Jaret Seiberg, housing policy analyst at TD Cowen Washington Research Group, joins ‘The Exchange’ to discuss Fannie Mae and Freddie Mac reform, lowering home borrowing costs, and more.

Ron Shaich built two unicorns in the food industry – Panera and Au Bon Pain. His life and new book, Know What Matters, offers 7 lessons that can help entrepreneurs develop their own lean unicorns.

1. Start with Passion.

Entrepreneurs need passion because passion fosters persistence. Shaich found his in the fast-casual food industry. His first job was in the cookie industry and his first venture was a Boston cookie shop that he started in 1981 when he was 28 years old. When he realized that few people buy cookies before noon, he pivoted and became a licensee of Au Bon Pain, a 3-store French bread chain. When he realized that he could improve the management of Au Bon Pain, he merged with the licensor, got 60% of the combined entity, and built Au Bon Pain into a national chain of 250 stores. He then acquired the St. Louis Bread Company and used its business model to create and build Panera Bread
PNRA
into a giant with annual sales exceeding $5 billion. Find your passion. Pursue your passion.

2. Get Skills.

Passion is good but not enough. You need skills. By graduating from Harvard Business School and working in the cookie industry before starting his own venture, Shaich was well prepared to start his own cookie venture. He used his business skills to license products and expand his offering, merging with the licensor who could benefit from better management, and building the merged entity, Au Bon Pain, into a national chain. He then used acquisition skills to buy and build Panera, Shaich also demonstrated the skills to find and implement the growth strategy in an emerging trend where few succeed.

3. Find your Emerging Trend.

Billion-dollar entrepreneurs, from Sam Walton to Brian Chesky and Joe Martin, mainly started in emerging industries. The fast-casual food industry started in the early 1990s and boomed in the 2000s. Shaich entered the emerging trend when Au Bon Pain bought the St. Louis Bread Company in 1993, became Panera in 1997 and expanded. As Shaich notes, “the job of leadership is to figure out where the world is going and make sure your organization is there.” Jump on the right emerging trends.

4. Finance for Control.

Shaich financed and built Panera with control. When he merged his cookie company with Au Bon Pain, he kept 60% of the combined entity. When he bought the St. Louis Bread Company, he paid $23 million and stayed in control. That is one reason he was able to mold Panera in his vision and keep the lion’s share of the wealth created.

5. Grow with Cash Flow.

Shaich notes that the managers of Au Bon Pain, when he was a licensee of the company, did not always bill him for the license fee because they were “out of control.” Shaich obviously did not make that mistake. By monitoring his growth, he built Panera and controlled it.

6. Exit at the Right Time with the Right Strategy.

Know how to exit and when. Shaich considered selling Panera to McDonald’s and Starbucks
SBUX
. Neither worked out. McDonald’s was on an acquisition spree, but many of its acquisitions did not work out or did not fit, and were divested. Shaich made the right decision in not selling to McDonald’s. Shaich also discusses the problems with going public before the venture is ready. In their search for returns, VCs push their ventures to go public as soon as possible, especially if the stock market is hot. That is one reason why many ventures that are taken public prematurely often end up failing as SPACs have proved. Managing a failing venture with public investors is not simple – but VCs are fine with it since they sell their interests as soon as they can.

7. Build the Right Team.

Shaich is always on the lookout for talented individuals whose objectives align with his own. When activist investor Noah Elbogen was on Panera’s board, disagreements arose between Shaich and Elbogen. However, when Elbogen launched his own investment venture, Shaich recognized his talent and invited him to join forces. It’s all about pairing the right talent with the perfect role.

MY TAKE: Shaich follows many of the fundamental guiding principles of billion-dollar entrepreneurs. Learn these common rules and apply them to your business to build your lean unicorn.

Home equity sharing agreements, which allow property owners to get a lump sum of cash in exchange for a portion of their home’s future appreciation or value, are moving from a niche product to a more popular option for funding a variety of needs. 

In July, DBRS Morningstar, the fourth-biggest credit ratings agency in the world, became the first to develop a methodology for assessing home equity investment securitizations. That will allow securitized notes backed by home equity sharing agreements to become more mainstream. 

About two years ago, finance company Redwood Trust announced a deal with fintech company Point, which became the first securitization solely backed by home equity sharing agreements. But the first rated securitization of notes backed by home equity investments came this fall, with $224 million in notes backed by home equity agreements originated by Unlock Technologies and issued by Saluda Grade. The transaction shows heightened confidence in the asset class as an option for investors.  

Home equity sharing agreements are a way for homeowners to access some of the equity in their home without taking on debt or making monthly payments. But are they a good option for investors looking to leverage their existing equity to expand their portfolio of properties? And do these speculative investments pose a threat to the market in the long term?

What is Home Equity Investment?

Home equity investments, often known as shared equity or shared appreciation agreements, provide homeowners with access to cash in exchange for a portion of their home’s future value or future appreciation above a starting point. These contracts aren’t loans, which means they often come with more lenient credit and income requirements, if any, and aren’t impacted by today’s high-interest rate environment. Homeowners can use the cash to make renovations, pay off high-interest debt, or even buy a second home, all without a monthly loan payment. 

However, the agreements are secured by your property and typically come with repayment terms ranging from 10 to 30 years. During that time, you’ll usually have the option to repurchase the company’s share of your home equity for more money than you received initially, or you can pay the company their share when you refinance or sell your home. 

If the term ends and you don’t have the money for repayment, some contracts may force a sale. Home equity agreements are also nonstandard contracts, unlike home loans, and may have burdensome stipulations for renovations or other terms that may be difficult to comprehend. 

Additionally, most agreements come with closing costs and an origination fee, plus a share of your home’s future appreciation or value that equates to a high APR. For example, Unlock allows you to access 10% of your home’s current value in exchange for 20% of your home’s future value. 

Some companies, including Unlock and Splitero, have a cap that protects homeowners from owing too much in the event of rapid appreciation. Splitero uses a shared appreciation model, which means the company shares your losses in the event of depreciation as well. 

“In the event your home or property value drops significantly, your investment repurchase amount to Splitero may be less than your initial investment,” says Michael Gifford, CEO and co-founder of Splitero, in a conversation with BiggerPockets. However, the company calculates appreciation from a starting point that is less than the appraised value to account for the risk. 

Is Home Equity Investment a Good Option for Real Estate Investors?

To ensure that a home equity sharing agreement is a favorable way to fund an investment property, you’ll want to ensure that the property would generate returns that exceed the cost of accessing your equity. You’d also want to compare your net revenue over the term with the expected net revenue you’d get financing the property with a traditional mortgage, home equity loan or HELOC, hard money loan, or alternative financing arrangement. 

But entering into a home equity investment agreement isn’t the same as borrowing, and it comes with other benefits, which means it’s difficult to compare apples to apples with traditional financing options.

Explains Gifford: “Because it’s not a loan, there are no additional monthly payments affected by the rising interest rates or new debt associated with a Splitero HEI. This means it won’t add to your debt obligations or affect your debt-to-income ratio. Splitero HEIs also don’t have income requirements to qualify, which means if your wealth or income is tied up in a property, you can still access it.” 

Splitero accommodates both owner-occupied and non-owner-occupied properties. 

In other words, it’s an option for investors who can’t qualify for other types of financing. And if not having a monthly payment allows you to use your cash flow to grow your rental property portfolio faster, you could potentially see earnings well above what you owe the originator of the agreement. But you’ll need to crunch the numbers and, given the complexity of these nonstandard contracts, you’ll likely want input from an attorney. 

It’s also important to understand that while most companies offer calculators you can use to estimate the price to repurchase your share, these tools are based on assumptions about the market that may not hold true.  

The Risk of Home Equity Investment Securities as a Mainstream Asset Class

Securitization of home mortgages began in the 1970s. Most mortgage-backed securities have long been considered relatively safe investments since mortgages are collateralized by real property, and government-sponsored mortgage companies like Fannie Mae and Freddie Mac guarantee payments in much of the secondary mortgage market.

However, home equity investment agreements are typically secondary liens. If the homeowner defaults on their mortgage and the home is sold in foreclosure, the home equity sharing company would only collect after the primary mortgage lender is paid. 

Therefore, shared equity securities may be a high-risk, high-reward investment. While real estate tends to appreciate in the long term, the housing boom and subsequent crash of 2007-2008 revealed how typical trends can go awry. Research suggests that housing speculation was partly to blame for the economic downturn, coupled with the packaging of low-quality mortgages, including subprime loans, into securities. 

DBRS Morningstar rated the Class A and B notes included in the Unlock HEA Trust 2023-1 as BBB (low) and BB (low), which means that analysis shows the notes to be of “adequate credit quality” and “speculative, non-investment-grade quality,” respectively. 

DBRS Morningstar’s rating system may help institutional investors view the asset class as reliable, and it’s possible that the government-backed mortgage companies could go as far as becoming players themselves. Under current regulations, Fannie Mae and Freddie Mac can’t buy mortgages constrained by private transfer fee covenants, which are used to enforce home equity investment agreements, but the Federal Housing Finance Agency (FHFA) is considering permanently removing restrictions on shared equity loans. 

The move is intended to support affordable housing by allowing shared equity loans administered by land trusts, governments, and nonprofits to be securitized. These programs typically provide down payment assistance to low-income homebuyers in exchange for a share of the home’s future appreciation or value. 

The FHFA not only provided a waiver through 2024 that allows Fannie Mae and Freddie Mac to buy shared equity loans but also removed income limits. The agency is requesting comments on whether to make the waiver permanent for the banks it regulates and whether the income limits should be reinstated. Looser standards could contribute to the rising popularity of home equity investment agreements, but that can also mean speculative danger.

But with the average homeowner in the U.S. now sitting on more than $274,000 in home equity, Gifford doesn’t foresee problems for Splitero, even in an economic downturn, adding: “It would take a never-before-seen, catastrophic event of greater than 50% declines for the average homeowner to be underwater like we saw during the GFC. After such a correction, most homeowners will still have equity in their homes and are unlikely to sell those properties at that time. It is far more likely they will hold on and ride the value of their home back to higher price levels.” 

The Bottom Line

Home equity investments may be evolving from a niche product to a mainstream financial tool for property owners. For some, the agreements may be a favorable alternative to taking on new debt. The first-rated securitization of equity-sharing agreements could increase confidence in the validity of the asset class, promoting the growth of home equity investment providers and leading to new, competitive product options for homeowners.

However, because home equity sharing agreements are often costly options for property owners looking to leverage their home equity, caution is advised. Furthermore, the economic consequences of lower-quality securities should not be overlooked. 

Get the Best Funding

Quickly find and compare investor-friendly lenders who specialize in your unique investing strategy. It’s fast, free, and easier than ever!

What’s got 38 trillion microorganisms and almost as many products to tame it? The microbiome.

It’s boom time for gut health. Or products aimed at the gut anyway, which is said to affect the immune system, inflammation and even our moods. If some of the claims these products make seem dubious, well, that’s by design says Seed Health co-founder (and co-CEO) Ara Katz. Her company aims to disrupt the $50 billion global probiotics market with their first consumer product, the DS-01 Daily Synbiotic, which is clinically validated and—in layman’s terms—makes you poop better.

Seed’s probiotic works on the microbiome, a community of 38 trillion microorganisms that live in and on the body, and perform critical functions like digesting food and synthesizing essential nutrients. Unlike other probiotics, this one arrives in a glass jar so chic you might actually leave it out on the counter. But the product, developed with co-founder Raja Dhir, is also something of a Trojan Horse. In 2021, Katz led a $40 million, Series A round for the company, which includes an environmental research arm called SeedLabs, which studies how to use microbes to tackle the impacts of climate change. (Gwyneth Paltrow, Karlie Kloss and Cameron Diaz are investors; Founders Fund, which has backed SpaceX and Stripe, also participated.) SeedLabs’s early work includes creating a probiotic for honeybees and sending microbes into space.

