Foreclosure Fears, “Emotional” Equity, and Big Buying Opportunities

Dave:
Hey, everyone. Welcome to On The Market. Today, we have an incredible show for you. Jamil and I are going to be interviewing Rick Sharga, the EVP of Market Intelligence for one of the biggest data providers in the entire industry, ATTOM Data. And we have an incredible conversation that we’ll get into it just a minute. But before we do, Jamil, you are the busiest man I’ve ever met. What have you been up to recently?

Jamil:
Man, it’s been a lot of fun. I’m wrapping up season two of Triple Digit Flip right now. So, we’re in the tail three houses of our season. It’s incredibly taxing, because these three houses are crazy big projects. We’re in the middle of a market shift right now. So, my wholesale operation is relearning a few markets and how we are approaching them in terms of pricing. And beyond that, I’m enjoying my opportunities with BiggerPockets and this has been a lot of fun and we’re just doing the thing that we always do, buy houses. We’re buying houses, man.

Dave:
It just sounds so simple when you say it that way.

Jamil:
Yeah.

Dave:
Well, that’s awesome. We appreciate you making the time for us. It’s always fun to have you here. Just for everyone listening, we do the interviews before we do this intro. The interview is awesome with Rick. He is so informed and so smart. What should our listeners look forward to and pay attention to in the interview?

Jamil:
Because I think what’s really important to pay attention to is how and why Rick is saying the things he’s saying, okay, the fundamentals in his arguments. This is I think the biggest piece that’s been missing with a lot of the headlines that you’re reading out there or the people that are clickbaiting you on YouTube. The facts are it sells to say something really, really, really wild and crazy and to stir your emotions and to tap into your lizard brain and instill fear, but what I found that when we talked to Rick, what was really interesting was just how measured he is.
I mean, this man has looked at the numbers. He’s swimming in data. He understands the dynamics that created our last real estate crisis and he’s comparing them to the current market conditions. And he’s making a very strong argument to where the housing market is going and why. And I really want the viewers and the listeners to pay attention to those fundamentals. Are his arguments strong?

Dave:
That’s such a good point. I mean, if people are trying to sell you something, think about what their motivation is. And Rick, his job is to make accurate predictions and forecast. Some people come on and they say this to me too, they’re like, “Oh, you benefit if houses are bought or people keep investing.” And sure, I work for BiggerPockets. Let’s be clear about that, but my job is to try and read data as accurately as I can. And that is what my motivation is and same thing with Rick.
I just think in general, people need to be wary of any people out there who say things in these definite terms like the housing market will crash or it will go up forever. The truth as we talked about this in the interview is always somewhere in the middle and Rick does a great job of parsing out the nuance. And I know people want to just know, “Is it up or down?”, but there is nuance and that as an investor, understanding that nuance is where you’re going to gain your advantage. So, awesome interview. With that, let’s get to the interview with Rick, but first let’s take a quick break.
Rick Sharga, Executive Vice President of Market Intelligence for ATTOM Data, welcome to On The Market. Thank you so much for being here.

Rick:
It’s great to be back with you guys and looking forward to talking about what’s going on in the real estate market.

Dave:
Okay, good. Because I know we do want to talk about foreclosures and what’s going on there since you’re such an expert in that topic, but since you’re knowledgeable about everything going on in the housing market, I cannot resist asking you what your read of the current market conditions are.

Rick:
Yeah, the impact of rising mortgage rates has been dramatic and has hit the market a lot faster than the many forecasters that expected. May home sales numbers were the fifth consecutive month where we had lower sales in the prior month. It’s marked almost a full year where home sales were down on a year-over-year basis. So, we are starting to see a weakening of demand. I believe that’s tied into affordability issues that the prospective home buyers are facing.
If you were looking to buy the same house today that you might have bought a year ago, the combination of rising home prices and those mortgage rates doubling means your monthly payment would be somewhere between 40 and 50% higher than it was a year ago. I’m sure you guys got your 50% annual raise. Mine seems to be missing.

Dave:
Same, weird.

Rick:
Unfortunately, a lot of home buyers are in the same boat I am. So, we are starting to see the impact there. Loan applications are down about 20% year-over-year. Pending home sales are off year-over-year and for the most part month over month. So, there are signs everywhere that we’re really at an inflection point in the market and the Federal Reserve’s actions, which I believe were at least partly intended to cool down the housing market, which is part of the inflation mess that they’re trying to fix right now. It had probably been more successful more quickly than they expected.

Dave:
And so where do you think we go from here?

