Welcome to The Accelerated Investor Podcast with Josh Cantwell, if you love entrepreneurship and investing in real estate then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1,000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss in his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals, he actually does them and so do his listeners and students. Now sit back, listen, learn, and accelerate your business, your life, and your investing with The Accelerated Investor Podcast.   

Josh: So, hey, welcome back to Accelerated Investor. I’m so excited to be with all of you. And today we’re going to talk about one of my most favorite quarterly topics. If you’ve been with us for the past several years, I’ve had my good friend Daren Blomquist jumping on. He is the vice president of MarketEconomics@Auction.com. Many of you have probably been on Auction.com or many of you have bought properties from Auction.com or research properties on Auction.com. They’re a massive platform that, you know, banks and foreclosure properties and motivated sellers of all kinds, including large institutions go to liquidate and sell their properties. And many of the buyers of those properties are of course residential real estate investors. Daren is the VP of Market Economics, so he is tracking trends throughout the economy and seeing what’s happening so he can deliver that content and those trends back to his clients, his clients being both the sellers of the inventory and those real estate investors who are buying inventory.   

Josh: Daren’s been joining us now for the last several years, once a quarter to tell us about the trends in the market, what’s happening with home prices, what’s happening with days on market, what’s happening with net migration, people moving from state to state, you know, prices going up, going down. Those types of things. I love to hear about this content because it’s real data in real time that if they’ve all been able to aggregate together. Just at the end of Q four. So we’re going to talk about that with Daren today. Daren, thanks so much for joining us, man. Tell us what’s new, what’s going on at  Auction.com. What are any new products, services, things happening within the company that you’re excited about? Let’s start with that and then we’ll jump into the trends.   

Daren: Yeah, I mean we had a couple of things at Auction.com you know, the foreclosure market is shrinking. I don’t think that’s a surprise to everybody, but we’re, you know, we’re continuing to grow as a company and last year was a great year for us. We sold over again over 50,000 properties and we were continuing to gain market share. Basically we’re accounting now, our platform accounts for right about at 50% of all foreclosure auctions that happen nationwide. We’re handling that. So we’re the lion’s share of that market. And then gaining share also on the REO’s, which are the real estate owned properties, bank on properties. And one thing that’s exciting for us, you know, and this is a little bit insider information, maybe a little bit, I mean, not in a bad way, but it’s really exciting I think for your listeners as potential buyers of these properties.  

Daren: Some of seven of the newer entrance to the foreclosure world in the last few years. Folks who have been buying up nonperforming loans, not banks. A few of them we’re pursuing a strategy of when these nonperforming loans, if they went into foreclosure pursuing a strategy of taking back those properties as rentals and kind of building a rental empire. And we’ve been telling them, hey, look, that, that may work to that strategy may work to a degree, but that’s really not what you’re good at is having a rental empire. You should leave that to local real estate investors. And we just, you know, one of those clients recently while they’re still continuing to hold many properties as rentals, they realized that’s, they can’t do that everywhere across the country. And so they just put up 300 properties for auction as REO’s on our site.   

Daren: And that got a great response from our buyers, our buyer community. In the first run, usually those auctions have multiple runs in the first run. 200 of those 200 or 300 were purchased in the first run. Demand for that. The other hundred will be coming back on. So that’s more inventory and that’s a theme that I’ll talk about later too with some of the data we have is that we actually expect an uptake in inventory of distress properties this year. And we already saw that now with this, it’s not necessarily there is an element of new distress coming, but this is older distressed that’s just finally making it out to be available to investors.   

Josh: Yeah, well let’s call it what it is, right? It’s all the people that have jumped into real estate, which is great. And a lot of my students, followers, subscribers are jumping in and buying properties, but it’s not like people make mistakes, right? Everyone can make a mistake. The wrong financing, they didn’t evaluate the deal properly, the wrong contractor. Things can go wrong. And when they do, it usually takes, again, months and months for someone to go into default non-performing then more months and months for the bank to foreclose. And then again, potentially months and months or years later that the property actually comes back on a platform, whether it’s Auction.com, the MLS, something like that and actually is sold. So that problem could have happened three or four years ago, which is again what Daren just described as the older distress. It doesn’t matter that the market’s amazing.   

