Odd Lots - Inventory Vanishing and Bidding Wars Exploding in Crazy U.S. Housing Market

Episode Date: January 20, 2022

If you wanted to buy a home in 2021, you probably found it a frustrating experience, rife with a shortage of options, and intense bidding wars. Well? Bad news: So far, things are even hotter in 2022. So what's going on? Where are all the homes disappearing to? Why is there nothing for sale? Why are people happy to place higher and higher bids? On this episode we speak with Mike Simonsen, the CEO and founder of the real estate data provider Altos Research, to explain the acute and long-term trends driving the market.See omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, OddLots on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. So Tracy, it's a new year, well, already a bit into the year, but it's a new year and yet many of the big stories from last year remain the same, if not even more so. I feel like many of the things we were talking about last year have only gotten more intense. Yeah, I think you're right. I mean, we spent a lot of last year talking about supply chain issues, the possibility of shortages, the idea of the bullwip effect where you sort of get a small disruption in one supply chain

that then ends up cascading through the entire chain and also causing very, very big swings in supply and demand. And that feels like it's definitely getting more. tension. And then, of course, the secondary effect from all of that is this question of inflation and price increases and how is that feeding through to the broader economy. So we, you know, we talked about it last year, but we're talking about it even more in 2022. Right. And of course, one way that people experience inflation or feel inflation, whether it's captured in official statistics accurately or regardless of how it's captured

and statistics is everything related to housing and shelter. And by all accounts, it appears that everything that you just mentioned is getting more extreme with housing. I saw one survey that said like 100% of home builders are experiencing supply disruptions, which is up from like 98% in December. Apparently it takes three weeks at a minimum to get a garage door. I think we might have an episode coming up on garage doors, by the way. Housing just seems to be completely nuts this year already.

and we're just a couple weeks in. Yeah, so I remember we did do an episode last year with Allie Wolfe. And when we did that, I sort of declared my complete lack of knowledge when it comes to U.S. housing because I'm based in Hong Kong and I've never bought a house in the States. But now I have to declare, I guess like the opposite personal interest. I'm trying to close on a house right now in the U.S. and let me tell you, going through the market for the past three months has been absolutely insane. And we've had like three instances where we've made an offer and gotten gazumped by other

buyers and not by like a small margin, but by an absolute massive margin compared to the listing price. It's just been really difficult to get anything at the moment. I just looked up the word gazump, which is British English, which is why I'm not that familiar with that. Oh, sorry. According to Dictionary.com, raise the contracted price of a property after having informally accepted a lower offer. So you have indeed been guzumped. And in fact, it's perfect because we are going to speak with someone who has been tracking the gazumping phenomenon that is widespread in the U.S. housing market, or more specifically, bidding wars have been breaking out across the market. So Tracy, I think this episode is going to be very good for you.

Maybe you'll even get a little like a home buying strategy out of it. Yeah, I need answers why none of these offers are attractive to people, even though it seems like a lot of money to me, obviously, yes, I want to know why. All right, I can't wait. Let's do it. We are going to be speaking with Mike Simonson. He is the CEO of Altos Research, which puts out and gathers tons of data on the housing market. He's been putting out lots of videos on exactly this phenomenon.

on the boom and bidding wars, rising prices, declining inventory of homes available in the United States. What's going on? Mike, thank you so much for coming on odd lots. Joe and Tracy, it's nice to be here. So Tracy's experience of getting gazumped left and right on, like everyone's experiencing that these days, huh? Everyone across all price points, basically, the whole, all geographies across the country. It's been a pretty consistent phenomenon. So remind us, what exactly is going on? Like, what is driving this? Because obviously you have some of the pandemic trends where people want to move out of cities and they want more space and things like that. But you would have thought that

almost two years on in the pandemic, that some of that trend would be fading away. And yet it seems like demand for housing is still incredibly strong. Yeah. So the biggest theme of the last few years, it has been record low inventory, tight inventory, a few homes for sale. That's partly a pandemic phenomenon, but the interesting thing about that is that we have been losing available inventory of resale homes for a decade. So as we came out of the housing bubble crisis, rates started falling, and we have had But each year, basically each year for the last decade, we have gone from a million two homes available, a million homes in January to right now we have 284,000 single family homes on the market. And it's been a decade-long phenomenon for a few reasons.

