Welcome to Passive Real Estate Investing. I’m your host Marco Santarelli .What a crazy market we have been seeing for the last two years. Strong, strong price appreciation, lack of inventory, strong demand. That doesn’t seem to be subsiding, even in some of the more expensive markets around the country, the tier one markets, but that’s the topic of today? What is the housing market doing? And that seems to be a common question. Everybody’s talking about housing and the question is how’s the market? Are we going up? Are we going down? Is there an issue where rates going are prices are gonna continue to appreciate that’s. The general question is how’s the market. So today’s topic is about the housing market, the trends that are going on and what forecast we might see for the next 12 to 24 months. And I have a great guest, someone who is a founder of a company that aggregates a ton of data it’s Alto research.
And I’ve got questions for him to find out about what we are seeing in terms of price days on market inventory, the housing shortage, and how long he predicts. That might last, what is happening with the resale stock at, out there. And also I’m gonna ask him about some price predictions, inventory predictions, and mortgage rate predictions. So that is what we’re in store for today. I hope you enjoy today’s episode. And with that, let us get straight to our guest.
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Well, it’s my pleasure to welcome Mike Simonson to the show today, he is the founder of Alto research, a company that brings data and insight together on the us housing market company serves some of the largest wall street investment firms. They serve banks and tens of thousands of real estate professionals all around the country. I have been following them for many, many years since they started. I guess Mike can tell us about it with that, Mike, welcome to the show.
Thank you. Nice to be here Marco.
So when did you start Altos?
So we started January 1st, 2006. I like to say two bubbles ago.
Wow. That’s impressive. You guys have been very interesting to follow cuz you guys aggregate so much information and data and then, you know, draw intelligence out of that. What you would call insight on markets all around the country. Why don’t you tell us a little bit about Alto research, the sources of your data and you know what you do with it?
Yeah, so we track every home for sale in the country. We track every week. So, you know, there are new houses that come on the market and they’re priced at a certain level. We track, you know, every home that’s on the market in every zip, essentially every zip code of the country. And we use that data analyze. So traditional housing data, traditional real estate data is lagging. It’s like backward looking, they’re looking at sold prices of a house that’s sold in January or maybe December is now starting to be visible now in February. But that house was put on the market in October and then it got an offer in November and then it closed in December. Like there is so much signal back in those months, back then we can tell you exactly what was happening. And so what Altos does is focuses on what’s going on right now, we do it for the whole country and the, then we turn that into usable data. So I, a lot of our businesses with real estate agents and brokers who are taking local market reports and being able to hand that to their clients who are making buying decisions or selling decisions right now and using the traditional approach, or this is what’s sold two months ago. It’s not really helpful. You know, when we can say, Hey, there are 14 homes in your price range on the market right now. And a third of ’em have taken a price cut. Like that’s real interesting signal that people can use.
So that data is actually really interesting because it’s almost real time. It’s near time. You can track it as it happens day by day. So where do you get? I would assume your data’s all coming from the MLS. So you tapped into all the ML systems across the country.
It’s all actually Alto’s data. We do all the work ourselves. We have a big database of every home in the country and when they get listed for sale, they get, we see ’em very publicly and we, we literally go around and they say that one’s for sale and that one’s for sale. And we pull ’em all together and we go, here’s the 437,000 homes that are for sale. And these where the prices are this week. So traditionally the MLSs are, are tricky, cuz there’s like 700 of them. And most of them don’t want you to know what’s going on. Like there is R and, and so we actually are outside of the MLSs and it’s all our own data and we able to pull it together and that’s why we can do the whole country. It’s why we can standardize on things. So there are, you know, traditionally local associations or local groups of realtors have different local customs on how they do things.
Like how do you measure days on market? If I took a house off the market or 15 days, and now he put it back on, is that new? Right? Those kind of things. And so we do continuous days on market and we can measure all these things across the country, which would be very different and have been traditionally, essentially impossible to get for the whole country. Cuz you’d have to go cut all these deals and, and it’s just for a company like any, any company has been difficult to do. So we, we do our own data and we do our own analytics for the whole country.
Yeah. And it’s impressive. Like I said, I’ve been following you for as long as I can remember. And I’ve been in, in this space for over 18 years. So one last question on that before we kind of dive into what I’ll call the meat and potatoes of, you know, us housing market conditions and all that stuff, stuff that you analyze on a daily basis, just regarding the data, just for my clarification and for the people who are listening, I have to assume that the majority of your data is coming from resale sales and resale listings and whatnot. You’re not including which I would find very difficult to do anyway. New construction homes. Right.
