The Risks and Opportunities in Today's Housing Market

In this episode of the Top of Mind podcast, Mike Simonsen sits down with Rick Sharga, EVP of Market Intelligence at ATTOM, for a deep dive into the state of the current housing market. Rick talks about areas of risk for housing in today’s economy, shares some surprising insights into the foreclosure situation, discusses which policies might impact demand, and more.

About Rick Sharga

Rick Sharga is the Executive Vice President of Market Intelligence at ATTOM, one of the country's leading providers of real estate data for real estate, financial services, insurance companies, and government agencies.

An accomplished executive with over 25 years of experience in consumer and B2B marketing, Rick has held numerous senior leadership positions in the real estate and mortgage industries and has also developed and executed sales and marketing programs for tech companies such as Fujitsu, JD Edwards, Toshiba, and Hitachi; start-ups like Tickets.com; and consumer brands including Pizza Hut, Acura and Cox Communications. 

One of the country’s most frequently-quoted sources on real estate, mortgage, and foreclosure trends, Rick has appeared regularly over the past 15 years on CNBC, the CBS Evening News, NBC Nightly News, CNN, ABC World News, FOX, Bloomberg, and NPR. 

Rick has also been named twice to the Inman News Inman 100, an annual list of the most influential leaders in real estate.

 

Here’s a glimpse of what you’ll learn: 

• Which segments of borrowers are most at risk in the current environment
• Surprising insights about the foreclosure situation
• Which regulatory changes might further dampen buyer demand this year
• Why new buyers are facing a “triple whammy” of challenges
• Rick Sharga’s outlook for what’s next in the industry

Resources mentioned in this episode:

• Rick Sharga on LinkedIn
• Rick Sharga on Twitter
• ATTOM
• RealtyTrac
• Mike Simonsen on LinkedIn
• Altos Research

Sponsor for this episode

About Altos Research

The Top of Mind Podcast is produced by Altos Research.

Each week, Altos tracks every home for sale in the country - all the pricing, and all the changes in pricing - and synthesizes those analytics to make them available before becoming visible through traditional channels.

Schedule a demo to see Altos in action. You can also get a copy of our free eBook: How To Use Market Data to Build Your Real Estate Business.

Episode Transcript

Intro  0:02  

Welcome to Top of Mind, the show where we talk to real estate industry insiders and experts about the biggest trends impacting the market today. Enjoy the show.

Mike Simonsen  0:13  

Mike Simonsen here. Welcome to the Top of Mind podcast from Altos Research. Thanks for joining us. The Top of Mind podcast is where I talk to the smartest leaders, thinkers and doers in the real estate industry to provide context and perspectives beyond the market data that we put out every week and Altos Research. If you're not familiar with Altos, we track every home for sale in the country, all this pricing and all the supply and demand, we analyze all those changes in that data and we make it available to you before you see it in the traditional channels. People desperately need to know what's going on in housing right now, especially as the landscape is changing. So if you're asking, Can I get the data from my local market? The answer is yes. All the data, all the resources, visit altosresearch.com You can book a free consultation with our team and learn how to use a market data in your business with your clients, what people who need to know, right now what's happening. So without further ado, though, let me introduce my guest today, Rick Sharga. Rick is the Executive Vice President of Market Intelligence at ATTOM, one of the country's leading providers of real estate data for for real estate, financial services and insurance companies government. Over the past 25 years, Rick has held numerous senior leadership positions and in real estate and mortgage mortgage industries, and is one of the most frequently quoted sources on real estate, mortgage and foreclosure trends. Rick has appeared regularly on CNN, CNBC, Bloomberg, NPR, all the other major networks. So nicely done there, Rick. Rick has also been named twice to the admin 100, the annual list of the most influential leaders in real estate. So Rick, welcome to the Top of Mind podcast.

Rick Sharga  2:08  

It's great, great to do this with you, my friend, you and I have known each other for a long long time compared notes probably over a few too many glasses of wine. So So it'd be nice to do this in a probably more professional environment. But but be great to compare notes with you today.

Mike Simonsen  2:23  

Yeah, looking forward to it. So for listeners who don't know ATTOM Data, ATTOM and RealtyTrac, why don't you give us a quick overview of that of ATTOM and the company and then and also your work with RealtyTrac.

Rick Sharga  2:38  

Sure, ATTOM, as you mentioned, is probably one of the leading providers of real estate related data for people that are looking to to l that data as part of their business operations or marketing analytics. So we provide property property characteristic data, transaction data, loan information, environmental risk, climate risk, Crime Records, demographics, school rankings, just just about anything you can imagine that’s real estate related. And we provide that to companies in the real estate, mortgage, financial services, insurance industries and government agencies as well. And we actually have products that are also geared towards smaller businesses. And we have a small and medium enterprise group that caters to individuals, smaller businesses, real estate professionals, loan officers and the like. And so a whole whole range of product offerings from big enterprises to individuals. One of our product lines is a website called RealtyTrac, which actually is what the company started out as back in the mid 90s, before growing into a data licensing company. And RealtyTrac publishes the country's largest database of foreclosure information that's used primarily by individual investors and real estate professionals who are looking for information on properties and various stages of foreclosure. So that's available at Realtytrac.com no “k”, and you can find the whole ATTOM Data offering at our ATTOMdata.com website that's ATTOM with two T's ATTOM Data thank thanks for the opportunity to say a little bit about the companies.

Mike Simonsen  4:12  

Yeah for sure and and RealtyTrac was it was quite a story because it was the leading provider of the finance the the foreclosure data 15 years ago, when the world all of a sudden needed to know everything about the foreclosure market.

