Are We Repeating 2008’s Mistakes?

Dave:
What’s going on, everyone? Welcome to On The Market. I’m your host, Dave Meyer, and today we are going to talk about the rapidly changing housing market. In just the last couple of weeks, the data has been showing a pretty sharp decline in housing market activity and the media headlines calling it a crash or a correction have just increased a lot over the last couple of days. So we decided to invite the full panel on today and we’re going to have just a general conversation about the housing market, what everyone is seeing in their local markets and in their local businesses.
And then we are going to compare and contrast today’s housing market in 2022 to what happened in 2008, because that’s what a lot of people are saying, right? They’re saying, “There’s a crash. It’s going to be 2008.” And some of the data line suggests that a housing decline could be possible. So we’re going to learn what we can from 2008, compare and contrast, and see how this market might perform similarly or how it might perform differently to the great recession. So you’re definitely going to want to stick around for this one because the panel drops some incredible insights and advice for how to navigate a situation like we are in right now.
We got the whole fam together today: Kathy, James, Jamil, and Henry. I love having all of you guys here. How’s it going?

Kathy:
Good. Good to see you all.

Jamil:
It’s cracking.

Dave:
I feel even in the last three weeks or whatever, since all four of us were on a show together, the housing market has changed really dramatically. So we decided to bring everyone back to have a conversation about what is going on, what you would even call this weird housing market we’re in. So we’re actually just going to start and I’ll provide some data updates, and at the end of this I’d for each of you to tell me what this data means to you. Are we in a correction? Is the housing market crashing? Is it something else? What words, what emotions are you feeling? Let’s have a little bit of a session on what’s going on in the housing market.
So here is the data that we are seeing right now, at least over the last couple weeks. And I’m using Redfin data. They actually provide weekly data, which is really cool because a lot of the other data sources lag and are just looking at July. And what we’re seeing as of the last couple of weeks is that year-over-year housing market data is still up. It’s up 6% year-over-year and that’s really important because the housing market is seasonal and year-over-year data is kind of the gold standard in measuring the housing market. So that points to a housing market that is still relatively strong.
We’re also seeing that inventory has started to peak and active listings are going down. Both of those two things, when inventory stops growing and active listings go down are things that put upward pressure on the housing market. So those are some of the data points that sort of point to the housing market is okay or there’s a bit of a slide right now, but it’s not too bad.
But on the other side, we are seeing some other data that is a bit more concerning, or I don’t know if anyone’s concerned about it, but is putting downward pressure on the housing market. Specifically, we are seeing that days on market are still pretty low, but they’ve gone up in the most considerable way that they have in two or three years. We are seeing that 7.7% of homes had a price drop, which is a record high. And I think most notably the thing that most people are looking at when they’re saying the housing market is correcting or crashing is that month-over-month data from June to July was down 6%.
And so like I said, year-over-year is sort of the gold standard. But when we’re in a transitionary housing market we are right now, it is important to look at what’s going on on a month-over-month basis or even week-over-week if you can. And we’re seeing that housing markets in a lot of markets, they peaked in June and they’re starting to come down. And again, that is not year-over-year, which is sort of the gold standard, but that is month-over-month. And so we’re seeing that normally housing prices each year start to go down in August or September, but this year they sort of peaked in June and they’re starting to go down, which is a considerable departure to normal seasonal patterns and is therefore notable.
So that is really the data that we have to analyze here. And with that, let’s try and understand, let’s go to the panel and figure out exactly how you all feel about this. Kathy, are we in a crash, a correction, or something else?

Kathy:
Well there’s definitely a crash, but it is not what people think that means. There’s a crash in home sales for sure. Sales are down. It’s very hard to sell things today at higher interest rates and high prices. There’s not the huge demand that there was because fewer people can afford that or they’re just on the sideline because they’re afraid. So yeah, there’s a crash in sales and still a crash in inventory because again, new listings are down. People aren’t in a hurry to sell their home in this market for good reason, especially with what are they going to buy, something more expensive than what they have at a higher interest rate?
So it’s not a price crash. Maybe for people who bought in the last six months, they’re seeing their value of their home go down. But most people didn’t buy a house this year to sell it this year. If you’re a flipper, you did, and you are probably feeling some pain. But if you bought a house to live in this year and it’s gone down in value, are you freaking out or are you saying, “No, I got a pretty low payment here”?

Dave:
All right, so crash feelings, but not in necessarily crash level pricing.

James:
Crash-ish.

Kathy:
Yeah, The people feeling the pain are the people in the industry, people who try to sell homes, that’s hard right now. If you’re a realtor, you’re probably wondering how you’re going to get through this year. And mortgage brokers are getting laid off left and right. Construction workers are still busy because there’s a lot of homes that are trying to get completed. But people working in the housing industry, flippers are probably having a more difficult time than they did just six months ago. It’s a different market. But, yeah, so it just depends on who you are and what you’re doing in real estate.

Dave:
All right. Henry, is your word crash-ish?