In a previous life, Katz was the co-founder and CMO of Spring—a mobile commerce platform backed by LVMH. (Spring helped launch ApplePay on the iPhone.) But a personal loss inspired her to pivot. Over breakfast for the new Forbes series “Cereal Entrepreneur,” Katz talks venture capital’s love-hate affair with the microbiome, working with Bob Dylan, and what she learned from her father-in-law, CAA founder (and one-time Disney CEO) Mike Ovitz.

MICKEY RAPKIN: What are we eating today?

ARA KATZ: It’s oatmeal with flax and wild blueberries. And a lot of cinnamon and fresh ginger. I make it for my kids all the time. (laughs) It’s my microbiome breakfast.

Planting A Seed

RAPKIN: Let’s start with Seed. Did the VCs you were pitching understand the microbiome? Or did their eyes glaze over?

KATZ: It was actually worse—contextually. You had this surge of capital. I always feel venture capital is a big immune response. It’s like there’s an infection and everyone goes to it. Then all of these companies didn’t end up yielding anything. We can go into why we think that happened. You almost didn’t want to say “microbiome.” Then it comes back. Basically, every time there’s a scientific discovery in microbiome that shows you can lose weight or look younger the field blows up again. Which is maybe human nature. But we actually had two decks.

ERIC RYAN: For different investors. Smart.

KATZ: We had to articulate things very differently when you’re speaking to the life science-tech investors and the CPG world.

RYAN: What ultimately sold investors on the product?

KATZ: All of these health and wellness brands were telling people that they do all these things—things that you would never be able to say on a package in Europe. Which is a big part of how I got into this. We’re working with scientists that never put their name on a consumer business before. When people think science they think cold, clinical, complex. They think pharma. We had that kind of schism. Who doesn’t want brands that are beautiful? Who doesn’t want that life on Instagram? It was really about reconciling those two worlds. There was an opportunity to re-brand science.

RYAN: Re-branding science. I love that. There is no greater marketing challenge than translating complex science into a simple expression for a package or Instagram.

RAPKIN: It’s almost like the beautiful, glass package was the Trojan horse so you could go deep on the R&D front. Is that how you see it?

KATZ: The world—particularly in business—likes to look at your LinkedIn and decide who you are. Which is a terrifying and dangerous proposition. Fundraising is like storytelling. What would I uniquely be able to take a check for? Where someone sitting in a partner meeting would be like, “That person gets money for this. That makes sense.” The pitch was primarily around DTC probiotics and even a subscription. Certainly there was some bigger vision to it but primarily it was: How are we going to create a differentiated product? The evangelism for the category was way ahead of the evidence. How could we package the movie differently?

RAPKIN: With the probiotic and consumers, is it as simple as telling people, “Hey, you’re gonna poop better?”

KATZ: You have to meet people where they are. Not to get into more gendered attributes of products, but I remember years ago we did a partnership with a media platform that was very focused on sports bros. And it was like, “Best shit of your life.” That’s what converted and that’s what people loved. But I can tell you all the biohackers and a lot of the practitioners in healthcare—both allopathic and integrated functional—they want to talk about gut barrier integrity, they want to talk about NRF2 expression. The best brands in the world provide 1,000 doorways for people to walk through.

A Personal Journey

RYAN: Entrepreneurs always talk about “moving fast and breaking things.” Has that been your path?

KATZ: Absolutely. I come from bro-tech world. Almost everything I did until Seed was move fast and figure it out while you’re going. Building digital products­—there’s user testing. But you really do push something out into the world and kind of don’t know. When I launched Spring we were breaking things with 420 of the world’s best brands who are not used to moving fast and breaking things.

RAPKIN: Spring was back by LVMH. You helped launch ApplePay on the iPhone. Then you left the company. Of that moment you once said, “As a woman in tech, it wasn’t cool to resign from a company.” Would you unpack that for us? Did you feel you were disappointing investors? The team?

KATZ: Resigning as an employee is one thing. Resigning when you’re a co-founder—when you are one of the faces of something, and you were named on all of these lists? I actually have a very different experience than a lot of women in tech. I’ve had great mentorship and support from so many of the men in my life. I did feel very deeply that I was letting my team down. A lot of us go through these moments of our life where work is entangled in our identity in a way we’re not aware of. Then we go through a lot of work and growing up to disentangle our identity—or just to redefine what the work means, which is more my story, and understand what it looked like to prioritize life and create a better source of alignment. The most truthful version of the letdown—it was probably feeling that I had let myself down. It was a heavy moment. I think what’s missing in your question is that it was catalyzed by a miscarriage.

RAPKIN: I had read that. But I wasn’t sure if you’d want to talk about it today.

KATZ: I talk about it very openly. I think they’re biological miracles, which is maybe a different podcast. That life wasn’t viable. And the life I was living is not viable. I don’t want to live on planes. At a certain part in your career you realize what you’re capable of building and creating. Then you have to say, Where am I going to point this? It happened very quickly and was a beautiful, pivotal moment.

RYAN: What a beautiful thought. Thank you for sharing that.

Like a Rolling Stone

RAPKIN: The through-line in your work really is creating. Before Spring, you worked in film, producing an adaption of Howard Zinn’s “The People’s History of the United States.” Bob Dylan was in it. Do you have a good Bob Dylan story?

KATZ: That book changed my life. It’s the history of our country—not told by the victors and cis white men. It’s one of the most profound moments where you realize that your reality, and in this case our history of this country, is perceived by who tells it. Chris Moore—if anyone remembers Project Greenlight—he had the option with Matt Damon and Ben Affleck. Chris asked me to come produce it with him. And it was a beautiful experience. But Bob Dylan—he’s impossible to schedule with. It was unclear when he was going to show up. That was weeks in a row where it was like, He’s coming. No, he’s not coming. He’s coming! No, he’s not coming. I would say that I did not expect him to be so particular. He has his hat in a very specific way, the lighting has to be very specific. But at the same time, he’s Bob Dylan. And he’s earned it.

RAPKIN: Your parents were both psychologists. When did you realize you had the entrepreneurial bug?

KATZ: I grew up probably lower middle class. I had a wonderful childhood in so many ways, and I certainly did not want for food or clothing. But I definitely grew up with this sense that a lot of kids around me had a lot more. I also saw that my parents had no financial acuity whatsoever. But I had hustle. I remember where I placed my lemonade-and-brownie stand on Martha’s Vineyard one summer. It was very strategic. It was at the end of the bike path and right where the beach access was. I just remember at eight years old being like, “That’s a more strategic place.”

RAPKIN: You’re now married to a serial entrepreneur, Chris Ovitz. What kind of challenges does that present? When you’re a founder, it can be all consuming.

KATZ: Interestingly, we’ve ridden different waves at different moments. Somehow our intensity has lined up pretty well. By the way, he’s started and sold three companies since I started Seed. Me and my co-founder are always like, “What are we doing wrong?”

Exit Strategy

RAPKIN: What is your off-ramp then? Do you hope to sell to, I don’t know, Pfizer? What’s the plan?

KATZ: I know what the plan is not. Right now I don’t think the plan is to go public—with Seed Health at least. The public markets don’t really understand the microbiome. Ultimately, it really comes down to distribution for us. There is a moment where you have to decide, Do I need to take more dilutive capital to go try and build the infrastructure to get what we’ve built out to more of the world? Or do I go partner with somebody who basically can turn that on overnight? We’ve been quietly building for so long. We’re such an iceberg. No one is like, Oh God, you guys have a great bioinformatics team. They’re like, “I love your Instagram.”

RAPKIN: I see that. SeedLabs worked on a probiotic to help save coral reefs. That’s the part of Seed’s story that we don’t often hear about.

KATZ: We also sent microbes to space with NASA and the MIT Media Lab to look at how microbes could degrade—and then upcycle—plastic in space. The team got to experience a launch and the launch getting delayed. Actually, it was very much like working with Bob Dylan. It was like, You’re launching. No, you’re not.

RYAN: (laughs) Bob Dylan in space.

KATZ: I got an email from my son’s science teacher yesterday. He’s in second grade. And she said, “I just want you to know that we’ve been learning about this recent astronaut who went up to space, Francisco Rubio, and your company was featured in a news clip. And Pax told me about the microbes that you’re sending up to space to degrade plastic and create new biomaterials.” And I’m like, My son told you that? But yeah, that one was very exciting because it really is the embodiment of everything I didn’t put in those first decks when we were raising capital. But it’s something our whole team felt was a really historic moment in our journey.

RAPKIN: Your father-in-law is Mike Ovitz, the founder of CAA. What’s the best advice he ever gave you?

KATZ: I’ll say one funny story and one thing that I take away from it. We were negotiating something and he said, “This is what you do. You sit down with them and you say, Look, this can go one of two ways.” (laughs) I was like, “Michael, I am not in the mafia.” He goes, “I want you to just call them. And you tell them, This is what we’re going to do.” And from that, we raised the whole rest of the round. But it was very much, like, you just tell people what you want to do. Don’t waste time. Tell them exactly what you want. And that’s how you’re going to do it.

RAPKIN: Meaning we want X amount of money and this is what we’re going to do with it?

KATZ: No, these are the terms on which we’re going to take the money. Michael is known for creating the package—packaging the movie. He fundamentally understood that one plus one is three. When you put this actor with this director and this piece, that’s how you create these beautiful constellations of value and also how you get a lot of shit done. That’s how Raja and I have been packaging the movie since day zero.

RYAN: It’s so interesting. Because I always talk about myself as a showrunner—where I create concepts, bring together capital and a team. But I’ve never heard it articulated in that way.

RAPKIN: Coming back to cereal, what gets you out of bed in the morning?

KATZ: Well, literally, I have a seven-year old and an 18-month old. But existentially? I f— love what I do every day. I love the impact we make.

This conversation has been edited and condensed for clarity. In episode four, Vela co-founder Justin Kosmides talked about the luxury e-bike market, his company’s sudden move to Detroit, and why losing a fight with Walmart was the best thing to happen to his business.

Rob:
Welcome to the BiggerPockets Podcast show, 835.

Jamie:
That was definitely one of the predictions that we expected to come in for 2023 and to be a tailwind for demand. But for large city urban areas, they’re still seeing some of those slowest demand growth across the country. And those markets are really highly dependent on international travelers. It’s really still a function of the strength of the dollar and dollar is still really strong. We had expected it to weaken some as we got towards the summer travel season and that didn’t happen.

Rob:
Welcome back, everyone, every week, bringing you stories, how-to’s and the answers you need in order to make smart real estate decisions now in the current market and in the future markets. And today, we are taking over bigger news. So move aside Dave Meyer because it’s me, Rob Abasolo, and my good friend Tony Robinson. Tony, how you doing, man?

Tony:
I’m doing good, Rob. It’s always good when we get to share the mic together, man. Our producers called us the power couple. I’m going to embrace that. I’m going to embrace that title, man. We got a good conversation teed up for today, Rob. We’re talking to none other than Jamie Lane. Jamie’s official title is SVP of Analytics and he’s the chief economist for AirDNA. This guy is just like an encyclopedia of all things Airbnb. So every time we get to chat with him, I totally love it. Rob and I go over, what about those bust rumors? Are they real? How did Jamie’s predictions from when we interviewed him back on episode 712 hold up, and what markets are on track for growth this year?

Rob:
Yeah. We’re also going to be covering how you can stay one step ahead and hack your growth in the ever-changing market. Look, a lot of stuff has changed since he came on the show back in January, and he’s just giving us good insights on really how to look at your overall short-term rental investment. He talked about how investors should be looking at their investments in the long-term, which makes a lot of sense. So even if you’re not in the short-term rental game, I do want to say if you’re a midterm or a long-term rental investor, keep listening to get ahead of how new short-term rental regulations might impact your market. And we’re also going to be talking about Jamie’s predictions for the overall economy or potential recession and everything in between. But before we get into it, we’re going to do a quick tip brought to you by our good friend, Tony Robinson.

