Buck: Welcome back to the show, everyone. Today my guest on Wealth Formula podcast is Mike Simonds and he is the founder and president of Real Estate Analytics from firm Altos Research, which has provided national and local real estate data to financial institutions, real estate professionals and investors that can be found at Altos Research AECOM. Michael, welcome to the program.
Michael: Thanks. Nice to be here.
Buck: So your focus is on this concept of big data. Maybe you could explain to us, like sort of just the beginning what exactly is big data and how is it generated?
Michael: Well, yeah, You know, what Altos does is we track every home for sale in the country once a week, every week. So, you know, it’s the pricing, it’s the changes in the pricing, it’s the supply and demand and all of these things. And that turns out to be valuable because if you look at the traditional way that the housing market was tracked, it was looking at the homes that sold last month, the closed sales last month. And, you know, while there’s some signal there, there’s a ton of signal in the active market. You know, the the how long are they taking on the market? Which ones have had price cuts? How big are those price cuts? There’s all this signal that was never tracked before. And so, you know, where there’s capacity to track a lot more data and understand more about the market and where things are heading. And, you know, is it a good time, all these questions about the market now. And that’s really, you know, the power of big data. Yeah.
Buck: Does that include multifamily or is it just single family homes or.
Michael: Well, we track is we track single family and multifamily condos and townhomes. And we also track things like investment properties like apartment buildings, like the small unit apartment buildings, like one, two, four, eight units. When we’re doing broad analysis about trends, there’s actually not a lot of those, you know, 1 to 4 units compared to how many, you know, total homes are on the market. And so it’s a it’s a lot harder to to to do a trend on, say, you know, apartment buildings since it’s only like L.A. County has a lot of it. But most of the country, there’s one or two here or there that are that are on the market any given time.
Buck: Got it. Got it. And is there, for example, for people who invest in, you know, significant apartment complexes, things like that, is there data that you can extrapolate to that or is it.
Michael: You know, what we do on the apartment complexes side is we track rents. And so, you know, we can watch rents around the country and how those are changing week to week. And and it’s a lot of you know, there’s there’s signal in that as well. So, you know, we can look at you can look at the pricing and the changes in rents and you can you know, there’s a lot of a lot of insight to begin there When we’re talking about like big apartment complexes, those transactions are even more rare. And therefore it’s like it’s like a that’s a very specialized kind of data that you might be tracking. Right?
Buck: Sure. So, well, let’s let’s jump into it. What is the you know, when you when you look at nationwide, you know, what kinds of information are you getting right now? What what what kind of signals are you getting?
Michael: So the the biggest theme of the year is the available inventory of homes on the market has been dramatically lower than we expected, fewer homes available to buy. And the, you know, inventory available inventory has been falling for a decade, really since the beginning part of the last decade. Each year, fewer and fewer homes on the market, fewer available supply for people to buy, for home buyers to buy, for investors to buy. Because because we’ve been hoarding that, we’ve been owning them. More investors are buying more even when it’s like when I go to buy a next house, I keep the first one for an investment property. All those things take homes out of the active inventory. They keep them for that year. We keep them owned, they’re not resold.
Buck: So So here in money. So where I live in Montecito, in Santa Barbara area. And one thing that you know, anecdotally I have no data to to say this, but basically we look like what happened was anybody who was even potentially thinking about selling sold when there was so much froth in the market. Right. And and now it’s like, okay, well, rates are going up and everything. And so anybody who was, you know, who’s going to sell probably sold and now all of a sudden their rates are so much higher and potentially, although not where I lived, the the values are starting to fall because people can afford less homes. Right. Yeah. And so so that that’s like locally at least when I think about what’s happening that that would explain that. But do you see that explanation potentially is more of a national explanation or no.
Michael: So so it turns out that that last year when rates spiked, we saw the the we saw prices adjust down. Right. We saw affordability got way out of whack and prices are just down a little bit. And we expected that to continue this year, expected to have inventory to continue to rise. You know, we had demand stopped cold last in the second half of last year. And so we expected demand to continue to rise. But what happened was it did not we had more demand than we had supply this year. And we still
Buck: And so has that sort of artificially kept prices up in a way? Because normally you would expect, you know, in these situations, if rates are going up, then maybe the value of the properties are going down. But then if you have less inventory altogether and people need to buy a place and they have less competition, and so that would sort of keep prices up higher.
