Who’s Buying Houses If No One Can Afford Them?

This is probably one of the most confusing times in the real estate market. From one end, the prices are so high that most people can't afford to buy homes. From another end, sellers don't want to sell and lower their price because they have really good mortgages at low rates and they have equity in their homes. They don't have to sell. Today we sit down with professionals from real estate space who have different opinions on where the real estate market is headed. So I just went out driving across the country and we do not have an inventory shortage. Is it mispriced? Is it misallocated? Absolutely. But we don't have a shortage. In fact, we've overbuilt and this is why the builders just reported 9.7 months of inventory for January. It depends on the data that you're looking at. Let's say in Southern California, where there's not many houses for sale, there still isn't enough stuff for sale. I'm Siamak and this is Market Insider. Melody, it's great to have you on. Welcome. Thank you so much. It's my pleasure. Thank you for having me. You have been in the mortgage space for a long time and you've seen some irregularities in this space and you're concerned about the housing market right now. Can you tell us what you're seeing? Sure. So we have to remember all of the massive intervention that happened after COVID. It was much bigger than actually the intervention in the mortgage market after the last crisis with all of the forbearance and loan modifications and things like that. Those programs are just starting to run out. And what we're seeing on what I call government subprime, which is FHA, and that's about 13% of the market. It's been very delinquent since June of 23, where we're over, we're double digits delinquency. It goes between 11 and 12%. And they've had very generous workout programs for that in place. But the guardrails on those programs went on in October. And now what we're starting to see is serious delinquency stay sticky, and it's just going to increase from here. And then when you look over at the prime books, what's happening is you have a ton of people who are suffering under increased property taxes, increased insurance, increases in electric bills. And if you're on a fixed income, you can't afford all that. You can see on Fannie Mae reports, it's debt to income, for instance, and we're at levels last seen during the crisis in 2008. So the situation is very precarious, and they've kind of been keeping it afloat through several programs. One thing that the agencies do is they do what we call non-performing loan sales. And so they sell off all their delinquent books and they go off to hedge funds that don't necessarily report to credit. And so we have a misunderstanding of the health of those portfolios, but both agencies took very large, we call provision for credit loss recently. And that's going to continue because in the housing game, you need those home prices to appreciate. And if they don't, then sort of all the warts float to the surface. And that's, you know, that we're kind of at the place where we're starting to see some sickness, significant stress in mortgage. You mentioned there's like 12, 13% of the market are these players, and then they have delinquencies of like 10%, 15%, something like that. How much of the market is that? Is it like 1% of the market? How much of the total market do you think? When you're thinking, so total market, in aggregate, you're looking at about a 4% or 3.57% delinquency. It's about a million, a million borrowers that are in that FHA portfolio, but you also have in the private portfolio, which is 3% of the market, they also have double digit delinquency as well. It's just so far, what's been kind of holding up are these agency Fannie and Freddie books, and that's the lion's share. So 85% of loans are held by one of these government agencies. The rest is held by private actors that we know of. And there's a whole shadow lending that's been happening when rates started to rise that it's really kind of similar to the 80s and the SNL crisis. You also mentioned that these agencies are selling the not performing loans to hedge funds. Can you explain both of these, this shadowy market that we may not know about? Basically, we've always had what's called seller financing or private note actors where, like, let's just say you want to sell your house and you want to sell it to someone you know, but they can't really get a loan at favorable rates. And you're in a pretty good position. So you might say, hey, you know what? I'll lend you the money. I'll do the financing myself. Like, this is something that happens. After the crash, we saw institutional investors get in after 2008. Yeah. And Ford, you know, we saw institutional investors, especially in 2012, get in buying all these foreclosed properties. Well, private actors saw that and were like, well, I want to do that. What you have are people that will, they do the notes themselves. And I go to a conference every year in Nashville and speak to this group of individuals. When the agency started doing these single family loan sales, they sell them off to the hedge fund. Back in the day, they were supposed to report all kinds of information, how many modifications they did, all this stuff. They stopped all that reporting. But those hedge funds will usually take whatever loans they get and they'll say, OK, this loan I don't want for X, Y, Z. And then some individual out there will say, well, I'll take