Tony:
Oh, we are? Okay. All right. Quick tip number one, head over to biggerpockets.com-

Rob:
I know how it feels.

Tony:
Quick tip number one, head over to biggerpockets.com/tools. You guys will find an Airbnb or short-term calculator that’s there. It’s a free tool to help you figure out how much money your property could earn on Airbnb. And second quick tip, I want you guys all to go to Rob’s upcoming event Host Con. Rob, give them details. Where can they go? How can they find out more about that?

Rob:
Wow. You can go to hostcon.com and it’s October 28th through the 30th. It’s right after BP Con, so I’m going to meet all of you there. And then we’ll migrate over to Houston, Texas to hear from a lot of the people we’ve heard on the podcast, Pace Morby, Avery Carl. Would’ve been Tony, but you’re having a baby. That’s all right. You’ll catch the next one.

Tony:
Yeah. I’ll be there in spirit.

Rob:
You will. You will. All right, well let’s get into it. Jamie Lane, welcome back to the show. Glad to have you.

Jamie:
Thank you so much for having me back.

Rob:
You brought up just right before this that the last time you were on the show was actually Tony and I’s first duo together on the BiggerPockets Podcast.

Jamie:
Yeah. I was so happy that I could be the reason to bring you guys together and now we get to chat again. It’s been, what, nine or 10 months since we chatted last?

Rob:
Yeah.

Tony:
Yeah.

Rob:
That’s crazy. That’s crazy. Well, we know you and it’s great to have you back, but can you tell all the new listeners a little about yourself for those of the listeners that didn’t catch the episode about nine months ago?

Jamie:
Yeah. So I work at AirDNA. We are a short-term rental and data analytics company. I’m the chief economist and SVP of analytics at AirDNA. And it’s my job to dig into the data and help interpret what’s happening in our industry and make sure everyone stays informed on how the industry is performing, how do we expect it to perform going forward so you guys can all plan your next investments, figure out your strategy, and hopefully make good investments going forward.

Rob:
Well, like I said, glad to have you back, man. I think the last time you sat down with us was the start of the year and the Airbnb bust rumors were flying and it was doom and gloom. Sky is falling. You came in and you broke down the data on short-term rental so our listeners could keep their edge and I think we gave a lot of good useful data for everybody. I think the market now is a little different and we’d love to have your insights again. So if it’s cool with you, let’s get into it and sort of talk about the actual general pulse for the short-term market in 2023.

Jamie:
Yeah, so when we talked last and we were calling for a recession in 2023, and I think I was a little bearish on the outlook for the year ahead. We haven’t had a recession. It’s actually held up pretty strong on both the economy and the short-term rental industry. It’s part of the reasons why we actually talk about multiple scenarios when we forecast. So we have our baseline, we have our upside, and downside. And so we had an upside forecast that essentially called for 13% demand growth and it’s ended up about 11%. And our baseline was below that about 9%.
So I’ve actually felt really good of how the years played out. It’s outperformed our expectations. The economy has outperformed our expectations. We’re still at 3.5% Unemployment. We’re adding 150, 200,000 jobs every month. And that’s sort of the key metric for me when I look at the economy is what’s happening in the job market is if people have jobs, they’re going to keep traveling. And that’s what we’ve been seeing. So our outlook did call for some weakness this year. As of the beginning year we were expecting RevPAR, that’s revenue per available rental to be down about 1.5%.
Rates are ADRs up about 1.5% and that implicitly means occupancy is going to be down 3%. And that’s what happened. That essentially has perfectly pegged what the industry has performed, how the industry’s performed through October. So not great given that everyone is earning a little bit less money this year, but not a catastrophic collapse in revenue. Maybe some of the things we’ve been hearing on Twitter these past few months.

Rob:
There was a very viral tweet that was Phoenix and Austin are they’re half down and something like that. I believe you responded to it.

Jamie:
Yeah. Did you guys see that tweet? Did people Tweet it at you?

Tony:
Of course, yeah.

Rob:
Yeah. All the naysayers and haters were so quick to jump on that one.

Tony:
Yeah. We ended up doing a whole YouTube video as a response to that tweet also. So there was a lot of folks that were riled up by that one.

Rob:
Well, let me ask you this, Jamie, because I believe… And refresh me. I mean I don’t expect you to remember exactly what happened back in January, but I thought there was some trend where maybe occupancy was down, but ADR, which is average daily rate was up. Was that what it was back in January.

Jamie:
Yeah. And that’s what we are seeing in January and that’s continued throughout the year. So for the first… And through August. So back up, we break up the US in a lot of different markets. There’s 265 markets for the country and of those 265, 218 of them have seen declining occupancies through August. And essentially everywhere is seeing declines. Nationally, we’re seeing about essentially flat ADR. So no one is really increasing rates, but how that breaks out among the markets is just over half of them are seeing ADR declines or you’re not able to charge as much for the same property this year as you were last year.
You’re getting a little bit less revenue per night and that’s pushing and resulting in weaker RevPAR. At the beginning of January, we’re seeing slightly higher rates. Now rates have clearly gone into the flat to negative realm.

Tony:
Jamie, I want to just touch on something really quickly because there’s a lot of debate not just as real estate investors, but just as people in the United States and really I guess across the globe about what exactly is a recession. I just want to sidebar here quickly because I think it’s an important thing to call out out because you have this consensus idea that a recession is two consecutive quarters of declining GDP, which has happened, but there’s a more… Educate me and the rest of the listeners here, but there’s a more formal education of what an actual recession is. Can you just talk about the nuances? Why are we not already in a recession even though we’ve had two quarters of declining GDP?

Jamie:
Yeah. So that two quarters of declining GDP, that’s like a rule of thumb that people are taught in high school, but it’s not actually how we define recessions. And there’s this whole economic board, the National Bureau of Economic Analysis, and they actually look at the data and decide whether or not we’re a recession or not. It’s mostly PhD economists and the definition gets into that. We have to see broad based economic decline.
What we saw last year with the two consecutive quarters was not a broad-based economic decline. We saw some weird things happening with inventories around the pandemic, and we are at record below unemployment. We are seeing 300,000 new jobs being added every month. We are seeing five, 6% increases in wages each month. We are in no ways in a recession by really any different way you define it.
There are certain aspects of the economy that might’ve been in recession, like manufacturing tech industry saw a really strong pullback and actually saw some layoffs. But in terms of overall economic decline, we weren’t there. And even in the real estate industry and with rising interest rates and sort of a pullback in transactions, we’ve seen quite a few real estate companies go under because of the lack of transactions, but it is in no way sort of a broad base economic decline.

Rob:
Interesting. So relatively, do you have a POV, a point of view on what the next year or two looks like in terms of recession? Do you think it’s looming? Is there something big coming up or do you think we’re just going to kind of, “Tell us everything”? No, I’m just kidding. Do you think we’re going to hold this pace?

Tony:
And, Jamie, if I can just add one piece to that, because the goal of the Fed, what you keep hearing is that they want this “soft landing” where they’re able to tame inflation without causing massive unemployment. But I mean, there’s some things happening. You have student loans that are kicking back in October 1st. There’s the strike that’s going on. There’s potential government shutdown. So with all these things happening, I guess to Rob’s point, do you think that soft landing is even possible still?

Jamie:
Yeah. It’s still possible. It’s still highly likely that we go into recession over the next year. And with what the feds had to do in terms of raising interest rates so high so quickly, and there’s just such a high likelihood that something could break, and then you add on top of that, all those things that you mentioned, the government shut down, which more than likely could happen, and we’re recording here at the end of September, and at the end of the week, the government could shut down.
Now, expectations are that that’s a two or three week shutdown. If it pushes through the end of the year, that could have a meaningful impact and overall economic output. To the short-term rental industry too, if you’ve got a rental in and around a national park, that national park is more than likely going to be shut down, and that could really impact the earnings through fall.
So if you think you’ve got a property in Gatlinburg, and the biggest driver to that market is people going to visit the national park seeing lease change, and that could have an impact on that market. And then resuming student loan payments sort of impacting consumer spending. The UAW strike, actor writer strike impacting specific markets like LA and Atlanta. All these things have both direct impacts to the economy and our industry.

Rob:
Wow. I hadn’t really considered that, but that’s so true because national parks have always felt we’re sort of protected in the sense that… I call them Mother Nature’s Disneyland. You don’t have to market the Smokies. You don’t have to market Joshua Tree. You don’t have to make a billboard for the Grand Canyon. People are going to go by the millions. But yes, if they shut down due to government regulation, that’s going to hurt a lot of hosts.
So maybe that changes some of the POVs on the government shutdown, because I see both sides of it pretty much every single day at this point. Now, that we have a general understanding of where the economy stands, I sort of want to punch in a little bit and talk more on the municipal or even on the state level because we’re seeing a lot of regulations come in. I’m sure you’ve heard about Dallas and New York, all the big bands, and that is definitely shaking up the short-term rental market for a lot of those operators. Which markets are being most impacted by regulations and what impacts are you seeing?

Jamie:
Yeah. It’s funny how that’s now turned into that conversation that you have with your cab driver of when they ask you what you do and I say I analyze the short-term rental industry. They’re like, “Ooh, regulations must be really impacting you guys.” And it’s true. The New York regulation has really brought it into the forefront of essentially a defacto ban on Airbnb as the beginning of the month when it started going into effect. We saw almost an 80% decline in short-term rental listings in New York. And that was one of Airbnb’s biggest markets essentially decimated.
Now, the listings didn’t leave. They’re not off of Airbnb. It’s essentially people moving from a short-term rental strategy to a mid to long-term rental strategy. So they’ve changed their minimum stay requirements from short-term stays to 30 plus stays or longer, which we’ll see how much demand there is to support that strategy for 17,000 listings all moving to long-term stays at once. I suspect that there’s quite a bit of demand to support it, and we see that in a lot of other cities, but that is playing out and we saw it play out or will play out in Dallas.
We’re seeing that change or a part of that change in Atlanta. We’ve seen it in other large cities like Los Angeles, Boston, Chicago, that have put into place pretty onerous laws going after short-term rentals. But on the flip side, there’s also been significant pushback from the host community sort of banning together working with the local municipalities. We saw that in Atlanta essentially getting the ordinance going to effect delayed and delayed, and delayed, and delayed.
We saw there was a lawsuit on the Austin laws back in 2016 that just sort of came to fruition where they overturned the ban on short-term rentals. And I’m distinctly saying that there cannot be a distinction between different kinds of homeowners and how they can use their property.

Rob:
This is a huge one. That was a big one.

Jamie:
That was huge.

Rob:
I saw that that article came out because Austin has been… They’ve never really enforced it, and there were ways to get the permits and everything, but I saw an article, it was back at the beginning of August that said federal court strikes down Austin short-term rental laws and basically called them unconstitutional. And so it’s interesting because it’s like if that’s a federal court striking down an Austin one, I mean, how does that actually affect the rest of the country?

Tony:
You think about Dallas, right? Dallas just effectively banned single family short-term rentals also and now you have this neighboring major city. It’s like how does that impact Dallas short-term rental plan and all these other places?

Rob:
Exactly. Same states.