Josh: It doesn’t matter that the market’s going up. It doesn’t matter. Operators, there’s always what’s called operator risk operator risk is that you just have somebody trying to invest in real estate that sucks at it or you have a senior operator, a guy that’s got a lot of properties, goes through a divorce, loses all those properties or a guy that’s got a good operation and takes his eye off the ball, loses all those properties. There are things that can go wrong. So older distressed, delinquencies, non-performing deals that could have happened two, three, four years ago that are just coming online now. And I also agree, Daren, with your point about you know this institution that had these 300 properties that was thinking about building a rental empire, but they’re all over the country. That’s very difficult with single -amily homes. Even with one to four units, you’ve got to have some economies of scale in certain pockets, certain areas where you can own, if you’re talking about SFR, where you can own 10, 20, 30, 50 homes that are all maybe within an hour of each other.   

Josh: So you can have some economies of scale to have a property manager, contractors, handymen, realtors, all within that one area. If you’ve got 300 properties spread out all over the country, man, very, very, very, very, very difficult to manage. So I probably would have auctioned those properties off as well. Well, it’s good to hear.   

Daren: That’s exactly what’s going on there. Yep.  

Josh: Good to hear about some updates about auctions. So let’s jump into the slides again. If you’re hearing this in a podcast platform, iTunes, Stitcher, Google play, etc, there is a slideshow with this podcast. You can check this out on YouTube to actually see the slides. Daren’s got a tremendous amount of market data that you’ll only be able to see if you see this in video format. So Daren, there’s really five key indexes that you’re tracking. The yield curve, manufacturing index, consumer sentiment, unemployment rate, and foreclosure starts. And we, you know tracking this of like a you know, a sign of red, which is bad yellow, which is a not really much of a change and green, which is being good. Tell us about what are these five and what’s the trend quarter over quarter?  

Daren: Yeah. I think last quarter when we looked at this, we had the yield curve was in the red and manufacturing was in the yellow as it is now, but the yield curve has gone back positive and that, you know, that’s a tough one because it’s kind of a technical sign of a recession but it’s hard to, to see it anecdotally. But in any case it has historically been a good predictor of recession and it was predicting recession back in the late 2019, but now that has no longer indicating recession. Really everything is green here and meaning likelihood of recession is low based on all of these. The only exception is the manufacturing index, which did go anything below on that index below 50, as a contracting manufacturing sector. When it hits 45, it’s not red because we would put that to red if that index at 45 because historically 45 is when we see it hit that that’s when we see a recession.   

Josh: Got it.  

Daren: Manufacturing is struggling. But all of the other consumer sentiment, strong unemployment rate, strong meaning low for closure starts low. So all of those others that indicate some kind of recession. And we did see, you know, foreclosure starts may  seem like a strange one. Certainly it’s relevant to our industry. What we do is one of the reasons we included it, but it did, you do see actually foreclosure starts and delinquencies start to rise in advance, typically of a recession. But…   

Josh: Yeah, looking back to 2007, 2008, we saw a tremendous amount of new foreclosure starts well before, right? The true Armageddon happened before the unemployment rate went up before the minimum effect. Even the manufacturing index went bad and the consumer sentiment went bad. We started to see all the foreclosure starts happening and the banks starting to see some pressure from a ton of nonperforming loans. That was a big deal that happened around the same time as the yield curve going negative and then all of a sudden Armageddon happened. So I agree with that for sure. Foreclosure starts as a good one, that is sort of a precursor to what’s about to come let’s talk next slide. So let’s talk about the distress market headwinds tailwinds for supply and demand. What are we seeing? What are some indicators about supply and demand that are telling us where the market’s going?   

Daren: Yup. Yeah. And this’ll be very, this is very similar I would say to the overall retail market right now, but you, the, issue facing the distressed market if you’ve considered that way is supply. There’s not a lot of deals out there and I think probably your listeners can identify with that. It’s harder to find deals, I should say.   

Josh: I agree with that. 100 percent.  

Daren: And on the flip side, and we can dig into some of this stuff, but you know, the top half basically of this is supply indicators. So red means there’s not a lot of inflow and you know, for our business that matters too because inflow is what fuels our platform with sales on the bottom half is demand. Now that’s, you know, that’s good for our platform because we have tons of demand as I was talking about with the 300 or the example of the 300 properties we just put up, we see those elements helping to fuel demand because interest rates are low.   

Daren: People’s net worth is going up. People have more money to spend on price appreciation. It did falter last year and two on 2018 but it’s now picked back up. Consumer sentiment is very strong. On the supply side, we talked about the yield curve, unemployment rate, delinquency rates are all down for closure. The one red there is for closure rescissions which is something we look at. That’s properties that go into foreclosure and then the bank stops, the foreclosure proceeding. Those have actually been going down. So meaning fewer, more foreclosures that start theoretically or are not being stopped, they’re actually making it to foreclosure.   