Henry:
No, no, no. And obviously the caveat is real estate is market-specific. So there’s some difference in different areas of the country. I mean, I wouldn’t call this a crash. What I’m seeing is more of a correction and a slow down, but definitely not a crash. And I’m just speaking from the experience that I’m having. When we list a home, we’re still getting it under contract in five days. It’s not sitting long. And I think that’s due to that we have population growth here that’s probably unlike a lot of places in the country, and we also have housing shortage. There’s just not a lot of supply. And our supply for the last, I would say, three months was going up by about 100 houses a week and then it’s plateaued, it’s stopped. So we’re not seeing the growth in houses coming onto the market. So inventory is flattening out.
And we do have less buyers because the interest rates are higher, but there’s still plenty enough because we have population growth. There’s still new people moving here every single month because of the types of jobs that are here require butts in seats. And so when you’ve got population growth and shortage of inventory, yes, less people can buy, but you have new people coming in every month who still can buy because they’ve got these big salaries that these companies are paying people now to start working for them.
And so I think what we’re seeing, especially in this market, is more of a correction. We have seen price drops, and where we’re seeing price drops are on higher end houses. So houses that have more room. If a listing is listed for $2 million and they’ve got a million and a half worth of equity in it and they drop by $30,000, it’s really not affecting the seller, but it is going to do something to the numbers as far as houses that are taking a price reduction. We’re not seeing a ton of price reductions on the first-time home buyer types of homes, those single family, three bed, two bath, 1500 square foot homes, those things don’t have a chance to have a price drop. They’re gone.
So, no, I haven’t dropped… Have I dropped? No, I haven’t dropped price on anything. I’ve considered it, and then boom, you get offers in it and it goes. But I focus more on the first-time home buyer product, but we are seeing price drops on the much more higher end homes. And I think that’s just because people were shooting for the stars and hoping to land on the moon because values were still going up. And so if they didn’t get the price that they were dreaming about, then they just drop it to the price that they were expecting to get in the first place. To me the price drops aren’t, “Hey, I thought this house was worth 200,000 and the market’s telling me it’s only worth 150.” No, the price drops are like the house is worth 200, but I’m going to shoot for 225, and then if I don’t get 225, I’ll drop it to 210 and I’ll get 210, and it’s still more than the 200 that it’s worth. So no, I don’t think it’s a crash, it’s a correction to me.

Dave:
All right, well I think your market is the kind of market, at least according to my analysis, that is still poised to do well I would say, and definitely want to echo what you’re saying about list prices. People are definitely listing very aggressively, but still even to date, the sale-to-list price, which is a good way of measuring if sellers and buyers expectations are on, it’s right at 100%. So sellers are still getting what they ask for on average across the country. Now, let’s head to Jamil and James who are in more bubblicious markets, should we say, or ones that maybe a little bit riskier. Jamil, what do you think correction, crash, something else altogether?

Jamil:
I believe the housing market is in a standoff. I think that everybody’s got a gun pointed at each other here and there’s really no chance at victory for anybody. This is the reason why: When you look at Phoenix, Phoenix is one of those markets that was the poster child for the run up in 2006 and for the dramatic crash in 2008. And looking at the statistics, I love looking at Phoenix because it really gives us what this looks on a micro level. And then you can look at what the housing market’s doing on a macro level. So back in 2006, in Phoenix we had one house for every 80 people. All right, one house for every 80 people. Think of that. Now with respect to inventory, we have one house for every 360 people.

Kathy:
Whoa.

Dave:
Wait, can you explain that? How does that make sense? Where do people live? Does that not include apartments or something?

Jamil:
I think that’s just talking single family. That’s just talking single family. Because I think what’s happening is we’re seeing that the housing starts have dramatically plummeted, right? Back in 2006, we would have anywhere between 4 to 5,000 housing starts a month. Right now, those housing starts have gone down to about 2500 housing starts a month. So that’s nearly half. When you look at days on market, in 2008 the average days on market was 110 days. So that we had all of this inventory, we had a total of 49,000 houses on our MLS in Arizona at the peak of 2006. Right now we have 19,000 houses available on the MLS in Arizona. That’s down 61% from where we were at our peak.
So when you’ve got such dramatically low inventory, I think what we’ve seen and why we have this little pain point is investors. That’s who’s panic selling right now. The people who are fixing and flipping or the folks that need to sell immediately, they’re the ones that aren’t realizing the full potential or the full profits that they might have been able to extract from their deal. So they’re selling for less. You’re seeing those dramatic price decreases happen, and they’re happening for sure. We’re seeing them here in Phoenix. I look at the MLS and every day it’s price decrease, price decrease, price decrease. On all of my flips right now we are dropping price, but we’re still coming out profitable on those flips, and we’re still going under contract within 30 days of listing our house. Even in this correction.

Dave:
How much are you dropping price just out of curiosity?

Jamil:
Typically our average price reduction is about $10,000.

Dave:
So percentage-wise, like 2 or 3% or something that?

Jamil:
That’s about 10%. No, that’s about 1%. Because our projects are in the million dollar range.

Dave:
So pretty small relative.

Jamil:
So, small. Small price reductions and we are going under contract and they’re still going under contract within 30 days. I don’t see how that’s still a painful situation. I’m not hemorrhaging money on hard money. I’m not sitting on inventory choking out because I’m stressed out and overwhelmed. None of that’s happening. And I’ve made such incredible profits leading up to this time right now that I’m padded and cushioned to even break even for the next six months if I had to in order to stay in the game and keep my trades.
And so I think what we’ve seen happen, Dave, is we’ve seen that investors and people who had to sell, rushed to the market to list when they started hearing grumblings of a housing correction because of the rising interest rates. And now what we’re experiencing is these houses have jumped inventory and now that inventory can’t be replaced. And so we are going to see that number go from 19,000 dramatically low, dramatically decrease. And I predict that within the next six months that number will go back to dangerously low levels of inventory. And we’ll probably get back to that point where we have 6 to 8,000 houses listed in a month in Phoenix. And that’s going to be trouble.