Tony:
Yeah. But one thing I’m curious, and Rob, I want to get your insights on this too, because what I’ve shared with people is that regulations are coming. It’s a definitive thing. It’s just how is each city and municipality going to choose to regulate short-term rentals? But they are coming. So my focus has always been on investing in true vacation markets where the primary economic driver is vacation and tourism because I feel like there’s a little bit more insulation there. And if you do choose to go into markets that are more residential, call them suburban cities, major metros.
My thought has always been, “If I’m going to go into that market, I need to make sure that either one of two things are true.” Either first, I can still cashflow on this deal as either a midterm or a long-term rental. Or second, it should be a strategy that I can get out of relatively easily, which is arbitrage or co-hosting. Actively, we’re launching three units in Dallas next week through arbitrage, but I’m not worried about those because, A, it’s arbitrage. I can get out of those with breaking the lease and walking away, or B, I can flip them over to midterm and they still make sense.
So Rob, what’s your take on that, man? A lot of people are afraid of regulations. What’s your advice to folks who want to navigate that the right way?

Rob:
Totally. Yeah, I mean there is a lot to cover there. I think most of the time I am trying to find a city or a municipality that has some level of regulations because at least they’ve had the conversation and we know that they’ve already voted on it. And if there’s a process like getting a permit that’s been put in place, I usually feel a lot better than that, better about that than going to a place that’s like, “Well, what is that?” I don’t know. You can just list it. And then one day it gets-

Tony:
[inaudible 00:18:35]

Rob:
Yeah, exactly. Which that’s how it was back when I started in 2017 or whatever. But I have really accidentally stumbled onto the midterm market back during the pandemic because everything shut down and then travel nurses needed to stay at my place in LA. And so I was like, “Yeah, sure, why not?” And then they stayed and I never heard from them. They were mega clean and I made just about as much money as short-terms. And so I fell in love with that from the get-go.
I would say most of the time, you’re going to do yourself a disservice if you’re not trying to actively create a hybrid midterm rental and short-term rental strategy. My personal preference, and again, this isn’t going to work in vacation rental markets like Gatlinburg, but if I could mostly have a midterm rental strategy and fill in the gaps with short-term rentals, oh man, I would do that all day.
Really what it is, it’s mostly a short-term rental and then midterm rentals come in and I have to work around that. So I honestly think that 2023, for any host that’s scared of regulations, they’re coming, but you really do have to actively be working on those contracts with housing companies and relocation specialists and travel agencies, nursing relocation specialists, all that kind of stuff. You want to be working on your rapport with them and your relationships with them so that, yeah, if a regulation hits, you don’t have to shut down your business. You can just pivot straight into midterm rental.

Tony:
Jamie, one last follow-up for me on the regulation piece. As some of these cities become more regulated, what do you think the impact will be on actual property values of short-term rentals in those markets? Do you think that presents an opportunity for short-term rental hosts to get into this game, or is it more of a disadvantage?

Jamie:
Yeah. So there’s actually been a lot of academic research on the impact on property values and what regulation and means for it, and what a lot of it shows is that the option to be able to do short-term rentals is very valuable when you go to resell the home. So if you’re in a neighborhood, let’s say that has an HOA that you vote as your neighborhood to restrict short-term rentals in that neighborhood, you’re going to severely restrict the value of homes in that neighborhood compared to the rest of the market because now future buyers know that they cannot, even if they never even thought about doing short-term rentals, but the fact that they couldn’t now sort of reduces the option value there that they could go and do it in the future. So I think that’s one of the downstream implications of these laws going into effect is that you can overall reduce home values in specific areas of cities and specific neighborhoods with restrictions like that going into place.

Tony:
And Rob, you and I both we’re in the Smokies, we’re in JT and I can’t imagine what would happen to home values in those two cities if they severely limited. The economy, I think would collapse. That would be a forced wave of selling if they really limited short-term rentals in those markets.

Rob:
Big time. Interestingly, there’s so many people in those markets that want the short-term rentals out, but those specific markets, the economy is propped up by the short-term rentals, not just by occupancy taxes, transient taxes, all that stuff, but also the actual employment of the Airbnb Avengers, like pest control pool, maintenance cleaners, handyman contractors, all of them make a significant portion of their livelihood from the short-term rentals side of things. So I don’t know what would happen, but I hope to never find out.

Jamie:
We did a study looking at both short-term rental and hotel revenue for different markets, and Joshua Tree was number three in terms of short-term rental revenue compared to hotel revenue where there’s six times more revenue being generated by short-term rentals in that market than hotels. It just shows a market that is so dependent on tourism and it’s almost 6X and coming from short-term rentals to the hotels. So if short-term rentals went away, it would just decimate that market.

Tony:
Jamie, what was number one and two? Because you said Josh Tree was number three.

Jamie:
Yeah. So number one was Broken Bow Lake, a great market in Oklahoma.

Rob:
Oklahoma?

Jamie:
Yeah.

Rob:
Okay.

Jamie:
And then number two was Santa Rosa, Rosemary Beach area, so 30A in Florida.

Rob:
Wow. Man, that’s super interesting. Okay. Can we talk a little bit about international short-term rentals as well? Because I think the last time we had you on the hypothesis or the thesis in general was that the pandemic basically slowed down a ton of international traffic and we were going to start seeing the floodgates reopen. And seeing a lot more international travelers coming to the US, how has that held up? Where are we at in that specific regard?

Jamie:
So I was totally wrong on that one.

Rob:
Sorry. I wish I could have given you a softball.

Jamie:
Yeah. That was definitely one of the predictions that we expected to come in for 2023 and to be a tailwind for demand. But for large city urban areas, they’re still seeing some of the slowest demand growth across the country. And those markets are really highly dependent on international travelers. So you think areas like Miami, Boston, San Francisco, even going out to Oahu, as much as 40% of demand is coming from international travelers into those markets and staying in short-term rentals.
It’s really still a function of the strength of the dollar and the dollar is still really strong. We had expected it to weaken some as we got towards the summer travel season, and that didn’t happen. We have seen overall international travel being really strong, but it’s just everyone leaving the US and traveling within Europe.

Rob:
I mean, that makes sense. A lot of trips were canceled. A lot of marriages postponed. A lot of anniversary trips. I mean, there’s so much. I think it’s going to be a trickle effect of people that their lives carried on, they had kids, everything is delayed. I haven’t traveled internationally really since the… I plan on going international as soon, as I can as soon as my kids are just a little older because being on a plane with a two and a three-year-old is very difficult. But I want to travel a lot internationally. So it does make sense that a lot of people in the US are sort of going to these destinations or these dream vacations that they had to push pause on.

Jamie:
We’re actually seeing that impact now in the data where some weakness in demand and occupancy that we’re seeing is those destinations that people were maybe going to because it was a domestic destination. I live in Atlanta. Everyone was driving down to 30A in 2020, 2021. Now friends, they’re flying to Nice, and Cannes, and Greece, and they’re not driving down to 30A anymore. You’re definitely seeing some weakness in that market because of that.

Tony:
Jamie, let me ask. So I don’t own anything internationally, but do you think that this kind of exodus of American travelers overseas presents an opportunity for folks stateside to look internationally? And if so, maybe what are… And I know obviously the world is a big place, but if so, what are some international markets that you feel are good spots for folks to get started in?

Jamie:
Yeah. There’s great options out there. It is a little bit more difficult to sort of navigate deploying capital in different countries. It’s not just buying a house in North Carolina, but there are opportunities. Demand is now fully back across Europe. It’s playing into different areas, just like in the US where some cities are still really impacted negatively. They’re seeing even more regulation than we’re seeing in the US, especially in some of those major cities.
So in Amsterdam, there’s 80% fewer listings now than pre-pandemic, and a big piece of that is restrictions. So Dave Meyer is not going to be getting a short-term rental in Amsterdam, though it is a great location to travel to. So there’s all the same sort of dynamics you have to work with in the US of seasonality, I be it more so. Essentially all of Europe takes off August. There’s some demand in July from Americans, but it is very much a July and August dominated market where if you’re not getting the majority of your revenue during those two months and you’re not going to be profitable. It’s like owning a short-term rental in Maine or Cape Cod.
It’s like there’s a very short season you have to optimize for that short season. So it’s a little different than some of the markets maybe we’re used to investing in.

Rob:
Yeah. It’s definitely a different territory. Tony, what’s your appetite for investing internationally? Is that something that you want to do? Is that something you dream to do?

Tony:
Absolutely, man. I love Costa Rica. Sarah, my wife, she’s like a Mexican citizen, so we always think about buying something in Tulum or Playa Del Carmen. So I would love to go international, but to your point, Jamie, I just haven’t taken the time to really figure out the financing portion of it, like how to make that piece work. But once I do, I would love to do something out there.

Rob:
Just buy it all cash, dude.

Tony:
Easier said than done, huh?

Rob:
Yeah. A lot of people ask me and everyone always asks me with the hope of being like, “I love it, let’s do it.” And I’m always like, “I mean, it’s hard enough to run a business in the US.” I mean, long distance investing, you can build your dream team, I believe all that. But I have other places in the US that I would prefer to buy anyways. I’ll just rent Airbnbs if I ever want to travel. But that’s really interesting you say that, Jamie, because I don’t really think about the risks, I think. Or not the risks, but the risks of regulation in the US.
It’s hard to keep up with regulation in the US because there’s so many cities and counties and neighborhoods that restrict differently. You go to an entirely different set of countries and it’s like, “You don’t really know what you’re getting into unless you’re doing a ton of research.” So let’s segue a little bit here because we’re talking to international. We talked economy. We talked regulation in general.
Now, I also want to talk about another component of the short-term rental market, and that’s natural disasters and how they’ve impacted short-term rentals this year, because that’s not something we really cover all that often on the show.

Jamie:
And it’s I think a growing and growing risk. We’ve seen it really specifically in certain destinations this year. The fires in Maui were devastating. We saw it essentially wipe out entire towns. We’ve seen hurricanes over the past few years. We saw Cape Coral, Fort Myers last year, Sanibel Island, and really get hit hard. We saw infrastructure being knocked out, the bridges there where you couldn’t even access your short-term rental if it even still existed.
We saw more hurricanes hit Florida, and we’re still in the middle of hurricane season. So no telling what’s going to happen. You’re seeing insurance rates continue to go up. So even if you have a short-term rental in these markets, one, can you insure a new investment? And then secondarily is your existing investment, are you going to be able to continue to get insurance on it?
So there’s more and more risk happening. And back through the years, we saw fires in Gatlinburg, we saw fires in Tahoe. We’ve seen more wind events like tornadoes hit the Midwest, I think, than any other recent year. So all sorts of… My parents have four short-term rentals in Maine, and they got impacted by the hurricane that came up there that caused I think two weeks to essentially be canceled out because of guests didn’t feel comfortable getting up there with the hurricane coming.
So it definitely impacts different markets in different ways. And I think most importantly for investors is getting a sense of the type of markets you’re going in. What is that risk? And if you were going to be shut down for a month or two and you think about… And people now avoiding traveling to Maui, even though most of the island is up and running, and we saw I think 30% decline in occupancy in August.
We’re seeing another 20% through the first half of September. So even though the islands are telling people, tourists, please come and people are avoiding that area just because. Any number of reasons, yeah.

Rob:
Yeah. I mean, I think perception is probably going to… I think whether or not it’s okay to travel there, I know that Hawaii was… The governor was like please keep coming. But I think a lot of people in their head are probably like, “Oh, I’m not going to go. Obviously, everything is closed or whatever.” So I think that’ll probably be a lasting effect.

Tony:
Yeah. I want to transition, Jamie, if that’s okay, to talk a little bit more just about supply and demand. You’ve mentioned before that supply has slowed in terms of the rate of increase. Post pandemic, you saw a massive boom in the number of people that were listing their properties in Airbnb, and it seems like that slowed down a little bit. Demand though seems to continue to be kind of growing at a healthy pace as well. So we’re waiting for that balance between supply and demand.
I guess let me take a step back first. My first question is how do you know if a market is unquote saturated? How do you know if a market has too many Airbnbs to support the demand in that market? What data point should I be looking at? Where inside of AirDNA can I even go to see that?