Josh: Yeah. If I’m a banker, which I am to some degree within our fund, if I start a foreclosure, I have no motivation to stop it right now because if I end up taking the property back, if property values are continuing to go up, I’m actually protected by the market still continuing to go up. So if I make that kind of finite decision to start a foreclosure, you know, even if the property owner, the borrower can cure that loan, I may have no motivation to stop my foreclosure because I think the property is going to be worth more. So that makes a lot of sense.   

Daren: Yeah. Yeah. So that’s one kind of technical one. I think there was a surgeon foreclosure, recessions and modification type of things back in 20 1718 due to some of the natural disasters that happen. And that could have affected it too. Now that’s, we don’t have, that’s kind of cleared out. And so that’s part of the element that happened there. But all that leads to, you know, we’re seeing a shrinking foreclosure market for closure starts the numbers. They’re actually, you know, we got the year end numbers that is from the company I used to work for Adam Data Solutions for the year for 9% year over year. That number there is just for the latest month, which was November. Look it for the whole year, it’s about 12 times that.   

Josh: I figured that was somewhere around $300,000. But the reason why I highlighted it was look at 2010 $1.8 million foreclosure starts versus 2019 which is going to be about $300,000 foreclosure starts. You know, it’s significant. It’s like one eighth I think if I got the math right, it’s like one eighth the number of foreclosure starts or one seventh or something like that. One sixth it’s significantly less. And so, you know, again, people have …   

Daren: The peak was actually, we don’t go, it was actually 2009 or it was over 2 million. So seventh for sure. Yeah, it’s totally shrunk, but you know, it’s the foreclosures are, you know, unless we start giving away free houses then you know, the foreclosures is always going to be there as a element of a housing market that relies on heavily on financing.  

Josh: Right. Yeah. I mean there’s always going to be distressed, right? Divorce, distress disability death, that four D’s, that’s always going to be part of the deal, which is going to cause foreclosures, not necessarily, you know, Armageddon in the marketplace or higher interest rates are higher unemployment. There’s always going to be the four D’s. No doubt about that.   

Daren: But certainly pale comparison of what it was. As you say, back in 2009, 2010.  

Josh: Yeah. So this slide that we’re on, slide number four here. The one that stands out is your, headline sell while the sun shines? Tell me about that. What are we looking at here?   

Daren: Yeah. So that’s from the perspective o our clients who are sellers, their and that’s, you know, this idea of if you have inventory that for whatever reason you’ve been holding off and you know, talking to the banks and other holders, holders of this inventory, if you’ve been holding onto it now is a great time to sell because there’s strong demand for that inventory. This graph here is looking at, we have a mobile app with Auction.com that allows you to interact in real time with auctions going on at the courthouse. In most case I can talk, this is another exciting thing I wanted to mention. We have a remote bid service that we’re testing right now that we’re really excited about. But anyway, even beside that, we have a mobile app that allows you to, you still have to be at the auction to bid, but you can from anywhere see what properties are up for auction, which are being taken off in real time.   

Daren: And we found that the views on that app, there’s a super Tuesday that occurs just in the two states, really, Texas and Georgia, but those are big states. And the foreclosure auctions are only held one day a month in those states on the first Tuesday of the month. That’s why we call it super Tuesday. And we found that that’s a great leading indicator of what’s going to happen that month in the retail housing market basically, the blue there is views on our mobile app and the a month over month change in those views. And the light blue line is month over month change in existing home sales.  

Daren: And January we saw a big spike in month over month views on our mobile app, which indicated to us we’re off to a strong start this year for the housing market. There’s a lot of demand from our buyers. And now the January numbers for NAR haven’t even come out yet, but even their December numbers indicate a very strong start even before the year starts. So this is, yeah, there’s, this has implications for the distress market. People who are buying foreclosures, which tend to be investors are very confident in the market, but also implications for their broader retail market that there’s a lot of confidence there and back in housing.   

Josh: Yeah. It’s amazing how these two graphs don’t overlap each other over the last year and a half or so. That’s fantastic. Again, another slide about sell while the sun shines, prices are up. Days on market are down in some parts of the country. We’ll talk about this in a minute. Days on market are up. They’re taking a little bit longer to sell, but those are also some of the areas where days on market historically had been the lowest, where there’s been the most demand. California, Arizona, places like that, days on market are up by not much, but another indication here, prices are up. Median sales prices are up in the MLS and average days on market continued to drop is a general idea there. Anything else that we need to know about this slide?   

