Talk Your Book: The Housing Market with Mike Simonsen

0:04Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:34We're joined today by Mike Simonson from Altos Research. Mike, Altos was acquired in the past few years. Is that correct? That's right. We are now part of HousingWire, which is a bigger media company and media and data in the housing market, mortgages. Okay. And we know HousingWire from our friend of the show, Logan Motoshani. That's right. So you guys are all, you guys are, you guys like teamed up like the Avengers. Wait, one more question on Altos before we get into all the housing stuff. Who are your customers? What's the core business? So the core business is, so Altos, we track every home for sale in the country every week, all the pricing, all the supply and demand.

1:06And we have two sets of core customers. One are the realtors and the loan officers, people who have to help consumers understand what's happening in the housing market. You know, like the market's changing every day. And if I'm shopping for a house, I need to understand what's happening. So we help, we do like local market reports for those folks. Then we also have an enterprise data license business. So investment firms and home builders and all kinds of financial firms, if you have exposure to the U.S. housing market and you need to know what's happening in Kalamazoo right now, you have the data that we had your big giant data files so that you can go build your models from that.

1:52You named a ton of West Michigan just to suck up to me. Is that right? So I'm curious because you always say that I always listen to your weekly updates, which are great. And you always talk about like you're getting the data first before the monthly readings from the different agencies. How did you ever go about building this model in the first place to gather all this information? So originally, it is a personal need for me. I am a longtime data software guy in Silicon Valley. And I, when I was 30 years old and I bought a tiny little piece of shit Silicon Valley house with a giant mortgage. And it was 2001.

2:32And so that was the NASDAQ bubble, two bubbles ago, as I like to say, the NASDAQ bubble was bursting. And at that time, it was the first moment in the internet when you could figure out what was for sale without having to go talk to the guy with the dot matrix printout of the listings. And so I was able to start building models going like, I know exactly what's for sale. I know where they're priced. I know which ones are doing price reductions. And it was literally, I did it for several years just for myself to know that I wasn't upside down on my mortgage. And then after a while, we decided to commercialize it for the whole country.

3:13And we have a giant database of every house in the country. And we can say, that one's for sale. And that one's for sale. And that one was sold last week. And this one's for rent. And we can go build all that giant list together and then bubble up the analytics. And traditional housing data is focused on these houses sold last month or two months ago. But there's so much signal in the active market in how many are getting listed this week, how many are going into contract, how many of those are doing price reductions. And so none of that, nobody had ever studied that signal because nobody ever knew what was for sale before the internet.

3:56Like there's 700 different local realtor associations and they don't really talk to each other. And so there was no common database of everything that was for sale. So we started tracking it. And now I've been doing it as Altos Research for 18 years. Do you think the proliferation of data, housing data, has made the industry more, maybe not more productive, but more efficient, better insights, less prone to booms and busts? Oh, I think for sure. I launched a company in January 1 in 2006. And at that time, nobody knew anything about what was happening in housing. And And by the time you got the data, it was months old.

4:46Wow. And so we could tell you, I could tell you the days on market for houses in San Jose, the day that Lehman Brothers broke, and two weeks later and four weeks later. And you could watch at that time in 2000, whatever, that was 2008, that when you could still get a million-dollar mortgage, but you couldn't get a subprime mortgage. The low cost homes in San Jose were all subprime. The days on market flip. So normally it takes expensive homes longer to sell. Days on market flip. So the cheapest homes in San Jose were taking the longest and you could still buy a million dollar home in a week. And so nobody had any of that insight.

5:34The local realtor associations, the MLSs, they would save these houses sold last month, but they weren't data companies. They were realtor associations. So nobody knew anything about the housing market when 2008 happened. And so now we do. And there's a lot of places. you know i like i quit my job and started my company january one of 2006 and like 10 days later zillow was on the front page of the new york times with 100 million bucks of venture capital doing the not not the exact same thing but it was in the zeitgeist we can finally solve these problems and uh you know you started you basically top ticked the housing market too that was pretty close to the peak right in 2006 it was but i think it's probably not a coincidence in that It was Silicon Valley.

