Josh Cantwell: So, hey there, everybody. Welcome back to Accelerated Real Estate Investor with Josh Cantwell. Today, I have a very special guest. He’s been on the podcast and the YouTube show numerous times. He is Daren Blomquist, the Vice President of Market Economics at Auction.com and he has been on the podcast numerous times, going on at least five or six years to provide insight into what’s going on with the housing market, how it impacts apartments, interest rates. Daren is regularly seen on shows like Squawk Box and CNBC and CNN and many of the major news outlets talking specifically about what’s going on in the housing market. A lot of the major news publications rely on him and his input and his data to kind of get a forecast of what’s going on and what we can kind of expect. So, we’re excited to welcome Daren Blomquist back to the show.

[INTERVIEW]

Josh Cantwell: Daren, hey, how are you? We’re going to talk today about rising supply and falling sales and what’s happening in the residential housing market and how that could possibly impact multifamily and apartment investment. So, welcome back to the show.

Daren Blomquist: Thanks, Josh. It’s always good to be here. I was just looking back at the show we did about three months ago, about a quarter ago. And we were anticipating what we’re seeing here now in the retail market but we were already talking about that. We were forward-thinking and we were seeing it in our data from our real estate investors buying off the Auction.com platform and then you were seeing also with the investors that you talked to is basically that the market it was nearly inevitable that we were going to start to see a slowdown in the market and in the retail market, and we’re starting to see the early signs of that. Now, with this data, which we’ve now seen, basically the chart on the left there is saying that we’ve seen, we’ve actually seen nine consecutive months. I think there were those blue bars where sales are down and this is from the National Association of Realtors. But more importantly than just sales volume being down is the lighter blue line going up. Inventory is rising. And that’s been the case for the last three months now is where we’re seeing sales continue to drop, sales volume continue to drop, inventory rising. And that’s kind of the first domino to fall when you’re going to see a market slowdown.

And this is still not, I mean, it’s still early. The market is still, at least according to the data, is still very hot but it’s the early indication that we’re seeing a market slowdown. There’s more kind of on-the-ground front-line anecdotal data that probably a lot of your listeners have heard that indicates the market is continuing to slow down. Price appreciation is still very strong but you see the demand fall off and then you see the price appreciation slowdown. And so, I would expect that price appreciation on the right-hand side there. It’s kind of moderating but it’s still at 15% year-over-year nationwide. But I would expect that to fall down and probably by the end of this year going to the single digits at the very least, at least on a national level.

Josh Cantwell: Interestingly enough, really this data really supports a simple supply and demand conversation because if you look at home price appreciation prior to COVID, March of 2020, home price appreciation is in the 5% range. It’s in the 7% range. It’s in the 3% range. It’s kind of pushing towards 10% but it’s still in the single digits every quarter, every month in 2019, kind of very normal-ish growth. Then obviously in March, April, May, June, home price appreciation drops because nobody’s outside of their houses like nobody’s going anywhere. Everyone’s at home and masked up and scared. And then in July, the summer, things start to open up. There’s no inventory to speak of, so prices start to skyrocket. And you can see that prices continue to skyrocket late 2020, 2021, really going up at 25% home price appreciation in July of 2021. It’s just unbelievable year-over-year, 25%. So, if you had a $400,000 home and your house grew by 25%, you made $100,000 in that year-over-year difference. Amazing. And now, as you see rising interest rates year-over-year sales slowing down, inventory going up, home price appreciation starting to temper a little bit. Although it’s still, like you said, Daren, 15%, which is way above the historical average.

So, what does this kind of tell us about what the Federal Reserve is probably going to do? To me, this just indicates probably continued interest rate hikes to try to continue to kind of slow down the market a little bit, don’t you think?

Daren Blomquist: I think so. I was actually, again, I was going back and looking to see what we said last time to see if any of that actually came to fruition. But we were talking about the prospect of recession versus inflation. And I still think the Fed from everything I see is on the side of they don’t want a recession but they’d rather have a recession than runaway inflation, which includes some prices. So, I would expect those interest rate rises to continue. There are other levers that they’re pulling to stop buying mortgage-backed securities, which helps provide liquidity in the real estate market. That’s going to continue, which we would continue to see this trend in the housing market. And many people including, I think, yourself and myself would say that the best path forward is a path that gets this under control sooner rather than later.