Daren: No, it’s pretty, yeah, pretty basic here. That it’s a good time to sell and you know, for your investors who are especially flipping this is, and we’re going to be selling back into the retail market. This is this should be good news I think…   

Josh: December prices up six and a half…  

Daren: In the first half of 2020. It’s going to be sun shining. So yeah, it’s good.  

Josh: Nice. Average days on market by state. This is a great slide. So again, you see some of the sunshine states, California, Arizona, Nevada, Florida. Not much change in Florida. Not much change in Atlanta. Not much change in the Carolinas. You know, a lot of them days on market is either flat zero, maybe 1% change, 3% change. So even though they’re orange and showing that the days on market’s going up, it’s very small. And then in all the areas of blue, the days on market’s going down, which is again indicating that demand is up, there’s more buyers, the properties are basically flying off the market if you will. Especially it looks like in Wisconsin among, I’m looking at down 28%.   

Daren: Yeah. Yeah. Wisconsin market apparently is a, which is surprising because it’s cold there, right here. It’s doing very well. They, in terms of days on market as a leading indicator, I mean, I think the most concerning thing to me here is Nevada, which is traditionally kind  of a bellwether market ahead of the curve. And you do see days on market there had the biggest dip or excuse me, increase year over year. Still nothing hugely, you know, not huge. We’re not talking about huge days on market, but that stands out along with Florida too. Even though the Florida one is really almost a wash and California, some of those states that have had the hottest housing markets over the last few years. Maybe there’s some signs here that, you know, it’s still early, but that there may be a little bit of cooling even in those markets despite, you know, what we saw is with, in general, the housing market numbers picked up after interest rates went down basically in the middle of 2019 and so we don’t see that kicking in as much in some of these States that have some higher asset prices.   

Josh: Interesting. So the number that’s on here, you see the percentage change, but then the actual figure that’s on there is the average days on market for that state. Correct.   

Daren: Yeah. That’s right.  

Josh: So, yeah. So, you know, you’ve got states like Ohio 81 days on market, Michigan 83. It’s surprising actually to see, you know, Ohio and California have the same days on market. Actually Florida 110 days on market is actually longer than Ohio. Texas, 87 days on market, Pennsylvania, 97. Wisconsin, the state we talked about earlier with the biggest decrease had one of the higher total days on market 128 so you could see if, you know, if there’s properties are flying off, they could be a big swing and the percentage, New York 135 days on market and then you got the DC area looks like near Virginia, Maryland. Those are pretty low, 64 days on market in that area. Shortest days on market is DC, Indiana, California, Arizona and Ohio. Again I think price because of prices are still very affordable in the Midwest you see low days on market cause you have a lot of outside buyers from California, from Europe, buying properties in the Midwest. So days on market tend to stay pretty low. Net migration, this is an interesting one. Tell us what we’re looking at here as far as population movement.   

Daren: Yeah, really, I mean I, this to me is, you know, days on market is more of a short term indicator as you know, it can change quite a bit from month to month and quarter to quarter. This is a yearly thing and it’s more of a longterm, here’s where the movement is going and population and real estate in general tend to move fairly slowly. But if you’re understanding these trends, you can, as an investor you can really, you have time to get ahead of the curve. Because these trends move somewhat slowly. But I think the big, I mean, it’s not as surprising to me to see Illinois and New York, well, Illinois is for sure. It’s not as surprising as the Illinois with one of the biggest decreases in that migration in 2019.   

Daren: This is not overall, just to nuance it a little bit, this is not overall population change. It’s not taking into account births and deaths. It’s just looking at net migration, whether more left or more people came. And so blue means more people came to the state, orange means more people left the statement came to the state during the year. Illinois is not a huge surprise, but then I think the biggest surprise for me is California there. I mean, we saw these trends and we hear it anecdotally. I have, I live in California, I have friends. It feels like moving every week to the Midwest, to Texas or some other part of the Texas is the biggest one. Carolina’s is another one. But anyway, to see that longer  term trend and if that continues, that’s not great news for the California real estate market.   

Daren: New York is similar and you have a lot of forces at play and in places those high priced coastal markets to paint a broad, you know, paint with a broad brush there. They’re effected by the fact that housing is already high price. But then some of the tax benefits in years have been taken away from those states. There’s a cap on what you can deduct as like your listeners probably know. And those states also are continuing to enact and look at anti investor legislation, which I think has an impact. You know, California had a rent control law that went into effect in January and this month York was looking, I don’t know how likely it is, but New York City’s looking at an anti basically an anti home flipping law that would tax flippers up to 15% to 20%. And so those kind of things are, you know, you have the broader things that are driving the population away but also investors away in those states.   

