Over the next few months, you’re going to see a lot of misleading data. It might be from the mainstream media or from new investors who are nervous about the changing real estate market. Maybe somebody has PTSD from 2008 and they can only see another Great Recession around every corner.
I’m going to set the record straight on what I see with the data I have at my fingertips. Good data is the starting point for understanding where the market’s going to shift to next, but understanding what the data is telling you is also key.
HOW 2020 IS NOT LIKE 2008
Let’s briefly cover what happened in 2008 so that you can understand why what’s happening right now is not going to be similar to the last housing recession. If you think about it, 2006 is really when the housing market started to implode. By fall of 2006, we started seeing major cracks in adjustable rate mortgages going up, which made payments go up, which caused people to stop being able to afford their mortgages.
As mortgage defaults increased, companies who had portfolios full of mortgage-backed securities started to fail. First Bear Stearns fell, then Lehman Brothers, then over the next 12-15 months, AIG, Freddie Mac, and Fannie Mae started buckling under the huge mortgage default rates. All of these titans of industry failed because there was a problem with the financial market, the housing market, and the mortgage market.
The coming shift in the housing market isn’t because the underpinnings of the housing market are rotten. 20 million people are unemployed, and that is definitely going to have an impact on the mortgage default rate. I just heard some misinformation that home sales are down 15% and the housing market is imploding. You need to understand how supply, demand, and liquidity are working together to affect the housing market right now.
HOW SUPPLY, DEMAND, & LIQUIDITY WORK TOGETHER
Home sale units, the number of actual properties that are transferring is all about supply, demand, and liquidity. If you have a lot of supply, but not a lot of demand, the prices are going to come down. If you have a lot of demand, which is typically driven by liquidity, that means that there’s a lot of money in the system.
The central bankers, the guys that run the Federal Reserve, they’re the ones that make and crash the markets because of the amount of liquidity they create in the system by using quantitative easing. Cutting the interest rate is one of the ways they influence the market. Supply and demand are naturally down because unemployment is at a historic high. But in addition to that, a lot of the liquidity in the alternate funding space has dried up.
The life insurance companies, the crowdfunding platforms, the pension funds and a lot of the secondary market pulled back on purchasing all of that paper debt. When the shutdowns happened and people started working from home, all of these companies weren’t sure their $50 million, $100 million purchases were being recorded in a timely fashion. When even the county courthouse is closed, there was too much uncertainty for them to continue purchasing the debt.
INSTITUTIONAL MONEY LENDING
The reason I’m talking about supply, demand, and liquidity is because these factors are influencing the home sales units. When you see that home sales units have dropped 15%, of course they have. Liquidity has dried up. Record numbers of people lost their jobs, so demand is down. Those two factors together have caused the drop in home sales units, and that’s completely normal.
In 2008, the loans were not abundant and the banks were not liquid. Right after COVID started, the secondary market pulled back from purchasing debt and slowed down liquidity in the market, but Fannie Mae, Freddie Mac, HUD, and VA all have enough money to continue lending in the retail space. The alternate funding for real estate investors has definitely slowed down, but real estate investors only make up a very small part of the market, maybe 5-10%. First home buyers can still get access to loans to purchase a home. For 90% of the market, it’s home buying as normal right now.
THE DATA POINTS YOU NEED TO KEEP AN EYE ON
Ignore the home sales unit data that says everything is down 15%. The data points that are really going to determine whether we continue to follow a natural disaster recovery route, or if our recovery is going to look more like a “W”, aren’t about how many houses are being sold. Our long term recovery depends on kids getting back to school, people going back to work, and the supply in the market.
Once the economy starts to unlock itself, how many people still have to rely on unemployment money or stimulus? It follows that schools need to be in session so that parents can get back to work. So if parents are able to get back to work, will they also be able to reestablish themselves within 60-90 days so they don’t fall behind on their mortgage? How many people are being propped up by PPP money? And how many jobs were permanently lost?
Liquidity is definitely lower right now for real estate investors, and supply is also low across the board. That doesn’t mean it’s going to stay that way forever. If a tremendous amount of foreclosures hit the market because people are not working or are permanently laid off, then supply will start to increase and demand will ease up, and we’ll hopefully see housing prices go down as a result.
I flipped hundreds of houses through the last recession, gave seminars, raised private money, and taught hundreds of investors how to take advantage of pre-foreclosures and short sales. A housing recession is an amazing opportunity to grow your real estate portfolio. We’ve raised and currently control $39 million in private money in preparation for an event like this. I’ve been telling people for years that if they’re liquid for a recession, then they’ll be able to buy assets at a discount.
Over 45% of all investment transactions are funded with institutional money, and all of that money just dried up. That means 45% of investors have just left the market. Guys like me, and hopefully guys like you, who have access to private capital are going to be in the driver’s seat for the coming recession.
WHAT ARE YOU THINKING?
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