Rick Sharga  4:30  

That's actually how I accidentally got started in this business. I was. I was a technology marketing guy for the first half of my career. And one of the companies I started doing a little bit of consulting work for was this little startup called RealtyTrac. That was aggregating foreclosure data across the country and getting ready to expand and that happened at just the right time because that's when the the foreclosure crisis hit the great the great recession happened and you know, candidly, Mike We were the only company willing to talk about what was going on in foreclosures. A lot of the other there were only a handful of companies that had similar data, but most of them really didn't want to be talking about what was happening. It was scary, right? Yeah, it was scary. And and, you know, candidly, some of these companies were from inside the mortgage industry and the mortgage companies were the ones doing the foreclosing. So it just, it was an awkward time for, for them to be talking about it. So. So yeah, and, you know, you mentioned how much time I've spent dealing with the media. That's my current role at ATTOM is to kind of be our liaison to the media also, to speak at industry events and do a little bit of work with, with customers and prospects who were looking for market data. And you know, that that all started by talking about foreclosures, and then gradually went into a short sales, and then traditional sales, and then general real estate and mortgage topics. And you and I met back then as well, when and for the, for those of you who don't know, Mike and his company, you know, Mike, Mike is one of the, one of the longest 10 years of anybody covering the parts of the real estate industry that he does. And I've always looked at his data. So it's, it's it, the more things change, the more they stay the same sometimes. 

Mike Simonsen  6:16  

There you go, it's funny how all of a sudden, 17 years later, we are the world's experts in our little niche of the universe. Yeah, sometimes I sometimes laugh at myself, I think about that, you know, my Altos Research started off as, as a personal exercise, analyzing one my, you know, overpriced piece of junk Silicon Valley mortgage, you know, when I was 30 years old, and, and needed know, what was going on, and it evolved into this, and this company. And, you know, now I'm, you know, totally unemployable. So, I've got to, you know, gotta run out. So So you know, that we're in this market in the last two years, two years ago, we, we start when, when pandemic lockdown started happening, we all assumed that the market was going to tank, and that that there would be a lot of foreclosures, and people wouldn't be able to afford their homes. And we would run into another crisis that was pretty broadly assumed. At that time.

Rick Sharga  7:22  

Well, I I'm smiling a little bit because I was a lone voice crying in the wilderness. Back then, I had the opportunity to do some research on how the housing market had fared through prior pandemics, or periods of economic shock, like 911, which was the closest proxy I could find to a situation where everything shut down instantly. And what I learned was kind of encouraging is that the housing market typically fared pretty well through those other periods, and in fact, very often lead the rest of the economy in its recovery. So that that was one thing we had, at least in my mind, going into the pandemic, was the track record of housing, going through and coming out of pandemics was actually a lot better than people assumed it was. The other things that happened. And I'll try and do the Reader's Digest version here, we've lost 22 million jobs virtually overnight, to put that in perspective, and that that took unemployment up to almost 15%, nationally, almost 16% in California. And put that in perspective, during the Great Recession, Unemployment peaked at a little bit over 11%. So the number of jobs lost and lost all at once was just mind boggling. But unlike most recessions where there's job losses across the board, white collar, blue collar, government, entrepreneurial jobs, everybody loses a job. In this case, a lot of the job losses were focused on a handful of industries in the service sector, restaurants, retail, travel, tourism, hospitality, entertainment, and what a lot of the workers in those industries have in common is that they're renters, not homeowners, and in a lot of cases, not even close to being homeowners. So we had kind of a bifurcated situation going on in the housing market where the the rental community was, was under much more financial duress than than the owner occupant community. And so you had what what some economists refer to as a K shaped recovery where the homeowners and the better off folks from a financial standpoint, recovered much more quickly. So that was one of the reasons housing didn't tank the way a lot of people expected it to the other candidly, is the government came in in an unprecedented manner to protect homeowners. We had never seen anything quite like this before. But they initiated a foreclosure moratorium that lasted almost two years and during that time, virtually the only properties going into foreclosure were commercial properties which weren't protected by the same regulations and vacant and abandoned properties, which everybody kind of agreed would be a good thing to take have resolved. And then they put the mortgage forbearance program in place as part of the Cares Act, where all the borrower had to do is let their their mortgage servicer know they're impacted by COVID. And they were allowed to miss mortgage payments. And that gave people 18 months of not having to make a mortgage payments. As they left, the government's program gave them a repayment plan that the industry had never seen anything like before. You take all those missed payments, and you can tack them on to the end of your loan. So if you've missed a year and a half worth of payments, normally in forbearance, you have a lump sum due at the end of that period, which would have put everybody into foreclosure. Instead, you have a 30 year loan and you're on your five now you don't have to worry about making those payments for another 25 years. So it the program has been a remarkable success, less than 1% of the 8 million people who've entered that program have left via a short sale or a default or a deed in lieu or anything like that. Probably the best example I've seen in my decades in the industry, the government and the mortgage industry working together for a positive effect. So combination of the government protection rules, the odd nature of this recession in terms of job losses, and candidly, the unbelievably rapid recovery of the economy, literally, we had a recession that lasted one quarter, and then we had a record quarter the following quarter. So a lot of those jobs came back unemployment, typical unemployment rates typically lead to foreclosure rates. Right now, there's more jobs, and there are people looking for work. So it's just been a remarkable, remarkable period. I'm sorry, that was longer than I expected.

Mike Simonsen  11:37  

But that's perfect. That's really great. Well, you know, one of the things that that it brings up, though, is we have so the so one thing I noticed as you're talking is that we actually had the housing market started booming before the government programs went in place, like people started buying things. So it's I think it's important to remember that it was not just we didn't have a boom, because of the programs. We had the boom. And then we added, we had some started the boom, and then we added some of those programs out. So like we noticed three weeks into the lockdown that people were buying homes. Yep. And so that was before any any, you know, things were?