Jamie:
And saturation point is all going to be around occupancy, right? So is there enough demand to support the listings that are out there in a profitable way? So when I’m thinking about saturation, I’m looking at both year over year change in occupancy. So is the market that I am in absorbing the supply that has come into that market? If it’s absorbing it, we’re going to see occupancy maintaining or increasing. If it’s not able to absorb it fully, and you’re going to see occupancy decreasing.
Now, one year of occupancy decreasing is not a market sort of oversaturated. Most properties take some time to ramp up and it takes time to get bookings. It takes time to and sort of figure out your niche in the market. I tend to not like to look at this on a very short-term basis of like, “Oh no, we saw one month of occupancy down four or five, 10%.” This market is way oversaturated. You’ve got to be looking at it over time.
So I do like to look at it on a sort of 12-month average. And then also looking at it relative to prior years. So 2018, 2019 is indexing off the high of 2021. I think we talked about this last time is not fair. And maybe if you underwrote it in 2021 and had that expectations to continue, that’s a different conversation. But in terms of market saturation, there’s a lot of demand coming into this industry. There’s a lot more listings that need to be able to come in to support the growing demand.
I’d argue that very few markets are actually oversaturated. It might take one or two years of slow supply growth, which we’re seeing now for that supply to get fully absorbed. But if you’re investing for a five, 10 year hold, just because a weak patch in occupancy today doesn’t mean that that’s going to not be a great investment long-term.

Rob:
Wow. That’s interesting. I feel like most of the short-term rental peeps, we expect it to kind of hit when we list. So is the case that… I would say, I guess underwrite conservatively and expect growth from there. Because it does seem like if you’re telling someone, “Hey, yeah, get into the short-term rental, but it’s going to take you two to three years to really start hitting good revenue,” that’s an interesting conversation to have because I think a lot of people just wouldn’t do it.

Jamie:
Yeah. When I’m helping people underwrite properties, I maybe don’t do a three-year ramp, but I definitely do a two-year ramp that it’s going to take you one year to figure out your market, to figure out to get good reviews. Reviews definitely help get bookings. And it’s going to take you a few months, six months to get a bunch of good reviews so you can start raising rates and really profit maximizing that property. I came from the hotel industry 10 years helping people underwrite hotel investments, and there we typically did a three-year ramp of getting occupancy from when you first open the property to when you’re going to stabilize that in terms of occupancy. It does take time to grow into that market.

Rob:
That makes sense. I mean, our Scottsdale property, we bought one and it opened up a little slower than we had thought a year in everything is up pretty considerably. I mean, the reviews I’m sure have helped. We’ve also added amenities like a pickleball court and that pickleball court has increased revenues by, I don’t know, 60 to 80,000 at this point. So it’s paid for itself two or three times at this point. So I think it’s the profit maximizing that you’re talking about. That’s really the thing that I’m focusing on with my current portfolio where a lot of people keep asking themselves, “How do I get into my next property after they’ve purchased one?”
What I’m trying to steer people towards is instead of trying to get into your next property, how can you maximize the revenue of the current property that you have or the portfolio that you have? Because if you can invest, let’s say $20,000 back into your property and increase your revenue by 10,000 bucks, that’s a 50% ROI. That’s so much better than what you could get if you just go and buy a new property. So this year, I’m trying to still buy just because I’d like to consistently purchase, but really I’m putting a large majority of my capital back into my portfolio, which gets me a little impatient because all I want to do is buy.
But I do think there is a case to be made for reinvesting back into the property. Tony, have you guys gone in and ever optimized a property with amenities or have you added anything after the fact?

Tony:
Absolutely, man. Actually, I’m going to Joshua Tree on Thursday because our newest listing, we’re adding a really cool in-ground pool with a rock slide and just really trying to beef up the amenities because I feel like we’re out of space right now where because so many new hosts have come onto the platform, the table stakes have increased, right? And what it takes to be a good listing today is significantly higher than what it took to be a good listing in 2019, 2020, even 2021.
Like you said, Rob, we haven’t purchased a ton this year, but we’ve been going back to our entire portfolio, adding new game rooms, adding the pools, adding hot tubs, adding whatever we can to make those listings stand out. And it’s crazy, man. I have three properties in 29 Palms, which is the city adjacent to Joshua Tree and the one property where we invested a lot into the game room is doing 3X the monthly revenue of the other two properties that don’t, which is crazy, and it’s the smallest one. So it really just goes to prove the point that reinvesting into your current properties might be a better investment, like you said, Rob.

Rob:
Definitely. Wait, what was the amenity that you said you added to the 29 Palm ones?

Tony:
It was just a really cool game room. We’ve got a really cool game room as an extension of the house.

Rob:
Yeah, for sure. I built a epic tree house deck at my Gatlinburg property. I built a mini golf course in my backyard in Crystal Beach. I did a pickleball in Scottsdale. I’m adding a pickleball court to a property in Austin, Texas right now. I’m probably going to add pickleball to my tiny house in Joshua Tree. So for me, again, it does suck to not be buying, but I do think it’s going to be a much better return for me overall. So with that, Jamie, can you just tell us a little bit… I mean, since we’re kind of talking about Joshua Tree, how have established tourist markets fared this year? Are they holding strong? Has it been pretty consistent compared to some of the other areas out there, like a metropolitan area?

Jamie:
Yeah. So there’s definitely more weakness there in some of the established destination markets. I thought it’d be fun to sort of do in sort of an exercise where we walked through what we were seeing in one of the markets, and I actually pulled out a Gatlinburg, Pigeon Forge area, just to give you a sense of… It was also one of the ones called out in that sort of doom tweet by the Doom Squad of revenues dropping 40%.
So in the Gatlinburg, Pigeon Forge market year over year, we’re showing RevPAR down about seven and a half percent. But these markets, especially market like Gatlinburg where supply is growing 20%, you have churn, listings leaving, it’s really hard to get a sense of what is the average host actually increasing or decreasing the revenue. So we took it down further. So there’s 23,000 listings with the lease one night sold in Gatlinburg over the past year.
Only 12,000 of those were available full-time. So 270 nights of the year, and then only 7,500 of those were available both full-time this year and last year. So a small subset of the 22, 23,000 listings out there. And when we look at just those 7,500, overall RevPAR was down about 9%. And it was down most at the budget and luxury end. So the middle tiers were held up the best. What I thought was really interesting was for individual hosts, so those with just one to five properties, RevPAR was only down 7% where the large property managers in that market saw 13% decline in RevPAR.

Tony:
Interesting. Why do you think that is, Jamie, just out of curiosity?

Jamie:
Yeah. So that same question. So large property managers did such a better job of increasing occupancy in 2021 and 2022 in raising rates. And now they’re seeing bigger declines. But if you look at what they’re earning relative to 2019, they’re still well outpacing individual hosts. So it tells me that most of those individual hosts are not using revenue management software. They weren’t able and didn’t push rates when the times are good. Now, they’re not seeing as much declines when the times aren’t as good, but they’re still not earning as much as some of the larger PMs are in that market.

Tony:
And Jim, you hit on a really interesting point because I’ve kind of in my heart felt that that was part of what’s driving some of the decreases is that because so many of these hosts are new and they’re not leveraging dynamic pricing tools, and they don’t understand what their average booking window is in their market, if they’re not fully booked out every 30 days, they’re just dramatically dropping their prices.
And now it’s impacting the entire market because now you have guests that are able to choose a $60 listing that’s brand new versus the more mature host that’s charging a hundred bucks per night. So I’m literally launching a property management company right now because I feel that there are so many hosts that don’t know what they’re doing that overall they’re pulling down the revenue potential for the market. So that’s why Rob and I are both so focused on educating people about how to do this the right way, because if more people understand the basics of dynamic pricing, how to do it correctly, then as a host community, we all end up winning.

Rob:
It’s always so annoying, dude, when you’re comping out a property in a place like Gatlinburg and you’re looking at the neighborhood and this person has this insane 20,000 square foot placed with a helicopter pad and it’s like $70. It’s like, “What are you doing, man? What are you doing? You’re ruining this for us.”

Tony:
Well, Jamie, I want to ask you one last question before we start to wrap things up here. And for all of our listeners that are thinking of buying that first Airbnb, that first short-term rental right now at the tail end of 2023, what would your advice be to that person?

Jamie:
One, it’s make sure you’re leveraging data to find the right market to invest in. I don’t love the old adage of invest in a market that, you know, that you grew up going to. Find markets that make sense to invest in because they may not be the right market. It might not have been in the same market as a year ago, two years ago, on the cost basis of investing in homes right now has shifted dramatically over the past five years. And then the opportunity to grow revenues in these different markets has shifted dramatically.
So, one, I do a lot of research on finding the market, and then I think some of the conversations we’ve had on amenities are going to be really important for the type of property you can invest in going forward is don’t just look for current cashflow, look for that property that you can actually evolve and sort of grow into a good long-term investment. I try to help people think longer term like five to 10 years on that investment. Like Tony, that property you’re going to in Joshua Tree, if you didn’t have the ability to put in that in-ground pool, that would totally change that investment thesis for that property. Right?

Tony:
Yeah, absolutely.

Rob:
Sure. Yeah, that makes a ton of sense, man. So for people that, if you could give some advice on where people could find some of these markets, I agree. Going to a place where you grew up, not necessarily, I do like the familiarity… Oh gosh, let’s not try this on air. How familiar it is. How about that? How about that? How familiar? How familiar it is should not necessarily be the driver for why you buy it. I think that’s a way you can do it, but finding good markets that work, I think that’s what you’re saying. How can people find some of these good markets?

Jamie:
Yeah. So thanks for the tee up. We just rereleased AirDNA this past month, and one of the tools is all around market discovery. So you can look at a list of all markets across the US, filter down to the type of investment you’re looking in. So if you’re looking for, in one bedroom, unique listings, you want to go in on the luxury tier and you want to find markets with the highest occupancy, highest ADRs, highest investability, we now give you that ability to dig, filter in, find the right comps, rank markets against each other, and where you can find those hidden gem markets.
We actually did a piece recently where we talked about hidden gem markets. Maybe low percent of property managers, relatively small markets, like a 100 to 500 listings where you could go in and really dominate that market by running a property well. And all that can now be done with the new tools. So you can really customize it, find markets that really fit your investment strategy, your risk tolerance, and the type of markets, mountain, coastal, urban, suburban, and find those type of cities, find those good investment opportunities.

Rob:
Well, awesome, man. Well, thank you so much, Jamie. For people that don’t have familiarity into how to find you on the internet… See, I knew I could say it. I knew I just had to think it through a little bit. How can people find you and connect with you?

Jamie:
Yeah. So I’m active on Twitter @Jamie_Lane on LinkedIn and AirDNA. I host a podcast called the STR Data Lab where we talk about data and interview professional managers hosts on the data that they use to run their business.

Rob:
Super cool, man. Well, maybe Tony and I can be guests one day, the power duo, the power couple here in the short-term rental market. Well, awesome, man. Well, thank you so much, man. I do love getting into this and talking about the data with you. I think this makes me feel really good, honestly, just being armed with the proper data. So we appreciate you coming in and speaking some of these truth bombs. Tony, for anyone that wants to reach out or connect with you, how can they find you online?

Tony:
Yeah. First, Real Estate Rookie Podcast. We put out episodes every Wednesday and Saturday. And then personally, you guys can find me on Instagram @tonyjrobinson. And if you’re on YouTube @therealestaterobinsons.