it. And so it's just like this whole shadow lending that nobody's really tracking. But just to give you scale, I always look. So for one of my clients, I look at their payoffs. Fifty percent of them are not being sold through the market. And I can see that. And so I think we have a misunderstanding of what's actually going on in the housing market because of these private actors and individuals. That's the non-performing loan sales. Why are these hedge funds buying them and are they buying them at the price that is pennies on the dollar or are they buying them as the normal price? The last pool went for 70 cents on the dollar. They're buying them for a reduced price. And you can make a lot of money on these things, especially in an appreciating a home price appreciation scenario, because you can buy it fairly cheaply, rehab the loan, because a lot of times what these private actors can be a little more nontraditional and workouts that they offer when you have a agency long loan, it's very specific, the kind of workouts that you can offer. And so you can make a lot of money off of these. And so they go off to these hedge funds. And what I've found is that I've talked to some of these folks. They're not reporting this to credit. I'll hear from a little servicer that that's who takes payments on loans that, you know, they've got delinquency on a small book of seller financing upwards of 20 percent. But you don't see that in numbers anywhere. What I found when talking to them is they're not reporting to credit. And I think that's a lot of that is happening with all the private credit money that is out there doing things like secure personal loans with your house's collateral. I mean, there's just a lot of nontraditional activity that's going on that I don't think we know about. That's also giving me cause for concern. When we see the number of foreclosures, they're upticking, but it's not much. Are these type of transactions you're talking about, are they outside of these foreclosure numbers or are they when it comes to foreclosures, we're going to see those numbers in the whole data or are they outside of this ecosystem? So they should be in some foreclosure data. If you're looking at ICE mortgage, Black Knight, they're not going to have a lot of it because they report off of what's on their system. If you look at county recording records, which is what Adam, that's another foreclosure that you can often actually get all the information for the foreclosures. But what I can tell you is that we have 3,000 over 3,000 counties in this country and they all do things differently. And it's impossible to track all the foreclosures, especially in what's called a judicial state, because when you're in a non-judicial state, you're filing a notice of sale, a notice of default on record. And so people can see that, but in judicial state, it can take longer. But yeah, we'll start to see those foreclosures tick up, but there's a lot of private activity that if it's not being reported to credit, we're going to miss when looking at health of the consumer. Melody, a lot of people tell us in this space that there's not enough inventory in the market. At the same time, the transactions numbers are going down. What are your thoughts? Well, so that's kind of how I got started is in January 23, everybody was telling me the same thing and I just couldn't believe it based on the data, based on what I know. And so I just went out driving across the country and we do not have an inventory shortage. Is it mispriced? Is it misallocated? Absolutely. But we don't have a shortage. In fact, we've overbuilt. And this is why the builders just reported 9.7 months of inventory for January. And that pipeline is, I mean, it's still a massive pipeline and we've overbuilt multifamily as well. And what you're starting to see there, rents are coming down because there's so much vacancy, like that vacancy hit the highest levels that since apartment list started tracking it. And so we've got all this inventory out there, but a lot of it went to speculators, to people doing long-term rental and short-term rental. Out in California, you can look at places like San Diego and like a map of Airbnbs and it looks like a disease map. I mean, it's just, they're everywhere. And that's how it is in a lot of these coastal cities, places like Austin, 15,000 Airbnbs, like what city needs that many short-term rentals? They've got plenty of hotels. So it's just, people went absolutely nuts. And the other thing is that we've got 15 million vacant homes in this country that the census tracks. That doesn't include the 3 million seasonal properties. The boomers own 50, like they own a ton of real estate and they own multiple properties. As they age out, which is what's happening, they will be unloading these properties. And Charles Schwab did a study and it said 70% of people that inherit property sell them. So the inventory is just going to grow and grow and grow from here to 2050 because the boomers primarily own the homes. The younger generations just cannot afford them. You go to some of these older neighborhoods and there's just, there's nobody coming behind them to live there. They can't afford it. And I mean, you look at youth unemployment, I mean, it's double digits. The turning over of the generation is going to be severely constrained. Folks just won't be able to afford these homes. Yeah, we are hearing that from a lot of people, especially in certain states, it's almost impossible. But at the same