Rick Sharga  12:17  

You were you were the only ones reporting that because I, I did a webinar with a rather well known real estate industry analyst, I believe it was in May of that year. And at that point, you knew you knew that people were already buying houses. And he fairly confidently predicted that we'd see home sales crater by 40 to 50%. That year. And what we saw instead was a second half of that year, where the numbers were off the charts in terms of home sales. So you got an early inkling of that most of the industry missed it. And and actually, his thesis at that point was, was logical. We had missed the spring selling season. And that's usually the most critical time of the year but But what most people didn't anticipate was that December would turn out to be a great year for home sales, who knew that everybody wanted a new house in their Christmas stocking? So it was it was an unusual, unusual year.

Mike Simonsen  13:09  

It's great. It's every once in a while I say it's because we are so fast with the Altos Data. We can we are off we're often we are data turns before the headlines. Yep. And it is fun to be contrarian. And there are some times when you are contrarian and bullish at the same time, where the headlines are still really bearish. But the data is bullish. Like those are the best times to be able to

Rick Sharga  13:32  

Yeah, it's a lot. It's a lot more fun to do that than to be the contrarian bear. That's no fun at all.

Mike Simonsen  13:38  

I never want to talk about it. 

Rick Sharga  13:41  

I do want to push back a little bit on something you said, I agree with you that the boom started prior to the pandemic. And and that was driven really by two things. It was driven by demographics. So the average age of a first time homebuyer right now is 33. The largest group of millennials, which is the largest generation in history, are between the ages of 29 and 32. So demographically, we saw a ton of households being formed, I think, I think one of the things you'll see coming out of the pandemic is that household formation formation numbers are going to be corrected massively because I think they were grossly under reported for logical reasons. It was hard to go count people if you're, you know, quarantine but but that was already starting and low interest rates. And and I think the government actions caused interest rates to go even lower as we got into the pandemic. So those two things were driving driving home sales, but the thing that pandemic did was accelerate some trends you and I had already noticed were happening. We were already seeing millennials, who were renting in urban areas, moving to the suburbs and becoming homeowners. But I think the pandemic because of health reasons and because of the opportunity to work from home, really accelerated those trends. And we saw a lot of people moving out of the cities, we saw some people moving in to different states because of cost of living benefits. And and that I believe was an accelerant to what was already on fire housing market.

Mike Simonsen  15:08  

Yeah. So that so brings up interest rates. Yep. So so let's talk about interest rates. So I got to two questions. One is, you know, we've gone from from two and a half to five. And so we'll want to talk about what that means for the for the rest of the year. But then I also have a question, when I shared data, there is a class of people who view the the active market, the demand, which seemingly insatiable demand, insatiable demand and the price driving as as artificially inflated or supported by rate policy, the Federal Reserve and so so the, the two questions are one is, you know, first, let's just tackle what we think about the, you know, higher rates now, and and what we see happening, for example, are there foreclosures or things that might happen? Or like those kinds of trends that we haven't seen, that are super low now? Do they start again? And then and then the other is, is, you know, is the whole boom, fake? You know, propped up?

Rick Sharga  16:22  

Yeah. So yeah, and I get that a lot. I, for some reason, a lot of people in my LinkedIn network are conspiracy theorists. You know, it's, it's all the Fed. It's, it's, you know, the Martians coming in and anyway, on on the first one? No, I think I think we're kind of still suffering from PTSD from from the Great Recession. And what people have to remember is that during the last housing boom, interest rates on 30 year fixed rate loans were routinely 5-6-7-7 and a half percent, what we did see was an inordinate number of adjustable rate loans, that weren't good adjustable rate loans. These were loans with teaser rates, which were the only way people could afford to get into a house. So you had a 1% or 2% teaser rate on your loan, that in two years, went to 4%. And people weren't really good at basic math, they would say, oh, that's only that means my interest rates going up 2%? No, no, it means it's going up 200%. And that's going to have some implications for your payments. And as long as home prices kept going up, you could theoretically get out of that by selling your house, when prices stopped going up, the whole house of cards fell apart, we don't have that situation this time. In fact, we might have the opposite effect. This time, we've had millions of people refinance, or buy with loans that are now at two and a half 2.753 3.25%, they're not going to be terribly inclined to sell that house and buy a new house that's 20% More expensive than it was a year ago, and get a mortgage, that's, you know, two, three points higher than the one they already have. So we might suffer from a little bit of rate lock, which will not help inventory recover anytime soon. But but somebody who has a 3% mortgage doesn't care if the new mortgage rates go up to 5%, because it's not going to affect that person. In fact, they're now really happy because they're paying below market rates, and they're paying way below inflation rates. So so the rising interest rates by themselves are not going to cause any kind of foreclosure wave I am concerned, if I'm going to look for an area of vulnerability. It would be and I'm not picking on this cohort, but it probably be the FHA loan portfolio, FHA, particularly people who have bought more recently. So the characteristics of that that group are they have lower, they have less equity, because they took out a low downpayment loan, that's why they got an FHA loan, they typically have lower cash reserves, they typically have a higher debt to income ratio, which means more of their monthly income goes to paying down debt, and they're facing a couple of issues right now, not the least of which is this persistently high inflation. So if you were somebody who stretched to get into your house and just kind of barely made the cut off and now and a higher percentage of your your, your monthly income was already going for things like food and gas and, and heating oil, and now you're looking at those three prices skyrocket. You know, you're in a situation where you're one water heater mishap away from not being able to make your mortgage payment. And in a lot of cases, that's all it takes for a borrower who was right on the edge to fall into kind of a vicious cycle where they just can't recover. So I am a little bit concerned about that. The there's $27 trillion in homeowner equity out there, which is the opposite of where we were the last time during the Great Recession, a third of homeowners were underwater on their loans. So we had we had lost trillions of dollars of equity During the Great Recession, so even for people who do find themselves in financial distress and can't make their mortgage payments 90% of the time, 95% of the time, they have enough equity, they can sell their house and walk away and get a fresh start. But those those more recent buyers who have little equity to tap into, and might find themselves in financial trouble because of other economic conditions. Those are the ones I'm a little bit concerned about in terms of where the market goes, which I think was the question that I just ran right past, I think new buyers are looking at a triple whammy right now. You're looking at home prices that have gone up between 17 and 20%. Year over year, depending on where you are in the country, you're looking at interest rates that have effectively doubled on the most popular loan product out there, the 30 year fixed rate loan, and you're looking at inflation that right now is running at eight and a half percent, I may not slow down anytime soon, despite the Fed actions, you know, just just combining the home price increases and the mortgage rates. If you were looking at buying the same house today that you could have bought a year ago your monthly mortgage payment is going to be somewhere between 25 and 30%. More and you know I did ask my boss for 30% your yearly raise, I didn't get mine. I'm not sure how many people got theirs. But that that becomes a real issue. And and you know, just things you don't think about if the Fed does push through Fed funds rate increases as planned. And they're pretty much going to have to to slow down inflation, that's going to push the interest rates on credit cards, a lot of households have a lot of credit debt. So their their monthly prices for paying off their credit cards are gonna go up as well. So there is a ripple effect. And I do think over time, probably later this year, we will start to see demand noticeably weakened as we get to kind of an affordability wall, where potential buyers just say that's too much. And and you know you and I look at the same data. We've already seen existing home sales and new home sales down on a year over year basis for a number of months pending home sales are down. If you look at year over year, pending home sales are down for 10 consecutive months of the mortgage bankers Association's purchase loan index, which shows how many people are applying for mortgages, is now trailing both 2021 and 2019. I'm throwing out 2020 Because right now we were in the teeth of the pandemic. And so that those numbers are all all out of whack. And consumer confidence is about the lowest it's been in a decade. So you have a lot of factors that you look at. I talked to realtors, and they joke about it. They say yeah, now we're not getting 30 offers on a house, we're only getting 20. And there's there is still demand, because of the reasons we talked about before in terms of demographics. But I do think over the course of the year, we will see demand, appreciably weaken, as demand weakens, sales volume will slow down as sales volume slows down, I believe we'll start to see pricing get more rational. So I'm not calling for a market crash. But I do think we'll see prices plateau a bit. And and there will probably be some instances where prices will correct. You'll see you'll see price corrections in markets like coastal California, the Pacific Northwest, maybe places like Austin or Boise where prices were hyper inflated last year, but that's what's in my admittedly cloudy crystal ball right now. 