6:28It was that first part of the coming out of the NASDAQ bubble burst. We know where money was flowing into housing. There was a lot of things going on. And I had a housekeeper at the time who bought a house in two hours away in Central California. And I thought, this is a big deal right now. So before we get to the state of today's housing market, How do you think all of this data changes the way that buyers and sellers and lenders and realtors and bankers, how does this change the behavior of the whole ecosystem? You know, there are, if you are a realtor, if you've been a realtor in this business for decades, you know, the great realtors know what's happening.

7:17They can communicate it well to a buyer and seller. They help them make wise decisions. but it can be very difficult to communicate what's happening in the market to a buyer and seller. A buyer comes in and they say, oh, well, I hear the market's tanking. I ain't going to lowball. And a wise realtor says, look, you're shopping in the highest demand part of the market. If you want to get this house, we need to make a real offer. So using the data helps consumers understand what's happening. It helps them know that the market's changing. You reread these headlines. And if you read the headlines on the housing market now, you'd hear it's crashing.

8:03You hear it's not crashing. You have all of these different messages. And depending on what you've picked up, you might have no idea what's happening, even if you're paying attention. So for a realtor or a loan officer, somebody who's working with consumers, homebuyers, and sellers right now, So it's really important to pay attention to the data in your local market, in your price range. And so they can - It probably makes the market more efficient. I think so. I think it's one of the factors that makes, we can see measure in general, time to sell a house has declined over the years. We can see all of those elements.

8:41And at the very least, you know, it helps us understand, make, feel stronger about our buying decisions, you know, like understand what we're doing. You know, for example, I bought a house, when I bought my house, I did the classic, you know, buy the cheapest house in the expensive neighborhood move that they talk about. And when the NASDAQ blew up, all of the stock option, multi-million dollar homes, the median price in my town in Silicon Valley, Los Altos at the time, the median price fell by a third in 2002 or 2003. But the low price didn't go anywhere. I'd bought the cheapest house in town and I could watch that and say, I'm still the cheapest house in town.

9:26So that was very meaningful to me. It was very meaningful when I said, you know what, what I want to do is add a thousand square feet to this old house. And is that going to make me money? And I could say I can make a thousand square feet and it's going to be a good investment, but I can't go bigger than that because the more expensive homes have bigger lots. And you can see that in the data. So, you know, those were the kinds of insights that we were able to have that you never could have before. I think a good way to talk about what's going on in the housing market now comes down to like some of the rules of thumb that you've created.

10:01Cause often when you give your updates, you talk about the relationship between rates and inventory or the fact that seasonality, you take the data, but then you put it in context and say, well, we expect this to happen because it happens every year because of seasonality or because rates being higher or lower. So why don't you talk about maybe some of those different rules of thumb and things that you've teased out of the data that people should expect and then where we stand now based on that. Yeah. So right now there are 677 ,000 single family homes unsold on the market. And it is 40 % more than last year.

10:33And so that's a pretty significant gain. But it's still, you know, this time in 2019, at the end of July, there was nearly a million homes for sale. So pre-pandemic, so there's still a lot fewer homes for sale than pre-pandemic. So the big question is, when do we get back to normal? How do we get back to normal and the normal levels of inventory? And the answer to that question is one of the rules of thumb. The rule of thumb is inventory rises when rates rise. Inventory falls when rates fall. We can, and it's pretty tightly correlated so that we can see, for example, 2020, rates fell dramatically in inventory.

11:11We bought everything in sight in inventory of unsold homes, fell dramatically. Starting in 22, two years ago, rates started rising. Inventory has started rising since then. Why does that relationship hold? It holds because on two sides. One is that demand slows, inventory grows. So, you know, it's more expensive to buy a home. We buy fewer homes. It also impacts on the supply side. Over time, as rates have been super low, and that's really not just two years of the pandemic, but really the last decade, 12 years, rates were super low. And that incentivizes us to hold more real estate. So we have a 30-year rate locked in at 3%.