That’s exactly correct. So in particular, if you have housing development and you’ve gotta go talk to the guy to understand the price and the terms and the, when it’s available and like is the TV thrown in or is, you know, all of those things, those tend to be outside our data set.
Got it. Okay.
But there are new construction. So essentially, I mean there’s a lot of new construction that gets marketed essentially through the, the resale channels. And, and so we will see those. And in fact, when we actually dive into the data, there’s some really interesting trends that’s happening with those right now because they’re not being completed. And so one of the things that holding inventory down across the country is you can’t get a garage door to finish your house and it may be not available for six months. Is that active inventory? Like you can’t move in. So there’s those questions that are happening right now.
Okay. So your data is gonna be highly reliable with the exception of pockets that are concentrated with a lot of new construction. That might be a little bit skewed, but for 99% of the country, you’re gonna have accuracy.
Yeah. And when you’re talking about things like pricing and stuff like that, you can see very closely that new construction and the existing stock, the prices move in tandem when the demand is there, people are making that there may those buying decisions and when they’re, they may be buying new or they may be buying existing. And so they’re highly correlated. And you know, that home builders are a big customer of ours cuz they need to know where they’re pricing home. So, you know, you may, they’re like in a certain zip code, there may be a new development happening that isn’t you don’t really know publicly what’s where those prices are. The rest of that zip code, you know, very clearly.
Got it. All right. So I’m sure you get asked this a lot and you probably think about this question often. And my audience is always interested in what the market conditions are and how is the housing market. But we all know that all real estate is local and argue that it’s hyper local. So there’s no such thing as a national housing market. However, having said that, the question probably comes up often. Are we in a housing bubble when you get that question, whether in an email or in person, what do you say to people that are concerned about us being in some sort of housing bubble?
Well, I lived through the last bubble and I’ve been through this one now. You know, I started my company at the begin just before, you know, January 1st, 2006. We went through that and the conditions are very, very different from 15 years ago in particular, Americans have so significantly better mortgages than they did. So everyone in the country has a lot of equity. We have record levels of equity. Everyone has 30 year fixed rate mortgages. We have, you know, record few levels of variable rate mortgages. So they are locked in at under 4%. Most of the country is locked in under 4%. 20% of the country is locked in under 3% for 30 years. And so those people, no matter what happens to the economy, essentially never have to sell those houses. And so the first big thing is like the American consumer is way better off the American homeowner is way better off than they were than they’ve really ever been.
And, and when they were at the beginning of last bubble. So the thing we have in common right now with the last bubble is prices have been spiking and we have a lot of demand. And so there are things that could cause home prices certainly to slow down and maybe even reverse. But there are other things like the biggest phenomenon right now is that we have record low levels of available inventory. Americans have been buying everything in sight. So, you know, we have right now 249,000 existing single family homes on the market across the US in 2006, that number is more like 1,000,004. And so it is so vastly different than it was at that time that I don’t see bubble conditions. I don’t see it’s very difficult for me to imagine scenarios that caused massive home price crash, massive flood of available inventory to come on.
The market inventory might come from, you know, distress. So in the last time it was distressed inventory and you were upside out on your mortgage and you had to get out fast and while nobody’s upside down on their mortgage, nobody’s short on their mortgage. So there are no short sales forthcoming. We are at record low levels of delinquency on the mortgage, any stage of delinquency because everybody’s got a really good mortgage and nobody wants to leave that behind. And so it would take years for us to get like spiking mortgage rates, people start using adjustable and then that goes bad. And then, but that’s, that’s like a year’s cycle away. So that’s a long answer to say, like there are definitely things economic risks that will slow would flow our current boom. There are things that will add to inventory, but there’s, it’s really hard to imagine any scenario where we get a lot of inventory.
Yeah. Based on your numbers. That’s about one third of the housing stock that we actually need on an annual basis. We need something closer to 1.5 million. There are different numbers out there. I’ve seen 1.4, 1.5, 1.7 million. But if we only have 500,000 or less, you know, according to what you’re saying, we have a huge deficit. Now, you know, it should be mentioned that builders are desperately trying to catch up. I mean, they’re buying up all the land. They possibly can permitting it and having it ready to go. So when they can build they’ll build. So, you know, my prediction is that within five years or so, we’ll probably be closer to equilibrium in terms of supply versus demand. I don’t know what your thoughts are.