Josh Cantwell: Agreed. And the last time we talked, we talked a lot about home price affordability for the last several years, actually, especially in certain markets, coastal markets, and home price affordability was already becoming a major issue and it was also driving up rents on commercial multifamily and apartments because homebuyers were having trouble finding a home, number one, and it was runaway, unaffordable, number two. So, those people were staying in apartments and renting, which is good for my business but not really good for the overall market to have this not affordability issue. But as interest rates go up, you still have kind of another now affordability issue, which is your cost of capital, your cost of your mortgage is more expensive. And as you saw in the previous slide and as you mentioned, Daren, the cost of homes is still appreciating at 15% per year. So, what is this doing to homeowners as far as affordability? The constraints are kind of it’s almost like they’re getting pushed on every side.

Daren Blomquist: It is. It’s really surprising to me that the market has not responded to affordability faster than it has but it’s a little bit tough but on the graph on the left for those who are viewing this and I know not everybody is but basically showing the relationship between wage growth, income growth, and not just price change but the change in their monthly payment on a median price, which is really where the rubber meets the road, right? And so, we really saw this shift, the increase in your monthly payment on a median price home for someone buying with the median income was for a median price home I should say. It really shifted back in the beginning of 2021 around February and March. We started to see the payment rise faster than wage growth, which is not a big deal. You know, you see that up and down but that continued and has continued since then. And now, I mean, with the interest rates rising, the number that just sticks out to me is crazy is in May of this year. The monthly payment on a median price home is up 51% from a year ago. Home prices are up 15%.

If you were buying the same house or the same house at the same price a year ago and now you’re buying that same house at the same price today, or excuse me, not at the same price but the price given the home price appreciation at 15%, your monthly payment on that home is now 51% higher than it was a year ago. So, if your monthly payment was $1,000, now it’s $1,500. That’s a big change. And that’s, I think, why you see now that the market is finally starting to respond to that affordability that I thought it would respond to sooner but just the lack of supply and the strong demand was keeping it hot longer than I had expected it to be.

Josh Cantwell: So, when you say the markets responding on the previous slide, we saw the year-over-year sales, the number of sales units is down. That’s one metric of the market responding. Existing homes for sale, the inventory going up, that’s another way that the market’s responding. And you mention here about price drops. So, tell our audience a little bit more about what you’re seeing from a price drop perspective. Everybody thinks, “Oh, I’ve got to offer over market value. I’ve got to offer over list price.” There’s all these bidding wars. Seems like that’s starting to change.

Daren Blomquist: That’s right. And this is data from Redfin, which is a little bit of a leading the NAR data, which the data for June and for NAR won’t come out until almost the end of July. So, this is showing price. They’re showing in the four weeks ending of June, ending June 12, they saw the highest percentage of price drops in each of those quarters. 6% per week of homes that were listed for sale that had a price drop. And that was the highest since 2015. And then it really becomes, I think, interesting when you look at some of the markets where you’re seeing a much higher percentage of price drops. So, they look at 108 markets nationwide, 53 out of those markets had more than 25% of the listings with a price drop in May.

Josh Cantwell: Wow. Maybe more than I would’ve thought.

Daren Blomquist: Yeah. I mean, you look at the top markets at the top of the stack with the highest percentage of price drops is Provo, Utah, with almost 48% of the homes for sale had a price drop. And then you see Tacoma, Washington, Denver, Salt Lake City, Sacramento, Boise, Portland, Indianapolis, Philadelphia, Seattle, Harrisburg are the ones at the top of the list. More than 40% of the homes for sale had a price drop in those areas. And the common denominator, at least with a lot of those, is those are also some of the markets that were experiencing the highest price growth, were considered some of the hottest markets in the country.

Josh Cantwell: And they’re all on the West Coast.

Daren Blomquist: A lot of them are the West Coast. Indianapolis and Philadelphia are a little bit of exceptions there.

Josh Cantwell: Portland, Seattle, Ogden, Utah, Boise, Idaho, Sacramento, Salt Lake, some of the hottest markets, Denver, Washington, Provo. San Diego, California is just below 40%. 37% of the homes that were listed had a price drop in May of 2022. So, this whole idea of you’ve got to overpay and offer above a list price is starting to see, especially on the West Coast. The lot of California or in Stockton, California, Spokane, Washington, San Diego, California then you got several in Florida, Tampa, North Point, New Orleans, Louisiana, Cape Coral. Some of those, again, really hot markets that were just absolutely on fire, now you’re starting to see pretty significant almost 40%, give or take, of the ones that are listed for sale are showing a price drop in May of 2022. We’re recording this the second week of July 2022. So, we’ll have to see. Because that big 75-bp rate increase, that just happened in June, right? And so, the market tends to react first to what they think the Fed’s going to do and then the Fed is the last kind of they’re the last to show up at the party, and then they announce what they’re doing and everybody’s already reacting to it.