And then we threw the pandemic on top of it. The top theme was record low supply. We have high demand driven, too. So we have booming economy. We have cheap money. we have a lot of these other factors driving it. And then we have demographics where we have the millennials are now in their mid, the late 30s, their peak home buying years.

And they're the biggest chunk of people ever. So now we have tight supply on top of surging demographic demand. And that is a recipe for your bidding war problem. So this is very interesting. And if we could back up to the pre-pandemic level, what were the trends that drove the decline, the persistent decline in inventory? Like, where did all, where did they all go, basically? Where did it all go?

As interest rates have been essentially 4% or lower for a decade, money's been super cheap. It's been a really good time to own real estate. It's been a good time to own investment property, rentals. So two big phenomenon is happening. One of them is, it's like a doubling up. The homeowner goes to buy the next home, move up or move down. And because mortgages are so cheap, it's a really good time to keep the first one as a rental unit. And so each year, I go to buy a next one and I keep my first one.

And so that's one big phenomenon. And all of a sudden, I'm a real estate investor. And at the same time, money's been, institutional money has been cheap. And so we have, there's a lot of news about. about the big private equity funds buying up homes. But it's actually the individuals who are driving most of it. So in the last decade, we've taken 8 million homes out of the resale cycle and moved them into the investment rental part of the pool.

And that's, you know, 8, 9%, 10% of all of our homes, not 10%, but 9% of all of all the single family homes. So this is something that I wanted to ask, but how do you actually differentiate between different types of demand? So obviously you have people who buy a house because they want to live in it. Then you have individuals who, you know, maybe buy a second property or do something with their first property and turn it into an Airbnb or something like that and rent it out. And then you have the big institutional buyers like private equity. how can you actually track who's buying what and why? The way they track that when you read the numbers of like 20% of purchases are investment properties.

The way that that is estimated is by looking at the title. When the title on the property, the address that that title gets sent to is a different address than the home. that's that's then aha there's an investor owning that property so but it can be institutional or individual what's the split like right now like do you know the numbers offhand it's something like in the 20 percent's 20 low 20s that are investor properties so i want to talk a little bit more about this phenomenon of the individual homeowner not the institutions and of course that's obviously plays a role, but the individual homeowner essentially all getting into the game of de facto

real estate speculation. Maybe they become a small-time landlord by having their old home that they then rent out or something like that. But talk about the emergence of this phenomenon of, okay, maybe I moved down to Austin because it's warm, et cetera, but I keep my house here and rent it out or vice versa. And how this trend emerged and how big that's gotten and how. How how unusual that is compared to, I don't know, the old days, whenever that was. So it's always been, you know, in many markets, it's been a pretty good deal to own some rental real estate. You know, some of the, you look at the blue collar folks in San Jose. I live in San Francisco, you know, Silicon Valley, San Jose, if you were an electrician in 1980,

and you happen to buy an investment property, you made millions of dollars over the time when, you know, vastly more than when you were making from your salary. Like, it was a really good opportunity. And Ian, that was even when interest rates were super high. Yeah. So over the time, you finance it lower. And so in the last decade, we've had 30-year fixed rates, 4% or lower. So these are not like the 2005 bubble investors where I'm buying a house with a mortgage

rates that's going to explode in two months. And after month three, I'm not going to make my payment anymore. These are people who have 30-year rates locked at 2.7% that in a 6%, that inflation environment. Like, it's a really good deal to be owning these houses. As a result, people have, therefore, they do it, right? Right. This is something that I've been wondering about because it just feels like there's so

much money available for housing at the moment that even if you put in, you know, I've heard stories about people putting in all cash offers. And even with the cash in hand, they will get outbid by someone else who, has taken on like a very, very large mortgage, but because interest rates are so low, it doesn't really matter that much to them. So yes, exactly. There is a lot of money available to housing, but, you know, it's really, it's a lot of money available in the economy. The, the, and one way you know that it's not over, over supplied to housing relative to the rest of the economy is that the quality of the mortgages and the quality of the borrowers, the credit

scores of the borrowers is increasing. It's actually at record high levels. So relative to the bubble time, those credit scores were declining and the loan to value was increasing. So the loans were obviously a lot worse at that point. And the loans right now are really good. It's not just overlending to borrowers the way it was 15 years ago. This is Tom Keene, inviting you to join us for the Bloomberg Surveillance podcast. It's about making you smarter every business day. I'm Paul Sweeney. We bring you complete coverage of the U.S. market open.

