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Home prices are no longer rising like they were, but the cost of debt is going up, and you might be seeing and feeling distress in the markets by the time of your next deal. So, with all signs pointing to a recession on the horizon, what should you do?
To help me answer this question, I’m once again joined by Daren Blomquist, EVP at Auction.com. As their in-house economist, he helps clients–both buyers and sellers–understand where the market’s going. There was so much more than we wanted to cover in our most recent discussion and I knew I wanted to bring him back to make sure we covered everything.
In this episode, Daren and I talk about why housing prices in 2023 are all but guaranteed to drop, why there are still a ton of great investment opportunities during economic downturns, and which markets are likely to be riskiest in the months and years to come.
Key Takeaways with Daren Blomquist
- The dangers of investing for cash flow in a tumultuous economy–and how interest rates can ruin a flip overnight.
- How the end of the foreclosure moratorium is going to create a growing backlog of distressed mortgages, delinquent loans, and foreclosed properties.
- Why this housing downturn is highly unlikely to be as tumultuous as the Great Recession of 2009.
- What makes coastal areas so much more prone to cycles of boom-bust than the Midwest.
- Why flippers may still want to consider selling right now.
Daren Blomquist Tweetables
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Josh Cantwell: So, hey there. Welcome back to Accelerated Investor. Hey, I’m your host, Josh Cantwell, and today we’re about to start Part 2 of our conversation with Daren Blomquist. Daren is Executive Vice President at Auction.com. He’s essentially their in-house sort of economist. He works on all of their statistics, data analysis of where the markets are going and then publishes that out to all their clients. Obviously, their clients are buyers of real estate on their platform but also their clients are the institutions that list and sell inventory on their platform. And so, Daren’s been tasked with a very big job of trying to help clients on both sides of the table understand where the market’s going. If you caught Episode #1 of this series or Part 1 of this series, we talked primarily about the prices and where prices were going, the likelihood of recession, and kind of how we’re seeing home price appreciation decelerate, okay, and with the cost of debt rising. And so, I want to welcome Daren Blomquist back to the show.
And today, we’re going to talk more not only about prices a little bit, but we’re going to talk more about the kind of backlog of distress and what you as a real estate investor can expect for future distress and maybe opportunities to buy on the Auction.com platform as well as other places by your next deal, by your next property, and when some of this distress will start to show its face.
Josh Cantwell: So, Daren, welcome back to the show. Thanks for being here.
Daren Blomquist: Great to be here, Josh. Thanks for having me back
Josh Cantwell: For sure. Well, listen, we left off the last show kind of talking about certain areas primarily along the coastlines, California, some parts of New York that were already starting to show some decreasing home values. So, Daren, why don’t you just kind of pick it up where we left off and talk a little bit about, well, what are some areas where we think there’s going to be some decreasing home prices because of the cost of debt, and then we’ll pivot into distress and where we think some of that distress is going to come from.
Daren Blomquist: Great. Yeah. So, yeah, to recap really quickly last time, basically, we’re going into a year in 2023 where it’s looking increasingly likely and more and more folks are jumping on the bandwagon of there being a recession and also a downturn in home prices and not just in some markets, but nationwide. And even Zillow, which does tend to be pretty conservative, pretty bullish on the housing market, is predicting home prices. Home values will fall in the next 12 months between September 2022 and 2023 and about 30% of metros. And there’s a lot of folks out there who believe it’s going to be more than that. But at least, you know, we have more certainty that this is likely to happen in 2023. Home prices are going to go down. It makes a lot of sense. If they didn’t, the market would not really be behaving rationally given the rising mortgage rates, as you alluded to, Josh, and that’s putting the Fed in some ways, and in fact, Jerome Powell has come out and said words like he’s expecting the housing market to correct and that’s okay with him because, you know, the Fed raising rates is really about something more long term bigger, which is inflation.
So, all this is just helping us, helps investors frame out what the next year is going to look like most likely. We can’t guarantee anything but, yes, home price is going down. And, Josh, we were talking before and I’d love to get your thoughts for your audience, too, on how this is impacting how you’re viewing investment opportunities. And do you think that’s going to, eventually, there’s going to be enough downward pressure on home prices that some of those opportunities that aren’t penciling out right now will pencil out maybe in 2023.