Dave:
Yeah, just to clarify for people what inventory means, there are two components of it. Inventory is not just the number of houses that get listed for sale. That’s actually known as new listings, and that’s what Kathy said was actually dropping. And inventory is a reflection of how many properties are for sale on the market at a given time. And so inventory over the last couple of months has been going up because demand is falling off and so houses are sitting on the market longer, but it wasn’t because new listings were dropping.
Now new listings are dropping and so that’s counteracting the decline in demand and I think that’s why a lot of us are seeing inventory start to level off. Of course, we don’t know which way it’s going to go, but that’s sort of the dynamic at least in the data that’s going on right now. All right, James, Seattle. What’s happening up there? Are we in a crash or correction or are you going to say we’re in a standoff like Jamil?

James:
I think we are in a snapback is really what comes down to. If you look at Jamil’s market, my market, even Boise, all these peaked out markets that spiked, in Washington, a lot of our really strong markets, they appreciated 20 to 25% in March alone, which is a huge run up. And what we’re seeing is it’s just pulling back naturally. And I do think we are in a slide. I think it’s completely different 2008. 2008 was the breaks got hit on us. All of a sudden subprime mortgages went away, there was no money out there. And it just hammered us. It was very drastic and quick.
This feels this slow, slow slide, because what we’re talking about 6%. We’re up 6% but last month we were up about 10% and it’s just this slow slide back. And really I think the people that think it’s crashing is they bought it at the wrong time. If you bought any type of short term investment, whether it’s an Airbnb, a fix and flip, or those high yielding investments during I would say February to April, you are going to have problems. That is the reality of it. Just like the same type of good timing if you bought… If you bought four months after the pandemic hit, that’s good timing. You hit the same gas, but the brakes are getting hit right now, and what we’re seeing is we’re about 20 to 25% down from peak.

Dave:
Whoa.

James:
Yeah. I mean, it came right back down. There’s a house that I have listed actually with, we did My First Flip with Ashley Kehr from Real Estate Rookies. We bought this property in Bothell and when we performed at the deal, the comp was from 18 months ago, exact same house for a million, 50. During this remodel, it went all the way up to 1.5 in a six-month period. The value skyrocketed almost 40%, which is absurd. And I remember calling Ashley, I go, “Hey, we got to get this thing on market, because it can’t start going the other way really quick.” And I was joking with her and then it went the other way. And we sold that house. We listed at 1.2, so about 10% below what the peak was. We got it pending. That buyer fell apart because of financing at 1.1.
Now we’re at a million, 50, which is the same value that it was 18 months ago and we’re getting one show in a week max. And so there’s certain markets that come through and it really just comes down to where is the market at? When did you buy it, and kind of pushed through. But that’s where you hear all the crashing because people also broke a lot of rules and they weren’t really paying attention to what true real estate rules were. And those deals are coming backwards. The stuff that is crashing is homes that were always negative or had deficiencies that people bought acting they didn’t have deficiencies. That stuff is down 35%. But other than that, it’s really just the general market is just kind of leveling out.
There’s other markets, like Capital Hill in Seattle is one of the most expensive markets in Seattle. It’s had a little bit of issues with a crime and it had a weird kind of stigma for a while. And so during this peak, when me and Ashley’s Bothell one went up 24%, Capital Hill was actually very steady. It went up 10 to 12% during this time, which is the best market in Seattle. But it kept steady. We’ve seen no price change in that neighborhood. We listed six town homes last weekend. We sold all of them. We sold all six of them in three days. And so the markets that were steady and good and healthy, they’re fine. Deficiencies, spiked. I mean, it’s just like anything, hockey stick up, it comes the other way. And I definitely have seen that and I do think it is starting to level out but I predict that we might see some of those markets that really jolted come down to pre-pandemic pricing. I think that’s kind of where it’s going to level back out.

Dave:
Wow. Pre-pandemic, like in Boise and Reno, some of those really hot markets, you think it could come down that far?

James:
I think, yes, I do. I think in 12 months there’s going to be some markets. Because here’s the reality: Some markets are not supposed to be expensive. Where people live, they’re supposed to be affordable. And as you know we have some factors going on.

Dave:
What are you saying about Boise?

James:
I like Boise. I would definitely live in Boise, but you get this slow slide back and I just think as we see inflation going up and people, there’s an erosion of capital right now, of disposable income. There is right now one in six Americans are behind on their utilities. That’s a big deal. That means people are struggling to make payments, and in 2007 and ’08, they were at one in five. So there’s other signs of affordability issues which are going to cause the market to be flat because people can only buy what they can buy. People can only sell for what they can sell for. So there’s going to be just be this kind of stagnant market for the next, I think, couple years. But I think it’s just going to be this slow slide, not this sudden jolt. We’ve already seen the sudden jolt and now from here it’s more steady.

Kathy:
I wonder about the Boise market because a lot of that growth came from California, and right now California is facing a pretty severe drought. We can’t water our gardens for two weeks at all. We invested a lot in our yard and probably going to see that all just turn brown, and Boise has no water issue. So I’m also curious about those kinds of factors, if more and more people are retiring in California are able to move and are thinking maybe I want to be in a place where there’s water. So who knows? Who knows what the future brings but that could keep Boise prices up possibly.