Rick:
I think what’s going to happen is you almost can’t be on social media without some guru telling you that the housing market’s going to crash and expect prices to fall 30 to 50%. I’m so tired of reading those stories. I see just about no possibility that’s going to happen. Now, the last time I said, almost nothing could go wrong, we had a global pandemic. So, I’m a little bit cautious about making too broad statements, because God knows what’ll happen next. But the most likely scenario is we start to see home prices plateau. We see home price appreciation slow down dramatically. So, most people forget in a normal housing cycle, you start to see sales activity pick up. That’s followed by home prices picking up.
And at a certain point, prices get to a number or a level where buyers say that’s just too much and they stop buying. So, sales volume drops and then prices normalize or correct. That’s the period that we’re in right now. So, I anticipate we’re going to see home sales continue to slow. I don’t think we’re going to get into the low levels of home sales we had coming out of the great recession, but I believe by the end of this year, you’re going to see home prices maybe appreciating in the low single digits, 3, 4, maybe 5% on a year- over-year basis, which is something we desperately needed. We can’t keep seeing home prices go up 15, 20% a year and avoid being in a housing bubble, but we still have strong demand.
Demographically, we have the largest cohort in history of young adults reaching home buying age. We still have people looking to move to less expensive markets, because now they can live wherever they want because they’re working from home. So, there is still pent-up demand. We still see bidding activity, multiple bidders on the same homes as they come to market. Maybe it’s not 30 anymore. Maybe it’s down to 10, but that demand and the fact that we also have a record level of homeowner equity, over $27 trillion in homeowner equity, will provide a lot of cushion for any potential downturn. I don’t think we should be surprised if we see local market price corrections.
If you’re in the Bay Area in California, Coastal California, maybe the Pacific Northwest, maybe some markets like Austin or Phoenix or Boise, Idaho that were just crazy, crazy overpriced a year ago might settle back down. We might see some price corrections in those markets, but nationally speaking, I think you see home price appreciation drop and I think you see prices plateau. One of the mistakes people make and this is one of those urban myths that won’t go away like alligators in the New York sewers is that whenever mortgage rates go up, home prices come down. That’s not the case historically, believe it or not. If you track this stuff, historically, what you find is as mortgage rates go up, home price appreciation goes down.
It doesn’t mean home prices are falling. It just means that appreciation is less than it was the prior year. And the other misnomer is that people think if you have a recession, the housing market suffers. And in fact, if you go back to ever recession from World War II forward in the United States, you see that housing actually outperformed the overall economy and in most cases dragged us out of the recession. One exception to that rule and that was the Great Recession, our most recent real recession, and that’s because housing dragged us into that one. But I see housing slowing down. I see prices slowing down, but I really don’t see any scenario where we wind up with a crash.

Dave:
One of the main things that happened in 2008 and led to the severity of the price declines is that there is this foreclosure crisis. Can you just provide some historical context about what happened there with foreclosures so that we can better understand what risk might exist of a foreclosure crisis now?

Rick:
Well, I try and explain things in terms that are simple enough so that I understand them and the best analogy I can give you for what happened back then was that in decades past, lenders were expected to provide adult supervision at the party. And in the mid-2000s, they basically threw the keys to the liquor cabinet to the kids and went away for the weekend and we had predictable results. It was a perfect storm, Dave. It was a scenario that we literally haven’t seen in the history of the US housing market before. It was worse in terms of foreclosure activity, even than the Great Depression.
And that was partly because home ownership rates were as high as they were 10 years ago, but people blame subprime borrowers and they were probably the tipping point. People were getting loans that really had no business getting loans. They didn’t qualify for loans. The industry even came up with a term for the type of loans that were being offered. They called them ninja loans, which stood for no income, no jobs, and no assets. So, if you fogged a mirror, you could get a loan. And that was okay as long as home prices were escalating. Once home prices stopped going up and these loans started to reset, that’s something you have to keep in mind. There were about 15 million adjustable rate loans that were resetting during this period.
A very high percentage of those loans had borrowers on teaser rates. So, they were getting a loan with 1 or 2% mortgage interest rates, which was the only way they could afford to buy the home, because they couldn’t make a monthly payment if they were paying full mortgage rates. When those loans reset at 5 or 6%, the borrowers couldn’t make the payments. As home prices started to weaken, they suddenly found themselves underwater on loans. And that was in large part again, because the lenders were giving away loans with zero down payments, in some cases, negative amortization loans, which meant you were underwater as soon as you bought the house. So, the whole thing just crumbled on itself.
There was a lot of speculative buying going on and this is where inexperienced investors got themselves in trouble. I’m coming to you today from Southern California Orange County. There was a story in our local paper about a local investor who owned eight properties in the City of Santa Ana and that doesn’t sound like a bad thing until you realize that her full-time job was she was a cleaning lady. She made less than $40,000 a year and somebody thought it was a good idea to give her eight mortgages. And this was replicated at scale across the rest of the country. So, when things started to go sideways, they went bad in a real quick and dramatic manner. And it fed on itself. You talked about the glut of foreclosures.
About 10 million people lost a home to foreclosure during that timeframe, which again was unprecedented. And as those foreclosure properties came to market, they were coming in at dramatically discounted prices, which was driving down the value of all the properties around them. So, it was a vicious circle that fed on itself and continued to get worse. One other big difference between then and now and the biggest difference is the loan quality, by the way. Delinquency rates right now are the lowest they’ve been since the Mortgage Bankers Association started tracking them in the early 1970s. So, people are getting loans. They’re making their payments. That wasn’t the case back then, but the other big difference is inventory.
So, we talked about supply and demand a couple minutes ago. Right now, we have about two and a half months of supply of available homes for people looking to buy. In a normal market with equilibrium, you’re talking about a six month supply. Right now, we’re about a third of where we would normally be. There was a 13-month supply of homes in 2007 right before the stilts got knocked out from under the house.
So, we had more than twice as much inventory as the market would normally absorb and the builders never got the memo. They kept on building even after the market had turned. So, again, there was way too much inventory. There were way too many bad loans. That precipitated a foreclosure wave, which just sucked the air out of the whole market. And it took us a better part of 10 years to dig our way out of that.