Michael: That’s exactly right. Like the quantity demanded even at these rates in these prices has been higher than the quantity supplied this year. And so inventory has been falling and I think there’s a few things that go on, like people who are buying now are, you know, they’re stretching to make the payment, but they can make the payment and then their roll of the dice if rates go down in 18 months, then they can refinance and that only gets cheaper for them. So like, those are the calculations that people have been making this year. And there and so they’re finding a ways around the the higher rates in order to make the to do the buy that it’s like time to buy the house.
Buck: Is this what are you seeing like as you know like obviously this show is there’s a lot of real estate investors. Right. And so if you look we always talk about how real estate is generally local. Right? And so this national data is great. But like when you look at, you know, individual markets, what looks like, you know, which markets look like they are potentially ripe for investors.
Michael: You know, this year it was the big change in the last year, you know, we had the boom markets, we had the western U.S., southern West, you know, Phoenix and Austin and Boise. These were all the big boom markets during the pandemic. And they slowed the fastest last year, second half of last year. Denver and Salt Lake. And like all of these markets, slowed really dramatically last year. Almost all of those recovered this year. But the real strength through that process, through the second half of last year and the beginning of this year were the central and Northeast markets inventory never rose in those markets. We had buyers buying those, and I think those are often more affordable, you know, in Ohio and those kind of places where, you know, that they weren’t as far out of whack as affordability got in Austin or or even Phoenix. And so so you could see that. So there is, you know, we we have investor competition in the same places that we have. We have, you know, regular homebuyer competition. It’s, you know, investors are buying in Phoenix. And then when the rates spiked, the investors stopped very quickly.
Buck: Because that affected the prices there.
Michael: It did. And though they have recovered this spring, because with an almost all of those markets, places like Phoenix and things have recovered, demand like supply has fallen, people have been buying the things that are available. There is some the top of the pricing came off. So, you know, all of a sudden if you’re an investor, the cap rates got out of whack last July. Then all of a sudden they were you could see like, oh, I can get a little discount, and now it’s back into my my buy box. And so those were bought they were they were like gobbled up very quickly this year. Any amount of home price adjustment in those destination investor markets. Investors were there with cash ready to to to compete.
Buck: Yeah that’s been an ongoing you know theory and we’ll see how it plays out that you know the obviously there’s quite a bit of distress in multifamily and apartment complexes which we’re involved with in that space and that even despite the, you know, the economic issues that surround these properties, that the values may not drop as much as we would predict simply because there’s so much demand, so much money sitting there waiting to get deployed.
Michael: And that’s my observation, especially in the the single family, you know, that side of the investor pool, the bigger, you know, the bigger complexes that have variable rate interest like those, there’s there’s still a lot I think of of paying to happen there. The but but you know nobody who owns you know smaller properties in the US has variable rate interest and so every one of those investors has a really good deal and you can really see that right. You can see you can see the big investors, the big Wall Street investors stopped most aggressively. The the ones it uses slowed way down. And the middle range investors, the ones that are professional investors, they own 50 or 100 doors kind of that size company. Those barely slowed it all last year. And so, you know, the professor tional investors that are you know built that run that business were they were like I buy houses and I’m going to keep buying houses and you could really see that none of those categories, the big middle or small size none of them were active sellers I they’re still hold it.
Buck: Yeah yeah well and you know and that and like if you have a great raid on your house that you bought in during this period also and rates have doubled or tripled or whatever why in the world would you sell now and trying to get into another house with a much higher rate. Right. Like it just doesn’t make any sense. So yeah I went with your data. What are you seeing on the on the renter side? What are you seeing? Like see shifting demographics, that kind of thing. When it comes to renters.
Michael: You know, we had the thing that surprised me most this year is how household formation has held up and therefore that is so. While our rent appreciation year was skyrocketing during the pandemic, year over year rents were going up, you know, ten or 12 or 15% that that year over year appreciation has come down a little, a little positive. So like to 4% kind of growth and rents. But it didn’t fall negative. Right? So like I’ve been continued to be surprised that, you know, we’ve had recession signals, but we haven’t had like people are still fully employed and and incomes are still going up. And we have all of these things that have have continued to provide support for that that I, I wasn’t expecting. But there’s still there we can see that in in things like, you know, the migration paths have slowed but California people buying in Austin or Phoenix have slowed but they’re still there.