Mike Simonsen  23:23  

Yeah, so there's a lot there. Yeah, I know. The so that the interesting scenario, then is we have what if we have people who are FHA buyers now, and basically tell me FHA means means they can have a tiny amount down because the Federal Housing Administration agency is guaranteeing that loan to add. So typically what what are the dynamics of an FHA loan?

Rick Sharga  23:54  

It's very similar to a normal conventional loan that the difference is it as you mentioned, it's it's guaranteed by the Federal Housing Administration, a government agency, so if the loan goes bad the government basically makes makes hole the lender but you can have a loan you can get FHA loan for as little as three and a half percent down the borrower typically has less stringent credit requirements, less stringent requirements for cash reserves, employment history. So you know, it's not exactly the way it's written up. But But FHA loans typically are, are you know, for for lower income borrowers or first time homebuyers.

Mike Simonsen  24:33  

So then, so that we could see for example, if we're FHA buyers in some of the crazy markets like like Austin or Boise then we have and we have some of that migration driven stuff like California people stopped buying and in Boise, and we have plateau price decline. We could see a segment of buyers that could get in trouble. 

Rick Sharga  25:15  

Yeah, I'm looking at it more. More historically, Mike, if throughout the pandemic for a minute and to a certain extent throughout the Great Recession, you can almost always draw a direct line from unemployment rates to delinquency rates to foreclosure rates. And that's been pretty true historically. So you start to see unemployment ticked up over 5%. But you start to see delinquencies go up, you start to see foreclosures go up. So it all comes down to the underlying economy. What concerns me right now, for those and again, could be other types of loans, but let's just stay with FHA borrowers for a minute, because they, they kind of fit into this profile. By and large, even if they don't lose their job, their cost of living is going disproportionately quickly, because of inflation. And it will also go up because of Fed actions. As I mentioned, their their interest on on other loans and credit cards, those payments are gonna go up. So if you were, you know, if a borrower were 40-45% of your monthly income was going to housing costs, which is not unusual. For an FHA borrower in a high price market, now you have less money to spend on food and other necessities, which are getting more expensive. Yeah. So just, if that continues, you might wind up not being able to pay your bills. If you have a medical problem, if you have, you know, your roof needs to be patched. You don't have cash reserves to handle those sorts of things. So maybe you take maybe you put everything on a credit card, now you have more monthly debt. So it's that's what worries me. And then we you know, you and I haven't talked about the dreaded R word yet. But but the reality is that the Federal Reserve is almost almost inevitably going to push us into a recession, not because they want to, or they're mean, or there's a conspiracy, but but the fact of the matter is, if you look at the last 11 cycles, where it looked like there was going to be high inflation, or there was high inflation, the Fed acted preemptively three of those times before the inflation took off. And in all three of those times we had a soft landing, everything worked out well. There were another eight times where inflation had already taken off, and the Fed came in to correct the inflation. And in eight out of eight tries, we wound up with a recession. So Fannie Mae's chief economist just last week called for a recession, probably in the second half of next year. He's looking at it being a mild recession, Deutsche Bank seems to be going back and forth between mild recession and severe recession. But one thing all recessions have in common is job loss. So if we're if we're looking at a traditional typical recession, which might happen next year, you could start to see job loss. If you see job loss, you're gonna see delinquencies, and if you see delinquencies, inevitably you'll see some foreclosure activity. So what's I don't see a wave of foreclosure this year. But in fact, I don't think we'll get back to normal levels of foreclosures until the end of this year, beginning of next year. But if we do have a recession next year, we could see some fallout from that.