Josh Cantwell: Yeah. I think, look, if you’re buying for cash flow, right, there are two types of buyers that buy real estate, let’s say, on the residential side. If you’re buying for cash flow if you’re an investor or you’re buying for a flip opportunity, the trouble with flip opportunities right now is prices are still elevated. Sellers are not realistic. And so, if you’re buying for a flip, the challenge is how is the end buyer that you’re flipping the home to that’s eventually move into the home that you fixed up, they’re going to want a lower value because they simply can’t afford a higher price with a higher mortgage with higher cost of debt. So, that becomes a little bit more risky to be buying properties, to fix them up, to sell them, assuming that there’s going to be a buyer pool. Because we believe, I believe that buyer pool is going to get smaller because the cost of prices is more expensive. If you’re buying for cash flow, the trouble now is when you go into that deal, your rent is only X amount, but your debt is twice as expensive as it was 18 months ago when the rates used to be 3.25. Now, those rates are 6.5. Your debt is double.
So, are you willing to go into a deal where the deal’s bleeding cash in order to course correct, get the property back into the black, and then hope for upside value long term? The only way that you buy now for cash flow when the deal is actually losing money is if you’re a long-term investor, right? Daren, if you’re willing to hold that property, whether it’s an apartment building or whether it’s a single-family home, you’re willing to hold that in your portfolio for the next 5 to 7 years or longer because to buy it and resell it in the next couple of years can be very, very difficult. I do believe that prices are going to come down for both residential and commercial multifamily. And so, refinancing is going to be tough because rates are higher and it’s also going to be tough to sell because buyers are going to want a discount. So, stuff that you maybe have bought over the last 1 to 4 years, hold on to that for the next 2 to 3. Wait until the backside of this happens. Rates go down and then possibly refi yourself. That’s what we’re kind of preparing for.
Daren, one of the things that’s going to add possibly some inventory which may further reduce prices down, there’s more supply, right, to catch up with demand, pricing may come down, is distress, is a backlog of distress. So, let’s convert the conversation and pivot over there to talk about that. So, another is pent-up foreclosures from the pandemic. Obviously, we had a foreclosure moratorium for a long time. That stopped and now we’re starting to get caught up. So, bring us up to speed on where we are today on that backlog of distress.
Daren Blomquist: Yeah. So, this is more of a short-term view of distress. And I think the recession and home price correction that we’re talking about, that will have implications more in the long term going into even 24 and 25. But for 2023, what we’re really dealing with when it comes to the world of distress is the backlog from the pandemic and the foreclosure protection that was put in place during the pandemic was very successful in preventing a huge wave of foreclosures. However, there is a growing backlog, and this is data from Black Knight, 488,000, what I call unprotected delinquent mortgages. And that number has basically doubled in the last year since some of those foreclosure protections like the foreclosure moratorium and the CFPB rule that was put in place temporarily to protect folks against foreclosure. Those have expired and so now we’re seeing this number grow up to 488,000. And so, what I mean by unprotected delinquency is proper loans that have gone through the forbearance program, have come out of forbearance, and either have not qualified for any loss mitigation like a loan modification or they haven’t even applied for that.
So, there’s really nothing at this point stopping the foreclosure from happening, and most of these folks are pretty seriously delinquent. So, this is kind of the pool that we have to draw from in terms of what we would expect to show up at foreclosure auction in 2023. It’s 488,000. And the question is how many of those will end up? When we asked our clients a couple of months ago, you know, and the clients, meaning the mortgage servicers, the banks who are foreclosing, their consensus was 23% of this 488,000, a very specific number. I think it might end up being lower than but you’re ending up with, you know, our best estimate out of this backlog in 2023 is going to be somewhere around between 115,000 and maybe 150,000 properties that end up at foreclosure auction. To put that in context, back in 2019, before the pandemic, we had 206,000. So, it’d be even lower than pre-pandemic levels. So, not by any means a big wave, but it would be an increase from 2021 when we’re on track for about 85,000 foreclosure auctions. So, that would go to 115,000, 250,000. It could go up to…
Josh Cantwell: 2019 would be considered a normal year but prices were starting to go way high already. And a lot of people, when prices are going up and houses are appreciating in value and you’re in foreclosure or there’s some kind of distress, whether it’s a death, delinquency, whether it’s disability, divorce, bankruptcy, something like that, you have the benefit of a rising price, which you could just throw your house on the market and ultimately exit. Then, of course, the pandemic happens. There’s no supply. So, if you are in any kind of foreclosure situation and you wanted to sell, you could sell and you probably got multiple offers on your house on day one. The problem with 2023, we’re presuming, will be that there’ll be this increase of foreclosures and also possibly decrease in price, which would make it so that more people can’t just get bailed out because of rising prices, right?