Dave:
That’s super helpful. I often forget about those teaser loans and what a big impact that had. It’s just such a foreign concept now that they were able to do that and people were giving out those loans.

Rick:
You’re right. When the CFPB was formed as part of the Dodd-Frank Act back in the day, they put ability to repay rules in place for loans. They call it the qualified mortgage rules. And it means you can’t get an adjustable rate loan today, unless you have the ability to repay it at fully indexed loan rates. So, it’s a big, big difference in terms of qualifying. And a lot of people think maybe it overcorrected and some people who should be able to get loans can’t get loans today, but that’s a discussion for another podcast.

Jamil:
So, thank you so much, Rick. That was incredibly insightful, because for me right now, especially in the space that I’m in and there’s a lot of folks that are tuned into BiggerPockets that are primarily investors. And so, the inventory that we’re after, the inventory that we hold, that’s the inventory that we want to put into the marketplace as either rentals, short term rentals, fix and flips. And so, we represent this portion of activity that happens in the market. And right now, with all of the fear that’s in the marketplace and I’m so happy that you addressed the guru around every corner that is screaming crash from the rooftops. They’re doing that to sell a course, right? They’re doing that to sell a program. They’re doing that to sell something.
I understand it. I don’t agree with it. I think it’s salacious and it’s not helpful, but there’s fear. There’s fear right now. These are the things that I’ve seen push the market, right? We’ve had migration. We’ve had millennials and money. We had really cheap money. One of those things has disappeared. One of them has disappeared. And so, we still have these very strong dynamics that still exist with people still moving. We still have people coming of age that are well qualified. They are well capitalized because of the types of jobs they have and the income that they can produce and they can actually buy these homes. But you’re noting that we are in a space right now where we are at the inflection point.
Is there a time or is there a world where that inflection point just noses dives, even for 12 months to where we have some overcorrection where we find opportunities in the housing market? Because I think that’s the thing that has stopped people from taking action is they’re waiting for an opportunity to jump in and they want to know, Rick, is now my time to pounce?
Should I put on the camouflage? Should I hide behind the tree? Should I come with my cash? Should I wait to hunt my house down, or are we just crazy thinking that opportunities like that are going to exist and we should just jump in right now, even if it means that we’re going to get mediocre at best returns for the next 12 to 24 months? But over time, as we know, housing will appreciate. What’s your thoughts on that?

Rick:
Every investor’s decision making has to be based on their own plans, their own risk tolerance, and things like that. There’s no way to guarantee against a major correction or downturn in the market. Having said that and this will show you that I really desperately need a life, I was recently looking at home prices over the last 100 years and you can actually find this data. And we’ve had exactly one period where home prices have fallen for over 20% in 100 years and that was the Great Recession. So, I think we all have a little bit of PTSD coming out of that. And every time we see something negative, the knee jerk reaction is panic or I’m going to sharpen my knives and get ready to pounce because things are going to go bad.
A lot of the same gurus who are predicting wholesale housing market crash were the ones that a year and a half ago were predicting a tidal wave of foreclosure activity and we were going to see millions… I was shrieking from the mountaintops on this one. We were going to see tens of millions of foreclosures and tens of millions of people evicted from their homes as we exited the pandemic. And just to be practical about it, if you start to see tens of millions of people being evicted from homes and rental units, you’re actually going to have war on the street. So, it’s not going to be a housing market problem. It’s going to be a civil unrest problem. That didn’t materialize.
And the rationale behind why that was supposed to happen was as faulty as I believe the housing market crash rationales are today. Having said that, you need to be a local market expert. You need to have an idea of what’s going on in the markets where you’re looking to invest. Is population growing or is population declining? Are there more jobs coming into the area or is the unemployment rate going up? Are home prices going up at 20% or 5% or are they flat lining? And for any of us to sit here and issue an edict that nationally now is a really good time to invest would probably be doing people in those local markets a disservice. But the very, very strong probability is that on a national basis, we don’t see home prices falling 10 or 15 or 20 or 30%.
So, if you’re waiting for that opportunity, very, very unlikely, you’re going to see too much of that happening. Very unlikely, you’re going to see any of that happening to be honest. That doesn’t mean there aren’t opportunities for real estate investing. You just have to adjust your objectives, adjust what your ROI calculations look like. The old saying in real estate is the best time to buy a house was 15 years ago and the second best time is today. I expect that we’ll continue to see home prices go up for the rest of the year. I expect that we won’t see mortgage rates come down anytime soon, probably at least not into sometime next year, if inflation gets under control.
So, if you wait six, nine months to buy something, you’re probably going to be paying more for it than if you bought it today. That doesn’t mean to rush out and buy the first thing you see. But if you find something you can afford, if you find something that pencils out at a profit for you, don’t wait, because the likelihood is it’s going to cost you more both from a raw cost standpoint and from a financing standpoint if you wait. That doesn’t even take into account, if you need labor and materials, those prices continue to go up as well. So, there is a strong demand for rental properties. There is a very strong demand for properties that owner occupants can purchase.
So, whether you’re a flipper, whether you’re somebody buying properties to rent out, right now, there’s probably… I don’t know how long the period of time is going to be, but there is a temporary period right now where prospective owner occupants have voted themselves off the island. They’ve decided right now because of affordability, they’re going to wait. So, they probably look for rentals. And a lot of those people would like to rent a house. So, it’s one of those situations where you might have a short term opportunity that if you wait, you’re going to miss, because at some point, those people are just going to decide to throw in and buy.