Mike Simonsen  28:07  

So okay, yeah, so we are at record few delinquencies right now. And because everybody has equity, everybody has a cheap mortgage. Everybody has a job. Like, what conditions would you not pay your mortgage? Oh, heck, yeah. The very only real weird scenarios that that, you know, we get behind the mortgages right now,

Rick Sharga  28:29  

Mike, you'd be surprised how many of the loans that are either delinquent or in foreclosure are actually from the Great Recession era. These are bad loans that have been bad loans for a decade, and we've been reporting through through our our ATTOM database, a higher rate of foreclosure activity over the last last quarter, the first three months of the year. I mean, you know, 132%, quarter over quarterly increase compared to a year ago. But it's off, you know, foreclosures running at 25% in normal levels. So it's just going to take us but but the point is that the loans we're seeing under foreclosure right now, we're in foreclosure, or were 120 days past due before the pandemic, there should have been a foreclosure two years ago.

Mike Simonsen  29:16  

They are they are chronic non payer type, folks. I have a friend who was in that boat and it's wild. And it's in court out of court, pay stub shuffle things around, like, that's, like, it's kind of part of the trade. It's like the, you know, it's it's wild. But you know,

Rick Sharga  29:36  

There was a guy in Long Island who was evicted a few months ago, who had been in the foreclosure process for 23 years. Yeah. And he's just, it's crazy.

Mike Simonsen  29:46  

It's crazy. So, so that's interesting. So the foreclosures are climbing. But really, these are these, like there's not, it's not like people who are somehow pandemic impacted. These are pre pandemic things and and we're getting through a long backlog.

Rick Sharga  30:09  

And we're still running at half of the normal level of foreclosure activity. So it's just, you're gonna see the headlines, but But you know, people that are watching the podcast should keep in mind that, you know, again, those increases are coming off remarkably low levels.

Mike Simonsen  30:22  

So then unemployment to delinquency to foreclosure, what's the lag time?

Rick Sharga  30:26  

That's a good question. And it'll probably be a little longer than in previous cycles. So normally, unemployment to delinquency can be anywhere from 60 to 90 days, and then delinquency to foreclosure. Because of the regulations that were put in place during the Great Recession. And because services are being extraordinarily cautious about putting people in foreclosure right now is probably, you know, another 60 to 90 days after that delinquency kicks in. So you're probably talking about six months before, you know, between job loss and entering foreclosure. And then the length of time you're in foreclosure varies wildly. If you're in Texas or Georgia, you may be in a two month process, start to finish in states like New York, New Jersey, Illinois, Florida, it's over 1000 days. So you could be in for in the process for for three years or more.

Mike Simonsen  31:17  

Right. The judicial states are, there's likely backlog in there. So we probably have a

Rick Sharga  31:20  

There's a backlog, not just the foreclosure cases, you're absolutely right, the the courts are backed up because of the pandemic. So they're just kind of working through that backlog. And they're not going to be anxious to get, you know, foreclosures process going to be just to be nice.

Mike Simonsen  31:38  

So in some ways, we could see that, you know, we got we have to rate hike to calm inflation, it triggers a recession. But that recession, then is job loss in the second half of 2023. And that it's it's a good six months from then before we start seeing active inventory increase. So it's like 2024, assuming all these things happen.

Rick Sharga  32:09  

Yeah. And if it is a mild recession. Now keep in mind right now, there's one and a half jobs available for every person looking for work. Yeah. And we I think we had a record jobs month that was just reported this morning, so So those numbers may even be conservative. So the real question is, how bad is the jobs fallout? If we do have a recession next year? If you lose your job? Is there another job waiting for you? Or can you get another job fairly quickly? Or does the government step in and do something unprecedented again, because, you know, now we've seen that we really can interject and prevent a lot of unnecessary foreclosures, or is the housing market still going gang but and and as the inventory is coming to market, we don't even notice because people are gobbling it up. One of the big differences this time, so anybody who's an investor or real estate professional, this is important, an important consideration. There was a glut of inventory during the Great Recession, when when the wheels came off the bus, there was over a 12 month supply of homes available for sale. In a healthy market, we're looking at about six months, as you've been reporting regularly for the last couple of years, we're down probably two months or less nationally, right now, if if that inventory level continues to be low, people continue to look for properties to buy. If you're looking to buy a home in foreclosure last cycle, you didn't buy it during the foreclosure, you probably didn't even buy it at the auction because the pricing was off, you waited for the bank to repossess the property, and then ultimately bring it back to market at a discount. That's not the situation this time. 90% of borrowers in foreclosure actually have positive equity, which is unbelievable. 24% of them have more than 50% equity, there's no reason for them to lose a house to foreclosure, they, at the very least should be able to sell it at a significant profit. So we believe that most of these properties are going to be sold before the auction. And and my friends in the auction industry tell me that whatever is going to sale at the courthouse or in a sheriff sale, the sell through rate right now is between 65 and 70%, which is double the normal rate. So people are going to those auctions and buying because that's all the inventory they can find. So there's almost nothing going back to the banks. So if you're gonna buy this cycle, you need to be earlier in the process, probably working with those distressed homeowners. And that creates a win win because they don't lose everything to a foreclosure they don't lose all that equity to ongoing fees and fines. And you bring inventory to the market or find a property you can buy.

Mike Simonsen  34:42  

So let me let me make sure I got this right. So 90% of the homes that are in foreclosure right now have positive equity. That's correct. Wild so that if you're an investor you are it's likely never gonna go all the way through the process where the bank owns it and then auctions it. Because at some point, somebody's gonna go up, I'm, I gotta get out of this thing, and then they will sell it. And it's a short sale. It's like,

Rick Sharga  35:13  

It's a traditional equity sale, you might be able to get it for a little below market value, because you do have a distressed owner who's on the clock. But yeah, it's like, like I said, when you when you start breaking out these numbers, some some of the numbers are just mind boggling. But but the problem for that homeowner with 50% equity, is they can't tap into the equity to get out of default out of delinquency because No, no bank, no lender will give them a loan, because they're currently unemployed, or, and they're, they've missed a bunch of payments, so

Mike Simonsen  35:46  

they don't pay their loan, right? Yeah, I'm not gonna give you another loan on your equity. Yeah.