time, we're hearing that these people that own the they have a lot of equity and for them to give up the equity and they have low interest mortgages, which they don't want to give up. What are your thoughts on that? Yeah, so I think that equity is we're not seeing an accurate picture of the true environment because of all this private credit, you know, we're seeing in the headlines, private credit fall apart, UBS gating redemptions, they're just one of many. There's all that money flooded into two different credit products, be it buy now, pay later, these personal secured loans I was telling you about. And a lot of these actors like Klarna wasn't reporting to credit. So we, again, we don't, we have a misunderstanding that there's actually probably lanes out there that we're not aware of. And I'll give you an example. So Kotality is who puts out the mortgage equity withdrawal schedule that everybody looks at to say that there's so much equity out there. Well, how do they get that information? They pull it from public record. Well, Fannie and Freddie, which is the largest share of mortgages out there as a workout to the forbearance, which was 18 months of not having to pay your mortgage, you could do a payment deferral, which is it would be a non interest bearing lien that you put at the back of the loan to be paid off when you sell the home or just pay off the loan. They didn't record those. They didn't record those on public records. So the provider of our equity picture is missing. The last time they reported on it and they stopped reporting, it was like 1.8 million of these payment deferrals are not being calculated. And if you think typical mortgage payment, 2000, 18 months, like that's a, it's a lot of money. They're like little junior liens that nobody knows about, which is kind of what got us into trouble. I personally, by the time 2008 rolled around, my former company was doing okay on the subprime front. It was our agency, our prime book that was starting to crumble. And you're seeing a very similar path right now. When these loans, now they're not in forbearance anymore, right? Right. And people have to make payments. How is it going there? Is there any data? What are these people doing now? Are they making the payments or are there more foreclosures coming? Yeah. So there's more foreclosures coming. So many people don't understand is it just takes so much time. Like after, you know, the last housing crisis, so many regulations went into place, slowing down the process and you have to offer work out so many different times, but what's happening when they put the guardrails on FHA specifically in October, they make you do something called a trial payment before they'll give you that workout. Well, we're seeing those default at over 50% is what I'm hearing from inside the industry. That means they are unable to even make the trial payment to get the workout. And so those guys will be going to foreclosure. Now they'll have one more shot where believe it or not, they changed the like, so they are looking at the COVID forbearance as like a one-time crazy thing. So you are eligible for another 12 months of forbearance, believe it or not. So we will start seeing delinquency tick up. We'll have foreclosures build, but we probably, it'll be pretty sizable in June, but it throughout the end of the year, it's just going to grow and grow as these people fell out of these workouts. When the president mentioned he could crash the housing market, if he wanted to, was he talking about this or was there any other things that we might not know about? Generally. So I know everybody's like, you know, looks at the last war and look at foreclosure crisis and things like that. But really I've always said, I don't know that we'll have the same sort of foreclosure crisis, but we have an affordability crisis where you're, you just, people cannot afford to own a home. It just gets to the point where they have to rent because they can't, they can't even, in many places you can't even get insurance, you know, you can't get insurance and you just can't make it work. I do think we'll have foreclosures, but this is really about affordability and the lack of an income that can sustain the median home price. Those used to be correlated and they're not correlated anymore. Household median income and household, you know, the median home price, because you just had so much speculation in the market, but we've got to get back to a place where your median income can afford your median home price. And what are your thoughts? Where do you think we're headed in terms of the housing values? So I think that where we're headed is that housing is no longer going to be seen as an investment. Right now it's a casino. And so I think that home prices will correct to the point where a median income could afford a home. And so you're talking about around 250,000, something like that, to not overstress your borrowers. I think we will see a correction. I mean, I think it'll be, I think we're going to see permanent changes to the housing market because of the silver, what we call the silver tsunami. Why is it called the silver tsunami? Can you explain that? I always get in trouble when I talk about this because it's not a pleasant topic, but our boomers, so Harvard did a study and, you know, we're going to lose like 15.6 million boomers between now and 2035 and another 26 million by 2050. It's just, they own all the assets. They own all the assets. And so that's the tsunami of inventory