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That's the Bloomberg Surveillance Podcast with Tom Keene, Paul Sweeney, and me, Alexis Christophores. Subscribe today, wherever you get your podcasts. Bloomberg's Surveillance, Essential Listening, each and every business day. So this is really fascinating to me that, like, credit scores and the quality. of the mortgage, like we're definitely like not talking ninja loans or any of the stuff in the mid-2000s, credit scores, high-quality paperwork, lending standards, all very high. One thing I'm curious about, and I don't know if this requires a more macro assessment, but obviously you have to like have a certain amount of wealth to be able to carry multiple

homes. Like it's still not the norm, let alone, you know, to be able to keep your old house as a rental property, the emergence of people with very strong balance sheets. How much of a lot of this is in some level, I don't, maybe inequality is part of the word, but the existence of a certain class of people who just have a lot of cash and capital, really having this sort of like a very big structural advantage in the housing market right now. You might say that that certain class of people are the boomers. Ah. So, and there's more of them, they're staying put in their homes longer.

They're owning their homes longer. All the laws are really designed to allow people to stay, keep people in their homes. You know, the tax laws and the mortgage interest laws, all of those things are designed for the existing homeowner. In California, we have Prop 13, which basically means your property taxes never go up. So if I bought a house for $100,000 or $250,000 in 1992 in that housing recession in California, and now it's worth two and a half million. I'm still basically paying taxes on $250,000, a little more than that. But paying essentially no taxes in California.

And so I'm never selling at home. I've got a tiny mortgage and no taxes. And so those things are all designed to keep people in their homes. And it is to the detriment of the first time homebuyer, the people who can't get in. the mortgage payments as mortgage rates are low, the payment is super low. So that helps. And it actually, as home prices increase, as long as the rates stay low or ratchet a little bit lower, then the mortgage rate has more impact on my monthly payment than does the total purchase price.

And actually, Tracy, this is partly why a function, partly a function of why it's easier to overbid in a low, rate environment because if the home prices are accelerating by 10% this year, and I overbid a little bit, what I'm doing is I'm eating away six months of equity and putting that of equity growth, you know, and home price growth, that I'm putting into a payment that's super, that's barely noticeable difference. And so that's why people, that's why the, why the overbidding tends to accelerate in this kind of environment? So I guess that begs the question what actually happens to house prices and demand when interest rates start to go up?

Because on the one hand, we can argue that low interest rates are causing some of the higher prices and people overbidding and some of the tight inventory. But on the other hand, I guess it's not like the pre-2008 situation where everyone had adjustable rate mortgages. and when interest rates started to go up, you know, suddenly they can't afford their home loans anymore. Yeah, it is very different from that time. And, you know, we looked during the pandemic, especially that March, April of 2020, we started publicized. Why I started publishing this weekly videos. We've been doing our data for 15 years, but we started publishing these weekly videos

because we wanted to help observe what's happening to all these people as we locked down on the pandemic and people lost their jobs and we started the mortgage forbearance program. What we're trying to find out is, is there a big wave of homes that are going to have to be sold or go into some kind of foreclosure? And it turned out that wave never came. And it never came because it's a really good time to own. The laws allowed me to stay in my home. If I didn't pay my mortgage for a year and then I could start again, all of 2020, my home actually gained the value. I ended that year with more equity than when I started.

So I was in a better place after that year. So there was no, there's no wave of, you know, foreclosures or anything coming to market. So, so that was, we were, we were watching, you know, to see, is it going to happen? But ultimately it never happened because it was a really good time to keep owning. And the money was super cheap and the laws were there so that I could read. negotiate and attack my missed payments out of the end of my loan and essentially stay in my home.