Buck: Yeah yeah. Can your data give I mean, can you pick up signals of recessionary activity and that kind of thing with the data that you’re collecting?
Michael: That’s a good question. We tracked the house, we tracked the homes for sale. And so in some ways there are, you know, the ways that housing is connected to recessions. It’s actually lagging in a lot of cases. So, you know, one of the ways we might finally see some available inventory for investors or for home buyers would be, you know, you have distressed sellers, people lose their job and they need to you know, they they have a mortgage they can’t afford and they need to sell the house or they’re an investor. And, you know, they’re they’re upside down on something and they need to unload some of those properties. But what happens is those that distressed inventory can take like 12 or 18 months after the start of the recession, before you see the inventory, you think about it like you’ve got a house. Now let’s say you bought an investment house and now you lose your job and you lose your renter and now you’re you’re struggling. And but, you know, it’s like, I’m going to maybe I’m going to get a new job or I don’t get a new job for 90 days. Now I stop making my mortgage payment and now it’s another 90 days before I even start talking to the bank. It’s six months after the big parts job loss part to the recession before I even start talking to the bank. And then it might be six or 12 months after that before it gets forced in a sale or those kind of things. So so a lot of times the housing market is lagging recession, certainly an inventory like distressed inventory and so, you know, for people who have been bearish on housing, which there have been a lot of housing bears in the last year and afraid of bubble conditions or, you know, affordability. Right. And so those folks who are thinking there’s a recession coming and therefore we’re going to see some inventory, we’re going to see floods of inventory, then when we have floods of inventory, prices are going to crash. Like that’s the bearish scenario. But the distressed inventory is now look in like 2025 at the earliest because people are still employed right now. Maybe by the end of the year they start losing their jobs. Then therefore it’s like 2025 before we see that inventory. So if if you have that bearish, you know, scenario like that inventory is probably, you know, two years from now.
Buck: Yeah. How about building, do you do you follow building? Because obviously that has a pretty significant effect certainly on the the rental market like new availability and competition, all that. So what, what are you which markets are having say the most success with zoning and building policies and getting things through. I guess that’s one question. And then another question would be like, you know, our is building or is there building going on right now at the rate that it needs to be?
Michael: You know, I I’m in the camp that says, you know, we’ve been under building for the last decade and, you know, we can see that the long term average is like a million and a half homes per year that we added. And then post grade financial crisis, it was more like half a million. And now we’re getting back close to the long term average. So we have been we’ve been under building for the last decade. And, you know, you can see some green shoots in terms of zoning and things in especially some of the most challenging states like California and Washington, where they’re starting to do some zoning for density, doing multi multiple unit on single family like zoning kind of thing. So so it seems to me that we have a little bit of momentum for some good policy in terms of getting more construction to happen.
Michael: But there’s still a lot of we have a long way to go in that.
Buck: Front and why is that? Tell me why we why do we need more building.
Michael: We have for all the policies for 50 years in this country, all of the policy, all of the tax law, all of the the the local laws is is designed to favor the owner of the house. Right. Keep you in the house. Make sure you get a good deal. Now, make sure your mortgages are cheap like all of our systems are designed for the homeowner and and as a result like that keeps our home prices higher and it makes it less affordable for new families to come in. Right. We live in where I live in California, too. And you look at, you know, kids growing up in California today, you have you’re starting a young family in California today. It’s so out of whack. It’s one of the reasons why you have to go buy in Texas, Right? Because because that’s where they’re building the houses. And and so policy makers, I think, see that everybody can see that that, you know, the affordability challenge. And so, like, we’re starting to to see some of that that change there. There’s so much, you know, momentum against that. You know that like, you know, in California we have Prop 13, which keeps property tax rates artificially low and therefore it’s even even a better deal to not sell my house and to keep it forever. And therefore, we have chronic shortage of inventory in California. And it’s you know, Texas has high property taxes. And it’s one of the reasons I talked about is ironically, it’s high property taxes in Texas is one of the reasons that Texas has a a better functioning housing market than does California. I guess it’s more expensive to hold your house. So you put it back on the resale market. And and therefore, you know, there’s more opportunity for people to buy. Therefore, prices are lower, like all of those things happen. And in California, we we have and it’s a really good deal if you already own.