So we do have record levels of in process construction. And we do because they’ve started a lot in the last couple years and they’ve been unable to finish ’em because of supply chain and labor shortages. And COVID all the things. So we have record high levels of in process. So some of those will come to market. Some of those are already purchased, but in the next 12 to 18 months, you can imagine that Wes start getting some completions. Let’s say we get some, the supply chain problems ease up that can add to our inventory, but add to it, not like explode it in, you know, in terms of, and so, you know, fingers crossed like hopefully it does add to it. It makes it easier for buyers.
So here’s what I’m curious. Now, since you bring that up, when do you think we’ll be at a point of equilibrium? How many years from now? And then the follow up question to that would be, do you foresee an overreaction by the inventory being built by builders where we’re gonna have a far amount of access homes in particular markets?
This a few factors we see one is that because everybody has locked in very cheap money on their homes for 30 years, those people essentially never need to sell. Like it’s a really good deal to hold your 3% mortgage in a 7% inflation world. Yes, it’s really a good deal. And so even if inflation goes to 4%, like nobody ever wants to sell us own. So in that sense, multiple years of big economic changes before those start to come to market. The other thing that is bullish for the next few years are the millennials, so the millenials are the biggest population, boom ever they’re in their mid-thirties, they’re reaching their peak home buying years. They were delayed on their home buying, and now they’re in full force. And so we’ve got 2, 4, 5 years of millennial home buying. So those are factors that look pretty sure hard to bet against those, the demo and hard to bet against the long term rates.
We have the next wave. The next demographic shift is maybe we finally have some boomers selling their homes, but the boomers have had such good. Like it’s been such a good deal to own that in the last decade that they’re, you know, significantly less likely to sell than previous these generations, but at some point the boomers age out and start selling. Yeah. So that’s a shift to happen in the next. And, you know, in our data, in our expertise is like right now. And there’s some, we have some really interesting leading indicators in our data where we can see 12, maybe 24 months. But beyond that, there is, there are mega economic shifts that are very difficult to predict, but the big trends in the next few years sure. Look like they’re bullish for housing.
Okay. So you mentioned leading indicators. I know you’ve got data and you’ve mentioned that you could see 12 to 24 months ahead in terms of trends. Let’s talk about price trends. What are you seeing? And, you know, a lot of this conversation we’re having today, we’re talking about as if there was a national housing market, we’re not talking about specific markets at the moment. So, you know, keep that in mind more. So for our audience, you know, just the context of it, but where are you seeing prices here in 2022 and, and maybe even a prediction for 2023?
Yeah. So the, the record low inventory where it’s still at super high demand, even in a world where rates have spiked over 4%. And so the leading indicators we can look at are we watch houses that are on the market. Now these are houses. Let’s say they get a, an offer in March. The deal closes in April. And we can see right now, for example, one of the really powerful leading indicators is the percentage of homes on the market with price reductions. And so this is a good one that we can look at nationally, but we can also look at, in an zip code of the country. And as a rule nationally rule of thumb, about a third of homes, take a price cut before they sell. Sometimes that’s strategically overpriced, sometimes it’s accidentally, but about a third. And then in the more investor markets, places like Phoenix, well, that’s more, that’s really more commonly like 40% take a price cut before they sell in the hot California markets.
It might be more commonly lower than that. So think about 30, 35% are overpriced and take a price cut before they sell in a cooling market. Demand is a little weak. And so a third of them think they’re overpriced, but now 40% have to take a price cut or 45%. Wow. There’s no offers. It’s 50%, half the stock has taken a price cut because there’s nobody like we don’t have buyers. We need to change in a hot market that 35%, all of a sudden now was only 30% or 25, a third of ’em think they’re overpriced. But right now across the US only 18% have taken a price cut. That’s because even the ones who think like, Hey, I’m gonna price it up here and see if I get my offers, they’re getting their offers.
Right, or more.