will be coming. And this, this has implications for 401ks and all of this. And so that's why we call it the silver tsunami. Melody Wright, housing analyst. It was great to have you on Market Insider. Thank you. It was absolutely my pleasure. Thank you. Now we'll go to Jim Rickheimer, who's a developer and he's in the real estate space to get his take on this conversation with Melody. Jim, it's great to have you back on. Welcome back. Great to be here. We want to talk to you about housing, housing market. We have had some guests on the show that are telling us that there is a potential crash and there's potential foreclosures coming up. What are you seeing in this market? It depends on the data that you're looking at. Obviously, if you went out there right now to go buy a house, let's say in Southern California, where there's not many houses for sale, there just, there still isn't enough stuff for sale. So therefore buyers have to buy what's available. And so when I call the, especially the coastal areas from, you know, San Diego to Santa Barbara, all the way up the coast, your more expensive areas, I'm seeing that the people that are buying these homes for some of these, what I consider inflated prices are writing big checks. And it seems that more, more of the people that I see are almost like getting their inheritance early from their parents, literally their parents or their in-laws or something, because the numbers don't make any sense. And I talked about this before in Orange County communities. I'm not talking necessarily Newport beach, super expensive or Laguna beach. So I'm talking like central Orange County and stuff where houses were like middle-class housing, middle-class housing in six, $700,000 was a crazy number. And then you go through the neighborhood now and it's a million, 1,000,002. And you go with that. Nobody can afford that payment who lives in that neighborhood. What you find in different neighborhoods is it's not like your neighborhood went from middle-class people to doctors and lawyers moved in and they can do the higher price. It's still the same. People are there. Maybe they're making a little bit more money. They're a little higher up in the job chain of what they do, but the prices just do seem high. There's no doubt about that. So when you hear discussions out there of, is there a hidden amount of foreclosures happening out there? I mean, we hear about FHA selling off their bad loans. Well, then we don't know what's happening to those bad loans and they're selling them at, you know, 25, 30% discount the bad loans. And I don't know how many of those, the loans they are. But when you hear that and you see that they're somehow going to show up in the marketplace, even somebody buying at 70 cents on the dollar is going to somehow dispose of the property or do something. So do they foreclose? Do they cut a new deal with the tenant? I don't know. What about Colorado, the market you're building? You're building in California too, but you're building in Colorado. I'm building mostly in Colorado only because they have availability of land. I call the North front range of Colorado kind of Orange County, 1965. No, it's not on the beach. No, it's not there, but Colorado is a pretty nice place to live. They don't have, you know, it's not like they have Chicago winters or something like that. They have winters, but they're at 5,000 feet. They're the third sunniest, the third most sun of any state in the country because of their altitude and how the clear skies come in over there. There's a lot of reasons to be there. You see companies going there now it's that slowed down a little bit. It seems like the tax situation of the Texas's and the Nashville's and these no tax States is really catching fire. You're seeing more and more people go. So we're, Colorado is not considered a high tax state. It's not a zero tax state. And there's a difference there because some people say, well, maybe they'll start to inch it up. Who knows what's going to happen. But, but we're seeing is, is that again, not a lot of availability of, of a bunch of houses, but clearly downward pressure on prices from what they were. Let's say two years ago, everybody's waiting for the interest rates to drop. We've been waiting for what two, three years. They haven't dropped. There's talk about interest rates might go up just because the fed gets a new chairman and pushes the short rate rate down for the, for the shorter term federal fund rates. Doesn't mean you're not gonna have the rates go up on the long end. So who knows what's going to happen there, but I will tell you on the, the higher end in Colorado, it's slower. It's clearly slower. We have lots that we could build right now and deliver to the home builders and they're not absorbing enough sales as they were before. And I'm talking about 900 to a million, one kind of homes. And depending on what market you're in, that sounds like super high or super cheap, but it's a nice home. Yeah, that's a nice home. It's not a crazy mansion, but it's a 3,500 to 4,500 square foot home on a normal size lot. And this is new product too. I'm talking about, obviously, cause I'm doing that. It's slowed and we're not delivering the lots like we did before, before we couldn't build them fast enough to get them to the home builders. That was in 2022 or all the way from the COVID. I mean, literally we weren't that many months into COVID when the market realized, if you don't have to go to work, all of a sudden, I don't have