind
like yeah it’s close enough right four
to six is normal or prices don’t go up
prices don’t go up when you’re at 46.
but yeah it’s at three so that’s um
that’s an interesting number because you
know there’s two variables that can make
that stay flat right and that’s why to
me it’s all about listings because again
in an environment where we already lost
20 million on the demand side
you can actually have falling Supply and
days on Market or months of inventory
can still it could still go up you could
have less Supply and months of inventory
go up uh that actually happened in
Fresno uh just last month we went from
1.9 months to supply to two but active
inventory went down but it was because
demand went down more right so there’s
all kinds of stuff going on are people
just thinking oh let’s wait it out like
they think you think they’re gonna I do
think I think we have six months I think
things change so fast nobody had a
chance to recalibrate anything yeah it
happened so if I say emotionally they’re
still living in the past it’s like what
we shut down the economy in March what
the heck right these people are just
pulling back that’s exactly what I think
is happening is everybody is going oh my
God I hear the media talking about a
recession I hear about unemployment I
want to be a little more conservative I
don’t want to sell because I can’t move
anywhere I I just think the next six
months active inventory comes down buyer
demand is not going to go up I’m not
sitting here telling you demand’s going
to go up but I think Supply is going to
shock people to the to the low side in
most markets maybe not Phoenix but
active listings are coming down and I
think that just keeps things flat
until March and then in March we have a
decision are we in a nasty recession
you know world war three going on I I
have no idea what March is going to look
like I’m so confused so right now the
thing there’s always something that’s
surprising me the thing that surprises
me now is there’s so few new listings
hitting the market that’s keeping things
tight now what exactly I don’t know
exactly what’s happening there but I
wish I could figure that out because
maybe I could get a better idea but I my
tendency is to think okay we’re heading
into this time of the year the
seasonality where they go up plus
they’ve been going up tons so maybe
things start changing and people start
listing but yeah my I’m sitting it’d be
loved I’d love to talk to you in a month
or so get an email from you I think
active listings are going to shock
people to the downside to the downside
okay I would say for sure on the upside
at least in Phoenix yeah so again so
let’s put do you know what active
listings are roughly today is it like 8
000 like 8 800 or something
you can send me a note we’ll just put a
Line in the Sand and then we’ll check on
you check on it the next couple months
okay yeah let’s just for fun right just
for fun again Phoenix may be very
different because of Open Door eye
buyers okay it’s 15 000 15 500 for sale
single family active listings that’s
what that is that says for sale yeah
active listings yeah and that’s higher
than um in uh
anytime in 2019. listen so 15 500 I’m
gonna put this on the Whiteboard where I
track calls that’s single family
non-distressed I totally get it so what
you’re saying is by the end of the year
December 31st we will be above that oh
yeah totally okay all right I’m gonna
call below that I have little doubt
about that it’s just isn’t going to be
significantly above or just
yeah okay I like it yeah I just yeah and
the real thing that happened to the
market here is we had a ton of we had
sales tanking after the interest rates
went up but we had a worse surge of a
surge of listings in the summer and now
we don’t now this listings are like so
they’re kind of in balance between the
new listings and the sales yeah that’s
what all the sales are at very low
levels yeah I told my folks on July 15th
and the beauty is all the videos are
there I said July 15th which was
obviously National Association of
Realtors report about June data was when
the market changed we demand was already
being crushed because of rates but what
happened is you were going to get six
weeks of fomo from sellers which was a
new phenomenon which is going to flood
the market at most of those would be
wish pricing so it would be fake
inventory right trying to sell a 400
house for 500 Grand works when there’s
nothing it doesn’t work in that
environment hence inventory artificially
Skyrocket
and then it will be bleeding off uh
going forward as cancellations and
expires happen so that’s what I’m seeing
hey if you want to talk about risk Mike
here’s a huge risk we haven’t talked
about is rents Uncle Reds yes what if
for rent keeps softening and I think oh
I’ve called that as well I think and
again you got to be careful with the
rents because I I break it in two parts
there’s rents for apartments and rents
for single-family homes we got to be
very careful very careful good uh I’m
saying nationally speaking rents and