Buck: Yeah it’s the good it makes for a good rental market in Texas as well then right. I mean because you’re not really worrying yourself necessarily about the property tax changes, although you know, you do you do experience that through rises in rental costs. What do you see? Like, okay, so, you know, a lot of your when you look at big data, I’m curious, you know, one of the things that I would be curious if I was looking at a big set of data like that is like where is the next you know, where’s the next boom? Where’s the next Phoenix, where’s the next you know, because we have population growth, we have a shortage in housing. We you’ve just talked about how people, you know, started moving out of California and they hit Austin like reasonable. Austin’s really expensive. So where’s the next Austin? Where’s the next Phoenix?
Michael: Yeah. So I’m not a caveat this by saying like I’m not a an investor or a.
Buck: I don’t even mean it as an investor, but I just mean like, where’s the next place that’s booming.
Michael: You know? Yeah. So I think we can see a few things. One is we know the growth markets in the south and east, so the, the Charlotte’s in Atlanta’s and you know, Tampa’s I have colleagues at a company called Razzi Shares, which is an investor, a data analytics data driven investor platform and they do the migration and economic and growth conditions. And what they do is they take previously great markets and they say who looks like that today? So I was like, if buying in Denver ten or 12 years ago was a really good deal, who looks like Denver today? And and one of their observations like Tampa looks like Denver today is their view. And so I think that’s a really neat way to look at it. And, you know, based on all of those elements that they can see and so they direct their you know, like one of their buy boxes is in Tampa for that reason, because they can see it. And then they also do that they drive that down into lower like zip code level. What parts of type are the ones that we’re going to perform the best?
Buck: Where else? Tampa. Just I mean, I’m just we’re just curious.
Michael: Yeah. So you can see it in markets that are I’d call them tertiary. So you know we we had you know, you had the booms in Denver and Austin, but you know, Austin is is really unaffordable right now. And so so like you said, but but El Paso and San Antonio are significantly more affordable. And so you can see that opportunities shift to those markets from the from the big the big, you know, focus of the last decade.
Buck: Got it. Interesting stuff. D again, Michael D the tell me about a little bit more about Altos Research and you know who uses Altos research You know who are your clients, that kind of thing.
Michael: Yeah. So Altos Research, we track every home for sale in the country every week. We and we analyze all the pricing in the supply and demand and all the changes in that data. And then we bubble up the analytics for, for our clients. We, we work with realtors and loan officers and, and people in the industry to we do local market data for them to get to their clients. So you know, if you’re a real estate investor and you have your realtor, you might be getting your, your like market report from your realtor that we’d, we’d create and prepare for them. We also work with big enterprises like lender is and homebuilders and hedge funds and you know, like the big enterprises that have exposure to real estate across the country. And they need to know right now what’s happening in the housing market. You know, most housing market and most housing data, traditional housing data is lagging. You know, it’s several months old. By the time you hear it, like like the Case-Shiller index. You know, that is that is the latest headlines now is for March, you know, and it’s March data and it includes January, February, March transactions in it. But, you know, we’re at the end of June and like we can see already what what’s going to close in July and August. You know, so like that’s the that’s the kind of reason that you use our data. And I publish each week. I do a video on YouTube and a podcast where I look at the national data and the changes in the national data each week. And so like inventory is inventory climbing rates went to 7%. How is the market responding to that? And and you know, you can watch in real time what’s happening way before the headlines get down, huh?
Buck: And how do you find that? What’s the is your your handle there.
Michael: Yeah. So on YouTube it’s Alto’s research it’s the Alto’s research YouTube channel and you can find it and I do a video every Monday. You can follow me on Twitter. Mike Simonsson on Twitter, I published that or LinkedIn. You can find me there. And you know, we are part of H.W. Media, which owns Housing Wire now. So we were acquired by H.W. Media last year. Let’s see, you can also see our the data gets published every every Monday and Tuesday and housing wire if you read housing wire, you can go there and find that as well.
Buck: Thanks, Mike. Appreciate your time. It’s good information and hopefully people will check you out on those various social media channels to keep up with the most current thing. I guess that you can get out there right now. So Mike Simonton from Altos Research, thanks for joining us, Mike.
Michael: Pleasure to be here.
Buck: We’ll be right back.