Josh: And it’s interesting though, you have, you already have…  

Daren: Weak in those markets.  

Josh: Yeah. You already have in those markets prices that many people would say are out of control. So, and it’s so expensive in California, many parts of California, so expensive in certain parts of New York, especially around the city that they’re instituting anti flipping, you know, anti landlord, anti investor and, you know, I get it to some degree, you know, I’m not, I mean regulation is important. Regulation is important because unchecked capitalism is also not a good thing. And so when you have prices that are way out of people’s range, I understand demand, demand, demand, you want capitalism sure. But when it’s driving up prices to the point where nobody can afford it, like that’s not good either, right. And it’s forcing some of the migration to happen to Arizona, Texas, the Midwest, the Southeast, Florida, etc, where people, you know, frankly can, it’s just more affordable. It’ll spread things out. I don’t necessarily think that’s a bad thing. All right, so home price appreciation looks like just about everywhere except for maybe, Arkansas.   

Daren: Yeah. Red is, home prices are appreciating  

Josh: Things are going up. Yeah. Tell us about this.  

Daren: Yeah, so I mean, this is I think a function of mortgage rates and we’ve seen if we looked at this heat map, probably in the third quarter we might see a couple more states. Now this the state level, couple more States with negative, but now everything, pretty much everything except for a couple of states there. Kansas and Maine are positive. And now you do see in the highest states are you know, Boise or excuse me, not Boise, but Idaho driven a lot by Boise and South Dakota. That’s interesting to see those states. You do see a lot of net migration. Speaking of that in the previous slide to places like Idaho, Arizona is still doing very well. But you do see a little, I mean to me that’s a little bit of weakness in California there with just the 3.7% increase in prices and even Florida with 4.2%, those are below the national number was about 6.5%. So you see just a little bit of, you know, weakness is probably too strong of a word, but not as red hot of markets there.   

Josh: Gotcha. Got to love the Midwest. I love the Midwest. Eight and a half, 6.7%, 6.1% 6.5%.  You know, net migration is a little bit mixed in the Midwest, especially when considering, you know, Illinois, but you’ve got some states that are blue, some states that are orange, but the orange is relatively low. But the home price appreciation is up. And again, I think it’s, this is partially a function of, you know, Florida and California, many people did move there and did buy there over the last four or five, six years. And so there might be some psychological reasons to say, can the market still be going? Can it still go up? Can it still go up? And so there’s a little bit of a pullback.   

Daren: The next slide just drills down to the county level. And this is all MLS by the way. So you do see in California, in Northern California, maybe hard to see there, but the blue, you do see some home prices going down in places like some of the counties are Santa Clara County and San Mateo County, which are San Jose.   

Josh: San Francisco. Very expensive.  

Daren: And then you see it again, it’s hard to see because there’s so many circles there, but in around there’s a few counties like, around the New York city area that are seeing negative price appreciation, Bronx, Rockland County, which is just outside of New York city. You do see some Midwestern counties with a negative appreciation as well. But yeah, I mean overall prices are going up, but you do see a few exceptions to the rule and about 6% of the countdown.   

Josh: I wonder what’s going on. What stands out to me is Kansas City, right, right. Between  Kansas City…   

Daren: I actually generally pulled this yesterday and that’s immediately stood out to me and I’m not sure I wasn’t able to dig into it too much. I’m not sure there, but it was several counties in the Kansas City area with negative appreciation. So that’s something that peaks my curiosity, but I don’t know the answer to what’s going on.   

Josh: Yeah. Yep, yep. Interesting. More distressed inventory coming. Tell us about that. There isn’t, as we’ve talked about, there’s not much distressed inventory relative to years and years ago. The market’s going up, property values are going up in a lot of areas, but this distressed inventory is coming. We’ll probably see some more. So tell us about why we would see more and what segments of the market that’s going to be providing more of this inventory.   

Daren: Yeah, so, and this is switching gears a little bit to yeah, to the supply side of just of the distress market, and this is based, this data here is based on a survey of our clients who are banks and non-bank who have who have foreclosure inventory and are selling it. And our clients make up when we compare it to the top servicers in the industry, they make up about 87% of servicing volumes. So they’re a very big chunk of it. So anyway, that’s to set the stage. But when we surveyed them, and this was in December, we asked them, one of the questions we asked was, do you expect your foreclosure and REO inventory to increase or decrease in 2020? And about two thirds of them said  increased. 60% said increased slightly and another 6% said increased substantially for the year.   