Dave:
James, I was just going to say, man, you’ve probably had so many good deals and the one that’s fallen apart you did with the Bigger Pockets podcast. Pretty public one to take a loss on.

James:
Yeah, luckily though you, but you have to pivot as investor, right? It is what it is. The market is Mother Nature, you cannot fight it. You have to participate in it, you got to adapt to it. So just pivot and change things. So for that deal especially, we’re not losing money right now. We’re still making money. But if we sit there and we don’t make a change, as the market flattens out, that means longer hold times, you got to stop the bleeding.
So actually, I just paid off our hard money loan yesterday on that and because I had some liquidity come in, I called Ashley, I’m like, “Hey, I could just pay this off,” because now we’re not in a hurry to sell it and if we’re not in a hurry we can wait. Because I do feel good about our list price, but we don’t want the hard money and the debt expense to force us into a different situation. And so we just paid off the loan and now we have no debt, and now we’re going to wait for that buyer. Because if it doesn’t sell for a million, 50, that means we are actually getting close to pre-pandemic levels in that specific neighborhood, which is a great neighborhood. It’s right outside Seattle, suburb, good schools, everything is good about this neighborhood. So that’s a little scary to look at.

Jamil:
James, I believe first and foremost, everybody listening to this podcast right now, rewind what James just said and understand that he just gave you a look inside the mind of every one of your fix and flip investors out there right now. If you are wondering where they are, what their temperature is, what they’re feeling and what they’re thinking, you just got the most true example of what that thought process is. And here’s what I want to say about it, James. I think you’re a little bit over. I think you’re overthinking the pain part, which makes sense. I get it because you have to insulate for your projects moving forward, and I think that you will be positioned well to do that because of the pivots that you’re making right now. But I also believe that it’s not going to turn out to be as bad in six to 12 months as you’re planning for right now.
But for anybody out there that wants to do business in fix and flips, that wants to sell deals to fix and flippers, this is what they’re thinking. And if you can structure your deals in ways to give them enough runway so that they can stay in the game with you and they can continue to do projects, because they also don’t want to lose their trades. I think, James, for you right now, one of the keys is making sure that you retain your highly talented team but do so in ways that isn’t going to hemorrhage money. Would you agree that that’s a concern?

James:
Yeah, well it’s about working smarter and working in the certain market conditions. You have to keep your team but you also have to pivot and change thing and give different roles and responsibilities out. Because at the end of the day it doesn’t matter if it’s declining or flattening, it’s a different market than what it was 24 months ago. There those are three different types of markets. And so you just have to prep, move your pieces around, pivot and then make your adjustments.

Dave:
All right, this has been a great conversation. Thank you. It sounds the general consensus here is that things are adjusting. I think James probably the most bearish. I actually am feeling a little more bearish right now too. I’d say we’re solidly in a housing market correction. I don’t think we’re in crash territory, but the data’s definitely turning a little bit faster and more dramatically than I think I was personally expecting. And like you all said, different asset classes, different markets are going to perform differently, but on a national level, I do think we’re heading back towards at least very, very modest year-over-year growth and possibly even negative on a national level in the next couple of months.
I do want to turn this conversation to all the research you all did and just for everyone listening, what we’re going to talk about for the remainder of the show is how this housing market is different than 2008. You’ve now heard everyone’s, all the panelists opinions about what this market is and where it might go. But with all of the media coverage and about a crash, we wanted to analyze how the housing market is different from 2008 and we’re going to go through five different topics and sort of break down, compare and contrast different points about the housing market. But first we are going to take a quick break.
All right, so let’s get into our compare and contrasting of the 2008 market to the 2022 housing market. Myself and each of the panelists researched a single topic to talk about and how it’s either the same or perhaps different from 2008. And I’m going to go first and I probably took the easiest one. So thanks for letting me get away with the easy homework everyone. I’m going to go with consumer debt and mortgage quality. So as we all know, subprime mortgages was one of the main issues that led to the 2008 crash. Basically irresponsible debt was given out and I want to just show some data about how different it is now. So, the first thing is that the median credit score, I’ll ask you guys… Actually, I’ll have you guys guess. Does anyone have a guess what the median credit score for a mortgage is right now?

James:
680?

Kathy:
740.

Henry:
640.

Dave:
It is 773 is the median credit score right now. Yes. And that is actually down. It was up to 780 before, and what’s the highest? It’s like 850, but anything above 720 is considered excellent credit. So I thought this was an extremely telling point because credit scores, they’re not perfect, we all know that. But they are a very good indicator of how able you are to pay your mortgage. And a 773 credit score is phenomenal. There was also some other data that showed that anything below a credit score of 620, that’s considered a subprime mortgage. That’s like someone who has at least a relatively decent chance of defaulting on your loan.
Back in 2004 and 2005, the total number of mortgages that were originated that were below 620 was 14%. That’s what it maxed out at. It is now below 2% right now. So when you think about the main thing that brought us into the depths of the 2008 crisis, and listen, 2008 there was a drop off in demand, but in my mind what made it really bad was a lot of the foreselling, all the foreclosures, that kind of stuff. And so when I saw this, I thought that to me, although I am seeing the market go down, sort of like in my mind puts a stop gap on how bad things can get because you’re not going to see people who are going to default on their mortgages because lenders basically have cleaned up their act and are starting to lend to people who are actually qualified to pay back their mortgage.
I mean, it’s unbelievable. Kathy, you might know because you were doing this, isn’t there something that, what do they call it? It was ability to pay a requirement.