So, that becomes, okay, we have the normal sort of log of foreclosure activity, then you have the backlog from the pandemic, and then you’re also going to have possibly decreasing prices. So, that should create even more supply, more inventory of foreclosures by the end of 2023, at least that’s in my opinion how I see it kind of stacking up.
Daren Blomquist: Yep, I totally agree. That’s a great point about the convergence of these trends, being that the people who have forestalled selling their homes, you know, because a lot of people had equity who are in trouble. And if they’ve put that off, unfortunately in 2023, they may be in trouble because they can’t get that price that they could have gotten back in at the peak of the market in 2021 or 2022 even. And mortgage rates have gone up. So, there’s not as many tools in the toolkit for the servicers just to go and modify the loan because they can’t. It’s pretty hard to bring that interest rate down from what the borrower has already. So, I do think the 23% that I talked about could be higher given that situation. And so, that does mean more opportunity for distressed buying I think in 2023, nothing on the scale of 2008-2009 at this point that is shaping up.
Josh Cantwell: Yeah. That’s good to see. We don’t want to see another 2008-2009. A little bit of a correction would be great for everybody I think considering how fast prices inflated. It appears like there’s a lot of people working their way through the system where they had some COVID relief. They maybe got a forbearance agreement or a loan modification. And I’m actually surprised to see that the redefault rate’s only 12%. I would have thought it’d be higher but it’s like that ability for people to restructure their loans worked for the vast majority of people who did that.
Daren Blomquist: Yeah. I would suspect that this number will go up closer to that 23%. But as of right now, at least according to the Philadelphia Fed, that’s 12%. And so, that’s good news for the market. I think many people are what we’re seeing, I mean, this is showing basically the big takeaway here is some people if what we’re seeing is a lot of canceled foreclosure auctions. So, properties are scheduled foreclosure auction. They get canceled. What’s happening to those? About 20% to 25% of those folks are selling on the retail market probably because they have equity. What we’re seeing a change in as those gray bars is but there’s a much higher percentage of people who are recycling back into foreclosure who have after the foreclosure auction is canceled. And so, that’s an indication to us we might see that 12% go up a little bit higher than it is right now.
Josh Cantwell: Gotcha.
Daren Blomquist: But yeah, right now we’re not seeing this massive wave. This is kind of putting those numbers by quarter of foreclosure auctions into perspective. And you see back in 2018-2019, basically twice as many as what we’re seeing right now. So, that supply has not really turned back on.
Josh Cantwell: And even if prices were to come down in 2023 and there’s a little bit of a correction, let’s say, by 5% or 10%, in a normal real estate correction, 10% residential correction would be huge, right? It would be all over the news. But prices were up 33% in 2021 and they were up again early part of 2022. They were up in 2020. So, prices have just gone up significantly. So, if you’re talking about a 5% or 10% correction in prices versus what could have been a 30% to 50% increase over those three years, it’s relatively small. And you would think if people hadn’t refinanced and pulled all their equity out, that they still have a tremendous amount of equity. So, the fact that the amount of distress and the amount of properties going to foreclosure auctions, about half of where it was pre-pandemic, and the fact that there is, in theory, so much built-up equity over the last three years or two-and-a-half years, that some correction in prices really shouldn’t, just the correction of price shouldn’t cause all that much distress, in my opinion.