Daren: And so then we asked another question which was where is this going to come from based on product type? And the biggest one, and this is something we suspected as well but our clients back this up, is that the government insured loans are the ones that are going to be the source of additional inventory. And so yeah that’s that the right graph there. The 89% of people who responded said they expect their inventory of foreclosures from government insured loans specifically, which is FHA, VA, USDA, 89% said they expect that to increase. That was more than any of the other product types. You know, the Fannie Freddie loans was on the low side, only 53% expect increase in inventory from that source matches with what we’re seeing in the marketplace and what the reports that those folks put out. Is the risk Fannie and Freddie continue to get rid of risk on their books as much as possible, sell it in the form of nonperforming loans. And then the FHA loans really over the last few years have kind of the riskiest loans in the marketplace. With the low down payment.   

Josh: That’s exactly what I was going to say, Daren right there, the low down payment like USDA, you can get 100% financing in rural VA a hundred percent financing for vets, which is a great program for them, but it’s still hundred percent financing and FHA very little money down and versus Fannie, Freddie conforming financing typically again at least 5% down if not 10% 20% down. And so I’m not surprised to hear your clients say if there is an increase it’ll come from the loans with little or no money down. Makes total sense.   

Daren: I might add is our own data that kind of supports that. So we look at what we call our inflow data, which is a leading indicator. What, what our clients are actually sending us. And this was in the fourth quarter, that inflow and so they send us, you know, here are properties that are in foreclosure and we are probably going to or not probably, but may go to auction. And what we find is when we get that inflow, when we get a property in inflow within the next six months, 52% of those properties do end up actually being foreclosed on. So it’s a good leading indicator. Certainly not all of them, but 52%. So when we see inflow go up, that’s an indication that over the next six months we’re going to see actual completed foreclosures go up as well. It was a 3% nothing huge overall, nationwide.   

Daren: But then you can see the states where we see more of the inflow increases. You might, you know, the North and South Dakota were, those are off of pretty small numbers. You know, the biggest takeaway here on the state level for me is Florida where you see a 33% increase in flow. And that’s based on pretty hefty volume in Florida because it’s such a populated state. So that’s one that stands out to me here. You know, and even, you know, us Texas and California with double digit percentage increases in inflow is interesting to me and then…   

Josh: That could also be though Daren, that there are more clients providing you more inflow, which simply means that they’re using the auction.com platform to sell properties as opposed to some other platform.   

Daren: But that’s actually a really good point. And we are gaining market share. So you have to take that this is not taking that into account. It’s just a straight so yes, that’s partly maybe partly a function of us growing market share. But one of the thing, I mean, you see the, when we break it down by loan type, which is a second bullet there you do see GSE volume from Fannie and Freddie is actually down. The inflow is down 19%, whereas the government insured is up, the FHA is up 3% and BA is up 19%. And then private portfolio loan inflow, which I didn’t really mention in the last slide, but that’s up 61%. And those are the kind of the nonperforming loans, not completely, but it’s loans that are owned by the bank or the non-bank that is for closing. And they take, a lot of them are nonperforming loans that these entities have bought up and are finally coming home to roost and being foreclosed on. So that’s one that stands out as well.  

Josh: Yeah, there’s just because people are looking for yield, right? There’s so much more private money or alternate financing money in the system and so many more people that institutions, hedge funds, private equity funds that have stepped up to buy portfolios of distressed properties or distressed notes. So not surprising to see that those people stepped in, saw an opportunity to buy a portfolio, either buy the asset or buy the note at a discount probably, and then just take it through the foreclosure process that would fall into that private portfolio category. And again, another slide here that talks a little bit more about distressed inventory coming. This one more on the FHA delinquency rates. So tell us about this.   

Daren: Yeah, and this is just, you know, the last slide was our own data which could be tainted somewhat by the fact that we’re growing market share. This is from the FHA’s own report that they put out each month their loan performance report. You do see foreclosures starts are still down, but 90 day delinquencies are up 3% 60 day delinquencies are up 16% and this was in November. Their data lags a little bit. So you do see some signs there that the delinquencies in that range are going up on FHA and if you read their reports, they’re signaling all over the place that they are expecting foreclosures. Basically a distress to increase because of the rising risk profile of their loan originations over the last year that the average debt to income ratio has gone up to record high of over 43% and the percentage that are over 50% debt to income ratio on the loaner adjurations is at an all time high as well. So there are signaling all over the place when you read their reports that we actually expect the distress volume the default delinquency distress volume to go up and that rising risk in our loans over the last few years.   