Dave:
Rick, you just said so much incredible stuff there. It’s hard to pick which one to go after first, but I want to just say that I love what you’re saying here. It just seems like so many people in the media or on social media are saying, “It’s either there’s going to be a crash or it’s like to the moon.” Those are the only two opinions that people have. And it’s so black and white when the truth is always somewhere in the middle and there is gray area. And as you said, the only way to really understand this is to understand your local market there. Kathy always says there is no national housing market, which is a great way of putting it.
Of course, we try and summarize and talk about broad trends like inventory, but at the end of the day, if you were going to invest, you absolutely have to be a market expert. Because you have such an expertise here in foreclosures, I do want to dive into what you talked about, which is that people were screaming from the mountaintops that there was going to be a foreclosure crisis. I think many people who look at data knew that wasn’t going to happen, but for people who aren’t as familiar with what happened with the forbearance program in 2020 and where we are now, can you fill us all in?

Rick:
We came out of an unprecedented situation and again, I think we had a little bit of PTSD from the Great Recession that drove a lot of people’s thoughts and fears. Look, when the pandemic was declared and the government shutdown took place, we wiped out 22 million jobs in a week. That’s never happened before ever. So, when you look at losing 22 million jobs and you say foreclosure activity isn’t going to go up, people are justified in looking at you sideways and thinking you might be crazy. This was a very different recession from prior recessions, though. You look at those 22 million jobs and a couple things jump off the page.
First of all, in a normal recession, you have job losses across the board, white collar, blue collar, service industries, entrepreneurs, government jobs. You name it. Everybody loses a job. In this case, the job losses were almost exclusively focused on the service sector. Retail, restaurants, travel, tourism, hospitality, entertainment, they got clobbered. They just got clobbered. And if you look at the employees in those industries, they tend to be younger. They tend to be less educated. They tend to be making less money. And because of all that, they tend to be renters more often than they are homeowners. In fact, a lot of them are even close to being homeowners.
So, the fallout you would’ve normally had losing 22 million jobs, you weren’t going to have based on who was losing these jobs because they weren’t homeowners in the first place. So, it was much more of a renter job loss situation than it was a homeowner job loss situation. The other thing that is just phenomenal is we’re less than two years away from that tipping point and we’ve recovered almost all those jobs. The service sector literally is the only part of the job market that hasn’t fully recovered. And that’s not due to lack of effort. There are a ton of jobs still available there. It’s just having a hard time hiring people. Still about one and a half to two jobs for every person who’s looking for work, which is a very unusual circumstance.
So, the two things that were really different about this recession were the types of jobs being so focused that were lost and how quickly these jobs were recovered. To put that in context, it took us a full decade to recover from the jobs lost in the Great Recession, 10 years. Unemployment then peaked at about 10% compared to 15% this time. So, you can just see the dynamics there. The other thing is that the government got involved early on and actually worked very closely with the mortgage industry to execute two programs. One was a foreclosure moratorium that basically said that any loan that was backed by a government entity was not to be foreclosed on until further notice.
And that’s Fannie Mae, Freddie Mac, FHA, VA, USDA, all told that accounts for about 70% of mortgages. So, right off the bat, 7 out of 10 mortgages were protected from being foreclosed on full stop, period, end of sentence. A lot of the other 30% private portfolio loans, the lenders and servicers decided to treat them as if they were government loans for a variety of reasons. And then when they did decide they might want to foreclose on some local sheriffs in a lot of markets, I heard this anecdotally, refused to move forward on a foreclosure. So, the local governments were stepping in as well.
The forbearance program that you mentioned, Dave, has probably been the single best example of the government and mortgage industry working together to achieve a positive outcome I’ve seen at all my years in the business. There was a very well-known East Coast economist whose work I like to follow because he’s invariably wrong, who predicted that about 35% of mortgage holders, mortgagees would wind up in the forbearance program. And if that had happened, it would’ve bankrupt the mortgage industry and nobody would’ve gotten any loans. You didn’t see that headline. So, apparently, that isn’t really what happened. The program peaked at about 8% of borrowers being in the program at about 4.4 million people at the peak.
All told from day one until today, about 8 million people have been in and out of the mortgage forbearance program. There’s about 425,000 left. They’ll all exit this year. Of those 8 million people, less than 0.5% have exited via default or short sale or deed in lieu. 83% have left with a plan in place, a mortgage modification, a deferral program. Some of them paid off their loans. Some of them never missed a payment the whole time they were in forbearance. They were there hedging their bets, but 83% left with a plan in place.
The 17% that didn’t, about half ultimately wound up with some plan. The other half went back into forbearance. Of the people that exited with a plan, about 83% of them have continued to make their payments on time since they left. So, again, just remarkable, remarkable numbers. And that’s left very few people probably a couple hundred thousand who have exited the program are still delinquent and don’t have a plan of some sort in place with their servicer.