Daren Blomquist: Yep. Yeah, I agree. And so, we’re not seeing that yet. Now, what we are seeing in slide 11 there, if you go on, what we’re starting to see increase is the foreclosure starts. So, this idea that some of these delayed foreclosures are starting the process. Now, it takes a good year, I think, in most cases for and it depends on the state for foreclosure start to translate into an actual foreclosure auction. So, this is a little bit more of a long-term perspective but it is important to note that these numbers are coming up. So, if you look at the blue line there, that’s the actual number of foreclosure starts and this is data from ATTOM Data Solutions. If you compare to the blue line prior to the pandemic, it’s still not quite there, but it’s at about 80% to 90% of that level. So, it’s coming up. And we’re seeing those gray bars are 150% to 250% year-over-year increases from the artificially what you might call artificially low levels of 2020 and 2021.
So, there’s evidence that there’s more coming but that hasn’t translated into foreclosure auctions as of yet. And yeah, slide 12 actually, does that kind of reiterates it from this is specifically Auction.com data. Foreclosure auctions are about 48%, about almost 50% of pre-pandemic levels. The one thing that we’re noticing, if you’re someone who focuses on REOs, that volume has really not come back because for twofold. One is the foreclosure volume is down but two is we’re seeing a lot higher percentage sales rate at the foreclosure auction. So, almost 60% of the properties that come to foreclosure auction are selling, whereas prior to the pandemic, it was more like 40%. So, fewer of those are actually making it through to REO, real estate-owned, and investors are scooping them up at the auction instead. Actually, this data is a little bit a quarter behind here still but that sales rate is coming down again because investors are getting more cautious about the market and pricing.
So, anyway, just a couple of dynamics there that in terms of the volume, and this is where for as many of your audience may know, the foreclosure process is vastly different from state-to-state. So, this is just a view on where we’re seeing the volume come back the fastest. It does tend to be in the Midwest and in parts of the Rust Belt where we’re seeing that volume come back the fastest. And so, if you’re someone who is flexible on where you’re buying and we do have now remote bid in many of these states where you can bid remotely at foreclosure auction, there may be more opportunity in some of these states early on and then other states later on. Places like New York, you may see where the foreclosure process takes a very long time. You may see some more opportunities down the road in a couple of years.
Josh Cantwell: It just doesn’t seem like, as we talk through some of these different levers that that happened in 2007, 2008, 2009 where you had adjustable rate mortgages adjusting up. You don’t have that. You had the banks that weren’t liquid. You don’t have that. Banks are very liquid. They didn’t stress test and they’re very kind of ready for a recession. You look at the foreclosure process getting caught up. But as you alluded to during a few times, the foreclosure process, even if you start the foreclosure, it’s roughly 12 months until it gets through the foreclosure snake ends up at auction. And then often because I’ve foreclosed on a number of properties as a private lender and when I run my fund, it could be then able to have the foreclosure auction if the bank or the institutions, the high bidder could easily be another 2 to 3 months until you have full clean title, meaning the taxes are paid, the deed is awarded, everything’s cleared off, and now you have full clean title to the property and now you can actually list it as REO.
So, because the foreclosures, the foreclosure moratorium went all the way into 2021, it’s not like the banks just snap their fingers and all of a sudden foreclosed on everything. They had to restart that whole process. So, that can easily, in my opinion, take well into 2023 until they’re caught up. Those properties are moving their way through the snake and then if they’re not bought at auction, then they’re being sold as REO. A lot of that stuff I have a feeling will start to really gain some momentum in the second half of 2023 for all that to finally kind of peak and work its way through what typically is a very slow foreclosure process. So, some of that opportunity is not going to happen for maybe a year from now until it really, really hits a peak.
Daren Blomquist: Yeah, I think that’s true. So, just trying to set expectations for what to expect. I think there is more volume coming but it may not be this amazing buying opportunity from the perspective of an investor that 2009-2010 was. Now, I do want to say there’s still opportunity there and there’s still foreclosure sales happening. We have many buyers who are still they’re aggressively buying, although they’re being more cautious on their pricing. So, there are certainly opportunities out there. Yeah. Set the expectations. This is a view of kind of how 2023 could look depending on some of the macroeconomic circumstances. So, the guardrails here from 112,000 on the low end all the way up to 278,000, which is a huge difference, obviously, but I think we’re probably more going to be closer to that 112,000 to 175,000 in 2023 as the impact of the recession and home price downturn really won’t take effect and kick in, in terms of distressed volume until later years.
