Josh Cantwell: So, hey, guys, welcome back to Accelerated Investor. I’m your host, Josh Cantwell. And today, I am joined again by my good friend, Daren Blomquist. He is the VP of Market Economics at Auction.com. We’ve had him on the show many, many times to talk about the status of the market and as well as all of the different buying opportunities and properties that are available on the Auction.com platform. Today, we’re going to primarily talk about some of the different market indicators and the sentiment in the marketplace of what’s looming, what are we seeing, what are investors and even retail customers thinking about this looming recession in the state of our economy.

[INTERVIEW]

Josh Cantwell: So, Daren, thanks so much for joining me again today, as always.

Daren Blomquist: Thanks, Josh, for having me. And great to be here as always.

Josh Cantwell: Yeah, you bet. So, Daren, what’s new? Tell us what’s going on from your perspective. You track a ton of different market indicators. It’s a lot of things, I think, that are standing out. But before we jump into some of the nitty-gritty details and some of the changes from previous months, just high level, how are you looking at today’s market?

Daren Blomquist: Yeah, I’m looking at today’s market as a resilient market. I mean, the Fed was doing all it could to break the back of the housing market, particularly last year. And we saw the housing market bend, but it hasn’t broken. And we’ve seen a lot of resiliency in the housing market. And this year, we’re seeing what I’d call a bounce back. I mean, there’s a lot of indicators that show that the housing market is going back into boom mode after being in six months of slumping housing market last year, the end of last year and beginning of this year. So, that’s what I would say, resiliency in the housing market.

Josh Cantwell: Yeah, amazing for me to hear you say that the market is bouncing back and growing even, like your rate’s high, but we have a major supply/demand issue, right? So, tell me more about your thoughts on that.

Daren Blomquist: Yeah, I think, at least in the short term, and the short term being the next year or two, even though we have much weaker demand than we did a year ago because of the rising interest rates, we also have weaker supply, and also, in part because of the rising interest rates. And so, there’s less supply coming on online that the new homebuilders are providing some supply, but existing homeowners are missing in action really in this market. And they’re not listing their homes for sale because they’re thinking about where they have to go next and also trading out of this low interest rate that they’re in into a high interest rate if they trade out or trade up or even trade down.

So, the supply/demand dynamic is somewhat dysfunctional right now because you don’t have more supply coming online and even though you have very weak demand. And so, that is creating this market where you have weaker demand, but you also have enough demand to fill the very low supply that’s there, at least in a lot of markets now. At the same time, we are seeing home prices, and at least at the beginning of this year, come down and actually go negative nationwide. And so, the demand is weak enough, and the interest rate and affordability constraints are real enough to actually push prices down in a lot of markets, not every market for sure, and nationwide, but still the overriding kind of environment is one of low supply that is hindering this market from kind of working through and actually correcting in a way that it normally would.

Josh Cantwell: Yeah, it’s wild to me to think that– I understand why Powell would raise interest rates to combat inflation. I get it. Too much money in the system, you make that money more expensive to borrow, should temper demand. However, wouldn’t it be interesting if he was able to somehow uncorrelate real estate from the greater market? Because it would seem that we have such this supply and demand problem in real estate that we really need more supply of housing, both apartments, both single-family homes, of all kinds that we need more supply, that the only way to create more supply is to reduce the interest rates.

But wouldn’t it be interesting if there was kind of two different interest rates that he could allow the banks to lend that, one for general business and one specifically for real estate construction? Because, look, I just underwrote an apartment deal this morning, a 125-unit apartment that we’re trying to build. The cost of that debt is SOFR plus 275 bips. The SOFR rate is at about 5, 275 bips puts the cost of that new construction loan at 7.75%.

It’s impossible to build that real estate to help fix the supply/demand issue. It’s impossible for a developer to develop that real estate when the cost of that debt is almost 8%. So, wouldn’t it be interesting if he could somehow uncork the two, where maybe other general business, lines of credit, different types of loans had more expensive interest, but real estate development, which is what we really need to solve this housing crisis, was somehow lower? I’ve never done that. I don’t think there’s a way to do.

Daren Blomquist: Yeah, I mean, I guess, I think what he’s trying to do, and actually, I would tend to agree with the approach of their needs. Actually, I think the other way to solve the problem you’re talking about is besides lower interest rates is lower prices, lower asset values. And of course, a lot of people in the real estate market don’t want to hear that, but there’s different ways of looking at it. But I would argue for sure that we’re out of touch with the fundamentals in the real estate market. I hate to use the word bubble, but we’re in a bubble when it comes to asset values, property values, and those– because of the record low interest rates that we’ve been experiencing over the last few years, short of going back to those as you’re arguing for, I guess, another solution is to see the prices go down. And then your cost of capital, even with the higher interest rates, it could make sense, that deal might make sense.