Josh: Got it. Yeah, that makes a lot of sense. And then the more they’ve relaxed lending guidelines, the more the higher the debt to income ratio. It just always seems to prove that that’s going to eventually lead to more foreclosures. I’m not sure why they continue to allow that to expand and the debt to income ratio would go up. It never seems to last.   

Daren: Last quarter I think it finally went down. So they’ve realized it and I’ve started to clam down, but certainly loans originated really between, I would say 2014, 2018 were we saw that elevated risk.   

Josh: Got it. Got it. Yeah. I don’t know why they even play with the number. Why not just set it and set it at what works and leave it. I don’t know why they are always kind of monkey around with debt to income ratios. It seems like there would be a number that’s would just prove that…   

Daren: Yeah, there’s, you know, there is a pressure there. Their mandate is to provide to assist  affordable housing and all that. And so there’s that pressure there.   

Josh: That’s true.  

Daren: Mixed with keeping the risk profile in a place where it should be.  

Josh: Got it. So this last couple of slides here, tell us a bit more about foreclosure auctions as an indicator. So tell us a little bit about what we’re comparing here. Home prices to foreclosure auction sales rates.   

Daren: Yeah, this is something that we’re working on and that I saw in the data that I think is going to be, is a leading indicator is our own buyers. And this is actually market data this is not our own data. But so this is looking at the percentage of properties that go to foreclosure that are purchased by third parties, which would be real estate investors. And that percentage is a great indicator of how confident investors are in the market. And investors are on the front lines of the housing market. So they see things coming before most other people do. And so the primary, this is nationwide. The prime example, if you look at the blue line, is that rate of sales to real estate investors at the auction that plummeted back in the third quarter of 2005. It started falling off a cliff. But we didn’t see it go negative until over a year later and at the end of 2006.   

Daren: And so they were, they saw that coming before the rest of the market did and stopped buying at the foreclosure auction and then home prices followed and you conversely, you see them start buying again before the market recovered. So they saw the market recovery as well. And of course that was a really extreme example where it’s easy to see. What’s interesting to me at the national level is starting in about 2013. You see the two lines really follow each other very closely, which tells me that at least at a national level the foreclosure buyers are, you know, are following the market and are pretty, continue to be fairly confident in the housing market. Now where it gets a little more interesting is yeah, if you go to the next slide and look at some local markets the story is not the same.   

Daren: Los Angeles is one local market where we see the foreclosure buyers starting to pull back quite a bit. And by the way, last, you know, we talked about Nevada earlier. I didn’t put Las Vegas in here, but it’s another market where we see a similar pattern like this. And actually maybe even more extreme where these guys and gals on the front line of the real estate market who are many of your listeners, getting in a little, or at least especially around the end of 2017, got a little bit hesitant now it’s bounced back a little bit in the last couple quarters, but that those two lines diverged quite a bin in the last couple of years with investors pulling back. And so it may not, you know, we don’t see as big of a fall off as in the last crash, but it does signal some weakness in that market.   

Daren: Tampa is another market where I, and the reason I pulled Tampa as I was talking to a buyer who does buy a lot there who said he’s very hesitant about the Tampa market. And so I pulled the data there and he said he stopped buying in the camper market. Or at least he’s buying a lot more cautiously. And we see that in the data here where foreclosure buyers are tapping out. Now home prices have not followed suit. But to me that’s a real sign that there could be some weakness in some of these local markets even though you don’t see that in the national numbers.   

Josh: Sure, sure, sure. Yeah. And it could be that, you know, I’ve said for years to our people, you know, if you’re in a market and there’s a lot of competition, you need to expand your market or expand your marketing, okay. We use that all the time. We say that expand your market or expand your marketing. So it could be that people are seeing that home prices in Tampa are at record highs and they’ve gone up a lot over the last 10 years. And they’re saying like, I’m not going to buy it. I’m going to keep buying just not in Tampa. Maybe they’re buying, again expand your marketing or expand your market. Maybe they’re on the outskirts of Tampa, they’re in other counties, they’re in other areas because the core part of Tampa, just way too much competition.   

Josh: So the foreclosure buyers that we’re seeing according to this data in this local market are going down. But it doesn’t mean that investors are not buying. It just means they could potentially be buying other places. And when you overlay that data in with Tampa, the overall market for Florida, you know, it’s going up. But in the local market of Tampa, the number of foreclosure buyers is going down. That’s how I read it as, you know, a boots on the ground sort of guy. I don’t have any data to support that, but that’s my takeaway.   