Jamil:
But Rick, it’s fair to say that they’ve all got equity, right? Those people, the 200,000 people.

Rick:
Right now, the percentage of underwater loans is probably in the low single digits, depending on whose numbers you follow. Our number shows you’re somewhere around 5% that are underwater on their loans. And those are just from markets that haven’t fully recovered from the downturn. So, there’s a ton of equity out there. I talked about it before, $27 trillion in equity. In fact, we show at ATTOM that 90% of borrowers in foreclosure have positive equity in their homes and a surprising percentage of them have 30, 40, 50% equity. So, a lot of an opportunity for a much softer landing, but the bottom line is a lot of people believed that forbearance was going to equal foreclosure. If you were in forbearance when you came out, you were going to be foreclosed on.
And that was part of the justification for why millions of people are going to be in foreclosure. That simply isn’t the case. And in fact, if you count the couple hundred thousand people I mentioned in the current delinquency numbers, we’re still looking at numbers that are lower than historically normal levels. Normally, about 4% of mortgages are delinquent at any point in time and about 1% are in foreclosure.
Right now, we’re at 3+% delinquent and at about 0.5% in foreclosure. So, the programs have been remarkably successful. The strength of the market has been phenomenal. We are starting to see foreclosure activity pick up. And I know that’s something you guys wanted to talk about, but from where I sit looking at these numbers every month, I don’t think we get back to normal levels of foreclosure activity until sometime next year and I do not see a foreclosure tsunami on the horizon.

Dave:
Well, thanks, Rick. That’s incredible amount of data and specific information. That’s super helpful. You mentioned that foreclosures are starting to go up. So, what’s happening there? You mentioned it’s not going to be a tsunami. We’re at a low level. So, even if it’s going up at a high percentage point, in absolute terms, it’s not going to be this huge amount, but where are these new foreclosures coming from? Obviously and personally, I don’t ever want to root for foreclosures, but does this mean that there are going to be buying opportunities for real estate investors?

Rick:
Yeah, there will be. Again, as I mentioned in a normal market, about 1% of loans are in foreclosure. During the Great Recession, we were at about 4 to 5% in foreclosure and about 12% delinquent but not in foreclosure. So, that’s how bad it was then, again juxtapose that with where we are today. A lot of what you’re seeing in foreclosure activity right now is restarts of properties that were in foreclosure before the pandemic. So, that government moratorium froze those loans in place for over two years. And some of those people actually wound up in the forbearance program as well.
So, when you see people exiting forbearance without a loan modification or a deferral program in place, a lot of them were already 120 days delinquent before the pandemic or they were already in foreclosure before the pandemic. So, the first wave of activity that we’ve been charting at ATTOM since January really have been mostly those loans that were already in trouble before the pandemic, before the government program has kicked in. So, we’re not seeing a lot of new foreclosures. What we’re really seeing is a lot of new activity, if you will, but it’s on these older troubled loans. We will start to see more normalized foreclosure activities as we go forward. And one of the things that we do need to keep our eye on is if we do enter into a recession.
Bad news for people who don’t like recessions, if the fed activity has the same result that it’s had in 8 of the last 11 times, it’s raised fed funds rates, we’re probably going to be seeing a recession sometime in 2023. Most forecasts that it’ll be a short recession and it’ll be a fairly mild recession, but it will still result in some job loss and job loss tends to lead to mortgage delinquencies and that tends to lead to foreclosures. So, we’ll probably see a little bit of activity there, but right now, you characterized it right, Dave. I think our May foreclosure report showed on a year-over-year basis, foreclosure activity was up 158%, but keep in mind, that’s going from one foreclosure to two and a half foreclosures that has 150% increase.
So, we’re coming off historically low levels of foreclosure activity. So, the percentage increase is year-over-year going to look ridiculous, but we’re still running at about half of the rate of foreclosure activity we would normally see. One thing I do want to point out to your investor, viewers and listeners, and I think this is important for them to understand in this cycle. The last time we went through foreclosure wave, the smart thing to do was to wait for the lender to repossess the property, wait for it to become an REO, and then buy it when it came back on the market. And at that point, you knew it was going to be discounted, because it had been sitting vacant for two years and you get the best deal. I don’t think there’s going to be a lot of REO activity this time.
I mentioned that 90% of borrowers in foreclosure have positive equity. We know we have more demand than we have supply for homes. I believe the majority of borrowers who find themselves in financial distress are going to be able to exit by selling their house before the foreclosure auction takes place. And I think that’s smart of them to do. So, if I’m an investor, I’m going to be trying to look for those people in the early stage of foreclosure and go and deal directly with them. Your second best bet is going to be going to the foreclosure auction and I know Jamil has some interesting experiences there, but my auction company friends tell me that the sell through rate at auctions, at courthouse auctions, and sheriff sales right now is about 70%.
So, 7 out of 10 properties that get to the auction block are selling at the auction. That’s about twice the normal rate. So, the combination of properties being sold before the auction, properties being sold at the auction means a lot less of those properties are going to get back to the lender. And so, waiting around for those REOs, whether you’re an agent looking to list them or an investor looking to buy them, is going to dramatically limit your opportunities in this cycle, because again, very different cycle than the last one we went through.