to be, you know, 15, 20 miles from Denver. I can be 30, 35 miles away and I can get more house and it's, and it's nice communities. And you've got university towns like Fort Collins. It's a nice place to live. I mean, anybody who's been there, it's all the restaurants, the stores and the shops, because you have all the kids going to the university there and their all come to see them. And so it keeps the restaurant business and stuff pretty nice. I know that it's different in Colorado compared to California, but how's affordability there? Are the incomes a lot lower than California or is it similar? Depending on where you come from, people will say, Oh, the prices have just gotten so high. Well, if you were been in Colorado your whole life, you have a medium income. Okay. You're not, you don't have a college educated income. You don't have the higher measure of income. Of course, that's now changing with a lot of the service jobs doing better than college graduates. Remember how it used to be college graduates were higher. Apparently getting a degree in sociology isn't a big mover for the marketplace, what they pay you. They'd rather have you be a diesel mechanic because then you can actually add some value. A lot of people in Colorado would say the prices have gone up tremendously. But in the meanwhile, that's a lot of people from California to the world coming out there going, Oh my gosh, this is fantastic. I mean, you know, when a California person's buying the new homes because they go into the design center and they do all the options, they buy everything because they think it's so cheap to have a new home when they're coming out of a 40, 50 year old home in Southern California, selling it for a million and a half, $2 million. They can buy a brand new house there with all the bells and whistles for 900. But to a lot of people, if you don't, if you're not selling out of California to buy a $900,000 house, it's hard without a big chunk. Well, it's hard. Anyway, just a million dollar house. If you put 20% down and get a loan, it's a big payment in property taxes and insurance is really insurance used to be a nothing line item, you know, 25, 30 bucks a month or something. Now your insurance is tens of thousands, not tens of thousands, but thousands of dollars per year. It's two, three, four, $500 a month for insurance. So there's costs that are going into it. So when people say, is there going to be a downturn or something here? Clearly when houses get more, you know, when the medium house gets more expensive than the medium buyer can buy at a certain point, prices have to come down. If people cannot afford to buy the house and people want to sell their house, what we've had is there's not a lot of sellers in general. There's just not a lot of sellers like there used to be. I think what you had a guest on, on the show that talked about, and I'm gonna get this wrong, but it was like, of the multiple listing systems in the country, they had like 25% of the houses available as they normally have. Something like that. 25. I mean, a number like that, that's like 10, 12%. That's like 75% less houses. That tells you that the supply, there's no supply. So people are coming in and paying more willing to pay whatever price, but there's only a small chunk that can get up to that. What happens when all of a sudden a bunch of houses come out? What happens- If there's foreclosures coming? Well, the foreclosures come when the baby boomers start to sell their houses. I live in a neighborhood, a nice neighborhood, and nobody moves in my neighborhood until they pass away. And guess what? That's, that's what happened. You know, people pass away, their kids come to the house and none of them want to move into it. And the house gets sold. Things come on the market. The demographics of the generation that my generation is getting to the point where, I hate to say it, people are starting to pass away and the, you know, the upper end of that generation, and we're not going to be here forever. More houses are going to come on. The question is kind of like people ask, is there going to be a crash? A crash denotes something happening now or quickly, not necessarily now, but quickly. So when would that happen? That's the harder question to figure out. When people ask me, should I buy a house? I say, listen, if it fits to where you want to live and you can afford the house and it's good for your kids and it's got the school, then go do it and quit looking at the real estate deal. Would it be better to buy it cheaper? Yeah, but you got a life to live, right? So go ahead and have your kids and do it. But you don't see me run around saying, Hey, go buy a bunch of houses for rentals. Well, no, but in all businesses, if, if with your loan and your cashflow, you can, you can break even or make some money and get your tax deductions for owning it, time's on your side. If you're losing money every single month, that's a concern and you got to be concerned. Is it the end of the earth concern? No. If you've got deductions and you've got a big enough income to kind of cover it fine. But in the end, you want to get to break even because when you're break even, time's on your side. What about the story that the supply, there's not enough supply and we haven't built enough because you're in this business, right? The home builders are not going and building a ton of land and telephones. They're just doing it very systematically as they sell them. They become a lot more calculated, right? They