So, I would argue that’s what we need to see. And I think Powell has hinted at basically, we need a correction in the housing market. And so, that’s what he maybe is looking for, too, is to see the–and I think, eventually, we’ll see that. Right now, we’re in a standoff because sellers don’t want to see the value of their properties go down. And there’s not enough sellers out there who have to sell and are motivated to sell that we’re seeing a substantial correction in prices or values. I mean, we see it in the distressed market, though. I mean, we saw because the distressed sellers are much more reactive to the market, I would argue, because the distressed sellers are the banks who have these distressed assets and they’re pretty motivated to sell them in most cases pretty quickly, especially when the market is slowing down.

And so, we saw them adjust prices at the end of last year, adjust pricing and downward. And people, buyers on Auction.com were getting much bigger discounts at the end of last year than they were at the beginning because of that adjustment. Now, we haven’t seen retail sellers, at least in math, make that kind of adjustment. But I would argue that it is coming unless we have some kind of savior come in and Powell decides to be the savior and comes and lowers interest rates, then we would see more of that correction happening.

But that kind of sounds contradictory to what I just said. We’re seeing as many boom as resiliency in the housing market, which is true. But I think in the little bit longer term where we’ll see that correction playing out, it might be a little bit slowly and it may not be what anybody would call a crash, but it will be an adjustment back to the long-term kind of mean of price-to-income fundamentals.

Josh Cantwell: What is that? Remind our audience about that price-to-income fundamental, like where should prices be relative to incomes?

Daren Blomquist: The way that I look at it, actually, is as a percentage of income to buy a property. Right now, at least, if you take the nationwide median price and then their wages, average weekly wages, it’s about 33% to 35% of that income to buy a property, a median price property, and that has been the affordability is seen. Over the longer term, I would say we see more like under 30%. So, when you see under 30% of income to buy, at least on a national level, and of course, every market is different, but that’s kind of the threshold I would look at that we’ve– and you see it on the chart when that affordability went over, basically 32%, that’s when we started to see the home price appreciation really respond and come down very quickly in the second half of last year.

Josh Cantwell: Yeah, understood. It seems like it’s taking the market about a year to just really get used to these higher rates, where there was a period, especially Q4, where the transaction volume just went way down. And even in Q1, I just saw something on CoStar that said five out of the largest six brokerage firms in the commercial real estate all lost money, meaning the company, whether it’s Marcus & Millichap, Colliers, Newmark, one of the big boys, they lost money because transaction volume is just way down.

But buyers and sellers just weren’t transacting. It wasn’t like prices were really coming down much. Even looking at the start in the lower left corner of home price appreciation, a year ago, the appreciation was 16.2%, previous year. And then, in the last month, it’s zero. In March of 2023, it’s -0.9%, so not even a 1. So, it’s really kind of flat. It’s really going down substantially at all.

Daren Blomquist: That’s right. Yeah. And in fact, I would argue the early trends that we’re seeing is that -0.9% is going to turn positive in April and May because of this kind of resiliency that I talked about. So, I mean, it’s easy to say up in my ivory tower that it would be good for the market if we actually saw that -0.98% or -0.9% go to maybe a little bit deeper, a little bit deeper correction. I do think in the long term that would be good for the health of the market, but we’re not seeing that and we’re not seeing that because of this weird supply issue where just homeowners are in a situation where they don’t need to sell.

And maybe some of that ties into the shift we’ve seen because of the pandemic with work from home. I think that’s probably an incremental piece of that like, hey, I bought my home. I may change jobs, but I don’t need to move. That could be tied into this, too. But we’re not seeing homeowners as motivated to move.

Josh Cantwell: Yeah. I mean, I look at these kind of market indicators on the dashboard here. And if you’re listening to this on a podcast, just the audio version, this is also available in YouTube, which you can watch the video portion. We just have one slide up. Daren’s put together nine different market indicators of things that would indicate that we’re heading toward a recession or heading towards some negative sentiment. And still, out of the nine, four are in the green, only two are in the red, meaning that they’re going the wrong direction.

We obviously have had this yield curve that’s been inverted now for a while in which is typically an indication of a future recession. But recessions also, the definition is two months, two quarters of negative GDP. We’ve seen some quarters of negative GDP, but not two in a row. GDP right now, Powell says, is going to stay at about 1%, still positive, although very kind of flat. But the second big indicator is rising unemployment. And you still have…

Daren Blomquist: You have still 50-year unemployment rate lows at 3.4% in April. So, there is resiliency in the job market to it. It actually kind of parallels the housing market, I would say. The supply of labor is not enough to meet the demand. There’s more job openings than there are unemployed. And now, that gap is closing a little bit, but at one point, it was like two to one. And now, it’s below two job openings for every person who’s unemployed. And so, I think that’s that same supply/demand story.

