HOUSE PRICES MUST FALL THIS FALL – Interview with the Author John Wake

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


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


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


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

  1. 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


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 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


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


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


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


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

  1. 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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


that’s where the flippers got crushed

last time and I think they could get

hurt there again what do you think of


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


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


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


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


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


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


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


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


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


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

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