apartments have already peaked and are
coming in
yeah rents for single-family homes
again a lot of the country has less
Supply into an affordability crisis
which increases demand so I think rents
for single-family homes again nationally
speaking flat we’ve already had stupid
rent growth non non-receutable right
stupid yeah yeah but I don’t think again
rents are sticky in an environment where
nobody can afford to have a home and you
want a home instead of having neighbors
I think in an economy where unemployment
is still sub five I don’t see rents in
single-family homes in the country
coming down I don’t see them going up
but I just see flat because we basically
pulled forward five years of
appreciation yeah because of the stupid
two-year printing of money hey Mike
let’s play a mind game here what happens
if rent’s real rents did fall sure to
where they were two years ago that would
be like the worst case scenario what
would uh what happens so will people
still be able to make you would think
people would still be able to make the
payment that’s still cash flow wouldn’t
they unless you bought in the last year
that’s the key the people who bought in
the last 12 months if you yeah like
basically if you bought after January
when rates were three percent you’re
gonna be fine that is an asset for
everybody homeowner or investor but if
you bought like I don’t know where the
break even is it’s probably four and a
half if you were a very recent buyer or
heaven forbid got an arm you could be in
trouble oh yeah but I think it I think
it would be a small percentage but
I mean these things I mean that three I
mean we should have never had rates at
two six two seven we certainly shouldn’t
have had them for two years that that
that’s what the housing market got
broken
yeah I think that was the big the big
trigger right there was the race because
there’s is there any industry that’s
more sensitive interest rates than
housing two two years The Leverage is
like what four times what it is in the
stocks and oh easy yeah yeah yeah so
that’s so yeah I just feel like the FED
is using housing to oh it’s clearly Wall
Street happy Whipping Boy yeah yeah so
the other thing to talk about that I’d
love to go back to we talked about Burr
being the ones that are against spanked
most um uh they’re the most optimistic I
think that’s a great Insight but I want
to flip to who gets helped the next year
I actually think there’s a part of the
demand curve that was ignored
for two years
that will actually have opportunity and
can keep a floor on pricing
and that is FHA and VA buyers
right they were basically ignored if you
were an FHA or VA buyer and you wrote an
offer you were just flat and ignored
computers you just were I’m in the
industry I know but now because there’s
no demand you’re suddenly being able to
write FHA offers you know get three
percent buyer credits for closing costs
rate buy Downs you’re getting closing
costs paid for you’re getting all
repairs done you’re basically buying a
perfect property so again in an
environment where transactions get
whacked in half I think the percentage
of FHA and ba buyers goes way up yeah
right that makes total sense that’s what
happened last time too they they filled
the Gap that uh the crazy people left
yeah the crazy people left uh you’re no
longer getting 100K over but again FHA
buyers mom and pop buyers this is their
dream three and a half percent down
you know they’re used to paying list
price or getting you know one like the
average uh purchase the list is now 99
or 98 for the country so again get a
little discount don’t pay less price get
closing cost credits they’re going to
fill in the demand curve so we’re still
have transactions and prices will be
sticky well Mike you’re talking about
prices somebody on uh the Twitter thread
was mentioning
um
the discounts the uh what closing costs
getting the seller play closing costs
you don’t see it in the sale price
exactly if you see it in the net
and so the net is changing so maybe
sales price even though in Phoenix has
went down to what uh six percent it’s
even more than that if you take into
account also if you’re taking account
inflation it’s more than that if you
take into account the the difference the
the closing costs that are being paid by
the seller then that’s awesome it’s a
very it’s a very different game but as
you know we report nominal price which
is the top number we’re not yes yes
we’re not you know factoring three
percent closing costs so again this is
why I think nominal prices are going to
surprise people being sticky at least
through March transactions will go down
50 percent and again I think active
inventory for the country goes down I
don’t know about Phoenix it’s a very
unique Market we have a number of 15 15
500 you’re calling over I’m calling
Under just to have some fun
um any other closing thoughts let me
bring up the article what what would you
like a
so what have we got in this video is
this a nickel bet everybody in a nickel
on this I like a dog it was like a
dollar it’s a dollar when I get your