Jamil:
Rick, a lot of the activity or the naysayers that people that are stuck on fear headlines that I’ve been listening to or watching at least, I don’t listen to them, is the activity that we saw that led to just the craziness of appreciation in a lot of the markets. And that was the overbidding the $50,000, $200,000 above list price. I know that happened in Southern California quite a bit when the demand was so overwhelming that they were paying hundreds of thousands of dollars above appraisal contingencies. So, the lenders aren’t even backing the value that this property is being sold at. So, somebody has to come in with cash now and make up the difference. And that was so much activity in very many markets for quite an extended period of time.
And I feel that that’s risky appreciation at that point because it was not lender backed. It was not appraised. This is just emotional equity. And so, I want to understand what the impact of emotional equity is going to have on the housing market, so that people who are in the fix and flip game, they can understand, “What comp do I hold? Which sale actually is the true sale that I know that if I go and buy a property, I can bake in the correction that might occur because of the emotional equity, or are we just agreeing the emotional equity is here to stay?” Values raise this much. We’re going to plateau at a single digit or possibly no appreciation in some markets, but it happened, it happened. Now, it’s there and we can actually count on that sale as a benchmark for value.

Rick:
Well, if I had the exact answer to that, I’d write my book and go on the road and retire soon. It’s a great question. The numbers in the last year, you have to take with a grain of salt, because buying behavior was so different than it normally is. And you just characterized it really well by talking about the emotions involved, the emotional equity, I guess. If you were buying a house and let’s face it, appraisal values always lag the market, right? So, they lag it going up. They lag it coming down. That’s just the nature of the beast. And you knew that you could buy that property by contributing more cash. I would submit to you that that’s not as risky as it sounds, because you’re not likely to get foreclosed on.
If you have to sell the property, you might be out the cash, but you’re probably going to be able to get somebody to buy it for at least enough to cover your mortgage, because you had such a high down payment. And that’s one of the factors that was very different. We had a very low percentage of first time home buyers in the last year. It was probably 25%. Whereas in a normal market, it’s north of 40%. So, everybody who is buying these really expensive houses was tapping into equity that are already accrued in their current house and making a pretty significant down payment on the next one. That and the low cost of capital, the low cost of financing made those monthly payments affordable.
So, again, it mitigated risk, because you traded in 4.5% mortgage on your current house for a 3% mortgage on your new one. So, there’s that factor as well. I saw a post yesterday on Twitter from an economist who was talking about how Boise seems poised for price declines and what he was pointing to was a chart that showed home price appreciation going up and then coming back down. And he failed to point out that the low mark, which right now, is still 12% year-over-year home price appreciation. And I raised my hand in the background and said, “Excuse me, excuse me. Is 12% on top of last year’s 40% really showing that the market’s going negative or should we just be happy that we’re at 12%?”
The other thing and Boise’s a good example of this is normally prices go up organically on a local market basis. Boise prices did not go up 45% last year because of anything happening in Boise. The economy didn’t suddenly double. You had people moving in from the Bay Area of California. They sold a house in San Jose. They made $900,000. They took $450,000 of it and overpaid for a property in Boise by 20 or 30% over list price. And they were happy to do it because they got twice as much the house. They still had $450,000 to put in the bank and they don’t care and they don’t have a mortgage. So, they’re not going to get foreclosed on. Are they going to be able to get $450,000 for the house if they sell it this year? I don’t know. I don’t know.
It looks like it because prices are still going up 12%. But that kind of out-of-state migration and you talked about migration and millennials being two of the drivers, Jamil, that out-of-state migration trend, high cost, high tax states to low cost, low tax states really inflated those median values pretty significantly. And I don’t want to say artificially, but it’s just not the way numbers have historically behaved. So, you have to keep that in mind.
So, if I’m a flipper, I’m probably not banking on much appreciation at this point, but I don’t know that I would price in a discount on my property just because I thought last year was overvalued and people were buying. They’re getting out over their skis to buy. We just released our first quarter flipping numbers, by the way. And the percentage of residential properties sold in the first quarter that were flipped was the highest it’s been in over a decade. It was almost 10% of all properties.

Jamil:
Wow.

Rick:
So, we had a very, very high percentage of flipped homes in the mix, still a lot of demand, but the margins were a little down. They were still healthy, but it appears that buyers are starting to look a little bit more carefully. You’re not seeing them overpay. You’re not seeing them throw extra cash into the deals. So, again, if I’m a flipper right now, I’m going to be really careful in terms of what I pay for a property that I don’t overpay for it, because I can’t bank on 20% year-over-year appreciation in every market anymore. And I’m going to take a real short pencil to estimating my repair costs, especially with labor rates going up and materials being more expensive.
So, I think in today’s market, it’s easier to get yourself in trouble. A high demand rapidly appreciating market is gravy for a flipper, but as those market conditions start to shift a little bit and mortgage rates have done that, then you have to be a little bit more careful, a little bit more, I guess, thorough in your assessment of the property’s value as repaired value and what those repairs are going to cost you.