Josh Cantwell: And the recession hasn’t officially kicked in yet. People say, well, third quarter of 2022 would have been a recession but we exported a tremendous amount of energy to Europe and to other parts of the world because of the war in Ukraine. So, we exported a tremendous amount of energy, which actually, instead of having the third quarter of GDP retraction in a row, it was actually slightly positive. But if you remove the energy exports, which were much higher than normal due to the war, it actually looked like the GDP was positive in Q3. So, from a very high level, they’ll say, “Well, we had two-quarters of retraction and then one-quarter of gain.” That is true if you look at the hardcore numbers. If you remove energy, it would have been our third quarter in a row of sinking GDP. The benefit again here, another thing working in the favor of a soft landing is the fact that we still have such a low unemployment rate. Incomes are still rising. Many people, we still have more demand for jobs than we have people filling jobs.
We have still millions of jobs open versus, again, you go back to 2007, 2008, 2009 when it was a true recession, lots of people got laid off and many major institutions were laying people off. That resulted in even more foreclosures. Whereas in this instance, you may have people now getting caught up on pandemic foreclosure distress, but a lot of people have jobs. If they keep income coming in from their job, the chances of there being a major foreclosure wave seems pretty muted. Seems pretty limited.
Daren Blomquist: Yeah. I think there’s a lot more in place to create some floors in the market and not just a trap door falling away type of situation like we saw back then. So, yeah, I think that’s true. And I think overall, that’s good news in many ways for investors because you’re not going to see this wild swing of the market that’s as much of a wild swing that is unpredictable and harder to navigate is the hope, I think, for many. Now, yeah, this is using some of our buyer data, which I think our buyers are a better predictor of what the market’s going to do than any economist out there, to be honest. And so, basically what this is looking at is their discount that they build into their bidding. And prior to the pandemic, as you can see, that yellow line is for those who can’t see but was around 20% to 25% discount. So, if you’re buying it at auction, you’re building in that 20% discount below, not below after-repair value. I want to make that clear. It’s below as-is value. And so, it would be more like probably 30% to 40% below after repair value.
But anyway, during the pandemic, things got a little crazy and buyers were willing to buy at as low as a 9% discount below as-is value, which is not a lot of margin. Not a lot of cushion. But that frenzy is subsiding. And so, we’re now seeing those discounts return to that 20% to 25% level. And that, to me, there’s two takeaways from that. One is our buyers are anticipating that home price appreciation is going to, at the very least, slow down. And so, they need that bigger discount upfront. And then number two, for folks out there who maybe are more kind of been keeping their powder dry, have backed away from the frenzy that was the pandemic market, this may be an opportunity to come back in or some of those frenzied buyers have backed out of buying at foreclosure auction. And there may be less competition and more opportunity for discounts.
Josh Cantwell: Well, even if you look at from kind of a very practical level of how do I actually buy a foreclosure, buy a property in the middle of COVID, it wasn’t like you were going to market to a seller with a postcard and then get on the phone with them and then go to their house and physically meet with them, right, when everyone had COVID and everyone was wearing masks and we thought the world was going to end. So, you removed some of the strategy around actually buying distressed real estate during COVID. You removed a lot of face-to-face ability to talk to homeowners, view properties. You maybe market to homeowners. So, if you remove some of those buying techniques, what are you left with? Well, an easy way to buy real estate is online. You do it right through Auction.com, you make a bid online, and you get awarded the deal.
So, if you’re thinking like a lot of my different buying strategies are now off the table because of COVID and I have less strategies to work with, and I still want a deal. I still want to buy a property, I want to buy a rehab or a rental or a wholesale property, I’m going to maybe require less of a discount just because I want something. Something is better than nothing. And then as the world unthaws in late 2021, 2022, Omicron is gone, Delta is gone, things start to unthaw, now, you can get back to and we’re seeing it all over. We’re seeing live events with thousands of attendees. We’re seeing people get back to all normal activity, economic activity, including meeting with sellers face-to-face, meeting with brokers face-to-face. So, that unlocks now all of your different buying strategies. So, you’re not as desperate to get a deal because you can go to multiple avenues. So, that’s one practical way I could have seen why it played out that way is people were online, they were like, “Hey, this is the great way for me to buy. I can do it from home. I don’t have to leave my house. I don’t have to risk my health.” So, we’ll get real good information there for sure.