Rob:
Dang. All right, man. That was like three of them. All right. Well, I’ll do four. You can find me on YouTube @robuilt, on Instagram @robuilt, on MySpace @robuilt, and TikTok on Robuilt. How about that? Well, thank you so much, Jamie. We appreciate it. Tony, thanks for doing this with me, man. It’s always fun to share the mic with you. And for everyone at home, if you like this episode, if this inspired you, if this make you feel better, feel free to go and leave us a review on the Apple Podcast platform or wherever you download your podcasts.
This is Rob Abasolo. I’m not going to do the David thing because I know I’ll mess it up. But thanks everyone and we’ll catch you on the next episode of BiggerPockets.

In many democracies, growing wealth inequality is showing up as a destabilizing force. What happens when we shift a sole focus on individual prosperity and broaden our lens to community wealth? To walk us through what this shift looks like, Ashoka’s Asier Ansorena spoke with Ashoka Fellow Joaquim de Melo, founder of Banco Palmas, Brazil’s first community bank that opened its doors 25 years ago. He talks about how they pioneered an alternative currency to build and retain community wealth in Fortaleza, and how they have since grown into a national movement of 150 community banks, which mobilizes and redistributes 1.5 billion reais (nearly 300 million USD) yearly in local economies.

Asier Ansorena: Joaquim, you were living in the favelas in the northeast of Brazil, training to be a priest, when a question occurred to you that changed your life. Tell us about this question.

Joaquim de Melo: When I arrived in Conjunto Palmeiras in 1974, the military dictatorship had displaced the whole neighborhood. So we began by building schools, day-care centers, and local markets from scratch. But even after all that development, year by year, the neighborhood stayed very poor.

The turning point came when we asked, “Why?” Why weren’t we managing to consolidate wealth, with so many hardworking people, schools, a daycare center, and sanitation? And we realized that it was because all our money was leaving the neighborhood. We were giving it to big box stores and big banks instead of producing locally. We realized that the key to defeating poverty was to start investing in ourselves. And that was how Banco Palmas, our community bank, was born.

Ansorena: What is a community bank?

De Melo: It’s a non-profit bank that invests in the creation of local businesses and a local currency. We charge interest on loans at a very low rate, and any profit gets reinvested in more loans for local businesses. In short, Banco Palmas is a new economic circuit that takes the wealth we generate as a community and uses it to strengthen the local economy.

Ansorena: Why create a community bank when you can just request a local branch of a public bank?

De Melo: The big problem in Brazil is that the commercial banks suck up wealth like a vacuum cleaner, and I’ll tell you how. Initially, credit cards were seen as a resource in poor communities. When local companies went under and people weren’t able to get loans, they needed to buy on credit. However, because the banks charged very high interest rates, up to 20%, people became indebted as well as impoverished.

When you buy using a credit card, they charge merchants a 2-3% fee. Then they take that money and invest it in big corporations and affluent neighborhoods. Local merchants lose money, and the big corporations get richer. So why not have our own bank, where you lend at very low interest rates in order to reinvest locally?

Ansorena: This reminds me of the European financial crisis of 2008. The European Central Bank did not put money into people’s accounts or lend directly to governments. No, 800 billion euros went to private banks, and practically none of that money was invested in small and medium-sized enterprises that would have grown the local economies. Banks are meant to fulfill a social function, but they are not doing that, right?

De Melo: Right. That’s because most banks are pursuing increasingly large profits rather than focusing on building productive capital. A company that wants to go to the bank to take out a loan to produce clothes, shoes, food, can’t do it because the bank prefers to put money in the stock exchange.

The Brazilian Central Bank actually sued us twice, saying our community bank was illegal. My colleagues and I were arrested. We had to go to court to win the right to operate. In 2010, the Central Bank recognized that it had made a mistake and issued two technical notes to the country, saying that our bank was important for Brazil and improved lives.

Ansorena: How do the vast economic disparities in different regions of Brazil come into play? Reports show that private banks, including some public ones, regularly take the savings of poorer Northerners and reinvest in the affluent South.

De Melo: This is exactly what happens. But community banks are challenging their model. In 2022, community banks circulated billions of Reals. We had 1.5 billions reals (USD 300 million) in revenue, and that money was re-invested in production and distributed throughout 152 community banks, paying for everything from solar panels to loans for local businesses, like barbers or clothing stores. This is no longer a utopia; this is working.

Ansorena: Twenty-five years ago, you created the first tangible social currency, the Palmas, and now it’s gone digital. Tell us about that.

De Melo: We originally invented the Palmas currency to stimulate local spending. It was backed by Reals, so if a merchant wanted to, he or she could convert this social currency back into Reals for a small fee, which fed into the bank’s investment fund. Then in 2013, we converted to a digital platform, e-Dinheiro Social, which translates to Social e-Money.

What’s fundamental to our methodology is that each bank remains hyperlocal. Each community bank works in a territory or neighborhood. You download the app, search within your municipality, and if there is a bank there, you can register, make a transfer and start buying from merchants. But if you leave your municipality, your balance shuts down, because the currency is designed to stimulate a specific geographical area. The goal is to encourage you to buy local.

Starting around 2017, we’ve been hearing Brazilian mayors say, “Boy, the municipal economy is really developing, we are seeing much more prosperity.” So, some mayors have partnered with us, and, through municipal laws, mayors are creating community banks and social currencies. There are already ten municipalities in Brazil that have taken their money out of the big traditional banks and are creating social currencies, using our digital platform.

Ansorena: How do community banks empower people to become prosumers, i.e. people who both produce and consume to stimulate the local economy? What financial education is still needed in historically marginalized communities?

De Melo: The world tells poor people that they should feel lucky to buy products from big corporations, to be an employee, and to have a boss. The Community Bank offers another way forward: being an entrepreneur and a prosumer.

Financial education should teach people how to organize their finances, but also how to make money by producing, consuming and generating resources in their own community. Entrepreneurship is a good thing. As long as people get it into their heads that it should be done in service of the collective. Don’t think about it from an individualist perspective.

Ansorena: As a playwright, you also use theater as a vector of financial education. Why is culture so important?

De Melo: All change, all collective consensus, comes from culture. At Palmeiras, we do puppet theater, dance, photography, comics, and community radio to educate people about the local economy. Culture is also what fuels our mission: eating, socializing, dancing, beer, and pagode music. It’s that local culture that inspires me.

Ansorena: This move towards a different economic culture isn’t just an objective of Community Banks or a Brazilian issue, is it?

De Melo: Thankfully, it’s an objective shared by many across Brazil and the world who are building new economic alternatives – be they leaders of the solidarity economy, the green economy, the circular economy, community banking and more. Just last week I was in Brasilia for the launch of a new national initiative: the National Strategic Committee for the Impact Economy. Our mission is to bring all those movements together to coordinate national actions and new public policies with leaders from business, civil society and government. I met with Muhammad Yunus there, the Bangladeshi Nobel Peace Prize winner, and global architect for micro-credit. He stressed the importance of building a new global economic model and praised Brazil for its leadership. We have a unique opportunity to build this future.

Dave:
Hey, everyone. Welcome to On The Market. I’m your host, Dave Meyer. Today, I have an excellent interview on tap for you. Andy Walden, who is the vice president of enterprise research and strategy at ICE, is going to be joining us again on the show. Andy was first on On The Market, I think it was back in May or June, and he was working for a company that, at that point, was called the Black Knight. They have since been acquired by a company called ICE, or I-C-E, and so you might hear both of those during the course of our conversation. But Andy and his team are experts on all things in the housing market, but what they really focus on is what is going on in the lending market. As we all know, we are all subject to the whims of interest rates these days.
Andy has some insights for us about what is going on with foreclosures, purchase originations, where he thinks rates are going, how different parts of the country are going to be affected. He just released this amazing Mortgage Monitor report, which we’ll put a link to in the show notes. I am super excited to talk to him about it, because there’s just chock-full of insights that are extremely actionable for real estate investors just like you and I. With no further ado, we’re going to welcome on Andy Walden from ICE.
Andy Walden, welcome back to On The Market. Thanks for joining us.

Andy:
You bet. Thank you for having me again.

Dave:
For those of our listeners who didn’t listen to your first appearance on this show, can you tell us a little bit about yourself and what you do at ICE?

Andy:
Yeah. I am the vice president of enterprise research and strategy at ICE, and so effectively, what that means is I get my little hands in all of the data that we have available to us, whether it’s housing market data, or mortgage performance, or anything around the mortgage life cycle, really getting to play into all those different data sets. Now, in being acquired by ICE, we have even more data at our fingertips. We’re more heavily in the origination space. We’ve got some rate lock data that can tell us what borrowers are doing out there in the market, so really excited to get to share some of that data today.

Dave:
Well, I’m very excited. I was looking through your mortgage report, which we’re going to be talking about a lot today, and I was very jealous that you have access to all this data. There’s just so much information that’s extremely pertinent to the housing market, and everything that’s going on with housing right now. With that said, can you just tell us a little bit about the October ’23 mortgage report and what’s contained in it?

Andy:
Yeah. We did a little bit of everything, and we try every month to put, as you mentioned, the most pertinent data in there, so we’ll go everywhere from mortgage performance to mortgage originations. We’ll get into the housing market very specifically, and look what’s going on at a macro level, and look into specific geographies in terms of what’s going on. I think in terms of nuance, this month, we had some data around the Super Bowl mortgages. They’re becoming a bigger and bigger topic of conversation. We looked at the market from a mortgage lender standpoint, obviously, a very challenging market right now. We gave some pointers around where we see the market going throughout 2023 and ’24, how to best capitalize, how to understand who’s transacting in the market, why are they transacting in the market, and then as I mentioned, a lot around the housing market, and the dynamics going on right now, which are very interesting.

Dave:
What are some of the most important takeaways that you think our audience of small to medium-sized real estate investors should know about?

Andy:
Yeah. I think a couple different things, right? One is when you look at the mortgage performance landscape, it remains extremely strong, right? Folks that are looking into that foreclosure arena, or looking for any distress coming out of the mortgage market, it’s about as low as we’ve ever seen it. That being said, we’re nearing this inflection point. We’re seeing some signals from the market that we may be reaching kind of a cycle low in terms of mortgage delinquencies, and mortgage performance. Just if you look at those annualized rates of improvement, they’re starting to slow down, and flatten out a little bit.
But we’re seeing delinquencies one percentage point below both their pre-pandemic, and their pre-great financial crisis era, which may not sound like a lot, but that’s roughly 25% fewer delinquencies than they traditionally are even in good times. So performance overall is very, very strong. If you look at it from the housing market, I think that’s probably where a lot of your listeners are focused in, it was an extremely hot August, right? We got our ICE Home Price Index data in for the month of August. Very strong numbers across the board, right? We saw the fourth consecutive month, where we’ve hit a record high in terms of home prices in the US, home prices up two and a half percent from where they peaked out late last year. And then that headline annual home price growth rate that we all look at, where home prices versus where they were a year ago, we’ve gone from 20% in 2021 to effectively flat in May, as the Fed raised rates and tried to compress that market.
But then we’re seeing this reacceleration. We’re back up to nearly 4% annualized home price growth again, and poised for some additional push based on some of the baked in home price growth that we’ve already seen this year. That’s what we’re seeing through August. And then if you look at what’s going on in the weeks since with mortgage rates, they’re up to seven and a half percent according to our ICE conforming 30-year Fixed Rate Index, which has pulled 6% of the buying power out of the market, since those August closings went under contract, right? We’re looking for maybe yet another inflection in the housing market, as we move late into this year. A lot going on in the report, a lot going on in the mortgage and housing markets right now.

Dave:
You actually beat me to one of my questions, Andy, which was about how much buying power has been removed from the market, because obviously, we see this dynamic in the housing market where supply has stayed really low, and even though demand has deteriorated over the course of the year. Since they’ve both fell relatively proportionately, we see housing prices somewhat stable, as you said. In August, they were up a bit, but now seeing rates just skyrocketing even more than they had. Just curious, how do you come up with that number, and can you just tell us a little bit more about the implications of that, that 6% of the buying power has been removed just in the last few weeks?