So that one off the table, no new inventory. But what we can see is that the low rates affect demand, but they also affect supply. And they affect supply in that phenomenon that I was talking about in that when I go to buy my next one, it's really cheap to buy, to hold my first one, to hold two mortgages at three percent rather than one at six percent. So in a rising rate environment, we'll see fewer of those double-up transactions. Some inventory will come onto the market. The last time we saw rising rates was 2018. The three quarters of 2018 started in the first quarter peaked at about the first week of December of 2018.

So rates rose pretty much all year long. And we could measure the cooling of demand and increasing a supply in a few of our metrics. So we track inventory. We track every home for sale in the country every week. And each year, we have year over year fewer homes available on the market as more of them turn into investment properties. We have, in 2018, January of 2018 to 2019, for example, was one year in the last 10 years that the January started, January 2019 started with about, I don't know off the top of my head,

but it's like about 8%, 10% more than the year before. So increased inventory, by a fractional amount, 10%, not hundreds of percent, not hundreds of thousands of homes, but tens of thousands of homes. And that was the one year it did. So rates rose all of 2018, and we could see it in that inventory rate. We could also see it, and we track a bunch of metrics like the percentage of homes on the market that have taken price reductions, which is a really interesting indicator of demand. So about a third of homes, when they get listed, rule of thumb, third of homes when they get listed,

are going to take a price cut before they sell. Sometimes that's strategic, sometimes it's accidental, but about a third. And when the market is hot, then a third of them are trying to overpriced, but only 28% need to, some of them get the bid and they only 28% take a price cut. Or it gets hotter, maybe it's 22%. And last May, in the peak of the frenzy last year, nationally, we were at like 15%. So 35% think they're overpriced and only 15% have to take a price cut because they were getting their offers. And so you can track that price decreases. And so in 2018, 2019, we could watch the

price decreases go from the low 30s hot market to 36%. During the bubble burst, we could watch that go 40. 50%, 55% of the stock had to take a price cut. So that's a function that you can see. So you can measure it in things like price reduction. So that means that there are fewer buyers out there. And so, you know, Tracy, in your buying situation, you know, it's all of a sudden there are some of these folks who are listing and saying, well, let's see if we get a bidder. All of a sudden, they say we didn't get a bidder. And now their house sits on the market for a little while. Now you have the opportunity. You don't have the bidding wars because there's, as rates rise, then there's more purchase opportunity, more inventory opportunities for you.

There's less competition. The people who are using the mortgage to overbid are less likely to do that because now the payment is more impacted. So all of those factors come into play. And the way I look at it, if you look at 2018, we had a 10% increase of inventory in that year. So you could imagine that we would need several years of rising rates from 3% 30 year fix to 4 to 5. You know, we haven't been over 5 in a long time. So how that impacts things?

But you can imagine it several years before we have this enough of a cycle to put many of these rental properties back into the purchase market. And I sell my next one. I sell mine and I don't keep it because, two mortgages at 6% is very different than two mortgages at 3%. Right. So several years to build back to the old normal. So it's really about that cost of carry, literally, as that goes up in theory or in practice, as we saw it in 2018, that's what at least creates the new supply from at least existing

home sales. What is the state of price increases in bidding wars that we've already seen at the start of the year. And how does that compare to us a slightly more normal year like 2019, like pre-crisis? The biggest phenomenon of things like bidding wars during the pandemic period is a we sort of lost the seasonality to the housing market. In normal season, the inventory comes on, starts to come on for the spring in February, really accelerates March, April, peak, May, June, and then June 30th, its inventory starts declining for the fall. If your house is on the market in August and you haven't gotten an offer yet, now you start taking a price cut because school's starting.