I’m curious to know about foreclosure discounts, right? Usually, the market’s hot. Things are really growing. You know, the East Coast, the West Coast, you’re not going to see much of a discount because those are very like what I call boom-bust markets. When things are booming, people are willing to pay more so there’s not much of a discount. When you look at the Midwest, yeah, it’s more of a cash flow, stable market. It’s not a lot of boom-bust. And so, people want an immediate discount because there’s not as much appreciation later. So, how is it breaking out now compared to that theory that I just laid out?
Daren Blomquist: Yeah, absolutely. I mean, we’re kind of reverting to the mean is what I would say. And so, you did see that. You know, if you look at the two sides of this slide, which is the West and the Northeast, those are averaging a 19% discount back in 2019 before the pandemic. The Northeast is back to that 19%. The West is actually back to 25%. So, what this tells me is the West is where the most risk is. Our buyers are building in a bigger cushion than they were prior to the pandemic, and that would indicate they’re expecting potentially a home price downturn there. But to your point, if you look at the Midwest, the central region of the country in the Southeast, those are a little bit more stable markets where even prior to the pandemic, buyers were expecting a bigger discount of over 20%. And they’ve reverted back to that. Now, they’re there in the Midwest. It’s 24% discount. Southeast, 22% discount. And so, that’s again, reverting to the mean, I think. But to your point, yeah, there’s a bigger discount in those regions historically expected because you don’t have the dynamism of a market that could go up 10%, 20% typically in those parts of the country. That may have changed a little bit.
And then we do have a heat map here showing discount. And so, this is trying to predict what markets have the most risk of a home price downturn based on our buyer behavior. And so, where the discounts have not just reverted to the mean of prior to the pandemic but have gone beyond that. And so, the red parts and not everybody can see this, but the red dots on the map are those markets that are most susceptible to home price downturn. Top of the list is San Francisco. You have Pensacola, Florida, Pueblo, Colorado, smaller market, San Diego, Minneapolis. That was a little bit of a surprise to me. Riverside in Southern California, Lakeland, Florida, Tucson, Arizona, Davenport, Iowa, and Phoenix. Those are the top ten in terms of where we see our buyers are predicting the most risk of a downturn. And yeah, I mean, it’s a double-edged sword there. There’s more risk of a downturn there but there probably maybe better opportunities for deeper discounts in those markets.
And if you are willing, especially if you’re in the short term, there’s a lot more risk in maybe flipping a property in those markets. But for a more long-term investor who is planning to hold for a while, those markets may be really good opportunities. As we would expect, most of those are pretty solid markets where you would expect home prices, home values to come back over the next five years at the very least.
Josh Cantwell: Yeah. Like, we talked about at the beginning of the show, if you’re a long-term investor, even with some possible volatility in the next 12 to 24 months, rates are higher, prices come down, again, it comes down to cash flow. Right? Can you buy the property? Can you give them the right basis to let the property cash flow, hold the property for 2 to 5 to 7 to 10 years or longer, knowing that these are some of the stronger economic markets. They’re boom-bust markets. And I think this “bust,” in my opinion, over the next possible 18 to 24 months is not going to be a huge bust. So, even if you do lose a little bit of money on your purchase price and say buy a home for 300,000 or 250,000 and it drops by 5% or 10%, are you going to do better in the long run if you’re in Florida or Arizona or California or Colorado? If you’re expecting appreciation, then the answer, I would assume in my opinion would be yes, that 5 to 7 years from now those prices are higher. If you’re like me, maybe a little bit more conservative, maybe you’re buying in Iowa or in Minneapolis, Saint Paul, waiting for those discounts to happen and then you’re going to cash flow those, and you want them to cash flow right out of the gate if possible.