11:58I might hold two of those. I am perfectly happy to buy my second house and keep the first house. But if rates are 7%, I go to buy my next house. I have to sell the first one to finance the second one. So that first one's now back in the active inventory. That keeps inventory higher. That means we're hoarding less real estate. And so as a result, higher rates tend to lead to more active inventory. So did we see an uptick in rental housing purchases then? Because that's like one of the other big misnomers is the fact that people think it's all institutions buying rental houses. But it's really just more mom and pop people or smaller, small time investors.

12:41So did we see an uptick in that in like the 2010s? Yes, we did. We took 8 million or more homes out of the resale environment and put them into second home or investment property. Basically, they're now rentals that they would have been resold before. And if you think about it, if you could finance these two decades ago at 6 % or 7 % or 8%, then some of those get put back in. But now if I'm buying them at 3%, 4%, 3%, like the last decade, then I'm going to hold that thing forever. And so you can watch each year for the last decade, 12 years really, early 2010s, each year the peak of inventory, which would be like now, end of summer, lower.

13:34And the trough of inventory in January, lower. Each year lower. We take more and more homes out of the resale. And you're right. It's not just institutions. Companies that own more than 1 ,000 homes, it's like 4 % of the market. It's very small. It's like 96 % of the homes are - Tell the truth. Of investment properties. Actually, to that point, I don't know if either of you guys have seen Twisters yet, but the bad guy in the movie was buying up all the homes that had been destroyed by tornadoes. Oh, is that right? Not quite Blackstone, but not too far off. Well, and I do say that there's no more ready-made villain than Wall Street landlord.

14:22Like, we're ready to blame those guys for everything. And so it's a real headline villain, even though it's a small part. And in fact, it's like, it is us. It's the people listening to this podcast are going, I have a second home and I have an investment property or a few because I'm building wealth. And when money's been really cheap, it's been a really good decade to own real estate. And so we have. Did the interest rate inventory relationship hold up this time around? Because we'll get into it, but this was an awfully odd hiking cycle with respect to real estate. Yeah, it did hold up. And in fact, it even is, the slopes are similar in that rates were hiking the fastest in 22, right?

15:11500 basic points in 22. And inventory went from the record lows. And so the like two, I don't know, like doubled or whatever the number was in that, in 22 to 23, that was a big. so they both climbed hand in hand at the same time very steeply. And this year, rates are still higher than they were last year at this time. Maybe we're going to start to see that adjust back down. Maybe we're past the peak of mortgage rates. And so then we can see that what I expect is that we would have then flattening of the inventory growth. So we're 40 % more homes on the market now than we had a year ago. But that's not really growing.

16:01That gap isn't growing. And late in the year last year, September, we had a rate spike and we had an inventory spike, September, October, November. So inventory didn't peak last year until middle of November, like the week before Thanksgiving. And normally it'd be heading down for a few months before that for the holidays. But that's rates spiked and inventory spiked at the same time last year. So that's one of those rules of thumb. It's really easy to tell the story now about why housing prices didn't crash from rates going to 7 % or whatever. And it's always easier to drive in the rear view mirror.

16:41But if you would have told me two, three years ago, listen, mortgage rates are going to be above 6%, 7 % and they're going to get there in a hurry and they're going to stay there for, I don't know, it's been 18, 24, whatever months, I would have said, yeah, sure, a 10, 15, 20 % correction in housing prices after rising 50%. It wouldn't have shocked me. I think there was even someone on your podcast who made the case that that could happen. I know you don't make price forecasts, but did it surprise you that housing prices didn't fall more? Because I think it was, what, 3 % nationwide, maybe? Yeah, for four months or something that they were actually negative year over year.

17:12Very quick. So yes and no. I mean, there is a period there in 22 when we're watching, for example, we watch the percent of homes on the market that take price cuts and watch that skyrocketing and watching that get to the highest level in many, many years. And that's a pretty bearish scenario. And it turned out to be that price reductions peaked in November of 22, that leads the future transaction. So a house is on the market now and doesn't get an offer, does a price cut now. It gets an offer next month and it closes the month after that. So the price cuts are leading the transactions. So by the spring of 23 is when we had the negative year-over-year home price changes.