And so we have all of these seasonal factors. And then the holidays come and you have fewer listings. You have fewer people like, you know, you have some people like Tracy who are needing to buy, but pools way, way down in the holiday seasons. Over the pandemics of the holidays of 2020, January 2021, we all of a sudden we have all the Zoom town phenomenon. We have all the remote work. We have kids out of school. So we have all kinds of options to move in the winter.

and so we lost a lot of seasonality. If you look at, in fact, a lot of the seasonally adjusted home price numbers that you might see, you'll see that they swing really big in the November, December, January time last year, and also this year because demand has been unseasonably high, like it didn't cool down nearly as much. We can see that in a number we track, which is the percentage of homes on the market that have had price increases lately. And so price increases is a functional.

of things like investor fix and flips. Like I buy a home, I put a little bit of money in. 90 days later, it's back on the market at a higher price. And that phenomenon happens more in a lot of the southern investment market, the Sunbelt investment markets. But nationally, you might see in, quote, normal times, maybe two and a half percent of the market is in some state like that of price increase, a couple percent. It picks up a little bit after the beginning of the year, so it's maybe two and a half percent because the market's cool in the fall. If it didn't sell, I might pull it off the market. I might do a few things to it and put it back on the market in January at a slightly

higher price because now I'm leaning into the spring market. So there's some pricing strategy happening there. And what's happening now, so normal might be two and a half percent. 2018, 2019, after that rising rate year, it was closer to 2 percent. It was lower that year because there were, there were. We could see less demand. You had less investment investor activity happening. And now we're at 6%.

So we're spiking right now. We spike big last year to peak in the second quarter. Last year was about 6.3% in this week. So last year was slightly more frenzied, but it's spiking very quickly right now. And what that's a phenomenon is this fall, it seemed like things were backing off a little bit. The peak of our frenzy last year was May. We finally started increasing inventory for the year after April 30th last year. Normally inventory starts climbing in the end of January or early February,

but it kept declining week over week until April 30th. And that's because people were just, you know, we were at record low rates. We were, all of the things were colliding at the same time. But it cooled off a little bit in the second half a year last year. It's accelerating again right now. On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm.

Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. So setting aside the houses that have been locked up by baby boomers who seem to ruin everything, if we focus on new house, sorry, if we focus on new house housing supply for a second, like when prices go up and interest rates are extremely low, someone should be coming in and trying to respond to that increase in demand by actually building new houses. And of course, Joe already mentioned this in the intro, and we've been covering it for a year now. There are these supply issues that are obviously impacting their ability to build new homes. But you would have thought there would be some new supply coming onto the market, or at least some new supply planned in the future. What are we seeing on that front? So the answer is we are seeing it.

There are a lot of new homes in construction. And the last decade, the decade post bubble burst, we underbuilt for a bunch of years. So the 20-year average, about a million and a half homes, new home construction per year, pre-bubble, post-bubble is half a million. And so we built a lot fewer, right? The homeowners had to ditch, or the home builders had to ditch their land. There's all kinds of restructuring that happened. And so it took them a decade to recover. And now they are back to building, at least starting plenty of homes.

Or, you know, they're responding to the demand. So you get a lag time between, because of permitting and land use and, you know, construction time. You get a, you get a lag time between the demand and the new construction in housing. But we've got it now. We've had demand for a long time. And so the builders know exactly, like, there's a lot of home demand there. There's, there's demographic, the millennials, like, there is a lot.

of obvious demand. And so the building is happening. So the shortage right now is a function of historical construction. So if we had new construction seven, eight years ago, now you're in move-up time. That is in resale inventory now. But because it was constricted at that time, there's fewer of those in resale inventory right now. And so now we have this weird phenomenon, supply chain phenomenon, where we have all all these homes in construction, but they're not finished yet.

Ultimately, they're going to come to market, and that's going to relieve some of our inventory challenges. I want to talk a little bit more about the bidding war phenomenon specifically that Tracy has personally experienced. A, what is, is there actual definition of a bidding war? And B, in a bidding war, what is the mix? Is it people just raising their bid? because look at, you know, 3% mortgage rate, it really doesn't add that much, or is it people with

tons of cash coming into with all cash offers? And if they have $10 million in the bank, because they've done really well, whether they bid a million dollars for the house or $1 million to and try and get it right away, it's just not that big of a cost for them. Like, what are these bidding war dynamics? So the bidding wars are primarily a function of the low supply problem. So we have, We have, you know, generational big bulge of homebuyers, millennials, and generation. And so there are more people competing for available homes. We could actually measure inventory per capita. And we could actually see that or our homes available, flip it around, people per home

available. Yeah. And we could measure that in, as the bubble was bursting, you could see that that was a function of how likely a housing market was to crater down. So if you had, we had more homes available per capita than it was a more risky. It was a higher beta market. It was more likely to adjust down. And so everywhere in the country is ultra low right now and an ultra low per population.