Kathy:
Nina Loan?

Dave:
No, not a Nina Loan. They now implemented this thing you have to believe that they can reasonably pay back their loan, which it’s crazy that that didn’t exist before. Unbelievable.

Kathy:
It’s crazy. Yeah. And when we were giving loans to subprime borrowers who already had bad credit, it really wasn’t too hard for them to walk away from a home. They had shown a history of not paying bills.

Dave:
All right, so my compare and contrast to 2008 is mortgage quality. Mortgage quality now much better than it was a decade or a decade and a half ago. I think this will probably overlap a little bit with what you brought, James. Can you tell us what you think about the 2008 market and how it’s a little bit different or maybe the same?

James:
Yeah, the 2008 market, when we were going through that, it was definitely a completely different thing. It was the whole banking market had stalled out and just… It was this skyrocketing of defaults and everybody threw in the white towel all at once, and it was like people just gave up. And that’s why we saw this skyrocketing of foreclosures and people just did not care. Whereas right now people have worked hard, they bought some properties and they can afford them. And like you were just talking about, the quality of mortgage borrowers are much better. A lot of people learned a lot of lessons in 2008 and so did the banking market.
But what we have seen, is we have seen an increase in defaults in foreclosures. There’s a 219% increase, basically from the beginning of… Or we’ve seen a 219% increase in foreclosures in the last 12 months. But the big thing is we are at a fraction of what it was in 2008. In 2008, they were at 1.8% of all housing units were in foreclosure. Right now we are at 0.12. So there’s this dramatic difference of defaults going on because people haven’t given up. It’s like right now, people just can’t go buy something new. They spent all their money and so things are flattening out.
We’ve seen some pull back to get into the affordability factor, but it’s more like people still want to go buy, they still want to own homes, they still want to get settled in, they want to maybe move into a different market and it’s really not that bad. Yes, we’ve seen the increase in foreclosures and I actually think we’re going to see an even larger increase because there was a moratorium for two years. There was no foreclosures going on.
So we’re going to see that scary percentage increase ratchet up over the next 12 months, but we would have to be almost 10 to 15 times the amount of homes in foreclosure to match 2008. So there’s a lot of runway on that at that point. And so the foreclosure is just totally different in general. I mean, we were swimming in foreclosures in 2008. You would drive down a street and it was like… Door knocking was very easy and you could be very inefficient. We could hit 80 homes in a six-hour period because they were so clustered together. Right now our guys are still driving everywhere. It’s just not the same type of market.

Dave:
That’s incredible. I mean if you listen to the episode, I think it was in June or July that Jamil and I did with Rick Sharga who’s sort of an expert on foreclosures. he was saying it’s starting to tick up and that numbers sounds scary, but to your point, it’s still like 1/15th of what it used to be. And he was saying that a lot of the mortgages that are ticking up were people who were in default prior to COVID and the moratorium and now they’re restarting foreclosures. And it’s not necessarily even, I’m sure there is an increase, but it’s not necessarily even a huge increase of new people going into foreclosures. It’s people that were previously in it. But awesome, that was very helpful. So far on the lending/foreclosure side, we’re seeing mortgages are better. Not a lot of foreclosures relative to where we are. Let’s move on to Kathy. Kathy, what did you bring to show and tell today?

Kathy:
To my topic was inventory. And I love this topic because it really comes back to the fundamentals of supply and demand. That’s really at the end of the day why so many different markets behave differently. It all comes down to supply and demand. Interest rates are of no issue. In 2009 and ’10 and ’11, interest rates were lower but then there was tons of inventory but no one was buying. So it really comes down to the fundamentals, supply and demand. So when you look at where we were in 2007, there was 3.7 million homes in the inventory. And then today you fast forward and yes, it has gone up. In the beginning of this year there was only 860,000 homes in inventory. So that’s what… I should do my math, but three, a third or even close to a fourth of the amount of inventory at the beginning of this year, it has gone up.
It’s almost doubled. And that can be scary when you see headlines. And please do not get your facts from headlines. You are getting bad advice. It’s only meant to scare you. So just stop looking at headlines please and listen to data because you’ll make bad decisions if you just listen to that. So where we are, yes, inventory’s gone up dramatically as it should and as it needs to. And if you could just say, “This is a good thing,” then it won’t be so scary. We’re at about 1.3 million in inventory today, but we still need to be closer to 2 million. So we’re still way under. So that’s on the supply side. Every market’s different. Different markets are going to be behaving differently, depends on jobs, population, but overall we still don’t have enough homes out there for the people who need them. So let’s talk about the people.
If you go back to 2007, 2008, that was 14 years ago. Do you think that the US has grown in population since then? Well the answer is yes, it absolutely has. There was about 300 million people in 2008. Today, fast forward, it’s 332 million. That’s almost 30 million more people. So how many people live in a home? 2, 3, 4? You got to have homes for these people as the population grows. So again, you fast forward from then till now, you have right now less than half the supply of what we had then. But you’ve got 30 million more people. So just throw everything else out the window and just look at that. Supply and demand. People need a place to live. They’re not investing like a stock. They want a roof for their family.
So then on top of that, let’s look at the generations and the demographics between then and now. And we know that millennials are the largest generation today. I talk about them all the time. I love you guys. 1981 to 1996 is generally what we consider millennials. There’s 82 million of them. That’s a lot. That’s a lot. There was only 65 million or so Gen Xers. So again, you go back 14 years and the oldest of the millennials were 27 years old. So this massive group of people, they’re not looking to buy homes. They were just trying to figure out what happened to their world. And as the Gen Xers that were the home buying age.
So here we had all this supply flooded the market with way too much construction without the demand that the youngsters hadn’t grown up yet. And there was all this talk about, “Oh, millennials are going to never buy houses.” Well they were 27 and the largest group of them were like 16. So it was just misinformation, bad headlines, ignore the headlines. And just know that today we have the largest group of people ever who are now at home buying household formation age and the inventory’s not there for them.
So it’s really a crisis, but it’s not the crisis that people are talking about in the headlines. It’s not a housing crash, it’s a housing inventory crash where we didn’t prepare well and preparation would’ve been helping builders build. And of course I’m going to say that because we’re in the development world and we would love some help because what’s needed is more supply, more affordable for sure. And it’s just not there. If you go to the supply. And what happened since 2008 that we were building, we were starting 1.6 million homes in 2002, 2003, 2004. 2005 was 1.7. We were just starting all these new homes when the buyers weren’t there, it was silly. So then when the market just crashed, then from 2008 to 2015, it was 400,000 a year starts down from 1.7.
So again, a huge correction and bringing on new supply just when these millennials were growing up and ready to start homes. So we did not bring on new supply. Just this last year we got a little closer, 1.1 million in new homes, but not enough to meet this demand. And there’s not a lot of lot supply either. When you go online and search new homes. It’s kind of scary because it says there’s 10 month supply out there. And that’s what a lot of people are using to say we’re oversupplied. And what they’re not looking at is the fact that there’s really only one month supply of new homes available because those are the completed homes that can actually be sold. The rest are seven million in some stage of construction, which has been delayed and delayed and delayed and delayed. And then you’ve got two and a half months supply that hasn’t even started. So that 10 month supply number is not what you think it is. And yet a lot of people are using that as a headline to say that we’re oversupplied. We’re just not.