18:00What was the surprising part was how resilient 23 was to me. And when rates flattened, one of the questions I had was, there's a lot of investor capital on the sidelines. And in places like Phoenix, do the investors say, wow, Phoenix is down on the second half of 22. I should get out? Do investors exacerbate the downturn? or do investors say, wow, suddenly prices in Phoenix are back into my buy box and go in? And it turned out they went in and put a floor on pricing and they got their cap rates to where the cap rates fell to where they were comfortable and they said, we're going to go buy that.

18:41And so that surprised me that that happened. And I didn't have negative 10 or 15 or 20 % on the forecast, but I was thinking down zero to 5%, so flat to negative 5%. And we finished the year up 5 % in 2023. So that definitely took me by surprise. One of the things that we've been talking about is what happens when rates come down? And you would think like, be careful what you wish for if prices are high now. When rates come down, prices should go up. But I've been thinking about what happens to the inventory? Because the demographics, the young people that want to get into houses, they're still shopping, albeit obviously at a lesser pace.

19:27Does the supply unlock outstrip the demand that's in place and that will come to market? But then we've also been twisting our head into a pretzel. Well, it's sort of like the stock market. Well, for every buyer, there's a seller. So do they net each other out? Because the amount of new homes on the market is sort of like rounds to zero. So how should we think about this dynamic of what happens 12 months from now when mortgage rates go from, I'm making this up 7 % to 5.5%. Yeah, so in general, rule of thumb, you should think about rates hitting demand faster than supply. So rates fall from 7 % to 5.5 % that spurs demand.

20:10It'll spur some supply because you get some sellers who are buyers, but it spurs demand more than supply. So rates fall, inventory will fall again, or at least level off, not necessarily crater because we're not going to 3 % in mortgage rates. But if we go 5.5 or we go to 5, we go into the 4s, that's going to spur a lot of demand. And it gets back to the dynamic of what we had over the last decade, which was we were pulling inventory out and owning more real estate. It was a good deal to own it. The concept they call the mortgage rate lock-in, right? Mortgage rate lock-in effect. If you have a 3 % mortgage, you're holding onto that house forever, you're locked in.

20:59I think the misconception there that I like to point out is that people think that it's high rates now that create the lock-in effect. But I like to point out that it's actually low rates that are what we're locked into. So if rates fall again, we're actually creating more people who are locked in. And you know, there's - Wait, how? Because there are, say, 5 million transactions a year. And if those transactions are now happening at 4%, now we've got 5 million more people with a great deal on their mortgage that they never want to sell. The new buyers would be locked in. Got it. Okay. So based on everything you just said, I know you don't make predictions, but would you say you would think that prices would, given that scenario you just outlined, probably not go down?

21:51That's my take. There's nothing in the data right now that shows big price declines, even though we're at the real weak demand. And that's partly because every homeowner in America, and you guys have discussed this, every homeowner in America has got so much equity and such a good deal on their mortgages. There is no signal of any flood of supply. But each year we'll get a little more if it's slightly less a good deal to buy a home. There's 5 million people who don't have the locked in rates each year. So that loosens up. So multiple years at higher rates is what gets us back to the normal level.

22:32And so because there's like a floor in that sense, then the opposite side seems to be true to me, which is if we spur demand faster than supply, that seems to be upward pressure on home prices. And there's probably a lot of other factors in there. There's like right now, it seems like people are people maybe not buying because they're waiting to see what happens at the election or, you know, there's other macro factors in there. maybe we finally get some unemployment. How does that shift people's buying demand? When we work through all the pandemic cash, does that impact? So there are those other factors that are in play, but there's nothing in the data right now that shows a big home price downside correction.