And so bidding war ends up being, well, there's one house for sale and there's 40 people that want to buy it. What's interesting is you could look at like a lot of the hot California markets. Because of California's Prop 13, we have chronically low inventory. It's like rent control for the whole state. So so that these houses don't come back on the market. So you get a, you get like a Silicon Valley market like Palo Alto. And it's 50,000 or 70,000 people. And there's 60 homes for sale. You take a similar demographic outside of Dallas. And normally there's 700 homes for sale in the. same-sized town. As a result, really, one of the things is a result of property tax laws because your property

taxes are high in Texas and they're, you know, they're low in California. And so, you know, in the normal times, you'd have the same population in Palo Alto. You only have to be available to, you know, 40 people because there's only 40 homes available. And in Dallas, it has to be available to essentially the median income because there's 700 available. That's the normal time. What's going on right now is that that Dallas town is down to, you know, 140.

instead of 700 and or whatever that that you know threshold is and so all of a sudden the now you don't have to be available affordable to the median income you just have to be affordable to a much smaller chunk of population so on that note if I could just ask a question completely out of personal interest but you know what should you do if you find yourself in a situation where you put in an offer for a house and suddenly a people people are putting in much higher offers. Like, is there anything you can do or are you just automatically doomed because you don't have as much money as the next person? Well, I will preface this by saying, I am not a realtor. And it's one of the reasons that you

work with a really good realtor. You know, they, they know how to structure the deal, when to make that offer. What are the other opportunities for financing? There's a lot of interesting alternative financing products that have come to the market in the last decade for home buying as a function of having a lot of capital. There are ways to make cash offers even when you don't have the cash. And so working with a really good realtor is really how ultimately you make that success. You know, the guidance I give in what people ask me that, you know, the challenges of the bubble came when you bought a house either that you couldn't afford or one that you didn't like, but you felt you had to buy, then you got stuck into a house that you didn't want to be in

when the market was cratering. And so the way I look at it now is if you find a house that you like and you can't afford, then you buy the house. And if you look at the payment, you go, well, you know, it's 20% more than they're asking, but we can afford that payment. And this is the house we want. Then that is, that's the time to buy the house. If you can't afford it, or if you don't like it, don't buy the house. Don't buy it because you think you need to. So that's the way I frame our guidance when people ask me. So it really sounds like, I mean, you mentioned obviously the rates issue and lower rates make the cost of carrying an old home more attractive. And then you've called out California specifically a couple of times because

of how the taxes don't go up, contrasting that with Texas. It seems like, and I don't know that there's like a policy silver bullet, but the issue is when it's really cheap to carry a house for taxes and or rates or whatever reason, that is a real detriment to supply. It's a real detriment to supply. It's like everything we do in this country makes it really good deal to own your house and therefore people own it. And that is a detriment to the buyers who don't have.

own yet. So one of the things, the conversations that I recall taking place, again, very pre-pandemic when the market was probably warm or hot, but not crazy like this. You know, you mentioned the boomers housing and there was all the stories like, oh, boomer homes aren't what millennials want. And maybe they're like too far away from the city or, you know, two big lawns or maybe they don't have like a YouTube studio involved or whatever. like millennials are like into for homes. They just don't look like the homes that millennials want, whatever. And that there was going to be all this supply and also that either boomers would

downsize or move to a condo in Florida or eventually die as they get older. Like what happened to that? Because I thought there was all this stuff about like boomer inventory that was like going to have a really hard time hitting the market. Yeah. So we've been looking, you know, you keep looking for the boomer inventory. Yeah. And it hasn't, it hasn't shown up, right?

The boomers are finally getting to the age where maybe it really has to show up soon. Right. As they're getting their 70s, 80s, like that. Like maybe we finally get to see that come to market. And so, you know, when we measure the entire U.S. market every week, and there's some leading indicators in that data. You can see where the supply is going to go. You can see where, you know, three, six, 12 months. But when you look at five years, there's some real macro things that aren't in the data yet.