Or more. Yeah, exactly. And so 18% is normally like, you know, the hottest California markets like Palo Alto in the bay area is a small town with, you know, whatever 60,000 people and 15 homes for sale. So like that’s normally only a few low price cuts in a place like Palo Alto, but now it’s, the whole country is in that mode. And so that is saying that even as rates go up a little bit, you know, maybe there’s fewer buyers and, but there’s so much demand in the market right now versus such slow supply that we really can see price strength for the whole year because those buyers are there. They’re well financed. They’ve got cash, they’ve got good credit scores. Like all of those things are in place already. And we can see it now, as, for example, as mortgage rates spike, they’re now up over 4%, they go to, I, I don’t have any ability to predict mortgage rates, right. But let’s say they really like 5% and that puts the breaks on the market. Then in that world, you can see a few things happening. We can talk about how that would increase supply as well as decreased demand.
But that’s really a longer term. Those transactions are stuff that haven’t happened yet. And so that would slow that down, but we can really see already for the 20, 22 as another, essentially a 10%, 12% home price appreciation year.
Yeah. I mean, you talk about rates even when we were at 5%, that was a drop from five and half and a drop from six. And people were buying like crazy because rates were coming down and making housing a more affordable. So when you call a mortgage rate, spike a spike, you have to keep that in perspective and realize that we’re at historically low interest rates. And even if we go from four to four and a half or four and a half to five, my prediction would be that it would stall the market for a while. There would be a bit of a pullback. It would normalize people would come to the realization that, oh, okay. So this is the new norm. These are the rates I have to deal with. I’m just gonna look for housing that I can afford with new rates that are gonna determine whatever my monthly payment is. So they’re still gonna buy, it’s just gonna be based on their monthly payment and affordability.
Yes, for sure. And we can really see that in our data. Like we track inventory, you know, every home for sale in the country. And we can see that change. The last time rates spiked was 2018. They started been in the first quarter of 2018 from like 3.9%. And they climbed all the way to 4.9% by the end of 2018. And what we can see is nationally, the level of inventory, if you were, if you were selling your house in the fall of 2018, you felt it, you could feel that it had slowed down. So nationally in mid inventory climbed about 10%, 8%, something like that range year over year, but it didn’t crater, but it climbed. And some of the reasons that inventory climbs is because right now, when rates are super cheap and I go to buy my next house, a lot of folks, especially a lot of folks who listen to in your audience choose to keep their first house as an investment property.
I double up, but two mortgages at 3% is pretty, is a great deal. And we’ve been doing that for a decade, more than a decade. We’ve taken 8 million homes out of the resale market and put ’em into investor rental market. And a lot of video is me doubling up when I buy the next one, I keep the first one. And so most of the investors in the country have, you know, one to four units. And so as rates go to maybe four and a half to 5%, it’s a little more expensive to do that. So maybe I moved to my move up house and I choose to sell the first one rather than keeping it as a investment property. So now that one goes on the market, so it gives a little more inventory. So that’s what we’d be looking at. Later in the later half of this year, we will come off of our ultra low record, crazy low inventory and we’ll get up, but we’re still, you know, even two years ago, this time of year we had right at the beginning of the COVID lockdowns, we had 800,000 on the market and we have 250 right now.
Like we have a long way to go to even get back to normal.
Right. Right. Well, I, I consider that bullish in a sense from a real estate investor’s perspective, because, you know, it’s clear how much demand there is. There’s not enough inventory. You just gotta keep building your portfolio because you’re gonna have the ability to keep at least as long as you’re in a good market and a good neighborhood. And if you need it to exit, you know, there’s no inventory, it’s, it’ll be a quick exit. Here’s a funny story. Just, I was thinking about it a few minutes ago, when you were talking about, you know, prices and the lack of supply for the demand. I have a friend here locally in orange county that just sold her house a few weeks ago. She listed it for 1.2 million, and it didn’t take long at all for someone to come along with a 1.4, 5 million offer, she sold it for $250,000 more than she listed it for. That is just crazy.
It’s crazy. And we can see that that’s happening all over the country. Overbidding, you know, bidding war overbidding, you know, the fast market time. And we can look and we do this in the Altos data. We dive into every zip code in the country. And not only that, we look at price range segment. So for price range, the high end of the market may be behaving very differently from the low end. So in all the LTOs reports, you can go look at that and what you’ll see, and we can see the price ranges where days on market is down to zero or seven days. Yeah. For that entire price range in that zip code. And so last spring it to the same thing. And therefore we see this is another one of the leading indicators. Now, you know, we can also watch the price reductions in these leading stats. Start to adjust a little bit as rates, as things get a little more expensive, like we can see. And, you know, if we have a hypothesis that, you know, the market’s going to create, like we have a really bearish, I, we can test it in the data every week. How quickly are consumers reacting to higher rates?