Dave:
Rick, that’s an incredible summary. And although I’d love to hear more from you, we do have to wrap up this interview. Is there anything else you think that our listeners should know about the housing market or prospects of real estate investing for the second half of 2022?

Rick:
I think it’s a great market for both fix and flip investors and for rental property investors right now. I would urge your viewers to pay close attention to what’s going on in their state capitals and their state houses. There’s some horrific legislation trying to work its way through the House in California right now. And investors are at the bullseye of the target if you will, because there’s this belief that investors are competing with first time home buyers and keeping them out of the market. So, you’re likely to see well intended but really awful legislation by politicians who think they’re trying to do what’s in the best interest of their constituents, but maybe screwing up the market in general.
So, I can’t point to anything specific across the country, but I would urge your viewers, your listeners to find out what’s going on in their states and to get active to the extent that they need to try and prevent anti-investor legislation from taking place. The reality is 90+% of the market is mom-and-pop investors. It’s the small investors. They actually contribute a lot to the local economies and provide added value to communities and neighborhoods. A lot of the legislative activity is aimed at institutional investors. And even though it’s not fair to aim at them because they may not be doing anything terribly wrong either, people aiming at them inadvertently hurt those small investors that we saw that with the eviction bans that were part of the pandemic protocols.
I’m afraid we might see more of that going forward. So, I think we covered generally trends going on in housing. I do think again, we’ll see foreclosure activity continue to gradually pick itself up as we get through the rest of this year. The other thing I would say, if you’re looking at foreclosures is if you happen to be in a market that has a high saturation of FHA loans, those are probably the first loans that will suffer in an economic downturn. Those borrowers typically have less equity. They typically have lower cash reserves. They typically have a higher debt to income ratio.
And with inflation running at 8.6%, the highest it’s been in 40 years and with the cost of necessities going up even more rapidly, I think fuel costs are up 50% year-over-year. Food costs are up 10 to 15%. A higher percentage of the take home pay for those borrowers goes toward those necessities. So, if we are going to have problems, those are markets where you have high saturation of FHA borrowers, where you might have more distressed loans more quickly. So, make sure you’re visible. Make sure you’re front and center for anybody who’s looking to sell a house in distress.

Jamil:
This was such a great opportunity to talk to you, Rick. And I think I’m fair to say that from this interview today, I can say that unequivocally, the sky is not falling.

Rick:
It is not.

Dave:
It’s a good lesson for everyone to take away from the interview. Rick, thank you so much for joining. It is always a pleasure to talk to you. If anyone of our listeners wants to connect with you, where can they do that?

Rick:
They can find me on LinkedIn or Twitter. I keep it really simple. My Twitter handle is @RickSharga. We post a lot at ATTOM Data. That’s atom with two Ts. We have a series of reports that we publish for free virtually every week that are available on our website in the insights section. So, feel free to check me out at the ATTOM site or find me on LinkedIn or Twitter.

Dave:
All right. Rick Sharga, EVP of Market Intelligence for ATTOM, thanks for joining us.

Rick:
Thanks for having me. We’ll do it again.

Dave:
Jamil, that was a lot of information. I’m feeling good right now. I don’t know why.

Jamil:
I don’t know. I feel like I just got soothed.

Dave:
Yeah, right?

Jamil:
Right. Yeah. I just had mom just be like, “It’s okay. It’s going to be okay. It’s going to be okay.” And not that I didn’t realize that or know that it was going to be okay, Dave, because look, yes, my wholesale business sales are down approximately 10%. Okay.

Dave:
Sales volume or sales price?

Jamil:
No, volume. Price is not. But that’s seasonal too. It’s hot. A lot of people are leaving on summer holiday. People are just doing what they normally do in the summertime. And we’ve just had a lot of negative people with megaphones that shouldn’t be talking without looking at data. And I’m so happy that this show exists, because we can bring people who spend their entire day swimming in numbers so that we can retort some of the craziness that I’ve been hearing out there.

Dave:
100%. I look at a lot of data, not at the same level as Rick, but I feel like I was coming up with similar conclusions and we’ve talked a lot about this on the show, but it’s very reassuring to hear someone with his expertise. And he’s been doing this for a long time, just giving a really clear understanding of why this time is different and what is likely to happen. And I just really appreciate his very frank and honest assessment of the situation. And listen, we’ve been saying this. It’s local. There are going to be markets that see declines. I think that’s natural.
There are markets that are probably going to be pretty flat for a while, but what really stuck out to me more than anything was he was saying, he thinks mortgage rates are going to keep going up. He thinks prices are going to keep going up. So, if you’re waiting on the sideline, which people honestly have been doing for seven years, if you’re continuing to wait on the sideline, it might actually get more expensive depending on your market. And again, it depends on where you are, but that stuck out to me as there are people probably listening who are saying, “I’m waiting for this crash. I’m waiting for this 20% decline.” And at least according to Rick, that’s not coming.