So, this rise in interest rates was in anticipation of the Fed rate jump in June. Now, the market’s adjusting again in June because we’re anticipating another Fed rate jump here. I think it’s in the next couple of weeks they’re meeting again and we’ll see probably another rate jump to continue to kind of level things off.

Daren Blomquist: Yeah. There’s a lot of mix of expectations when it comes to the Fed’s expectations versus reality. But they very much try to telegraph what they’re going to do so the market has it baked in and there’s not some big shock when they raise the rates. But I would suspect that this is data from May. Their real estate data does tend to lag but I would suspect this is going to get worse before it gets better, as sellers have to kind of come back to Earth and back to reality with what they can get for their homes given the affordability environment that we’re in.

Josh Cantwell: Yeah. I’m happy to see that. You know, the stuff that I invest in, in the Midwest, in the Southeast is not on this list and just seems to be, again, as we’ve talked about this before with Daren and with other guests on the show, that the coastlines tend to be boom-bust markets. And this is just more data that supports the boom-bust where the boom was happening along the coastlines. And you’re not seeing a bust right now but you’re definitely seeing some significant metrics like inventory going up like year-over-year sales going down, like the home price appreciation slowing down, and people starting to cut the prices on their listings. Those are four major points of data that all point towards prices leveling off. And I don’t think the Fed is trying to create a bust here. But when you’re in a market like Seattle or there’s a lot of buying kind of fury, if you will, this kind of momentum that drives the market like I want to get in. I want to get in. I want to get in. And then you just don’t want to be the guy holding the bag who paid top dollar. And it looks like top dollar happened probably in March or April where things are still appreciating but just not at the rate that they were. Really, really good data here. Anything else on this, Daren, you want to cover before the next and final slide?

Daren Blomquist: I would just say that and we actually talked about this last time, too, but some of the data in our metrics at Auction.com were showing back in March that investors were starting to pull back. And based on that data, I would say February-March was probably about the peak of the market in hindsight. Unless something, things could change but right now, that’s what it looks like. And our investors were signaling that by pulling back on some of the metrics we see in our platform from February to March and have continued to do so since then. So, when we look at our June data, our buyers are building in. Back in February, they were only building in a 9% discount below the as-is value of the homes they were buying on our platform. Not the after-repair value. The after-repair value discount was higher than that but the as-is value discount was 9%. Now, in June, it’s almost doubled up to 17%. So, they’re saying, “Hey, to buy this property, we want instead of that 9% discount below as-is value, we want 17%.” That’s an indication to me that they are being a lot more cautious.

Josh Cantwell: Yeah. We’re definitely being more cautious as well with our apartment acquisitions. We have a deal that we just looked at and were one of the last and final buyers. And the price that is probably going to trade at is about a million less than the seller indicated they wanted. There was a couple of different prices thrown out and it’s not final. So, I don’t want to mention the price but all I’m going to say is that with the fury, the buying fury that happened a year ago, I think the seller anticipated a certain price. The broker was a little bit more realistic with a little smaller expectation. And the price that we’re at and there’s one other buyer that’s in the game is even below that number. And so, the apartment buyers pulled back as well, very similarly. Now, the other thing we wanted to talk about today, Daren, was this seriously delinquent mortgage, another lagging indicator that can add more inventory to the market and can kind of bring a market down are foreclosures, delinquencies, forbearances, these kinds of things because they take so long to work their way through the proverbial snake of the foreclosure process.

And we still have a lot of borrowers that are seriously delinquent still from when COVID happened and everybody was given some forbearance and some mortgage protection. Those were federal laws that were put in place to give people a foreclosure moratorium. That has to rectify itself over time. Tell us what are you saying these seriously delinquent mortgages kind of having their moment where it has to work its way out of the system somehow, finally, looks like some of that’s starting to happen.

Daren Blomquist: That’s right. And I would say the good news is the red line there, the bright red line, which those of you who are watching can see is that, overall, seriously delinquent numbers are going down and they’re going down fairly quickly. They’re down to well under a million now. Our seriously delinquent loans at the peak during the pandemic, they were at 2.6 million. Now, that’s come down. Before the pandemic, they were I think around 400,000. So, we got like 200,000 to 300,000 more than pre-pandemic. So, that’s still elevated a little bit but it’s coming down or I should say a little bit but it’s still elevated. Coming down, that’s the good news. All those programs, I think it’s safe to say at this point, did prevent that kind of dreaded foreclosure tsunami that some folks fear that a crisis like that could trigger. So, that’s the good news. The other side of the coin, though, is that at some point there are some of these that have delayed some of these foreclosures that would have happened anyway. And those were held up by these blanket moratoria and forbearance programs, and those are finally coming through.