But again, I think your buyer data, Daren, supports my general thesis, which is boom-bust along the coastlines, Arizona, Florida, Colorado. Those have been boom-bust markets now for 15 years since the last bust. And I continue for them to behave that way. The economics, the people, the population, that’s how it’s behaving. And I continue to expect that, especially this data here supporting that going forward. So, I’m curious to see as things move forward, I wonder if over the next 24 months, is demand going to continue to be there? Because we’re still short, right? We’re still short on supply of affordable housing. My friend, Jack Patrick, Daren, that you’re aware of, he’s building like 50 homes in Florida right now. And I talked to Jack the other day and Jack’s like, “Hey, man, I’m not sure what’s going to happen. All of a sudden, the debt for these buyers if they buy my new builds, skyrocketing for them.” And Jack and I had a conversation just the other day to say, “Well, even though their cost of capital is skyrocketing, there’s still a significant amount of undersupply.”
And demand seems to be pretty strong because people have jobs and the unemployment rate’s really low and people are still flushed with cash from all the pandemic subsidies that went out. So, you’re balancing this conversation around buyers, are they going to pull back on their prices? Is there still going to be demand for all of his new construction? So, what does demand look like for buyers? What does demand look like for distressed properties going forward? How do we kind of look at how was demand for retail versus distressed? Are people going to look for that or are investors just saying, hey, just give me a deal? I don’t care if it’s distressed. I want it, right? I’ll take it.
Daren Blomquist: Yeah. I think we’re kind of in this weird period where there is still that kind of long-term demand in place but because buyers are both on the distressed side and retail side, are anticipating a downturn. They’re not as eager to jump in. You know, they’re more willing to wait. And so, we see that in the distressed market. In our data, they’ve pulled back their pricing. This is basically your classic economic demand curve has shifted downward from the second quarter to the third quarter. And that’s an indication that basically at every price point, there’s fewer properties demanded from our buyers. And every quantity demanded is at a lower price point. So, demand is shifting downward. And then meanwhile, yeah, the next slide shows our sellers who our clients have really not shifted with that. And so, they’re still pricing their properties the same way as they were six months to a year ago. And in the short term that’s a problem because it means fewer properties are going to get sold. And I think this is a little bit of a mirror to the retail market and you’re going to have this period of adjustment where buyers are anticipating a downturn and so they’re waiting.
And honestly, the mortgage rates mean that it’s a lot more painful for them to buy. And I do think sellers are going to have to adjust to that. And that’s why we’re going to see prices come down. You know, it’s just basically your classic supply and demand. And we’re seeing that when we put the supply and demand curves together on our platform, what we see is that equilibrium price has come down from 72% of as-is value to 67% of as-is value. So, the price is coming down and then the volume is coming down. The percentage of sales that are happening are coming down. And so, that’s exactly what we see happening in the retail market. And the only way to change this is to somehow increase demand again, which I don’t think you would see unless you saw interest rates come down or for sellers to adjust pricing. And I think that’s going to be the more likely outcome because the demand is you’re absolutely right. If you look at the demographics and household formation, demand is there but I think demand is more elastic than people give it credit for.
On the housing side, people can delay the purchases. Many people can figure out a situation to delay their purchases, at least for a little while and we may see that happening right now. And so, the message for our sellers is it’s probably in your best interest to lower your prices now in order to sell the properties faster, rather than taking them back and holding onto those properties in a downward price environment.
Josh Cantwell: Yeah. I mean, if…
Daren Blomquist: So, yeah. Yeah.
Josh Cantwell: Whether you’re an institution taking back in REO, it’s all about the volume and speed of money, right? You turn that money over. The money is tied up in a house. Sell the house. Get the money. Make a new loan. Or in the case of an investor, if you have something that’s sitting on the market, maybe like my friend, Jack, who’s got new builds sitting on the market, drop your price, sell the real estate, go build something new. Because what I heard you say, Daren, is that, basically, buyers are not stupid. They’re not going to just buy at any price. They’re starting to take their foot off the gas. They’re starting to realize that they can wait. The investor buyers on your platform have bought at about five basis points lower. They’re credited to as-is value lower. They’re expecting a bigger discount. And even though six months ago, a year ago, everybody on the news was saying, “We have a supply problem, we have a supply problem, we have a housing shortage problem.” What I’m hearing you say now and what the data supporting is that, yes, we may have a supply problem, but people are not just willing to buy at any price.