So, you know, like, are there big shocks to the economy? They're like those kinds of things that you, that aren't yet visible in the data that we measure. So it's things like when the boomers finally go, do we have a generational transfer for of those properties? Right. You know, we could see the Zoomtown phenomenon that your Bloomberg colleague, Connor Senn quoted the label, Zoom towns, is during the pandemic, you know, people moved to, you know, the remote logo, the work remote locations. And in New York, it was Hudson Valley exploded in California.

It was a mountains like Truckee or places like Bend, Oregon. And so these Zoom towns happen. The phenomenon, though, was it turns out that most of those, a great majority of those, were second home purchases. Like, people moved from San Francisco to the mountains. They didn't sell their San Francisco home. Right. They just had another one. So those kinds of that millennial purchase turned to be that way.

There were, you know, some of those, some of that migration, especially out of places like New York and San Francisco at the time were younger people who didn't already own. They were renters. And so it was a pressure on the rental market much more than it was a pressure on the resale inventory. So let me ask, I guess, the big question, but bringing everything that we just discussed all together, when would you expect the housing market to actually start to normalize? And what does a normal housing market actually look like now? So if we look at the last decade, we could say, quote, normal being a million homes on the market around the country at this time in January. We're at 284,000 this week.

So that's single family homes. Getting back to that level of normal is a long way. Multiple years, multiple years of higher rates of systemic changes. You know, we have, one of the big phenomenons has been the institutional investors buying, building and buying homes for intended force as single family rental units. And so if there's structural change such that that's no longer a good business and those start to be sold, like that's been a big phenomenon. And therefore, there is some, you could imagine some risk in there. If that falls out of fashion or out of financing as a business, that those then start to become actual resale inventory.

There's a number of those phenomena that have to happen in order for us to get back to an old normal. You know, we are at rates. Rates has climbed a little bit in the last month. They're in the 3.something percent now. I am unable to predict interest rates. Like, where do they go? So I, no one else can either. So if they go up from here, the first thing that happens actually is as a rise is, is there's a, there's an accelerating phenomenon where people are like, I got to get in before,

while it's still good, that actually accelerates demand first. And then it probably pulls demand forward. And so before it takes, you know, eight months or a year before people start to really impact it, like in 2018, it took all year. And so then it's a multiple year process to get us back to some level of inventory, some level of lower demand because rates are, money is more expensive, that combination of things. Because everyone in the country has a 30-year rate locked at 3%, basically everybody, in a 6% inflation environment, there's no, there's almost no impetus to sell those homes ever. because, and they also have lots of equity. So there's no, there's nobody who is underwater in their home, essentially no one in the

house. In a few weeks, we will have record few homes anywhere in the foreclosure property, in a foreclosure pipeline. So there are always some, you know, deal went bad or divorce or whatever the thing, the thing is that triggered that, but we'll have record few properties in that because the market is so good. Everybody has strong credit, lots of equity, and cheap money. So all of those Americans are in really good position. And so there's no big catalyst for a lot of homes to come to market. So it's a multi-year inching more homes back into the market. And then at some point, it could be that it is

the boomer transition that those finally start to unlock from, from, from the boomer population and transfer to the to the millennials. You know, before we go, and that was a, that summation was extremely helpful. The one thing in my mind that I'm still like very curious on, and if you have more stats about, you know, there's obviously tons of talk these days about the big institutional buyers who buy tons of homes and rent them out and there's all kinds of anxiety about them. But as you've pointed out, there is this other phenomenon, which I have seen extremely little discussion, but it continues to come up about the person buying a home or the family

buying a home and not feeling the need to sell the first home. How big is that essentially the rise of the small landlord or the small real estate speculator? And how does that compare in terms of what moves the needle relative to the institutional investor, which gets tons of coverage all the time? The numbers I've seen on that are individual investors who own one to four units. is about 90% of the market. Wow. Wait, so when you say 90% of what market? Of those investment properties that are owned, they're owned by individuals.