Rick Sharga  35:49  

So we do see some Shared Equity players moving into this space, who will will actually create products that are geared specifically toward working with those kinds of distressed borrowers, I was I was unemployed, this six months of payments, I'm now in foreclosure, but I have 50% equity, and I found a new job well, for a share of the equity in your house and you know, some some profit margin, they will let you tap into that equity to pay down your debt, and you kind of restart. So it's, it's interesting that we're seeing these kinds of FinTech companies pop up and fill that void. So there may even be some cases where those houses don't have to be sold, where the homeowner can can tap into the equity and save the house.

Mike Simonsen  36:31  

Those equity sharing applications have always have always sort of escaped me of when they're really a good deal. Most of the time, they're high fees and things that and when you can sell really quickly, or you can get a HELOC. Like that's, that's those see the traditional way seem like better deals. But this is an interesting application where I can't get a loan, I have hundreds of 1000s of dollars in equity and like, so we can get that out via an equity sharing agreement rather than a loan agreement.

Rick Sharga  37:01  

Yeah. And what's interesting is, I've seen a couple of these examples, their companies like Unison unlocked, and in the unlock people in particular seen a couple presentations, there aren't this unlike a loan, you're not making payments. So that's the other benefit of this, you're tapping into the equity, you pay down your debt. And you're not making payments, you don't don't owe anything until the end of the term. Now the the flip side of that you have to go in with your eyes open is if you continue to accrue equity, they're gonna share that too. So your your, your ultimate profit from the sale of your house is going to be diminished a little bit because of that share. But if you're in a situation right now, where you can lose everything, you know, it's an interesting option.

Mike Simonsen  37:42  

Yeah, and in most cases, it's like, people are buying their homes, and it's the only investment they have anyway. So I don't want to give up that equity. That's the only thing I've got. But in the case where like, that's the way to get it that where I need that capital for whatever, you know, happened like that. That's a really fascinating view of it. You also mentioned

Rick Sharga  38:00  

The the other question I get about people selling their house while they're in foreclosure is and you will be surprised at this. One is where are they going to live, you know, virtually nothing available for sale, apartment. Vacancy rates are about 2% across the country. So the other, the other potential benefit to tapping into your equity and staying where you are as you go forward. And if you like where you live your kids in a good school, so forth and so on. You know that that's the other benefit to that kind of approach, I'm not shilling those services, I'm just, we're having a conversation or

Mike Simonsen  38:30  

having a conversation about when those might be useful. That's great. I appreciate that very much. You also mentioned government programs. And of course, during the pandemic, unprecedented support for homeowners, it's one of one of my bull cases or arguments for real estate is that all of our policy in the US tax policy, you know, all of the things is about protecting the home, which works actually to the detriment of the buyer, the people who don't own yet, because it keeps people in their homes. And, you know, it prevents them from selling their homes when they you know, they hit a time when if you can't afford the home, maybe it's a good thing to sell it. But but they support that it seems unlikely that that overall policy approach will change. So it seems like the government's into supporting homeowners and so I see it as a is like, it seems unlikely that we're going to shift and all of a sudden shift policy to support people who don't own homes yet. And like which would do, which sounds bad because that means like, Granny gets kicked out of her house because their tax payments went up or you know, those kinds of things. It sounds really mean. So it seems unlikely that that policy was will change. What do you think about a government policy and maybe even like over the next few years, the implications for the market for what we're talking about? Anything that is there? Is there anything that we should be noticing any trends?

Rick Sharga  40:06  

So, I just what you talked about Granny is a concern of mine, we just published our annual property tax report and taxes nationally went up 1.7% year over year property taxes. Home prices during the same period of time, according to our calculations went up 17%. So I believe there is a trailing tax increase that homeowners need to be on the lookout for. And I am really concerned about markets like Boise, and St. George's, Utah, and to a lesser extent, Phoenix, but Boise last year saw price increases of 45%. But in home sales, and as you mentioned, a lot of that was people selling their house in Silicon Valley, taking the cash. And and overpaying, you know, 20 30% over list because they could and because it was half of what they just collected on selling the house in San Jose. And they don't care. But what happens to granny who's on a fixed income, who's whose property whose housing cost is predominantly that property tax bill, are they going to go up? 45%? And what does that mean for people currently living in the market? So the truth is tax assessments go up irregularly across the country, we're kind of isolated, insulated from that in California, you and I because of prop 13. So it's you know, we don't really see the real world, but But you know, whether it's an annual increase, or every couple of years, there could be sticker shock for homeowners across the country. When that happens.

Mike Simonsen  41:38  

It sure sure could could sure could be the the prop 13 is such a crazy double edged sword. It's it is like I talked about it as the worst tax law ever now, because because your property taxes in California don't go up. You know, you you it's like rent control, it is rent control for homeowners in the in the state of California. And the result of rent control is that because I my payments are artificially low, I don't ever move and therefore I never give that there's, there's a shortage. And so and there's a shortage of chronic shortage of homes for sale in California because of prop 13. And, and, you know, and it's, it's a fascinating implication, because, you know, to get rid of property, you know, there's all kinds of other implications of the negative of that. So, property taxes are super low, therefore, the schools are starved. Therefore, the communities cities don't want to build more residential, they want to build commercial because commercial taxes will increase. So now you have an even more shortage created, like you have this this crazy dynamic because of prop 13. But granny doesn't get kicked out of her house. And it was is all in service of granny not getting kicked out of her house now, in California and some of the California markets and San Jose. Granny's got $3 million house with $2.9 million of equity because she bought in 1978. And, and is and literally has, has like and is paying, you know, few $100 a year in property taxes on a $3 million house.