Dave:
Wow. You just dropped so much knowledge. And that’s an incredible amount of data for everyone just to take in. And obviously that’s hugely important. It’s just the basic supply and demand. And if there’s more demand than supply, that will definitely at least put a backstop on some of the slide that we’re seeing. Even if you think the housing market is going down. Jamil, I mean that’s sort of dovetails with what you were saying before, right? About inventory in Phoenix.

Jamil:
Yeah, I apologize, guys. I thought I was doing inventory. So I literally have the exact same research and data that Kathy has.

Dave:
Just tell us again.

Kathy:
Let’s hear it, man.

Dave:
Let’s make sure it really sinks in with everyone.

Kathy:
We’re like twins.

Jamil:
Well, you know what, I love it. But they do marry each other very well because construction starts, that tells us sentiment. That tells us how confident builders feel about the housing market and where they think they’re going to be in a profitable situation. So when you’re looking at construction supply, I like to look at it from a micro perspective. So just looking at Phoenix for example, looking back at 2006, we were issuing 5,000 building permits a month. And that tells you where the builders were. That tells you where they thought the housing market was going. That tells you what they were thinking demand was coming from. And obviously it was coming from a lot of speculation. There was not the population, there was not the demand that truly was there to absorb all of that inventory.
Now you look at Q1 at 2022, and on a micro level, again, here in Phoenix, Arizona, they’re issuing two point 5000. So 2500 building permits a month. That’s half. That’s half of what it was back in 2006 and in the peak. And when you look at it nationally, in 2005, we had 1.7 million housing starts. 1.7 million as compared to right now in 2022, where we’re at 1.1 and that’s up from 400 to 600,000 housing starts that you had leading up to this ramp up that builders just actually started to increase their construction. So when you’re looking at it from construction starts and construction supply, we’re not there. We are so dramatically different from what led up to the 2008 crash to what we are experiencing right now in 2022.

Dave:
All right. So far we’ve heard that mortgages are better, foreclosures are way better, inventory is lower, and construction has just been very slow over the last decade or so. So the total housing supply is probably way lower than it was in 2008. Henry, what did you bring for us? Round it out. Is there any ways we’re similar to 2008 or what do you got?