And so, when we look at what I call unprotected, seriously delinquent loans, those are rising even though the overall are down but the numbers are much smaller. So, as of the end of May, there were 373,000 seriously delinquent mortgages that were not protected by forbearance. They’re not protected by the moratorium anymore. That has expired. And they’re also not protected by lost mitigation. So, many of these forbearance delinquent loans went into lost mitigation where they could get some kind of payment adjustment just to try to get that homeowner or that loan performing again. None of that is true for these 373,000 loans. So, those are going to be the highest risk for actually being foreclosed on in the future. Now, 373,000 is up 91% from a year ago and a year ago is right when the moratorium ended. So, from that point where the moratorium ended, blanket moratorium were up 91%, that sounds scary but it’s not. It’s 373,000 delinquent loans. Again, that was out of 2.6 million at the peak that are in this category but that is going up.

And then if we look at FHA specifically, which is in my mind, the highest risk going into this crisis, the highest risk mortgage product, those that have that are seriously delinquent but not protected by any of those programs that number is up 100% between basically over the last year for those FHA loans. So, there’s more inventory coming here but it’s not that massive wave that would knock the market off of its rails. Now, of course, we have this macro stuff going on that we just talked about. That’s a different matter but the delinquency piece in itself is not going to knock the market off of its rails but it is going to provide more inventory for investors.

Josh Cantwell: Right. Yeah. More inventory would be a good thing. You know, appreciation at 3% to 5% is what we historically hoped for. You know, you could make a lot of money in real estate with a simple 3% to 5% appreciation and another 3% principal paydown. Because then you’re making roughly 6% to 10% on your money just by owning the asset. Let it go up a little bit. Paid on the principal a little bit. You get wealthy in real estate over time. It’s the old adage of buy real estate and wait. Just buy it and wait and you’ll make money. But of course, the market isn’t normal. The market just doesn’t stay stagnant. There’s always things going on. There’s crisis, there’s COVID, there’s wars, there’s the Federal Reserve keeping interest rates too low for too long and then raising them too fast. And nobody can quite get that right. But it still kind of goes to show. You buy real estate at the right price, make sure cash flows, hold it long term and you’re going to do really well with it. And I had a great quote the other day, Daren, and we could kind of wrap up with this, is the only time you ever lose money in real estate is when you’re forced to sell, right? You can’t lose money if you’re able to wait out the storm.

And so, the way you wait out the storm is by owning the asset, cash flowing the asset, make sure that you’re rent positive, net free cash flow positive, and you can always wait out the storm and then sell when you want to, and that allows you to have options. I think where some people are realizing a lot of our coaching students, listeners are realizing I’ve been flipping properties for the past five or eight years. It’s gone really, really well but this isn’t going to last forever. So, I better have some cash, some assets and cash flow and not just be anticipating and expecting this wild appreciation. And I think that’s maybe the lesson I’m taking away from this, Derek, is that this wild appreciation that we’ve been kind of accustomed to now, especially for the last 18 months is going to start and it is starting to slow down and it’s going to continue to slow down because you’re going to have more seriously delinquent mortgages. You’re going to have higher interest rates. You have people dropping prices on listings. You have more inventory and you have less sales. All the things that you mentioned today indicate a continued slowdown in the market. And again, less of this price appreciation and less of this price growth.

Now, where is going to be the opportunity? I’m curious, Daren, if you thought three months from now, if you think about the buyers that are buying on your platform, a lot of investors buying on the platform, not that we have a crystal ball or can make any kind of prediction but where do we think the opportunity might be? Is there just going to be some more seriously delinquent mortgages, maybe some more foreclosures that you can buy at a major discount?

Daren Blomquist: Yeah. As you’re talking about that, what stands out to me is this is a moment in time where an investor has to say, “Okay. There’s actually a coming opportunity. It may not be as big as the Great Recession but there’s this opportunity coming where I can buy at a discount. I’ll be able to buy more properties at a discount.” But it’ll take a little bit of a gut check to do that because this is going to be a point where people are going to be looking at some of these scary numbers and running away from the real estate market. And this is where a long-term real estate investor that you’re talking about is going to run to the real estate market. And so, there’s going to be that opportunity. I think, to your point, the places, parts of the country that are the best opportunities in many ways are those what I just talked to an investor the other day who coaches students nationwide and he’s pushing them away from what he calls the dynamic cyclical markets, the ones with all those price drops that we talked about a minute ago, and towards what he calls the linear markets, which are more the middle of the country, slow and steady markets that don’t have as volatile fluctuations. I do think that’s certainly one approach.