Jamil:
Yeah, it’s not coming. And not only that, but what I found super interesting was even his assessment on… We talked about that equity piece that has happened where we’ve had people just overpaying. What dawned on me when he was saying all that is that the price of real estate is not determined by an appraiser. It is not determined by a lender. It is not determined by a seller or a realtor. The price of real estate is determined by a buyer.

Dave:
100%.

Jamil:
Hands down. And there are more buyers right now than there are anything else. There are people that have the ability. They are not as sensitive to interest rates. They have high income paying jobs. They’ve got bags of cash from their high cost, high tax markets. And they’re coming in and they’re still ready to take opportunity.

Dave:
Totally.

Jamil:
That’s not going to go away anytime soon.

Dave:
And a lot of people are like, “Oh, institutional buyers or investors.” It is going up, don’t get me wrong. More investors are buying more, but even still, 80% are home buyers. They set the price of the market for a large part. Of course, we saw Zillow doing some crazy stuff out there for a while, but for the most part, it is home buyers. It’s the people you were describing… That was a great question by the way. … and people that Rick was describing as well. Obviously, no one knows what’s going to happen.
So, Rick today, Logan Mohtashami, who we had on a few weeks ago, we’re talking so much about demographics. Demographics shape the housing market and that isn’t changing. Like you said, there’s three conditions that led to this rapid appreciation. One is getting pulled away. There’s still two legs there. I guess a stool would fall down with only two legs, but you get the analogy.

Jamil:
Yeah, yeah, yeah, yeah. It really just depends on how you’re leaning on the stool. I mean, guys, we might just have to get a little bit better with our core, right? Our core fundamentals, he’s talking about it. He was talking about good buying practice, understanding what you’re paying for and why you’re paying for it, and second, really, really, really looking for those opportunities.
Guys, if you didn’t take this, he said there was massive opportunities coming just in the pre-foreclosure going in and being able to problem solve for the people who aren’t problem solving for themselves. You’re going to find buying opportunities there. You’re going to be able to get deals. You’re going to be able to really capitalize on that, but it’s not going to come from this massive wave, the tsunami foreclosures. There’s not going to be an REO storm, guys, normal market conditions in that way, in that respect. They’re going to do the same things that we’ve been doing as investors, fundamentals, fundamentals, fundamentals.

Dave:
Before we go, I do want to know, what is your experience with buying foreclosures?

Jamil:
Man, that’s a great question. We got to talk off camera before we started the podcast with Rick and I explained to him. So, foreclosures, I’ve been investing in them. I’ve bought them. But in 2009, 2010, I bought a lot of foreclosures and I got great deals on them and deals that were just phenomenal, that you would never understand. Condos that sold for $400,000, I was paying $25,000, right? But I want to say that I was renting them at $800,000. So, rent really hadn’t gone down. So, I saw great opportunity there. That was my first experience with foreclosures. And then after that, I would try to go to the auction. I’d try to buy pre-foreclosure. I’d try to buy those foreclosure properties that were being auctioned off and I had a tough time there.
And that’s typically because bidding services and those good old boys that monopolize the action at the courthouse steps, those are the guys that really control that buying process. But Rick also talked about things like auction.com, where now you can go directly to the trustee and you can buy directly from them, but you can still buy from those bidding houses. So, I would just pay the $1,500 fee for a bid service to go and get me the deal that I was looking to get. And they also helped me read the title report, made sure that I wasn’t buying a second, instead of actually buying a property, buying a first note, a deed of trust.
And so, this is an incredible opportunity, I think. I personally buy at auction through proxy, through bid services. And I still think that there’s going to be a little bit of opportunity there. And as he said, it’s not going to be a wave, but if you can get to them pre-foreclosure, you’re going to have an opportunity there.

Dave:
That’s such good practical advice. From someone like Rick, who’s an expert in this, just showing how it’s going to be different. There will be opportunities, but you got to move upstream in the process here if you’re going to find those good deals. All right. As much fun as this has been, we do have to go. Before we do go, just a reminder to please leave us a five-star review. We appreciate it. And if you want to hang out with me and Jamil and the rest of the On The Market crew, make sure to get your BPCON tickets. It’s going to be in San Diego. It’s going to be super fun. Honestly, when I used to travel a lot for work, I really dreaded going to conferences, but I genuinely look forward to the BiggerPockets Conference. It’s going to be fun.

Jamil:
It is. There’s a lot of great guests that are going to be there this year. And so, there’s so much to learn. It’s such a dynamic and fun market right now that we’re dealing with. Guys, don’t sit on the sidelines. There’s deals to be bought there.

Dave:
Oh, totally.

Jamil:
There’s money to be found there, connections to be made, softwares and efficiencies for your businesses that you’ll find. Don’t sleep on BPCON.

Dave:
Sweet. All right. Well, thanks everyone for listening. For Jamil, I’m Dave Meyer and we’ll see you all next week.
On The Market is created by me, Dave Meyer, and Kaylin Bennett, produced by Kaylin Bennett, editing by Joel Esparza and Onyx Media, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.