Rick Sharga  43:15  

Well, it's not really a few $100 a year. It's it's a few $1,000 a year, but but but it certainly hasn't kept pace. You're absolutely right. And, and it is something people look at. And I think they looked at it even more closely with the tax reforms a couple of years ago that kept your your your deductions for your assault taxes. So so, you know, it's one thing to own and I'd say million dollar house because people outside of California, that looks like a big house in California, that's a fixer upper. But you know, yeah, that million dollar house. And you're no longer able to write off your state and local taxes beyond I guess $10,000 a year. So it's a really weird dynamic in California. It's probably almost as weird in some other high tax high priced states like New York and New Jersey, not quite as weird because they don't have prop 13. But we actually ventured off the question you originally asked you which is on policy. And but but in this conversation actually is going to make one of the points I was I was going to offer which is that most of the policy initiatives, most of the policy decisions that will affect housing won't be coming from the federal government. They're gonna be coming from state and local governments because, you know, you can have all the initiatives you want from Washington. But if the if the the if Peoria county doesn't want to implement certain housing initiatives, they don't get initiated, they get zoned out. And so a lot of this comes down to what your local city council is deciding they're going to do. I do know that the current administration is resolute about two things. One is about the need to increase affordable housing. So it's really good that somebody is finally paying attention and trying to come up with with ways to affect changes in affordable housing. And by the way they have broaden that definition. And this is really meaningful from owner occupant to owner occupant and renter because it turns out the asking rent prices have gone up 14% year over year too. So it's good to see that there's at least a lot of hard work and thought going into how do we fix that. The other is they're really, really dedicated to increasing the rate of black home on which if you look at various ethnic groups, and their homeownership rates, black homeownership, candidly has been lagging behind every other every other group. If you look at the Asian American Pacific Islander homeownership rates, they're actually higher than average white homeownership is higher than average Hispanic homeownership is still below average, but it's been going up consistently for the last five or six years. But but but black homeownership rates have lagged behind and the government's trying to figure out ways to affect that. But but it's it's there are limits to what they can do in a local market basis. Because you know, the just the difference, the states rights, the local county laws, the federal government just simply can't overrule those. So they're they're trying to come up with some combination of carrot and stick programs to entice entice communities to move into that create more high density housing units. And in transportation hubs. If you look at the top 25 cities across the country in terms of population, you'll find that almost all of them rezone very, very heavily for single family homes, which which again, makes it tough to have high density units and affordable housing. So there's a long climb to get out of this before. Before we see that work. One of the things somebody suggested in a meeting I was just recently at, I thought it was fascinating, the CFPB Consumer Finance Protection Bureau put lending rules in place to prevent some of the excesses we had that led to the Great Recession that was necessary. And it's worked pretty well. But one of the things they did was cap how much a loan officer can make on a loan and and what percentage they can make on the loan. And what that's done is disincentivize loan officers and lenders from writing low dollar value mortgages. So if you can write a loan for a $70,000 house or a $700,000 house, and your profit, and your commission is going to come out a percentage of the loan, you're not going to write a lot of $70,000 loans. So you know, a kind of common sense solution to making affordable loans more available, would be to undo the cap on on profit and condition, to incent lenders to write more of those low dollar value loans. And there's a need for that, because the lenders who used to do those were community banks, local community banks, and unfortunately, the CFPB  guidelines inadvertently wiped them out of the lending market for loans, the cost of regulatory compliance for the CFPB has rules is so extraordinary that only the largest lenders can afford the cost. So all the local banks went out, they just stopped issuing mortgages. So it's funny that this organization that was created to prevent too big to fail has basically made it you know, too small to survive in this in this industry. And so, you know, as Ronald Reagan once said, famously, the scariest words in the English language are I'm from the government and I'm here to help.

Mike Simonsen  48:22  

I love that you got a Reagan quote in. That's nice, nice work is good southern California raise its suburban southern Orange County, Reagan Republican, that's great to have the the. So those policies and there's a few I was talking with Dan Green from homebuyer.com on the podcast a couple months ago, actually. And he was talking about how as as, as, you know, Fannie and Freddie rate you as a lender, and if you're the lens, your loans you're doing are they go delinquent, then, like you, you're a lower rated lender. And as a result, the lending standards have been higher, and therefore it's harder for for lower credit, first time buyers to buy. But as as rates go up, it looks like that's one of the things that's happening is that is that the lending standards can loosen a little bit and actually make it more possible for some, you know, lower credit buyers to to have action and like have ability to buy. 