Henry:
Not in this category. I’m talking about appreciation and growth rates. So I mean we’re talking about a huge recession in 2008 where values of homes dropped 20% or more in some markets and they dropped so rapidly that… When we were talking about crash earlier, you asked us was this a crash or was this a correction? To me, crash means things are dropping so fast that no one’s going to buy because who wants to buy while they’re falling? They’re going to wait until the bottom. That’s not what we’re seeing right now.
And so if we’re comparing appreciation and growth rates from 2008 to now to try to see if we’re in a similar boat, I mean absolutely not. We’re still seeing values increase. Even through this slowdown values are increasing anywhere between 2 and 6% in certain markets month-over-month. It’s crazy. And so it’s because you have to look at, everybody’s kind of touched on it, but the things that drove the housing market crash in 2008 don’t apply here.
And I know we as people human nature, we naturally want to compare things and we want to use history as a teacher so that we can put ourselves in better positions for future decisions. But this is completely different. Global pandemic kind of started this, which caused money to flood the market and people had more money and then all of a sudden you didn’t have to be physically tied to your location to do work anymore. And so people were like, “Let’s move.” And everybody was moving and they had all this money.
And so before the banks were lending money to people who couldn’t afford homes or couldn’t afford the expense of the kinds of homes they were buying, which caused a huge problem. But that’s not what happened during 2020, 2021 when people were, especially 2021, when people were bidding up on houses and removing contingencies. You did see houses sell for 20, 30, 40, 50 grand over asking price, but not all of those houses were appraising for over that asking price. People just had the money to pay the difference. That’s not a crash. That’s people saying what they’re willing to pay for. That’s what the housing market is.
People decide what they’re willing to pay for homes and they were saying, “I think this house is worth more than what it’s listed for to me.” And so no, you just can’t compare the two. And so as a appreciate… There was no appreciation in 2008. I think one quarter things dropped 12%. That’s insane as far as a price drop goes in a quarter. And here we’re still seeing prices rise. If you look at the data for July, 2022, you’ve got the median home price grew by 16.6%. And you said earlier in the show, we talked about sellers.
Sellers are still getting what they’re asking for. You said it’s at about 100% that people are still getting what they’re asking for. And so if the median home price is growing and sellers are still getting what they’re asking for, that means values are increasing. And so no, this is a completely different correction. I don’t think it’s a crash. I don’t know that it will crash. But what I do know is that the factors of this are so far different than what we saw in 2008 that we really don’t know what’s going to happen. Jamil’s right, it’s a standoff and we are just, we’re having to take our time and try to pick the best entries we can based on our financial conditions.
And I think that’s what buyers are starting to do too. The ones that are buying are saying, “Hey, I don’t know what next year’s going to bring. I just know that I think it’s the best time for me to try to get in and own something.” And so follow the fundamentals of investing if you’re an investor and that is you try to buy at a certain percentage under market value to give you some cushion. But, man nothing, this 2022 correction is just night and day different than what happened in 2008. We’re still seeing appreciation across the table.

James:
The only thing I want to add to this is I agree with everybody, it is totally different market. The foreclosures, the appreciation’s different, but the only thing I have seen a similarity in is the buyer sentiment right now. Like, when we were listing and selling homes in 2008, there was just as many bodies out there and it was the same type of buyer. They’re opportunistic, can they get a good deal on something? And the buyer sentiment is very, very similar. And until that turns, that’s where we’re going to see… That has to change for the market to actually start getting growth back in. But people are buying, I mean, I’m a buyer, my sentiment’s changed, but I still contracted $16 million in real estate last month for myself. We’re buying apartments, we’re buying development, we’re buying fits and flip. We’re still contracting, but you’re just being cautious and then that… But the sentiment is very, very similar.

Dave:
Well, James, one of the questions I wanted to ask was what are some of the lessons for those of you who were investing in 2008, what are some of the lessons that you learned? I’m curious, can you help us understand what changed buyer sentiment in 2008? How did growth start coming back?

James:
Well, growth started coming… It was a very steady… I mean, part of the growth started with the government. They offered that first time home buyer tax credit and it was just kind of this building block through. But I felt like the sledge hammer came through in 2008, which this is not that. And so it’s going to be a different turn too in the sentiment. I think it’s just going to be time. And then also what will change is the unknown. We have the Fed jumping around saying, “Hey, we don’t know what’s going on.” I mean, soon as the Fed changes its message going to, I think then once they give us a stable answer and that this is what they think and here’s the actual plan, not just we’re trying, then the sentiment will start to go.
Everyone’s just kind of freaking out. But it is definitely making for some good buys though. Again, we contract contracted 80-unit building. I haven’t been able buy an 80-unit building in Seattle in three years because the hedge funds are buying them all. And so the settlements, and I sound little… I’m definitely cautious, but I’m buying and being cautious. And I think that’s who’s there. The real buyers out there looking at your listings, the real investors out there looking. Yes, they’re cautious. They should be. And at the end of the day, it’s probably not going to change until the Fed gives us more consistency and everyone feels safer.

Dave:
Yeah, that’s a very good point. I totally agree. I think that the Fed is really the big question right now. And until we get some stability there, it’s just a lot of uncertainty. Kathy, you were around in 2008. What were your major lessons that you learned?

Kathy:
Oh, so many. So many. The big one was I didn’t listen to my own advice that I was giving everybody else. And so we did really well on our cash flow properties, but we took a really hard hit on a couple of properties that really just didn’t make sense and there was no reason why we should’ve bought them. We had construction properties and those would’ve been fine, but they were short term notes. And when it came to refi out of the construction loan, there were no lenders left. Nobody would lend to us at that point, which is kind of hard to imagine, but that’s how it was. Banks were failing left and right. So we were already past 10 loans at the time. Before that you could get unlimited loans and then suddenly it was limited to 10. If you were over that you were at a luck. So we had to hand those new construction properties back to the seller and we lost all our money on that.
We also bought in Boise, which at the time wasn’t ready. It wasn’t where it is today. And there was only like two major employers, and that was really tough. We couldn’t get those properties rented. So I’ve learned since to just stick with what I know, which is be in markets that are really well diversified with lots of different kinds of employers. That’s really helpful in a market that’s slowing down. You could see job losses and a slowing economy, but there would be a diversification of employer. So that’s super important. All of our Texas properties fared well. They did amazing during that downturn. Rents went up. Over time, values went up. So had I just stuck with what I was telling people and just stayed in diversified markets where they cash flow, it would’ve been fine.

Dave:
So just stay in your lane. That’s good advice.

Kathy:
Stay in your lane.

Dave:
All right, Jamil, I know you’ve talked pretty openly about taking some pretty big lumps in 2008. What did you learn from 2008 that you’re applying to your strategy now?