So we keep talking about price increases and pretty much everywhere around the country, but are there markets? And I would imagine these are the big tier one major markets where this would be happening, but are you seeing any markets in your data where there are price reductions you’re in the bay area and last year I was reading some articles that there are some areas where, you know, people were reducing prices to get property sold, but where are you seeing price reductions around the country?
So right now this, you know, first quarter is the, the biggest buying time, like the demand’s ramping up for the spring. And so price reductions are falling, meaning fewer price reductions each week. And they have been falling and we’re at record low levels. So meaning we have fewer price reductions needed because there’s high demand and low supply right now. Interestingly, last fall, things like price reductions are starting to normalize a little bit. And I was sort of hopeful that we would go out of this crazy market and into something a little more normal, we would go get closer to say, you know, if normal levels of price reductions is 35% of the market. And we were at 18 or 16 last year. And then, but we got up back up to about 28 in the fall meeting. Some of those places, like we started to see a little more normalization, a little less strong, and then it accelerated starting in December, again, individual markets that are interesting.
So Boise, Idaho was a fascinating one because in the last two years, because it was a big, we call ’em the zoom towns, the, the pandemic markets where you moved to, and, you know, you move from LA or Orange County, or you moved to Boise for a nice big house and the trees that’s super affordable. And what was happening is early last year, you come out of LA and anything you want in Boise. And it doesn’t really matter how overpriced it was then by the fall that slowed down a little bit. We started to get a little, like kids are back in school. We’re not moving in the fall. And so the price reductions in Boise, Boise is normally a 40% price reduction market. 40% of the homes take a cut before they sell. Normally Boise was at like 5% in the spring, and then it, wow, got back up to its normal level by the fall. So that was a sign. It was really interesting. Like you could see that LA demand was what had slowed down, but what we see right now is that it actually Boise’s picking up steam again, right. With the whole country. So that was one that was really interesting to watch last fall, to see that strong pandemic migration pattern slowed turns out. There were some people who, you know, listed in Boise who said, oops, it listed too high. And, and it didn’t go.
So I wouldn’t call Boise an overpriced or expensive market. I mean, has become more expensive. You know, I don’t compare that to San Francisco, San Diego, LA Denver, Colorado, Washington, DC, New York. Right. Right. So when you’re looking at these major tier one markets that are expensive, like they are mostly unaffordable. Are you seeing price reductions in any of those zip codes or those markets?
There’s no place where like the bull market in terms of low inventory, high demand is pretty much across the country at all price points. In fact, right now, it sure looks like it’s even at higher price points, like it’s shifting to the higher price points like right now. I mean, in the last four weeks, it looks like the signals are there. So there’s no like you know, San Francisco is cratering because of the pandemic. The pandemic downturn was literally five weeks. And then people jumped in, there were pandemic CRA like San Francisco rentals and Manhattan rentals. What, you know, went down in price as people were leaving there. But what was interesting is renters left, but homeowners in a place like San Francisco or New York didn’t sell, they left, but didn’t sell. They just bought another house. And there was a little more inventory, you know, early in the pandemic, but there was no mass Exodus. The, the Exodus was, you know, really on rental rentals in the big cities that you wanted to get out of during the pandemic. So right now the big cities are all in the same general trend. Inventory’s low demand is high. People are buying. You might find a thing in like Seattle or San Francisco kind of high end condos is maybe demanders a, a little softer than it had been, you know, two years ago, you couldn’t buy anything, but that’s maybe the only place where you might see that kind of, you know, demand weakening.
You mentioned inventory a few times in terms of inventory trends. Are you seeing currently, as we speak today, inventory increasing or decreasing
It’s decreasing week over week. And normally the of inventory, the inventory curve is very seasonal. You see a big curve. It, it, the lowest date is usually mid-January you start getting new listings and it peaks right at the spring peak of summer. And then you start not listing stuff in the fall. You wanna get it rid of everything it’s on. And it, so it’s very normal curve. What’s fascinating last year, and this year’s happening again last year, the bottoms and bottoms normally mid-January, we didn’t hit our bottom until April 30th of last year. Inventory kept falling all first quarter. And then finally in may it ticked up more people were listening. We look like we’re on that same curve right now. Inventory is decreasing each week where, and we hope that it, it would be adding right now in a normal market. We’d be adding inventory right
Now. So what’s driving that my guess is it would be pent up demand. Those people that couldn’t find housing in the seasons before or the year before, and just waited and probably COVID had something to do with it as well. But is that pent up demand or is there something else driving that.