Rick Sharga  49:25  

That's a wonderful theory. So the reality is that for the last decade, the biggest lenders, the biggest retail shops, Bank of America, Wells Fargo, Citi Chase, that that group, have exclusively written two kinds of loans. They've written conventional loans 30 year fixed rate loans that fit that check every box in the CFPB S qm loan rulebook, so you had to be pretty much perfect borrower in order to qualify for one of those loans. They they're not taking on any risk, whether it's regulatory risk, loan default risk, headline risk None of it. The other loans they've issued are jumbo loans to high net worth individuals, in many cases at better rates than they were giving the conventional loans, which is very unusual. But they wanted those borrowers for other banking services. And so they use those almost as a loss leader to get those people in. But if you had a less than perfect FICO score, credit profile job history, you're getting a loan from those the dike, the paradox in the industry, you touched on the first part, which is that if you're a lender selling your loans, loans are being underwritten by Fannie or Freddie, they will ding you and your records, if if you have a high delinquency rate of high default rate, they're also going to ding you if you don't expand your your loan your credit box, to work with underserved communities. So this is this is the ultimate push me pull you llama of the of the lending industry. One of the things nobody talks about that kind of precipitated the Great Recession is that lenders were under enormous political pressure to go out and write loans to people they didn't take qualified for loans. And then they were accused of being predatory because they did that, because it's always easy to beat up the banker. So it's a real real paradox for lenders. They're under pressure to you know, not redline anybody, but but also not to allow any loans to go delinquent or into default, which is just the other thing that I the reason I don't think we're going to see the credit box loosen too much is the CFPB announced about a week ago, that they are now going to regulate non bank lenders the same way they regulate the retail banks. That's bad news for anybody who's not a really, really well qualified borrower, because the place you could get loans was from non bank lenders. And these are not all tiny little undercapitalized shops. That's, you know, Quicken and Rocket Mortgage fall into the category of non bank lender Loan Depot falls into the category of non bank lender. So, all of a sudden, these folks are going to be under extraordinary regulatory oversight at risk of getting enormous fines, if they, if they do anything that, you know, they is viewed as being, you know, too risky, or against the interest of that borrower. So, I think, unfortunately, and I love Dan Green, and he and I are both Philadelphia sports team fan. So we have that in common are long suffering, long suffering fools. But I think just that announcement last week is going to cause the opposite to happen and what normally would have happened. Normally, we would start to see the credit box expand a little bit as interest rates go up. But I think that CFPB announcement is going to have a little bit of a chilling effect on that non bank lending community. And if you look at who's writing the most mortgages, these days, I think the last time I saw it, six or seven out of the top 10 lenders were non bank lenders. So I think that's going to be a bit of a challenge for us.

Mike Simonsen  52:51  

Okay, so that could be yet another thing that slows our demand in the second half of the year. Yep. That's really interesting. Okay. Well, let's, let's, we've been talking, you and I could talk for hours on this topic. But let's, let's wrap up, what I like to do is, I like to ask my guests. You know, we've been in such a hot market for such a long time. Let's look forward a few years. And what what are the risks that the train goes off the tracks? What are the you know, what, what do you see in the future? And are there risks that we haven't talked about or that like, that aren't commonly discussed that that we should be paying attention to?

Rick Sharga  53:38  

That's a great question. We should warn me about this one in advance. I don't see endemic risk. In the in housing fundamentals, I think there could be a risk of a bubble if prices don't slow down. But I think prices are going to plateau this year or at worse early next year, just because of market conditions. So I don't think we go into a bubble that burst the the the cohort right after the millennials, the Gen Z group appears to be forming households earlier than Millennials did. So I don't see a huge drop off in demand. That way, as we go forward, there isn't there's a potential demand but we're four or five years away from it. Of the builders over building because they are starting to grow. We're seeing really strong housing starting permit numbers right now. But they've been very disciplined. I mean, they under built for a decade. So it's going to take them at least another four or five years at current rates. Before overbuilding became even even a thought so and I don't think there's anything sociologically or psychologically that's going to change the mindset of most Americans about the desire for homeownership that the biggest disproven nonsense in the last 50 years was probably the you know, Have a meme that millennials weren't going to want to be homeowners. All the research always said they would they were just getting to it later. And there are a whole bunch of good reasons for that. So if I'm going to look at anything in the next three, four years, that could upset the applecart. It'd probably be an unexpectedly severe downturn in the US economy. It was funny I was I was speaking at an event, oddly enough, on September 11 2019. And I was talking about the fact that the housing market was just on fire that the US economy was hitting on all cylinders, jobless rates were at 50 year lows, and it was working across the board highest rate of black employment of Hispanic employment, most women ever in the workforce. All systems were go. And I close my remarks by saying unless there's some sort of global catastrophe, I don't see anything derailing the US housing market. Apparently the universe was listening, or at least somebody in Wuhan province was listening. And you could almost hear them crunching into a bat when I said that, but but the and I probably just offended somebody I apologize for that. But yeah, but but that's what I said. I mean, you know, absent something that we really aren't looking at right now, or, or absent, a significant downturn in the US economy, which is a possibility the US economy is is you know, has been kind of in a bull run for the last decade as well. The housing fundamentals should continue to be strong. And and so I hate to be pollyannish. But absent one of those few things happening, I don't see a huge, huge downturn anytime soon.

Mike Simonsen  56:33  

All right, Rick, that's outstanding. Thank you so much for your time today. The conversation is terrific. I've got a bunch of notes on you know, neat things that we can call out really interesting insights. I appreciate so much the time.

Rick Sharga  56:44  

My pleasure and and please don't write anything down because that gives you proof I was wrong next year.

Mike Simonsen  56:51  

Turns out when you make predictions in this kind of environment, nobody pays attention that you're wrong. So it's okay. You can predict whatever you like. Yes, right. That's right. Exactly. I avoided making predictions for years because I wanted to be right. But now I just this, here's what I know, man. This is what I know. And this is what like what we can see. And here's what it looks like from here.

Rick Sharga  57:16  

And that's that's all we can do is you follow the numbers and interpret them the best you can

Mike Simonsen  57:20  

All right. Thanks. All right, everybody. That's the Top of Mind podcast for this week. This is Rick Sharga, my guest from ATTOM Data and RealtyTrac. As always, you can find everything you need about your real estate data. And by Altos Research at Altosresearch.com you can get these videos on our YouTube channel as well is our weekly market data videos on Mondays on the YouTube channel. And Rick where can people follow you social where's the best place social media wise to can connect with you?

Rick Sharga  57:53  

Yeah, I'm on Twitter and LinkedIn pretty regularly and you just look for my name Rick, Rick Sharga. And happy to if you if you do ask to, to connect with me on LinkedIn just mentioned Mike's podcast so I know where you came from, because I get a lot of really, really interesting invitations to connect on LinkedIn and I do them all anymore.

Mike Simonsen  58:15  

Yes, I'm worthy. Okay, so make sure you say Mike's podcast or Top of Mind or Mike from Altos Research, something like that. Alright, everybody, that's all the time we have for today back next week.

Outro  58:28  

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