Josh Cantwell: Yeah. So, look at this, like consumer sentiment is strong. The seriously delinquent houses is very low. Real estate net worth is very high. Home price appreciation is flat, but we’re anticipating it’s actually going to increase. Manufacturing is about flat but not going negative. So, you look at all these and you look at like, okay, the yield curve is negative. The 30-year fixed rate mortgage continues to go up. But you have a lot of indicators that say that, like you said, resiliency, the market’s very resilient, and we think it’s going to continue to be resilient. There’s not a lot of supply of houses. There’s not a lot of significantly delinquent homes. Consumer sentiment is still strong. Unemployment is at a 50-year low. Even the fact that the yield curve is inverted and 30-year mortgages are at a 10-year high, it doesn’t seem to be cooling things off very much.

We still feel pretty good about where they’re at. Although there’s these high-profile layoffs in the tech sector, you’re not seeing high-profile layoffs in health care, you’re not seeing high-profile layoffs in hospitality or in auto manufacturing or in manufacturing as a whole, just in those high-profile tech jobs. That was pretty much it. So, I’m having a hard time thinking like, man, yield curve tells me we’re going to have a recession, but it’s really hard to…

Daren Blomquist: Yeah. It’s like the theoretical tells you there’s a recession, but the real world tells you there is not. But I mean, I’m still putting my eggs in the recession basket. I think it is coming. I think that yield curve is a dependable predictor. And a lot of times, yes, it takes a while to play out, and especially, it’s really more of a situation of a self-imposed recession, a self-inflicted recession. But the alternative, if the Fed was not stepping in and kind of pushing the market toward recession, would be basically bigger asset bubbles.

Josh Cantwell: All right, $10 case eggs, right? I think, you have small pack of eggs, 10 bucks to get that kind of stuff. Pretty wild to think what expenses or how expensive things could be if interest rates weren’t higher. It’s really a fantastic debate. And also, what you find, as you and I talk about before I hit the record button, was that anytime the Fed raises rates in this fashion, really not impacting the market for a year later. Remember, the Fed just started raising rates in March of 2022. As we record this, it’s early of May 2023. It’s only been roughly 14 months.

So, a lot of the impact of those higher interest rates are still coming because in March of 2022, just when they started raising interest, when they were at zero, and then they did five months in a row or five meetings in a row of 75 basis point increases, so really don’t anticipate that to really rear its ugly head till the end of this year or even the early part of 2024 because it’s a 12 to 18-month lag. So, that’s why I think from that perspective, you can still count on a recession later on this year or in the early part of 2024. Is that your thought process there too?

Daren Blomquist: Yeah, I think it’s taking time to play out because I was just thinking of this analogy is basically the market, the housing market, as well as the economy. Whatever your drug of choice is, maybe they got addicted to it, sugar, let’s call it sugar. We got a lot of sugar during the pandemic. And Powell is now putting us in sugar rehab and saying, “Hey, look, you got it.” But it takes a while for that sugar to work its way out of our system. And there’s still a lot of savings built up, but one of the key things we look at is the savings rate has come down and it’s now below pre-pandemic level. So, people have eaten into their savings because the savings rate spiked during the pandemic and the disposable income spiked during the pandemic, it’s now coming down. And so, that’s kind of an early sign that some of that sugar high is wearing off.

But it takes some time. And ideally, you could kind of go through that rehab process and not have too many side effects. But I think that it will take some time to play out. One of the other early warning things that we’re looking at is credit card delinquencies. Credit card, first of all, credit card usage, which is kind of the flip side of savings, and credit card usage went up. Or total credit card debt has gone up 15% the last two quarters, which is the biggest jump that it’s ever seen, going back that’s Federal Reserve data. And then credit card delinquencies have also jumped along with auto loan delinquencies. And so, there’s maybe a little bit of a canary in a coal mine of people who are starting to feel the pinch, and that eventually will lead to the consumer having to cut back and potentially leading to a recession.

Josh Cantwell: Yeah, I think those are kind of leading indicators because, especially at the lower incomes and the middle incomes, those people are going to have credit cards, they’re going to have car loans, and that might be the thing that they default on first versus a home mortgage, right? Because maybe they don’t own a home or if they’re in some sort of financial pinch, they’re going to let the credit cards go or the car loan before the house. That’s one thing.