Just to be clear, the investment market in single family home is overwhelmingly dominated by individuals. That's correct. And you can see in some markets, the big institutions are trying to build market share. but it is in the in the in the in the you across the us is overwhelmingly individual investors that's really interesting yeah because it seems like the coverage and i you know the coverage is totally skewed i mean there's tons of talk about the big asset managers buying homes but it sounds like in terms of like who's owning a house for investment and therefore rental it's actually probably much smaller than one uh the impression one would get from the media and the just the general

discord. There are few fewer easier villain targets than a landlord private equity fund. Right, right. It makes a very good, bad guy. It's super interesting. Mike, that was phenomenal. I genuinely learned a lot from that conversation. I recommend everyone to go check out your videos and tweets, always updated with the data. Mike Simonson, CEO of Altos Research. Thank you so much for coming on Adlot. Joe and Tracy, it was my pleasure. I really enjoy listening to the program. So it's, it's great. Thank you. Thank you. It's really fun. Thank you so much. Thanks so much. Yeah. Take care, Mike. Tracy, do you feel any better about having been repeatedly gizumped in your quest to buy a home in the United States? I guess, I guess it's comforting to know that I am not alone in this

extremely frustrating experience. And I guess now that I am a homeowner, or hopefully it will be very soon, I guess I can take some comfort from Mike's prediction that it'll take a very long time for housing to actually normalize. But on the other hand, I can't shake off a suspicion. I guess everyone probably feels it after a major purchase, but I always feel like I'm probably buying at the top of the market. Yeah, I think that's like a phenomenon. Also, this is kind of news, right? Oh, oh. Like this is a little bit hashtag personal news, right?

Oh, yeah. Yeah. I'm going back to New York, which means Joe and I will finally be able to record these podcast episodes in the same room, which will be a lot of fun. I figure, I figure like the announcement would be a little bit bigger, but I like how we sort of backed into it a little bit by you talking about the frustration of being a United States homebuyer. Yeah, for clarity, I'm not buying a U.S. house for investment purposes. You're not, okay. I'm not one of those people. But you might, you know, when you buy, when mortgage rates in 10 years or 20 years are down to 0.5% and you're ready to move and you're like, oh, it's pretty cheap to refinance the old home and keep carrying it.

It might become an investment property. But anyway. I will join the ranks of like baby boomer mini landlords that milk everything for money. But I did find that to be extremely. I did not realize, A, quite how skewed that is because there is a, you know, tons. of attention to asset managers buying homes and how small they still are. And B, the long-term structural issues that, you know, and it makes sense when you're younger and you think about buying a home, it's like, oh, you're going to move to a new town, but it's really complicated because you've got to

sell the old home and you got to get the timing just right to free up the money. And you heard all, you know, people are just all these stories of like, oh, I got to like sell to get my down payment. But in this, in this market where there's a robust rental market, low cost of care, you just buy the second home and don't even so many people don't even have to worry about what they do with their first home totally um the other thing well i guess the one question that we didn't actually ask mike which would have been good um is at what point do prices get so high that they start actually impacting demand because i that feels like it's the only thing on a near term basis that might you know take some of the heat out of this market but otherwise yeah the um the sort of long-term

structural trends that he outlined were really interesting and definitely suggest tightness for years to come. And also, you know, just his point about like, in rates this low, you know, you could you could lob in a bid way higher than the market and it just does not move that much in terms of where you stay. If you can make the down payment, it doesn't change that much the monthly payment potential. Right. Well, housing just looks like a really good investment in the current.

climate with low interest rates and now as inflation ticks higher. I mean, Mike made that point that, you know, if inflation is at 6% or something and your mortgage is basically at 0%, that looks like a pretty good trade. Yeah, absolutely. Well, it is a fascinating episode. I did learn a lot. And Tracy, I wish you luck. Yeah. Thank you. I will probably need it. Okay. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Jill Wisenthal. You can follow me on Twitter at the stalwart. Follow our guest on Twitter. He's Mike Simonson at Mike Simonson. Follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast,

Francesca Levy at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening. Bloomberg Tech returns to San Francisco, June 3rd and 4. Join me, Emily Chang, along with Tom Giles, as we convene the CEOs, investors, and innovators shaping what's next in technology. Powered by Bloomberg's Global Newsroom and unrivaled terminal data will break down the capital, connectivity, and big ideas driving the industry forward. Be part of the conversation. Register now at BloombergLive.com slash tech. That's Bloomberg.com.com slash tech.