The folks who maybe have a little more risk tolerance will go to some of those more dynamic markets and try to make that work. But I think in both cases, there is going to be the patience that you mentioned is a huge piece of it as saying there’s an opportunity to buy right now when a lot of folks are running away from the real estate market but that doesn’t mean my exit strategy is going to give me instant gratification right now in this type of a market. So, I may need to have that patience in view.

Josh Cantwell: Yeah. It doesn’t have to be, again, if you’re a realtor, maybe a flipper, a wholesaler, it’s all about buy and sell, buy and sell, buy and sell. It’s very transactional. It’s going to be tougher to do that because you’re going to have sellers who have an unrealistic sales price because they’re emotionally attached to the price that they could have got six months ago or a year ago. And they’re going to want you to pay more. And if your strategy is to buy and sell, you’re at risk of buying high and selling low, right, instead of buying low and selling high. And so, as long as you’re looking at your numbers, whether it’s an apartment building, whether it’s a duplex, whether it’s a quad, whether it’s a single-family residential, it’s to look at that and say, “Can I buy it at the right price, make the improvement, do the value-add and hold it maybe for 2 to 5 years?” And then after this recession slowdown happens, what I anticipate is the Fed will probably overcorrect, which is what they normally do. They’ll raise rates too high, too far, too fast, which is what they normally do. We will have a recession and things will slow down. And then what’s the Fed going to have to do? They’re going to have to stimulate the market with new capital and lower rates. The market will pick back up and then that’s a good time to sell.

So, just buying right and buying for cash flow I think is the lesson here because flipping opportunities are going to come from buying at a deeper discount. It’s not going to be from buying at retail, which is what a lot of people have been doing and hoping that retail keeps going up. I think about the guy, Daren, I rented a house in Naples back in April for spring break with my kids. It was a house that a year ago or two years ago would have sold for $500,000, $600,000, $700,000. I talked to the property manager. I said, “Hey, if you listed this house right now for sale, what do you think you’d list for?” And I almost fell out of my chair. He said 1.75 million.

Daren Blomquist: Wow.

Josh Cantwell: And I looked at the amount of money I was paying him for it was an Airbnb. I’m thinking I’m paying him roughly $300 a night. Even if this place is listed out or rented out all 30 nights this month, you’re only getting $9,000 of income if you’ve got the property taxes to pay the property manager, the insurance, the water, and sewer bill, because, of course, there’s a pool there and then you have a massive mortgage on a $1.7 million property. Let’s say your mortgage is 1,200,000 or 1,500,000, you are probably upside down, right? That’s the buyer that I’m most afraid for.

Daren Blomquist: I agree. Yeah.

Josh Cantwell: Is to buy off that house thinking prices are going to continue to go up. Now, the prices are going to start to stabilize out or possibly even come down through some price drops and some price cuts on the MLS. And that guy’s not going to have enough cash flow to carry it and he’s actually going to have bought high and sell low. Right? That’s going to happen to some people who bought back in, let’s say, April or March of this year, expecting more and more and more appreciation. So, hopefully, our audience didn’t get caught by that and they’ve still focused on buying at a discount, buying value-add, and they’re looking at long-term dollars.

Daren Blomquist: Absolutely. Yeah. And this page is really capturing the pandemic distress. What you’re talking about is like a second step. The stress that we might see come out of the stimulus that was a reaction to the pandemic and I’m a little bit concerned about that more than I am about the actual distress caused by the pandemic itself.

Josh Cantwell: Yeah. Fantastic stuff there. And listen, if our audience wants to read your reports, it’s always Auction.com/Inthenews. Is that right? Is that still the place to go?

Daren Blomquist: That’s right. Yep.

Josh Cantwell: Okay. Auction.com/Inthenews is where Daren produces all kinds of data reports. He’s got a great team that works with him to produce this stuff. We only cover a small fraction of all the data and information that Daren could have shared. We’ll have him back on the show really soon. But make sure you go to Auction.com, bid on the properties there. There’s going to be more opportunity there for you and that makes you read up on Daren’s research reports at Auction.com/Inthenews. Daren, thanks again for carving out some time for us. This is always a blast.

Daren Blomquist: Yeah. You too. Thank you so much for having me, Josh.

Josh Cantwell: You bet.