So certainly pent up demand Americans, like happy to buy anything they can right now. And they have been, it’s also on the supply side. I locked my mortgage in my, you know, if I’m, if I’m reselling, I don’t, if I’m moving up, I don’t have to sell my first home. Cuz I’ve got that thing at 2.75. I’m not selling that thing ever. Right. And so, so because we’ve had a decade at 4% or less everyone in the country’s got that. So, so we don’t wanna sell the ones we already own because it’s really good. So that’s keeping inventory low. Another thing this keep, we mentioned really early on in the conversation here, that’s keeping inventory low is even the infill new construction. The infill new construction is really hard to complete now. So those are getting delayed. And some of those you might say, they’re like, okay, well normally they’re marketed and you know, we can market it for sale. Now it’ll be complete in three months and you can buy it and everything. But now all of a sudden those are delayed to maybe 20, 23. And so we take those outta the active inventory account. So like all of the things are, are conspiring right now to lower the active inventory.
I was wondering if you could kind of drill down a little deeper into a whole concept of the resale inventory, resale stock in the us being turned into rental stock, there’s, you know, more demand for rentals. I mean, there’s demand for rentals period, but investors are realizing that investment real estate is a great investment. Always has been and it’s superior inflation hedge, especially in the inflationary environment we have today. And what we’ve seen over the last two years. So, you know, real estate is becoming a go-to asset class. And so it’s, I think driving more of that resale stock that we see around the country into the rental stock. And maybe you can, she some color on that?
Yeah, for sure. The I love the line that the best inflation and hedge is a 30 year fixed mortgage and a Costco bank. Yes. You know, like, like, and everybody knows it. Right. You have that cheap mortgage. And even if you’re not an investor, you know, that you don’t wanna sell that house
And it’s not even your money you’re borrowing it.
Yeah, exactly. And so, yeah. So over the last decade we have turned, so, you know, figured there’s roughly a hundred million, maybe it’s about 90 million single family homes in the country. And we’ve tur, we’ve taken 8 million of those out of resale and turned them into investment properties. And that’s individual investors doing one or two at a time. And it’s a little bit with like the big funds doing a bunch at a time, but it’s mostly the individuals. And so we’ve been in a rising rent environment, we’re in a low, low, cheap money environment and it’s fixed. So that’s been a really good deal. And it’s been a really affordable time to especially do it that double up. I can move into the next one. I’ll just keep the first one has been a really good, you know, has been a really good plan. And so that phenomenon has been underway. That phenomenon gets a little more expensive when rates climb and it gets a little harder to keep that first one. And so that one, sometimes a few more people will opt to sell that first one to finance the next one as rates go up. So we could see a little more of that inventory or hit in the market as rates climb. So rates impacting supply, not just demand.
So as we see your mortgage rates rise this year, and probably I would guess next year to some degree, what kind of impact do you think that’s gonna have? I know we talked about this a little bit, but I want to drill down a little bit further. What kind of impact do you think that’s gonna have on existing supply and potentially new supply coming online? Because we need it to fill the demand, but…
Yeah supply side would, it would imply is that by next year. So right now there’s only 249,000 single family homes on the market and we’re listing about 70,000 a week. And, and then those get gobbled up super quickly. You can think about in those terms and inventory’s been dropping each week because you know, let’s say we list 70 and we buy 75. That’s what’s been happening. But so you could imagine a year from now, we’re finally off the setting record lows each week. We’re we have a year over year increase. I could imagine that let’s say it goes from two 50 to three 50, so it’s significantly more than we have now, but it is still not a lot. It’s a hundred thousand people of those move up have decided not to buy, keep the first one when they bought the second one slightly add to you, demand or slightly at the supply while the demand decreases a little bit.
Do you see a, a correlation between high-end and low-end markets? How much of a correlation do you see between price and inventory?