And the other thing is that when you look at the new lifestyle that some people were able to create during COVID because of all the government stimulus, whether it was low cost of borrowing, whether it was PPP money, whether it was literally government checks just being sent out to people randomly, people got used to a new lifestyle buying things like whether it was TVs, computers, new cars, etc., etc., upgrading their lifestyle a little bit. Then when that stuff wears off, there’s not as much income to support the same lifestyle. And now, you’ve got delinquency on cars and credit cards and things like that.

Daren Blomquist: And your price of eggs is higher, too. So, that’s eating too all the other things that you’re spending money on.

Josh Cantwell: Yeah, fantastic stuff. Daren, as we wrap up for today, you mentioned pricing on your platform of people who are buying distressed assets. Tell us specifically about those foreclosure-style, auction-style properties that are on the Auction.com platform. What have you witnessed as far as those prices go? Because that is a greater indicator of the larger market of what a real estate investor is willing to pay. So, our price is coming down a little bit on the platform. And what does that mean when you look at it?

Daren Blomquist: Yeah, they definitely have, and they’ve rebounded a little bit in the last couple of months in terms of a lower discount, but it’s still during the height of the pandemic at our foreclosure auctions, and this is nationwide. It varies by market, of course. But nationwide, we were seeing our investors buying at our auctions were only paying 9% below estimated as is value, not after repair value. I want to make that distinction, it’s 9% below the as is value of the home.

Prior to the pandemic, the average, it was pretty consistent around 20% to 25% below that as is value and it went way down that discount, way down to 9%. So, buyers apparently were counting on the strong home price appreciation to bail them out of such a low discount. But now, in the second half of last year, that discount spiked and it went up. It’s above 25%. So, it’s even above that discount the buyers were baking in before the pandemic. It’s around 28% to 30% discount right now nationwide and some markets are bigger. The markets where we’re seeing some of the biggest discounts are Western markets, which are most susceptible to the price corrections right now. Places like Coastal California, even Denver is popping up there.

And then, you do see some places in Texas also popping up where buyers are demanding basically bigger discounts than they were prior to the pandemic. And then there’s a few markets through the– kind of Tennessee and Carolinas that are seeing that, too. But anyway, the bigger point, I think, that you’re trying to make is that this shift in the market that we’ve seen over the last 9 to 12 months is creating opportunity for buyers of distressed properties, whereas even those distressed property auctions that we hold were kind of getting caught up in the frenzy of the pandemic housing market.

But now, that’s come back to reality. And so, there are bigger discounts available. So, even if you do see some home price correction, your investing strategy is not hinging on and dependent on home prices even going up because of that bigger discount that you’re buying at.

Josh Cantwell: I think a lot of that has to do if I had to add just my gut to that. My gut is that because the stock markets become volatile, because there’s been some banking takeovers, I mean, bank failures, there’s less liquidity, there’s less borrowing options. There’s less true private lenders out there lending money because they’ve taken a bet on their stock portfolio. We’ve definitely seen it with our apartments that limited partners are still out there, they’re still investing, but there’s definitely some pullback. So, there’s less people available to make private lender loans on single-family homes. That would be one.

Number two, with bank failures, there’s also less what I would consider institutional debt out there for real estate investors, those alternate lenders, those private lenders, hard money lenders. I definitely know there’s less of them. They’re being a little bit more tight with their lending criteria and lending those dollars.

And so, maybe it’s a situation, Daren, where if you add two plus two to equal four, you say, “Okay, well, there’s less debt for real estate investors to go get.” There’s still lots of it out there. I’m not saying there isn’t any. I’m saying there’s just less of it. Not that they’re having to pay cash, because they’re paying cash, they want a bigger discount. That could be something that you could easily theorize as well.

Daren Blomquist: Yeah, I think that is really well said. That plays into this as well. I would actually argue at least the investors buying our platform are behaving pretty conservatively. They’re sticking to their guns when it comes to building in their numbers that they need to make a deal work. And so, yeah, that’s been really interesting to see that big swing and the discounts at the auctions.

Josh Cantwell: That’s great. It’s great stuff. Well, Daren, again, I’ll put a plug-in as we wrap up. Again, all of my audience, all of our listeners, on audio or video, wherever you get it, go to Auction.com to check out their platform to be able to buy their properties, their inventories. They also run a number of foreclosure auctions throughout the country. But Auction.com is the place to start, register for an account there.

Also, you can go to Auction.com/inthenews. There is where Daren produces a tremendous amount of data. A lot of this data that you see in this presentation is also available at Auction.com/inthenews. I mean, also, finally make sure you follow Daren. He is very active on LinkedIn. Make sure you check him out there as well. So, Daren, thanks a lot for carving out some time for us today on Accelerated Investor.

Daren Blomquist: Yes, glad to be here, Josh.