Jamil:
Well, it’s funny. Kathy and I, I know we’re kindred spirits because we have extremely similar thought processes on how to survive and thrive in today’s situation. So my biggest downfall in 2008 was A) getting outside of my core competencies and my investing strategy. I went from wholesaler to multi-family development and I got creamed because I was over leveraged because I was counting on lenders to take me out of deals.
When you’re accounting on a third party to get you out of a situation, regardless of what that situation is, you have no control, because that person can change their parameters, that person can change their mind, that institution can change their parameters, that institution can change their mind. Things can absolutely get away from you if you have the survival of your business model dependent on a third party. And so for me, the thing that I learned the most was I have to be in control. And in wholesale, I get to be in control.
And so the thing that… And I almost made the mistake again, we all heard that episode where I was so excited to be contracting a 12 and a half million dollar multi-family building. And I had an opportunity to wholesale that building and make a great profit. But what did I do? I did the same thing I did in 2008 and I decided I’m going to puff my chest out and I’m going to get out of my lane and I’m going to roll the dice at being a multi-family investor again. And what happens? Half a million dollars lost in earnest money. And forgetting that if I put my destiny, if I put my financial future in the hands of a third party, I could absolutely get creamed.
And so moving forward, my strategy will always be one that I can control. Stay in my lane with respect to what I know, right? Wholesaling is a safe way to real estate invest and also stay away from leverage.

Dave:
All right. Very good advice and some painful lessons I think all around. Henry, were you investing in 2008?

Henry:
I was not. I was not.

Dave:
I mean, I turned 21 in 2008, so I was just… You can imagine. So I was not investing at the time. But I guess I will say that I graduated college around that and learned a similar lesson to Jamil, just trying to take control of your own life, because it’s very difficult to get a job in 2009 and sort of inspired me to get into real estate investing because I wasn’t able to find employment in the way that I wanted and just decided to take things into my own hand.

Henry:
So to answer your question, I was not in real estate as an investor in 2008, but I was in real estate as a homeowner because I had been working at my new job out of college for a year or two. And I then decided I was going to be a homeowner and I bought a condo in 2007 in Virginia Beach, Virginia.

Dave:
Okay, how’d that do?

Henry:
So shortly after I bought it and everything went crazy, this was a new condominium complex at that. So they were still building new buildings and selling new units. And so by 2008 they were selling brand new units for less than what I paid for mine. And then I was looking to move to where I am now in Arkansas and I couldn’t sell it obviously because why would they buy mine when they could buy a brand new one for less? And so I actually got hit and had to short sale my property. So I was in real estate, I just wasn’t at it as an investor and I got burned.

Dave:
Man. Well good for all four of you taking lumps and getting back on the horse. It takes some guts for sure. How long did it take you to buy another house after that, Henry? Were you scorned for a while?

Henry:
Yeah. I mean it was on my record for the seven years and so I didn’t buy anything again until, gosh, 2015.

Dave:
And now look at you, buying houses left and right.

Henry:
Absolutely, buddy. Raking them in.

James:
I do think we’re going to see a rapid increase in short sales. I know I’ve already prepped for my business to start facilitating them. So it’ll be interesting to see if those come back.

Dave:
Like as an opportunity, you’re preparing your business to buy them?

James:
Yeah. In 2008 to ’10, we actually probably closed like 600 short sales as a facilitation. Because we were a fee business, we were just trying to make money so we would negotiate for brokers and investors and write offers ourselves. But it’s just like that with that, the utility stat, people can’t keep up the bills. Even though people have great interest rates, a lot of buyers stretch themselves when they bought. And so I do think there is going to be a gap of people where they paid a high price, it’s an affordable payment, but they can’t keep up with the inflation in the economy and they’re just going to want to go.
Also, a lot of people bought homes they didn’t really want, but their balances might be too high. Nowadays, America likes to file bankruptcy, so they just be like, “Hey, move on to the next thing.” That’s the scary part about America and what could happen with inventory.

Dave:
Wow. All right, so thank you all. This has been really insightful. Basically, I guess if I could sum it up, I think we’re all sort of in agreement that we’re heading towards some sort of correction, perhaps a standoff, but very different housing market from 2008. And this is just my opinion. I think all the stuff that we talked about sort of puts a backstop on the declines that we’re seeing. The housing market, it’s starting to slide. It could go negative on a national level, but I think the odds, personally, I just think the odds of seeing housing prices decline anywhere near what they did in 2008 is a relatively low probability. Sounds like you guys all agree.

Kathy:
I just want to say I’m stoked. I haven’t been as excited for a long time. We haven’t been able to find inventory and right now there’s this massive need for rental property, massive need, and all this sudden we’re getting discounts on houses. So I’m all in. We’re going. I’m starting a rental fund.

Jamil:
Bye, bye, bye.

James:
I like it.

Dave:
All right. Thank you all so much for listening to this episode of On The Market. We would really appreciate it, all of you, if you like this episode or you just love On The Market or any of our esteemed panelists to please give us a review on either Spotify or Apple or give us a thumbs up on YouTube. It makes a huge difference for us. We want all five stars as Henry is pointing out. So please do us a favor, throw us a review if you this show and we’ll see y’all next time.
On The Market is created by me, Dave Meyer and Kaylin Bennett. Produced by Kaylin Bennett, editing by Joel Ascarza and Onyx Media. Copywriting by Nate Fontrau. And a very special thanks to the entire Bigger Pockets team. Content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.