Daren: Yeah. I’d actually like to look at some other markets. You know, I was talking to another investor recently who said basically the exact thing, they’re expanding the market and they’re going to places like De Moines, Iowa and Little Rock and Oklahoma city. It’d be interesting to pull the data here and in those markets and see, you may see a reverse almost of what you’re seeing in Tampa, where foreclosure buyers are coming in and before home prices have even taken off as much in some of those markets.  

Josh: Yeah. That’s fantastic Daren. So give us your sort of final sort of thoughts, executive  summary on the data that you’ve shared with us today.   

Daren: Yeah, I know it may, it’s a little bit all over the place, but I think we’re in a spot where it is a, at least for the short term it, the market is on solid footing. And so there is going to be a sun, you know, the sun is shining at least I would say for the six month, first six months of this this year. But investors, it is, you know, we were just, there’s so many things the length of this recovery, even though that in itself should not be a reason to be cautious, but it is. That investors need to keep their eye on what’s happening in the data as much as they can to make sure that they’re ahead of the curve if the market should shift.   

Josh: Yeah, I agree. And I think from a tactical perspective, for those investors that are in the market doing deals on the ground, I would say don’t lose sight of the fundamentals. The fundamentals of real estate are, and if you’ve heard our recent podcast with other  guests, including Frank McKinney, you know who build spec homes on the ocean he talked about even in his interview, even though he’s building $20 million, $30 million, $50 million spec homes, he still wants to be all in where his purchase costs plus his improvement costs is still at roughly 65% to 70% of the properties realistic, saleable after repaired value. If you stick with that fundamental, you become essentially almost bubble proof or bubble burst proof because you’re at such a low loan to value or such a low asset value compared to its real value that even if there’s a 10% correction in the market, which would be a huge correction, that you still have 20% or 25% equity.  

Josh: I think that fundamental doesn’t change. If you get into a situation where you’re in an expanding market like California, Arizona, Nevada, Florida, and you’re buying on speculation and you’re paying 80, 90 cents on the dollar and you’re hoping for appreciation, that’s where you could really get caught because you’re starting to see some weakness in certain markets. And again, real estate is very, very local, right? Very local. Even on a street by street basis in some areas it’s very local. So you’ve got to, you know what happens at Ohio is not the same as what happens in Montana. It’s not the same as what happens in Kansas city. It’s very local. So this data is really amazing. But stick with the fundamentals. Don’t get desperate to buy a deal and overpay. Don’t get desperate to buy a deal and overpay because if the crud hits the fan, if you will, you can always get through a recession with cashflow.   

Josh: If you overpay, you’re not going to have enough cashflow to pay your debt service. So stick with the fundamentals is what I would say, you know, be a smart investor. I also believed Daren on this data that you’ve shared with us. Some of my takeaways is that there’s not necessarily blood in the streets and there doesn’t appear to be blood in the streets for the next six months to maybe nine months. So if you have cash and you can invest, invest, that’s the way I read it, especially in most markets now. Again, it gets, it’s local. All real estate is local. It’s all geographic. So if you’re in one of those markets where things appear to be pretty good, you know, I wouldn’t keep your cash sitting on the sidelines hoping for blood in the water because right now I don’t see it happening for the next six to nine months. And even if it does happen, it’s going to be a year or two or three from now until there’s a major foreclosure crisis and because that stuff takes a while to work its way through the snake. So those are my takeaways Daren anything that we forgot about or anything you want to add before we wrap up.  

Daren: I think that’s good. I mean I would just to plug Auction.com a little bit.  

Josh: Oh yeah. Definitely.  

Daren: So I think this is a great way to those last slides we look at is the way that folks are behaving at the foreclosure auction is a great indicator of what’s going on in your market. A great way to interact with what’s going on in the foreclosure action is to download our mobile app, which I mentioned earlier, the foreclosure interact. It’s Auction.com mobile app, but then there’s this feature in that called foreclosure interact. And you can go in whenever you can look for your area, find a foreclosure auction happening and you don’t even have to go to the auction. You can just go and see and observe what’s happening, which property is going, how much they’re going, relative to market value and you can go in and research properties. I would just, and then of course  if you’re interested in bidding, you know, of course do that, but that is a great tool to kind of see what the foreclosure auction buyers in your market are doing and how they’re behaving. So I’d encourage that it’s a free app that you can go in and get it anytime.   

Josh: Fantastic. Daren, listen, I really am very grateful and appreciative for you coming on today. I don’t know what it is when you come on and I see this new data, I feel like I have some control even though I don’t, I feel like I have some control over what we’re doing, where we’re investing. It definitely impacts our decisions going forward. This is always really insightful. Thanks so much for being here on Accelerated Investor.  

Daren: Glad to be here. Thank you. 

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