23:18One other important component of all of this is that a lot of the new buyers are younger people. And a lot of these younger people can't afford homes on their own because they're so gosh darn expensive. And a lot of them are getting help from their parents. And that seems to be like a trend that absent some sort of economic meltdown is probably going to remain in place. It just seems like it to me. And the dynamic of where the cash comes from and and the demographic is a little outside of what we study day, what I study day to day, but it sure seems like those are factors when there's only 677 ,000 single family homes available.

24:01You know, those are going to the people that are the best capitalized. And in fact, you know, baby boomers are still like in most months, the biggest net buyers of real estate. Huh? In the country. Is that like as their primary or secondary residence? Or is that because, explain. Well, they have all the equity locked in, right? They can use their equity from their current home that paid off. Right? And they're not going to, they say, listen, I've got 20 good years left. I'm not going to wait around. I'm going to do it. All right, so don't be mad at Wall Street. Be mad at the boomers. Always. That's right.

24:34Blame boomers for everything. I always blame boomers for everything. But yeah, for most months, they're still the biggest net buyers. And so the other thing, so the boomers have the cash and there's also more of them, right? So like there's the net buyers. You can see sometimes a millennial cohort kicks up. I have seen that one of the interesting things as rates have climbed, the first time home buyer share of buyers is increasing. And that's because there is less competition for investor competition or boomer competition. If it's not as good a deal right now, the people who are like, I'm buying, I'm having my second kid, we're buying a house, they start their share, it becomes slightly less competitive for them.

25:27And so therefore, they are the ones who are gaining share over time. So that's an interesting fact that we were looking at lately. So it's also, it's going to depend on where rates go and when a recession hits and all this stuff. But like, when do you think we get back to normal levels of inventory and existing home sales? Because what did it drop to 4 million? And it's usually five and a half or six. Like when do we get back to normal? Inventory, the way I think we get back to normal levels of inventory is multiple years of higher rates. So like we went from$250 ,000 to$677 ,000 in the last 26 months, 28 months with higher rates.

26:05If rates go down from here, inventory caps out or even declines. If we go for it, stay higher for longer, then you could imagine we get fewer people with those deals penciling out. We get more homes back on the market. We get taxes and insurance in Florida and Texas that those costs are up. So those houses come back on the market. So we get multiple years of higher rates that get us back to the old normal levels of inventory. On the other hand, if rates fall, transaction volume picks up, right? So we buy more than, and that's why inventory is falling. So demand is kicking up. And so over time, the scenario I get to get back to is to more affordability with more transactions is like multiple years of higher rates, flat or slightly down for multiple years on prices.

27:05Meanwhile, incomes are catching up and then rates fall. then you get to a world where there's more selection, there's less competition, there's now cheaper money, incomes have caught up for multiple years with the prices. That's where it's like we had a decade of a really good deal. And so four years of slow time, over two years in now, that's how I can imagine it. If we get into a world where rates drop now, I think we go back into competition. We go back into falling inventory and rising home prices. Your scenario makes sense. They say in the stock market, what do they say, Michael, a correction over time?

27:44If the stock market trades sideways? Your point, a realistic scenario for the housing market correction, if there is such a thing, is housing prices staying flat, but income's catching up. That makes it more affordable for people. That makes more sense than the people who are worrying about housing prices falling 30 % or something. That's right. You know, the 30 % fall worry, it makes sense, right? You see that you look at the chart, it goes up and it goes up steep. And, you know, it is intuitive that it must come back down, you know, revert to mean. And, you know, maybe that happens. Maybe there's some catalyst that home prices drop that dramatically.

28:18It feels to me like the momentum is the other way with a floor on those prices because, you know, Americans have such a good deal on their mortgages. Like in 2006, when unemployment started kicking up, the first thing I wanted to do was unload that crappy mortgage. Now, when unemployment ticks up, the only thing I want to hold on to is that mortgage. If I lose my job, I can't sell the house and go rent somewhere cheaper. I can't go buy another house later on and get like the best thing I have is that mortgage. So I'm going to do everything to hold on to that mortgage. And I think everybody knows that.