Andy:
Yeah. Let’s talk about the numbers in and of themselves, right? When we look at home affordability in general, we’re really triangulating three things. We’re triangulating income, we’re triangulating home prices and interest rates, and we’re looking at what share of income is needed at any given point in time for the median earner to buy the median home. That’s how we assess affordability, and we do it at the national level. We do it across all of the major markets across the country as well. Nationally, we go all the way back into the 1970s to draw comparisons, because what we found was, during the pandemic, we were reaching outside of normal bounds. We were seeing the lowest levels of affordability that we had ever seen in more recent data sets, and so we were having to go all the way back into the ’70s, into the Volcker era, to find something more comparable to what we’re seeing today, right?
That’s how we come up with those affordability numbers. When you look at that, what you see is that we’re nearing 40%, right? It takes 40% of the median earner’s gross, not net, we’re not talking paycheck, we’re talking gross monthly income to afford just the principal and the interest payment on the median home purchase. The worst that it’s been since the early 1980s, obviously, very unaffordable. And the only time we’ve seen affordability at these levels was when interest rates were above 12%, right? We’re seeing those similar levels of affordability today at 7.5%, just because of how much home price growth has outpaced income growth in recent years, so a massive challenge out there in the market. When you look at how that’s impacting demand and borrower behavior, we’re now seeing, if you look at mortgage applications, they’re 45% below pre-pandemic levels. That’s the lowest that they’ve been versus “normal,” right? If there is ever a normal in the housing market, that’s the lowest that we’ve seen them so far. You’re certainly seeing these rising interest rates start to impact how many borrowers are out there shopping in the market.

Dave:
All right, great. Well, thank you. That’s extremely helpful. Do you have any thoughts on if mortgages go up to let’s just say 8%, another 50 basis points, is that going to be another 6%? Does it get worse as the numbers get higher?

Andy:
Yeah. It’s pretty even over time, right? The rule of thumb is kind of a 10 to 12% reduction in buying power for every percent rise in interest rates, and so you can cut that in half for a half a percent rise in rates. Again, our Conforming 30 or Fixed Rate Index was 7.5% yesterday, meaning that if you look at the market yesterday, the average rate locked in by a buyer using a conforming loan was 7.5%. Again, if you go up to 8%, another 6% reduction in buying power, and vice versa if rates were to fall, and so you are seeing it constrained. When we look at it in the light of the August data that’s been most recently released, those ones went under contract in July, right? We’ve already seen that 6% decline in buying power from when the latest housing market data is coming out, suggesting we could see further cooling here over the next couple of months, so certainly something that we’ll be watching very, very closely.

Dave:
That talks a little bit about the demand side, but when you look at the supply side, to me at least, I have a hard time seeing how that moves a lot in the next couple of years, right? If this lock in effect is real and rates are going up, then it’s going to only get worse. Construction is doing its thing, but it’s not going to come in and save supply anytime soon. A lot of things people point to or ask about is foreclosures. But you said earlier that delinquency rates, at least according to the most recent Mortgage Monitor report, are lower than they were in 2019. Can you just tell us a little bit more about the state of delinquencies, and if you expect things to change anytime in the future?

Andy:
Yeah. We do expect them to go up, right? Current state of delinquencies, you hit it, right? They’re extremely low right now. We talked about that a little bit earlier. If you look at serious delinquencies, and the risk of foreclosure, and typically, foreclosures account for roughly three to 5% of all home sales, they’re well below that right now. Even in a normal market, you’re talking about relatively slow, or relatively low volumes of inventory out there, but they’re well below long-run averages. When you look at serious delinquencies, and look at remaining protections on those loans, you’re still seeing a lot of servicers that are rolling some of those forbearance plans forward, or rolling those forbearance programs forward to help borrowers that are struggling in today’s market. 70% of all serious delinquencies of the very low-level of serious delinquencies that are out there in the market right now are still protected from foreclosure by loss mitigation, forbearance, bankruptcy, those types of things, and so you’re just seeing very, very little inflow into foreclosure, and serious delinquencies themselves are the lowest that they’ve been since 2006.
I mean, you’re absolutely right. When we look at it from an inventory perspective, we’re looking for all of these little nooks and crannies, right? New builds, how can they help? How can potentially, if we saw some rise in defaults, could that actually help the market from a housing market perspective? There just aren’t a whole lot of answers right now to the supply problems. We’re still, as we sit here, we’ve been seeing inventory edge slightly higher the last couple of months. We’re still at roughly half of what we should have, in terms of for-sale inventory out there in the market. As you mentioned, that’s keeping prices very, very sticky.

Dave:
I have a question that might be stupid, so please bear with me right now. But I’m curious if the relationship between delinquencies and foreclosures have changed over time, or if that’s possible, because obviously everyone compares the current situation to what happened during the financial crisis, where a lot of people had negative equity, and if you were delinquent, then you were probably going to get foreclosed on, there was a short sales, all these negative outcomes. Right Now, all the data shows that people are equity rich, and so I’m curious if there’s any logic to this idea that even if delinquencies go up, foreclosures might not go up, because people could just sell on the open market. That could still help the inventory, but it wouldn’t be through a foreclosure.

Andy:
I mean, you’re absolutely right. It happens for a couple of different reasons. One of them you talked about is equity, and you’re right, they are as equity rich as they’ve ever been. We’re nearing the levels of equity that we saw last summer, before housing prices began to correct, so homeowners are very, very strong from an equity standpoint. The other reason is, I look at servicers like Bachmann a little bit, right? Servicers have all these tools in their tool belt, or whatever you want to call it, to help homeowners, and they’ve really built those over the last two decades, right? The first time was the great financial crisis, and we learned a lot about loan modifications, and what worked and what didn’t work, and they’ve got all of those programs set up, and ready to deploy when borrowers become delinquent. The second one was during the COVID pandemic, and forbearance became the big talking point, the big program that was rolled out there for folks that had short-term losses of income, right?
We have all of these programs, and all of these tools in our servicing tool belts now, that we’re ready to deploy, right? They’ve been battle-tested, they’re ready to go, they’re set up in servicing systems. We can roll out loss mitigation plans relatively easily, if folks have longer term loss of income. For short-term loss of income, forbearances have become very, very popular recently. We have a lot of tools there to help homeowners avoid foreclosure, and avoid that distressed inflow, even in the case that they become delinquent. It doesn’t mean it’ll be non-existent, but the roll rates from delinquency to foreclosure are certainly lower than they have been historically.

Dave:
Okay, great. Well, I’m glad my hypothesis beared out. But yeah, I think it’s important that… I was reading an article, I forget where it was, just talking about the banks learned their lesson from what happened during the great financial crisis, and how they lost a lot of money that they may not need to have lost, if they had these tools in their tool belt, as you said, because they were just foreclosing. Everyone was just panicking and just trying to like they wanted to get them off their books, whereas if they rolled out some of these forbearance programs, or loan modifications, they probably would’ve done a lot better. I think this isn’t just out of the kindness of their own heart, but the banks have a financial incentive to modify and work with borrowers, if there is some sort of delinquency.

Andy:
Yeah. We’ve learned a lot on both sides, right? We’ve been talking about servicing, and how we better service mortgages to reduce default, and that’s ingrained in servicing systems. We certainly have it in our MSP platform, most certainly. But on the origination side of the house, we’ve learned a lot of lessons there too, right? If you have an adjustable rate mortgage, make sure the borrower can pay their fully indexed rate, right? Same goes for buy downs that are taking place, same goes for credit quality. You’re seeing extremely high credit quality mortgages being originated in recent years. When you look at the outstanding stock of mortgages, mortgage payments are very low.
Folks have locked in very low interest rates right now. They’re very strong holistically from a DTI perspective, from an equity perspective, ARM share of active mortgages is a fifth of what it was back in 2006-07. in many ways, when you look at where we stand today versus the great financial crisis, the mortgage and housing market is structured very, very differently. It’s much more solid, and I wouldn’t expect to see anything near an outcome you saw from the great financial crisis era, just because of the improvements that were put in place across the board from origination all the way down through servicing systems.

Dave:
Well, that is encouraging. Hopefully, you are correct. You mentioned origination, and I just wanted to get a sense from you about what is going on in the origination market now, with rates continuing to climb, is volume just continuing to deteriorate or what’s happening?

Andy:
Yeah. I wouldn’t say deteriorate, because it’s already been relatively low, and refinances have hit about as low as they can get, knock on wood. But, I mean, there is a small baseline level of refinance activity out there that’s really cash-out lending, perhaps surprisingly, is what’s really left out there in the refinance space. It’s a very unique set of borrowers, right? It’s odd, because the average borrower refinancing right now is raising their interest rate by 2.3%, which seems absurd. Why would somebody give up a 5% interest rate, refinance into a seven and a quarter? It’s because those borrowers are really centered around getting the equity out of their home, withdrawing some of that equity, and so you’re seeing these very low-balance borrowers that are willing to give up a historically low rate on a low sum to withdraw a large chunk of equity at a relatively reasonable rate compared to what you can get on second-lien products, right?
There’s some of that activity going on, and so if you’re looking at this from a mortgage lender, you need to be very acutely understanding of what’s going on in today’s market, who’s transacting, why they’re transacting. But then it’s very heavily centered around the purchase market, right? This is the most purchase-dominant mortgage lending has been in the last 30 years. We’re seeing months where it’s 88% purchase lending. That’s really where lenders are focused is driving that remaining purchase volume out there in the market.

Dave:
What are the characteristics of the purchase loans? Is it home buyers?

Andy:
Yeah. Absolutely. Home buyers, it’s higher credit score borrowers, right? There’s a lot of economic uncertainty, there’s uncertainty across the board, and so you’re seeing lenders that are very risk-adverse right now, and so it’s higher credit score mortgages, it’s moving a little bit more towards the FHA space than it has been in recent years. When you look at how hot the market got in 2021, or in 2020, a lot of those would’ve been FHA buyers, had to move into conventional mortgages, because there were 10 offers on the table, and the first ones that were getting swept onto the floor were FHA loans, and so you saw it more centered around GSE lending back then. Right now, I would say a little cooler, right, relatively speaking? You’re seeing those FHA offers that are being accepted a little bit higher pace. You’re seeing a relatively strong first-time home buyer population out there, and so it’s a more FHA paper than what we’ve seen in recent years.

Dave:
I think that’s probably a relief to some people, right? Like you were saying, the FHA was just not really a viable option during the frenzy of the last couple of years. For a lot of people, that is the best or only lending option out there, so hopefully that is helping some people who weren’t able to compete, even though it’s less affordable, at least you can compete against, it’s a less competitive environment for you to bid into for a home.

Andy:
Yeah. Blessing and a curse, right? The reason that it’s less competitive is, because it’s less affordable as well. You’re dealing with affordability challenges, but less competition out there in the market, certainly.

Dave:
What we’re talking about here, I should have done this at the top. Sorry, everyone. These are just residential mortgages, right? This doesn’t include commercial loans.

Andy:
That’s exactly right. Yeah. We’re looking at folks buying single-family residences, buying condos out there, buying one to four unit properties across the US.

Dave:
Does any of your data indicate what is going on with investor behavior?

Andy:
It does, right? Investor is going to be a little bit more difficult to tease out, but when you look at investor activity, especially in recent years, they’ve ebbed and flowed along with the market. You saw them move in, when we all knew that inflation was going to become strong, they were trying to put their money into assets rather than holding it into cash, because everyone knew cash was going to get devalued in an inflationary environment, and so you saw them push into the market in 2020, 2021. They’ve backed off along with overall volumes declining in recent years, but they make up a larger share, because they’re a little bit less affected by interest rate movement, because you have more cash behavior there in that investor space. They make up a little bit larger share, but they have been ebbing, and flowing in and out of the market similar to other folks, only to a little bit stronger degree early on, and a little bit lesser degree more lately.