money I will create a plaque we’ll be
back this will say John Wayne’s dollar I
will do that not a problem
feel free to do the same and again the
date’s December 31st just to just get
out there and record it let me share
your article one more time and tell
people
um you know it’s just the nuances and
the important things because again I
took a lot for this and I’ve been in
this game for 30 years any particular
part of it you want me to highlight
if you scroll down there’s the uh uh
part of the article that’s highlighted
in fact if you can find that that’s kind
of the summary the takeaway this one
yeah that’s kind of the takeaway oops
sorry so the takeaway is the demand will
continue to fall for many months
regardless of mortgage rates because
people are slowly lowering their
expectations for future house price
increases housing demand is falling
along with expectations for house price
increase in the future this is basically
the buyer not betting on getting
appreciation right so there’s all those
other regular factors on interest rate
et cetera but you gotta think this is
also a demand factor and a supply Factor
too is future price expectations is this
should be incorporated in your mix of
fundamentals you’re looking at no I love
it and this is why I looked at this I
love it I mean if anybody had experience
through the last crisis this article put
that last crisis in under a lens I’ve
never seen great job uh I don’t know I I
obviously don’t agree with the title but
it was a great intellectual exercise for
me and again I’m wrong all the time so
prices I couldn’t resist but the
alliteration I couldn’t oh no of course
I mean it got a lot of clicks it got me
to click that’s part of the battle right
you got to get people to read the great
material and you’re wondering full
insights and it often starts with a
title so uh John do you write for anyone
routinely where can we find your
articles where should people follow you
because you put out great stuff I’m
mainly on Twitter at John wake but also
I have a column I occasionally on
forbes.com so that’s what I write there
a lot and then lately I’ve been writing
on other places like
Barons that was cool to get an article
there and this is first time I was on
Fortune so that’s that’s fine because
for me
this is I’m basically I’m retired
essentially so it’s a fun thing to keep
me watching the market so I’m still
trying to I had PTSD from 2005 et cetera
trying to figure out what I’m still
trying to figure out what the heck
happened because I did not see that fall
at all that price fall at all yeah it’s
funny I I don’t know if you’ve ever read
my book one rental at a time but we were
buying single family homes O2 to o six
we 1031 out of houses because I couldn’t
afford I couldn’t mine I could never
make the cash flow work it was all an
appreciation game so I got out moved to
Apartments then the crash came and I’m
like God damn thank God I got away from
that that’s why I use affordability as
my Saving Grace yeah so oh well done
uh got lucky I’m not I’m not saying I
called him I just knew all I knew is I
couldn’t make the numbers work so I went
somewhere else that’s all I did yeah
it’s pretty pretty fun so hey uh here’s
one last thing on that Highway marketing
he said uh he had to say and he said
this is a saying in Wall Street said the
worst loans are made in the best of
times
yes so I wonder I don’t know the the
investor money where it comes from but I
wonder if there’s some bombs buried
there well there probably are
um so what has happened over the last
couple of years is probably not going to
be in the conventional Market because
generally speaking The Lending standards
were
you know tight to tight minus uh but
there was a new space called non-qm
non-qualified mortgage that kind of blew
up yeah as conventional was so tight
yeah there could be some hidden bombs
there for sure okay yeah yeah but that
will be that will be invest so again it
wouldn’t be the 68 owner rock it would
be in the 32 then you take the 32 you
whack half of that because most of that
second homes and then you know you get
to a pretty small pile but there will be
pain
but nevertheless I’m just saying it
doesn’t take very many foreclosures to
tank everything because we were at a
certain level and last time we were in a
certain level of closure didn’t affect
prices in fact because they were used to
it but then it got up but then I got to
some point where it just started
cascading where people were psyche hey
that house over there sold did you see
that house sold for and suddenly
everybody becomes cautious so you get
the key to not having a crash is to
limit the foreclosures one way or
another totally agree totally yeah
because there is a breaking point we
don’t know where it is yeah
and I agree I agree I agree I agree I
agree John this is so much so much fun
thank you for doing what you do thank
you for coming back wonderful article I
will put the link in the description
because people need to go check it out
thank you really appreciate it take care