The big phenomenon that we’ve been experiencing in the last few years have been across price points across geographies. So, you know, the people are iron million multimillion dollar houses in Orange County, as fast as they go on the market, too. Right? It’s been happening. The differences you can see are in general, the more expensive homes take longer to sell. And you know, it might be normal. Normally you might say 180 days across for all price points across the country. The imaginary national market might be 180 days in the high end. Maybe it’s two 20 in the last year that normal has gone is now more like 28 days or 42 days in that range, like in, in the gone way down from six months to a month as a median. And then at the peak of the frenzy last April in may a that was down seven, like, you know, a week or less meeting across the country.
And the two 20 at the high end went down to, you know, like six weeks. And so the high end compressed way down even. So it’s still longer than the median price. The high end is still longer than the cheaper stuff, but compressed way down as well. And it’s one of the places you can look for leading indicators. So we can see, we can watch as demand backs off in, in a more expensive world. We can watch things like the market time at the high end climb faster than the normal stuff, the cheaper stuff. It’s like one of those places, there’s all these leading indicators through the of data that we can go keep our eyes on.
What would you say is the best leading indicator for price? Is it price reductions or what would you say?
So my price reductions is, is my one of my go-to ones, but price wise. So leading sales price, we have the median ask price. And basically what happens is, you know, this is homes on the market. Now this is where they’re asking and you know, the sellers and the listing agents, they pretty much know in aggregate exactly where to price the house a little over a, any given house is a little over underpriced, but in general, it’s very close Ian hot. It’s like 104% of sales to, to ask in cold markets. It’s like 96% it’s because when you’re selling your house, you look around and you know where to price it. And so, so the ask price is really interesting and that’s the main one we use because house is on the market. Now it gets an offer in margin and it’s low as in April, the sales price, the traditional sales price.
You know, you don’t know it until may, but we know right now what’s happening before that one is really interesting, so that, so, you know, sales price would be, you know, meeting as prices like leading sales price by three, four months before that one though is the price of the newly listed cohort this week. So now we can look at the homes that got listed this week and did they get priced higher? Did they get priced lower? Because these are the ones that are, you know, the economists call it the wisdom of the crowds. The crowds are like, they’re, they’re like they say, oh, that, that last house went for a million, four. It was priced at a million, two, one for 1,000,004, and there were 13 other bidders. And so then they know to price their next listing. I would’ve priced this one at 1,000,003.
And so they know that, but if they also looked down the street and they say, wow, that one, they thought they were gonna get the bidding war. There was no bidding war. And it went for 1,000,001. Now I price my new listing at 1,000,001. So that wisdom of the crowd shows up in this price of new listings. And it’s really great. So the price of new listings when we hit inflection points turns, and then a month later, the medium price of the market, the ask price turns. And then a month after that, a meeting price of the ones that went pending into contract turns and a and a month after that is the median price of the sold. And so you can see the dominoes fall by watching these. So my favorite one is the median price of the new listings. And so we can watch that each week. And I do videos, I do YouTube videos and each week, and I report on the data. And one of the ones I like to report on is the median price of the new listings, because when thing is skyrocketing, that’s all the sellers telling us. They know that the, the demand is in their neighborhood and they’re gonna go capture some of that price.
Right now that one is skyrocketing. So that one’s really, the spring is showing very strong momentum.
Yeah, that’s very bullish. And that’s also very, very consistent with lot of the data that I watch and track where the majority of the markets that I look at are showing up with strong or very strong growth. And, you know, it’s just very consistent. There’s very, very few markets that are depreciating. In fact, I don’t think there are any zero to 5% is like on the low end.
Yeah. I can see weakness. So it’s interesting to watch in some of the older places like, you know, Cincinnati or Cleveland or someplace like that, you can look at the low end. These are like $50,000 homes in a place like Cleveland that are a hundred year old, $50,000. And you can see some of those sitting around longer and you know, there’s other problems with those. And so you could see a little bit of weakness there because if you’re an investor, you might as well buy the one for 120 and have a much more solid investment. And so, you know, you could see that, but even, even those aren’t, you know, people are still buying those the super low end. But if there’s one you might think about it in those terms.
Yeah. Those are typically low-end neighborhoods that don’t have retail buyers. So there’s very little sales activity, if any, at all. And those are areas that we always advise clients to completely avoid. Yeah.
Yeah and tax problems and like all kinds of weird things that you need.
You can’t even get financing. I mean, it’s in all cash purchase. And then trying to liquidate that, you know, on an exit is gonna be very, very difficult if not impossible. So you don’t invest in those areas. Mike, let’s just wrap it up with three predictions here. Give me what you believe based on your data prices are headed in terms of appreciation this year.