Dave:
Got it. Thank you. You said earlier that assumable mortgages are one of the things that are growing in popularity. Can you tell us more about that?

Andy:
Yeah. For folks that aren’t familiar with what an assumable mortgage is, it’s effectively, if I sell you my home, not only can you have my home, but you can assume my mortgage along with it. Now, the reason that that’s attractive is, if I have a three and a half to 4% interest rate on my home, you can get an interest rate three point half to 4% below what you could get out there in the market right now. At face value, they seem very, very attractive in today’s market where folks have locked in very, very low interest rates and you’re looking at getting a 7.5% interest rate if you just go directly to a lender today, right? Again, face value, these look like very attractive options, and they’re relatively common. There are about 12 million assumable mortgages, so FHA, VA, USDA mortgages are assumable out there. It’s about 12 million, so that means one in four, roughly, mortgaged homes in the US as an assumable mortgage-

Dave:
Wow.

Andy:
… which also sounds like, hey, there’s a ton of opportunity. A little over seven million of those have a rate of below 4%, so 14% of mortgage homes, you could assume the mortgage, and get a 4% rate or better, right? It seems like a ton of opportunity, and it’s certainly a growing segment, and a growing opportunity out there in the market. There are a few reasons why it hasn’t taken off as much as maybe you’d expect in hearing those numbers. One of them is two thirds of those that are assumable below 4% have been taken out in the last three and a half years, meaning folks just bought their home recently, or they just refinanced, and they want to hold onto that low rate, right? They’re expecting to live there for a while.
Reason number two is, it’s attractive to a potential buyer. It’s attractive to that existing homeowner as well, right? They don’t want to give up a sub 4% interest rate for the same reason that you want a sub 4% interest rate as a buyer. And then the third reason is more around home prices, and home price growth, right? If you look at those 12 million assumable mortgages out there, average home value is about $375,000. The mortgage is only about $225,000, right? You’re going to need to bring an extra $150,000 to assume the average home either in cash-

Dave:
Wow.

Andy:
… or via secondary financing at a higher interest rate. A lot of folks, assuming these mortgages, we’re talking FHA, VA homes, they’re in more first-time home buyer communities, folks shopping in those specific places don’t have $150,000 in cash to bring to the table, or that secondary financing offset some of the savings you were going to get with that assumable loan. Certainly attractive out there in some situations, but there are some reasons why you’re not seeing it completely take off, and everybody selling their mortgage, or turning over their mortgage along with their home.

Dave:
Just so everyone listening knows, because most of these people are investors who aren’t owner-occupied, assumable mortgages really are only available for owner occupants. If you were considering house hacking in a duplex, or quadplex, this is a feasible option. But if you wanted a traditional rental property, you would have to go a different creative finance route, but you couldn’t use an assumable mortgage. Andy, I got you here. Curious about, we’re fresh into Q4, curious, we’re seeing some seasonal declines, where do you think we’re heading through the end of the year?

Andy:
I think you’re going to have to watch housing metrics very, very closely for the tail end of this year, and here’s why, right? If you look at how hot the housing market has been so far in 2023, and there have been months where we’ve been 60% above normal growth in terms of housing, there’s a lot of baked in reacceleration that’s going to take place out there. If you’re looking at annual home price growth rates, I mentioned nationally, they’re up 3.8% through August. They were effectively flat in May. If we didn’t see any more growth, and we just followed a traditional seasonal pattern, you’re going to see that annual home price growth rate rise from 3.8 to 5%, through the tail end of this year.

Dave:
Wow.

Andy:
There’s some baked in reacceleration out there in the market that’s going to carry the housing market higher. The reason that I say you need to watch very closely, is that may be countered by some slowing out there in the market from the recent rise in interest rates, right? Keep in mind, and I think I may have mentioned this earlier, but the August home price numbers that you’re seeing out there, those August closings went under contract in July. Interest rates were more than a half a percent below where they were today, and so you’re seeing a different affordability environment, as we sit here in October, than when these latest housing market numbers when those homes were put under contract, right?
There’s going to be a lot of tea-leaf reading here in housing market numbers over the next few months to say, what if this was baked in reacceleration that we already had caked in before we got to these latest home price rises, and how much actual shift are we seeing in the market from this rising interest rate environment that could slow us down over the tail end of this year? You have to watch those housing market numbers very, very closely, understand what month you’re looking at, understand when they went under contract, because I do expect some inflection out there in the market, based on this latest interest rate increase. You’re already seeing it in mortgage applications, right?
Even when you look at seasonally adjusted numbers, we’re now at the deepest deficit that we’ve seen so far in the pandemic in terms of buyer demand out there. That could cool off not only volumes, transaction volumes, but could cool off prices as well. You’re just going to have to dissect that cooling from the already baked-in reacceleration that that’s caked into some of these upcoming numbers.

Dave:
That’s interesting. Just so make sure everyone understands this, we talked about on the show that year-over-year housing data is really important to look at versus month-over-month, because of the seasonality in the housing market. But to your point, Andy, there’s something known as the base effect that goes on, sometimes, when you’re looking at year-over-year data. Whereas if last year we had this anomalous high-growth, which is what happened last year, usually, the housing market doesn’t grow in Q4, but it did last year, that it may look like, or excuse me, sorry, it shrunk last year in Q4. It’s going to look like we had significant year-over-year growth in Q4, even if there is a loss of momentum, it might not necessarily be reflected in that data. I think that’s really important and a good reason for everyone, as Andy said, to keep an eye on metrics very closely over this year.

Andy:
You’re right. Traditionally you’d want to look at year-over-year versus month-over-month. One way that we’ve been looking at it, and I really like right now, is month-over-month seasonally adjusted numbers, right? They take that seasonal component out, because you’ll get very confused if you look at the housing market, and look month-over-month and don’t seasonally adjust.

Dave:
Right. Yeah.

Andy:
You’re going to be seeing a different trend every six months, right? Look at the seasonally adjusted month-over-month numbers, and those will give you indications for where those annual growth rates are going to go, and then you can take out the downward effect, if you want to, last year, right? A seasonally adjusted month-over-month is really important in today’s market, and that’s going to be one of the key metrics to watch, as we move towards the tail end of this year.

Dave:
Awesome. Now, in your mortgage report, there is a lot of… In the Mortgage Monitor report, there’s some great data about what’s going on regionally. I’m just curious, what are some of the big trends that you’re seeing? Because over the last year, we’ve seen, I guess, a return to somewhat normalcy, and that different markets are performing differently, whereas during the pandemic, everything was just straight up. Do you see that pattern continuing, or do you think mortgage rates are going to dictate the direction of every market, regardless of region?

Andy:
I think mortgage rates are going to dictate direction, but you’re going to see some regional differences, undoubtedly, right? Maybe we just hop across the country, and talk about what we’re seeing in region, from region to region. I mean, the Upper Midwest, and Northeast have been, and continue to be among the hottest markets in the country. The reason behind that is affordability well below long run averages, but still strong compared to the rest of the country. More importantly, you’ve got massive inventory deficits in the Upper Midwest, and Northeast, so regardless of the metric, right? We were talking about which metric you should look at, earlier. Take any metric you want to, take month-over-month, take year-over-year, take where we’re at today versus peak values next year.
The Northeastern part of the country, and Upper Midwest are going to be at the top of the list in terms of home price growth, right? Those are the strongest, and we expect to remain the strongest in the near term. When you get over into the West, it’s really interesting, and again, this is where you see some differences, and you really have to be aware of which metric you’re looking at. The West saw some of these strongest corrections, where we can lump pandemic boom towns in there, if you want to, Phoenix, and Boise, and Austin, and those guys. We saw some of these strongest corrections late last year, one, because those are the most unaffordable markets, not only compared to the rest of the country, those are the most unaffordable markets compared to their own long-run averages.
When interest rates rose last year, those are the markets where you saw inventory return back to pre-pandemic levels, and they were the few markets that did it. Anytime, we’ve seen a market get anywhere close to those pre-pandemic levels, we’ve seen prices start to correct, right? Those are markets that came down significantly last year, and they were the coolest markets, with the exception of Austin which continues to correct. If you look at what happened in August, the fastest month-over-month growth was in San Jose, Phoenix, Seattle, Las Vegas, which was really surprising to me, when we looked at those numbers. Those are markets that are still down 4% last year. But all of a sudden, sellers have somewhat backed away, inventory deficits are returning in those markets, and you’re seeing the housing markets reheat again, right?
I think it tells us a couple of different things. One, as we’ve move through the next couple of years, expect a lot of inflection going on in the housing market. You’re going to see some ebbs, and flows. When you’ve got a 50% deficit of inventory, and a 45% deficit right now in demand, if either one of those moves in any direction, you could see sharp upward, and downward swings in the housing market. Those pandemic-boom markets are extremely volatile right now. We saw the fastest 10% drops in prices we’ve ever seen in the housing market last year, in some of those markets. And then now, you look at month-over-month seasonally adjusted, and they’re seeing some of the sharpest rises. A lot of nuance going on around the country, when you look at it on a region by region, or market by market basis.

Dave:
Well, I’m glad to hear. It gives people a reason to listen to this podcast, as long as there’s a lot of economic volatility. Even though we don’t like, it’s good for my employment status. But, Andy, this has been super helpful, and very informative. Is there anything else you think from your Mortgage Monitor report, or anything else that you think our audience of investors should know right now?

Andy:
No. I mean, I think we’ve covered most of it. I think that the key thing, and again, this goes back to your employment, right? I mean, it’s really watching what’s going on a month-over-month basis. I think there are some folks that you started to see the housing market bottom out, and start to pick up steam here this year, and it was, “Oh, we’re back to normal, and the worst of it’s over, and this is it, and we’re ready to move forward.” I don’t think so, personally, right? If you look at the underlying numbers, and I touched on this a second ago, if you look at how unbalanced both sides are, you could still see a lot of volatility, and it’s going to be years before we see what’s “a normal housing market” ready for just normal, sustained three to 4% growth over the long run, so expect the unexpected, expect volatility out of the housing market.
We’re still in a very unbalanced position, and you could see shifts in either direction, and a lot of it’s going to be driven by, one, what happens with interest rates, and how sticky the broader economy and inflation is, and how that puts pressure on mortgage interest rates out there in the market. And then, two, that demand side, and we were talking about that earlier, right? Where does that… Sorry, I said demand, I meant supply side. Where does that inventory ultimately come from, right? Are builders able to eventually help us build out of this? When do sellers become willing to sell again, and do we see any distressed inventory? I mean, those are going to be the key components on that side.

Dave:
Awesome. Great. Well, that is an excellent advice for our listeners. Andy, if people want to check out your Mortgage Monitor report, which is awesome, everyone, if you have an interest in this type of stuff, definitely check it out, or anything else that you’re doing at ICE, where should they check that out?

Andy:
Yeah. They can access that a few different ways. We’ll add a link to the latest report in the show notes, where they can just click that, and go directly to that latest report. We also have a full archive on our website at blackknight.com that you can go out there, and access some of our historical reports as well. If there’s anything you want to see beyond that, you want info on our home price index, or anything like that, you can email us at mor[email protected], and we can communicate that way as well.

Dave:
Great. Thank you. Just again, everyone, it is in the show notes, or description, depending on where you’re checking us out. Andy Walden, thank you so much. It is always a pleasure. We appreciate your time.

Andy:
You bet. Thank you for having me, appreciate it.

Dave:
On The Market was created by me, Dave Meyer, and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Paul Donovan, chief economist at UBS Global Wealth Management , joins ‘The Exchange’ to discuss variable rate mortgages pushing up the CPI, the effort to exclude asset prices in the CPI, and the direction of inflation trending downwards.