All Forum Posts by: J. Mitchell Bernier

@Greg Scott It is looking more and more that way. CNBC even noted that before the rate rises in the UK none of them knew how leveraged these pensions were, said it was the same way in 2006-2008 when CDO's were unheard of. Inflation is far worse across the pond and the longer the Ukraine war goes on the worse it will get over there. The major question is how exposed are we to a global crisis are that starts outside the US?

In 2008 the US housing downturn caused everyone to come down, because so many foreigners were invested here too. I don't believe, but can't be sure, that this is the case with US investors invested into outside markets. It will hurt of course, but I think it would be less pain than what we faced the last time.

1 Vote

@Marcus Auerbach I agree that as landlords we provide an essential service that people have to have, but if this turns out to be a bad recession and you see job losses and inflation is still causing people to make tough decisions it will lead to slower pays and higher eviction rates. This will bring the housing sector lower and more and more people who were working on more speculative deals will feel the pain. I think your sunbelt markets will do best as the population growth is incredible compared to other markets, but we will see headwinds there as well.

I think caution is the word for the next 3-6 months until the data shows otherwise.

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Quote from @Rob Chiang:

how long is the recession predicted to last?

Early estimates are 6 months, but if the inversion continues be longer could mean recession is worse and longer too

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Quote from @Chris Seveney:

@J. Mitchell Bernier

We should be comparing pricing to 2019 and pre pandemic as that will be a better reflection on things.

I tend to agree with that, since the pandemic was such an outlier. Thats why I have watched the 400-dollar level on this, since that is the high during that time. If it breaks that level and goes down closer to 300 or less, it would be a bad sign. Which looks likely with the slow down on construction.

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Wells Fargo recently put out a report detailing the correlation between the inversion of the 10yr vs 1yr Treasury and predicting recessions. What they found was that when the yield curve inverted for the 10yr vs the 1yr, it predicted a recession 91% of the time with a 12-month lead time. Plus, the longer it stayed inverted the deeper and more severe the recession. As of now, the 10yr vs 1yr yield curve has been inverted for over 3 months.

I guess we will see how much longer this goes and what it means for our investments.

Wells Fargo - One Spread to Rule Them All: Is Recession Coming? (bluematrix.com)

1 Vote

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

3) 40% of homeowners own their houses free-and-clear and another 30% or so locked in 30-year fixed rates in the 3-4% rate and are unlikely to sell or let their houses go to foreclosure for the next 20 years. I don't see much room for a crash with those stats alone.

>>>

This has been discussed before. If #3 is true, then we would not see an increase in active inventory.
See housing market and equity market works in a similar fashion. The market needs liquidity. Liquidity comes from the buyer.

Currently, 100% of market in US has a negative YoY of new listing. Good, the theory is right. BUT. for those who has to sell, they don't see enough buyer so in about 75% of the market, there's positive increase in active inventory. Literally we have more seller than buyer.

Active Inventory increases by 25% YoY.
New Listing decreased by -10% YoY.

That's an interesting idea, problem is how do you know the actual # of buyers in a market? How do you know if it's growing, declining?

I think the only way to get any read on such is using listing times, % of listing to pending. That will show the velocity and velocity is a reflection of buyer volume.

Would be a great metric to have of "buyer vectoring". Very interesting. I wonder how MLS data could be utilized to build this.....

Here's more data so we have a complete picture :

January 2022
Active Inventory YoY -31%
New Listing YoY -8%

May 2022
Active Inventory YoY 10%
New Listing YoY 4%
(Most inventories increased in Austin, Phoenix and Florida)

August 2022
Active Inventory increases by 25% YoY.
New Listing decreased by -10% YoY.

Bottomline: there's a crack in the housing market STARTING from May 2022 as there are more sellers than buyers.
If we want to make a balanced market where # of buyers equal to #seller, the mortgage rate has to adjust to March-April 2022 timeframe.

This is from aggregated MLS data James. I found this is the easiest method to check the balance between # buyer and seller.

Problem with this is taking ALL real estate, as a whole, in the entire U.S., so this includes the malibu home at $28.3M, the Telluride condos at $3.6m, etc etc.. The luxury segment of real estate, that's it's own universe completely, it trades like wine, art and dinosaur eggs. A fart in the breeze 1 way or the other can have massive market movements.

You gotta narrow things at minimum into pricing strata's. If not strata's and regions. For one thing regional impacts will adjust things, for example, I am betting Florida is going to have a seriously down month in homes sales this month, does that mean the market is crashing there, or that a hurricane just tore through the place. Gotta keep context in mind, and not get into skewed data.

Inventory levels will speak much louder as to status of things, you could eliminate all those stats and what your trying to infer from them by simply going with inventory level which out right says the data of it. My market, inventory shot up too 1.3mnths. Although, that's right on par for normal seasonal adjustment. A healthy "strong" market is 2 months inventory, so we are still, as of today, in significant shortage of units territory.

We start considering inventory getting outsized at 3mnths.

I agree I think listings will tell the story.

Zillow data shows that the top of the market was in February of this year with listing being at the lowest since 2017 at 645k across the US. Since then listings have been rising every month are up over 323K since February. Will be interesting to see where it will be for September, most likely going to be up again.

For context, the most listings in 2019 was in July at 1.725 million listings on Zillow, yall can find the data at the link below

Housing Data - Zillow Research

2 Votes

Dallas, Texas

We will know more very soon, look what is going in the UK and mortgage companies are pulling funding on mortgage products. What happens there is going to be a precursor to here. Last data was published was from July and August data wont be out till Oct 19th. If the median price starts to turn there then we will know if it is on our horizon. The Median Price in the UK is 292,118 pounds.