I think we’re looking at another 10 to 12% price appreciation year for the year 2022, because most of it’s really already baked into the market right now.
Yeah. Okay. A little more aggressive than I thought you were gonna say, but I’m fine. I’ll take it. What about inventory? What, what’s your prediction with inventory this year.
So my prediction is that next year, at this time we are off the record lows. We have some increase in inventory from two 50 to three 50, but not any kind of skyrocketing inventory. And multiple years before we get back to anywhere close to our old normal, which would be a million homes on the market right now, a million single-family homes would be a normal sense right now.
Interesting. Okay. And lastly, what about mortgage rates? I mean, this is already baked into the cake in a sense for the year, but where do you see them going?
So I always say that if, if I could predict interest rates, I would be an interest rate trader. I wouldn’t be in the real estate data business. So, and I also tell you this, I bought three homes in my life. My first home I bought in the mid nineties and I, I bought it at it was like eight and a quarter percent. And I locked in for 30 cuz 30 years. Cause I, I was sure rates were gonna go up. I bought my second house in 2001 and I locked it in at 6% because I was sure rates were gonna go up. I bought my third house, you know, in whatever 2015. And I locked it in at 5% because I was sure rates were gonna go up at, so I’ve been wrong forever on rates, on, on market rates. I’m now refind at, you know, two point, whatever, 8% or something like that.
Wow. You know, it’s like, it’s so low. It feels like it’s gotta go up. The economy is roaring. So it feels like it’s gotta go up. Inflation is there. So it feels like it’s gotta go up, but I don’t have any idea of like, is, does that mean it’s four and a half percent. Does that mean it’s six? Like, I don’t have any idea about that. I guess the people that I look at that, that do think they have some insight on that have been saying four and a half percent is like where we would bounce around and that the markets don’t really have anything higher than that baked in, but that’s as close as I can come to a prediction on mortgage rates.
Totally makes sense. Very cool. Mike, I appreciate your time, your wealth of information, your company aggregates so much data it’s for me, at least it’s fun to kind of plow through some of the stuff that you guys do share with our, where they can find out more about you and Alto research and whatever else you wanna mention.
Yeah. Great altoresearch.com and you can go there and run local reports. You can get time with our team if, especially if you’re realtors and you want to put data in the hands of your clients right now, like they need to know what’s going on. We can go run reports for your local market and, you know, get you set up that way right away. That’s altosresearch.com. They can follow me on Twitter, Mike Simonson on Twitter. And I do weekly threads on the data and we do a weekly YouTube video on our YouTube channel. And that’s Altos research, ALTO research YouTube. So they can join us there.
Yeah. And if you’re a real estate agent, real estate broker, or a mortgage broker listening to this, and you’re not using data to put in front of your clients or your perspective clients, you’re really not giving anybody a competitive edge, you know, in terms of what you can offer. So you really need to have a data driven business model. So ALTOS is definitely a place to get some of that.
Yeah. You can imagine every single one of your customers is confused and really worried right now they need the data. Absolutely. Everybody wants to know, is there a bubble? Is it gonna crash? What’s gonna happen? Is it like everybody needs to know that. And that’s what the data’s for.
Very cool. Well, Mike, hang tight, but thank you for coming on. I really appreciate you spending some time with us today.
Thanks Marco. It was really great.
Well, I hope you enjoyed today’s episode. Mike is a wealth of knowledge. I, and I can’t imagine how much data those guys aggregate anyway, even with the tight inventory around the country, it’s important to know that if you’re a real estate investor and you’re currently investing, or you’re wanting to get into the market to invest, there are still lots of opportunities out there. We have inventory, we have a constant pipeline of inventory spread across 20, 25 different markets. Mostly those are growth markets, but some of them are more linear, boring markets where you just get strong cash flow. So regardless of the type of inventory, you’re looking for the type of investment you’re looking for, keep in mind that there are always opportunities. And it’s not a question of when I always say it’s a question of where. So with that, we’re gonna wrap up for today. Remember to download your guide off of our website, The Ultimate Guide to Passive Real Estate Investing. If you are looking to speak to someone, we offer free strategy sessions with our investment counselors. There’s never any obligation here. That is it. For today. We look forward to you tuning in on our next episode and that is it for today. Thank you. We will see you on our next episode.
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