do. And remember the only way, there's only two ways to have more houses available. One is to build new houses and the expensive houses out there or apartments out there or homes out there are new ones. So if the only thing you can do is to build new ones, new ones, you're going to have the most expensive. What we need is a lot more 25, 30, 40 year old houses to come on the market. That can happen with people, there's foreclosures or foreclosures or people pass away or something. Or we have people that didn't live in the country four or five years ago, go back to their country and they cause vacancies to happen. I think it can't be more understated about having whatever number you want to come up with, 8 million people, 10 million, 12 million people, 20 million, whatever it showed up. So you think the immigration had a big impact? There's no doubt it did. And everybody wants to miss it. So when these elected officials say the whole big world is affordability and how we're going to have elected officials vote in affordability, I mean, it's in the public falls for it every single time. But think about it. If you vote for me, I'm going to get you affordability. Like how? There is no way. All you can do is take from Peter to give to Paul. All you can do is pass laws to take money away from somebody who has money to have somebody who's rich. All you can do is put in rent control, which will stop new houses from getting built, taking the money away from them to make things more affordable. That's what they end up doing. All you do is you go in there and say the minimum wage has to be higher and we're going to pass laws to do it. There's nothing that an elected official can do proactively to help this stuff kind of happen for the most part. Or the other thing is let's go ahead and destroy a nice single family neighborhood and let everybody put apartments in their backyards. They're just not things that really solve the problem. You can't vote in. All in favor say aye. Affordability. We got affordability. Doesn't work that way. So you think the market, really the existing home market, the second-hand home market that are all their units, they need to unlock? Those need to unlock because those have the lower price point to get people into houses. I mean, I don't know about you, but most everybody I know when we bought our first house or first townhouse, it sure wasn't brand new. My first apartment wasn't brand new. My first apartment was old. So when I go around and I see these massive projects get built, right? Six, seven stories with 500 whatever apartments going for one bedrooms for two, three thousand dollars. You look at those buildings, okay? They have parking structures. They need one and a half, two spaces per car. That's like $25,000 a space, if not more. So if you need two spaces, that's 50 grand just to park the place and you haven't built the two by four for the buildings. So therefore, rents have to be higher. People say, oh look at all this housing that's coming in. What new newbie worker, young person can go in and afford $3,000 a month with a roommate for an apartment? They can't. So you're saying that a lot of the new development is not really hitting the affordability. What has to happen is that the main market, the second-hand homes need to unlock. That's the ones that have to unlock. And those, so when you bring those on the market, then you bring in affordability. You don't bring in affordability, build more new, more expensive homes. Now, I will tell you that if you build more product and the stuff does come available, the prices will drop because the more expensive stuff is not going to rent for what they thought it was. And then there's like, I've talked before about a housing ladder. There's a housing ladder. So as long as you build more, right. As long as you build more, prices will come down. The only problem is, is that the people that built the more expensive stuff have to lose money and they're going to lose money. There's, there's no doubt about it. I mean, I looked at apartment projects. We tried to make them pencil forever. And these pension funds were coming in, just funding the whole project. And literally when you go cap rate, how much return on your, on your equity or your cashflow, it was like zero or maybe 2%. It was like nothing, no return, no return. And the whole thing was, Oh, but you know what? We get a 3% bump every year. And every year we'll get that. What you do until you don't, because you're bringing up, but again, bringing down a $3,500 apartment to, you know, 3,200 doesn't really change it for the average person out there that's trying to do it. It does bring down, but then maybe the person who can afford the $2,800 apartment, we'll get that one for cheaper. And then somebody can get it cheaper. And then it does settle into it, but build, build, build is, is a more expensive stuff is not the In the end, more units will lower. I guarantee it, but it's easier to, to have less people in the area. People move out of an area to lower prices than it is to just say, we're going to sell them because we can't build 40 year old product or 30 year old product. We have what we have. Jim Rickheimer. It was great to have you back home. Great talking to you again. What do you think about the real estate market right now? Do you think these prices are justified or we're going to have a significant crash or a downturn? Let us know in the comments. I'm Siamak and this is Market Insider. We'll see you next time.