1 Vote

Dallas, Texas

Quote from @James Hamling:

Quote from @J. Mitchell Bernier:

@James Hamling

Since you are still actively buying in this market, what are you buying right now? I am curious on what strategy you are sticking too with all the economic uncertainty. Is there a certain price point you are staying in? Is it buy and hold? Residential or Commercial? What are you doing in your market?

Really liking this discussion!

For the most part staying away from commercial right now. Caps have been driven down to levels too tight for anyone sub $100m in holdings, with too much risk exposure in cap-x expenses being realized. Still open to value-add if/when opportunity pop's up but, sellers have better buyers and I don't blame them for taking those insane offers.

Staying away from flips unless there with a hold component of C4D component for exit strategy. Similar situation, costs are at level where time costs too much usually.

AAA strategy is still a rock solid one. This is one focused more on portfolio growth, vs NOI.

On cusp of jumping back into some Sec8 positions. Things are looking really good in that segment again, one step better and I would be going heavy on it. The operational side is a pain in the azz though, that's all that's holding me back really.

I have a few big things in works, significant strategic alliances to launch a C4D program, at scale.

I am not really the best read for the "average Joe", I have some large things in works where if I didn't have those I would be engaging more actively in other routes. I would be way more into Sec8 and ancillary market investing for sure. Especially those where price ascension has not hit at level like are primary market, and one can get into properties below replacement value. It's a time play.

There is really more opportunities then I have time or $. More so time because $ can always be found.

Primary focus is on single family and townhomes. Love love love em. Townhomes is one so many over-look, and please feel free to keep overlooking, lol.

As for price point, I am staying "in the squeeze", which will vary market to market. No real interest in anything $700k+ unless it's got solid STR analysis. On those I work out things on terms anyways so to mitigate risk exposure. Can have all the data in the world on a STR but you really don't know until your at it, results may vary is the rule of the day.

C4D? AAA? You got help me out with these haha

I am also a big fan of Section 8 homes. We are continuing to evaluate our specific holdings and see how we can move our properties into those as well.

0 Votes

Dallas, Texas

@James Hamling

Really liking this discussion!

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Dallas, Texas

Quote from @James Hamling:

Quote from @Greg R.:

Quote from @Jay Hinrichs:

Quote from @Bruce Woodruff:

Quote from @Greg Scott:

The market may correct, but I firmly believe there won't be a crash. The reason is simple, equity.

There is no house of cards here to come tumbling down.

I respectfully disagree. The house of cards is this - too many people....millions.....bought houses with hugely inflated prices in the past few years. This is especially true in certain areas. It's gonna suck to own a home that you bought for $800k that is only worth, say, $500k....especially if you bought that with any type of adjustable loan.....

I do agree that it will not be a full-on 'crash', but more a serious correction. It has already started. look at the stats...

keep in mind that if those 800k houses drop 20% they are now selling for less than replacement costs and builders will simply stop building. At least at todays prices for lots and materials.. you will need lot values to drop a ton and materials and labor.. pretty tough to get all of those to drop.. I know being a land developer .. those farmers that control a lot of the land for new development will just hold on before they sell the land for less than what they think its worth.. Most have no debt and owned it forever etc. we stop building and well you know what happened in AZ last time building came to a halt. Not good for the area at all.

But a "800k house" right now was a 500k house a couple years ago. In many of those scenarios it was purchased for +/- 450-500k and with a 4ish rate. I don't think it's unrealistic to see prices correct to pre bubble prices. If something peaks so quickly, why would we believe it can't return close to it's pre-peak price in an equal amount of time?

From a very basic/ simplistic standpoint. How can someone who was able to afford an 800k house a year ago afford it now that the rates have doubled?

Someone going in w/ 10% down on 800k purchase is a 720k loan balance, how much would it cost to get a 30 year fixed down to the mid 3's or low 4's? a single point in this scenario is $7,200? I'm not a lender so perhaps someone could help shine light on this situation and how many points would be needed. In any event, who is going to eat the cost, the buyer or the seller. The current market conditions require someone to take a big hit if the other is going to benefit as if the market conditions were the same as a year ago.

It's just not that simple Greg.

Just because 2yrs ago a home was say $500k, it does not mean tomorrow it can be $500k. 2 years ago the inputs to build that $500k were totally different. Cost of living was different. You have to take things in context. The entire economy is not going to regress 2 years.

What you describe in buyer capacity is market compression. A buyer who was able to buy at say $700k, now via rate increase, is pressed into looking at the, say $600k market level. As the rates shift buyer capacity downward, it add's additional stress on the lower level of say $200-$300k level. Pressing a "glut" of buyers into the lower rung actually drives UP the prices in lower strata, as demand is driven up unless inventory can rapidly grow to meet which that also raises those prices. Compression.

Builders at the top strata of builds are not over building today, there being smart about it, so it looks like supply is self-regulating to adjust to demand. This insulates against significant drops in that strata.

"The entire economy is not going to regress 2 years" Ask anyone with retirement accounts and they will tell you otherwise. Understand Housing is a different asset class, but it can happen.

I hear you on people lowering their buying and expectations but what happens when the Bank just says "No". So instead of the person being able to afford less, they can't afford anything. Look at the treasury markets right now, many banks are discussing why lend money when they can make the same net interest margin by buying "risk free" bonds. So instead of lending it out and making 6-8% on your money, since they are giving you less than 50 bps, they are going to make the same interest margin as last year with just buying treasuries and not have to worry about default risk. These discussions are happening and if this happens, hold on to your butts.

3 Votes

Dallas, Texas

All Forum Posts by: J. Mitchell Bernier

J. Mitchell Bernier has started 30 posts and replied 280 times.

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