They’re willing to delay and wait to make the right buy at the right price because they want prices to come down and they want the cost of their debt to come down. For a lot of people, as you and I, Daren, both know, it comes down to their mortgage payment. They only have so much money to put down. So, how much is my mortgage payment? I have X amount of fixed income to work with. Let’s say I’ve got $8,000 a month. So, my mortgage payment is whatever, 40% of that number. Let’s say 40% of that 8,000 is 2,500 a month. That only buys me a certain amount of house. I’m only willing to spend 2,500 a month. So, I’m going to wait for my price to come down and wait for my cost of debt to come down. And otherwise, I’m just willing to wait it out. Maybe rent a property, rent an apartment, you know, stay in my current home, whatever it is, until these prices get back to where I can afford them, I don’t have to buy the newest, shiniest house. I’ll just wait. That’s what the data is supporting here.
Daren Blomquist: Absolutely. And I would just add one thing is that I think that waiting is enabled as well by the fact at a kind of macro level, by the fact that all the stimulus during the pandemic pulled forward demand. So, people who might have said, “You know, we probably won’t become a homeowner until 2023 or 2024.” They said, “Well, rates are so low in 2021-2022 and I want to get at it. You know, I want to work from anywhere. They decided to buy earlier than they would have. And so, the consequence of that pulled forward demand, too, is that you have a lot of folks who might have bought this in 2023 or 2024 who’ve already bought. And so, that’s a piece of this, too.
Josh Cantwell: Yeah. So, for any of my students, subscribers, listeners, if you’re a home flipper and maybe you built up some inventory and you were hoping to sell it, from what this is telling me and what I’ve been thinking through is even if you have to take a little bit less profit, drop your price, sell it now because I don’t think rates are going to be coming down for a while. We know historically the Federal Reserve takes about 27 months from the time they start raising rates to the time you start dropping rates. Well, we still have time to go where rates are still going up. It wouldn’t surprise me to see 8% mortgage rates or even 9% mortgage rates in 2023. Because we still have a labor problem. We don’t have enough labor. So, there still is a lot of demand for labor. We still have this concept of instead of our economy going global, our economy seems to be coming more back home. The more it comes back home, the more there’s more demand for goods and services at home. And so, prices, I think, are still going to keep going up, which means the Fed has to keep raising rates higher and higher.
So, you either sell it off now, even if you have to sell it at a loss, or you’re going to have to hold it for about three years, in my opinion, three years to then find the equilibrium because the rates are going to keep going up for, in my opinion, next 6 to 12, then they’re going to flatten out for 6 to 12 and then they’ll finally start dropping at the end of 2024. So, if you’ve got inventory now, sell it now or you might be holding on to it for a while and you hope you can cash flow it in the interim. If you’re one of those home flippers, that’s my advice to you today. Daren, listen, you’ve done an incredible job with both this episode and the previous episode of sharing what’s going on. We can’t wait to have you back. We’ll have you back as soon as possible. As soon as you’ve got something to share, just text me. We’ll have you back on the show for that.
Daren Blomquist: If we see a huge jump in inventory or something like that, opportunity, I’ll let you know.
Josh Cantwell: Yeah, for sure. Our audience obviously is very aware of you and Auction.com, but when they go to Auction.com, not only can they bid on properties and buy properties and go there to find inventory of good deals, obviously, a lot of this economic data is also shared on that website. So, when they go to Auction.com, where should they specifically go to find this data and what will they find on the website as a whole?
Daren Blomquist: Sure. You can go to Auction.com/InTheNews. That’s where I post all my stuff like this and then kind of the economic side of things and then on the website itself, just jump right in. I mean, start searching. It’s not a subscription service or anything like that. And you can see what’s available in your area. And I think, you know, we’re trying to do the best to make these auctions that in the past have been kind of the purview of just the inside club of folks who knew what was going on but we’re trying to democratize that. So, it’s as easy as possible for even newer investors to jump in and start actually bidding on some of these properties.
Josh Cantwell: It’s fantastic stuff. Daren, listen, thanks for carving out some more time for us on Accelerated Investor. Fantastic show, as always. Thank you.
Daren Blomquist: Thanks, Josh.