Market Update March 12, 2024: Housing Market Shortage, Rent Price Fixing & Mortgage Rates

Podcast: Texas Real Estate & Finance Podcast

Episode Title: MU 3-12

Host(s): Mike Mills

Guest(s): 

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Mike Mills (Host) | 00:00:08 to 00:00:34
Hello out there to all you hardworking real estate survivors. So selling a home today's market can sometimes feel like trying to convince spirit Airlines passengers to upgrade to a private jet, doesn't it? As pricey as purchasing a home may appear to be at the moment, the long term cost of perpetual renting could outweigh it by far. Today, I'll provide you with the knowledge to illustrate why buying a home is paramount for your client's future financial well being. This is Texas real estate and finance podcast, market update for the week of March twelveth.

Mike Mills (Host) | 00:00:34 to 00:00:47
And I am your ever aging, ever balding host, Mike Mills, a North Texas mortgage banker with Geneva Financial. And I don't just do podcasts every week. I also help people buy homes. If you didn't know that. So if you're listening to this and you know someone that needs help buying or refinancing some real estate, shoot them my way.

Mike Mills (Host) | 00:00:47 to 00:01:21
I love helping people navigate the world of loans almost as much as I love rambling to myself in this small little studio and putting it out for all the Internet to hear. Lucky you, right? So most of today's episode is all about the housing shortage that we're facing right now in the US, and why every single day that passes, it will most likely become more and more expensive to buy real estate, making your role as a market educator to your clients even more critical as the dream of homeownership continues to slip away for more and more Americans. First up, we're breaking down Logan Matashami's insights on mortgage rates, because who doesn't love a good surprise, especially when it's below 7%? Then we'll tackle the Senate's latest take on our housing crunch.

Mike Mills (Host) | 00:01:21 to 00:01:48
Spoiler alert don't hold your breath for a quick fix. But in some good news, for those of you tired of credit card late fees eating up your taco Tuesday fund, we've got a new edict from the CFPB that'll have you celebrating. We'll also be exploring why the housing market's currently short a few million homes. And for our main story today, we'll discuss why the Department of justice should focus less on realtor commissions and more on landlords fixing rent prices and driving up the cost of renting higher and higher every day. And not just now, but most likely for years to come.

Mike Mills (Host) | 00:01:48 to 00:02:05
But before we get started, time for my weekly favor. If you like what you hear today, or just enjoy having my voice in your ear telling you soft real estate stories, then please don't be shy. Like comment subscribe and share. Heck, even leave us a review if you're feeling extra generous. It's like leaving a tip for great service, but much, much cheaper.

Mike Mills (Host) | 00:02:05 to 00:02:23
All right, let's get on to the show. Well, we're going to start right where we do each and every single week. Interest rates last week, mortgage rates teased us again with a drop below 7% for the second time this year. But the big question on everyone's mind is, will they continue to head lower, or is this just a brief respite? Well, let's find out what one of the industry's top voices thinks.

Mike Mills (Host) | 00:02:23 to 00:02:57
So Housingwire recently published an article by Logan Motoshami, one of the housing industry's leading experts. In the piece, Logan offers an in depth look at the current state and future prospects of mortgage rates. You see, after a week that included crucial job data and comments from the Federal Reserve's Jerome Powell, mortgage rates have shown a surprising decrease to below 7%. The article points to the ten year treasury yield as a key determinant of future mortgage rates, predicting a range of its possible direction based on current economic conditions. So Modishami's analysis covers the impact of these rates on purchase applications and housing inventory, indicating some good news for buyers but bad news for home prices.

Mike Mills (Host) | 00:02:57 to 00:03:21
So the article puts the 2024 forecast for the ten year yield to be somewhere between 3.21 and 4.25, with some significant implications from that to mortgage rates. So the stability of economic data is going to be crucial to how this all plays out. We'll have different outcomes if the data stays firm to what we've seen, or if we start to see the data weaken. Like particularly in the labor market. And based on this ten year yield's performance, we could see mortgage rates oscillate between 7.25 and even 5.75 this year.

Mike Mills (Host) | 00:03:21 to 00:03:44
Because last week, following job data and commentary from Jerome Powell, the ten year yield decreased, leading to a drop in mortgage rates all the way down to 6.87 5%. And although a weakening dollar isn't ideal for the country, it is good for mortgage rates. And right now the dollar is posing some pretty big challenges globally. And because of these lower rates, we've seen 11% week to week growth in purchase application breaking a long period of negative data. And there is even a slight positive trend in inventory growth year over year.

Mike Mills (Host) | 00:03:44 to 00:04:10
Now, inventory is seasonal and you see more inventory on the market, typically in your winter months. But we should start to see a little bit growth into the spring as people are looking to sell. However, people will also be looking to buy with these lower rates. The article also explores how right now, one third of all homes are typically taking a price cut before selling, and how this trend could possibly continue as the market continues to stabilize and more inventory comes available. Now, as always, rates will be affected by the upcoming CPI and PPI inflation reports that we're soon to see later this week.

Mike Mills (Host) | 00:04:10 to 00:04:41
If CPI comes in low, you could see interest rates start to fall. And right now, as apartments are starting to become overbuilt and rents are starting to come down slightly, this could be a positive impact for our CPI inflation, which would cause again mortgage rates to decline. But the bottom line here is that rates matter when it comes to how the market moves. Rates go up, demand slows, rates go down, demand increases. And while there is some recent data suggesting that listings are growing as we move into the spring buying season, but as rates begin to trend downward, don't expect prices to have big drops because most of the reduction of prices from listings are due to being overpriced to begin with.

Mike Mills (Host) | 00:04:41 to 00:05:06
And right now, buyers can be more picky these days because there's fewer of them and there's more homes available than there have been over the last few years. But just for context, you had over 700,000 homes newly listed for sale in March of 2019 prior to the pandemic. And even with the boost in inventory, we're only at about 400,000 homes right now. And a good chunk of those homes are new homes that aren't even built or actually for sale yet. But with the ten year yield declining and mortgage rates expected to follow suit, the real estate market might soon resemble a bachelor's row ceremony.

Mike Mills (Host) | 00:05:06 to 00:05:40
Your clients, like hopeful contestants, could find themselves amidst a throng of buyers, each jostling for attention of the all too please seller, ready to throw down hefty sums of money for a shot at homeownership bliss? All right, next up. So the real question is, is the US housing market supply crisis here to stay? Well, everyone's favorite Fed chair, Jerome Powell had a few things to say about it recently. So former guests of the podcast Lance Lambert's Regiclub.com reported that in a recent address to the Senate Banking Committee, Federal Reserve chair Jerome Powell recognized the persistent undersupply in the US housing market, attributing it to zoning challenges, labor and material shortages, and pandemic induced disruptions.

Mike Mills (Host) | 00:05:40 to 00:06:10
Powell forecasts this shortage to extend for years. The article notes that this scenario is further complicated by current economic policies and trends affecting both demand and housing prices. So during the Senate Banking committee, address. Powell predicted that these foundational issues will ensure that the housing shortage persists despite temporary market fluctuations. The article also mentions that build for rent investments are also impacting this there's reports on substantial investments in the builder rent sector, with Miami based BGO and a company called one sharp Capital committing 500 million to purchase single family rental homes only.

Mike Mills (Host) | 00:06:10 to 00:06:40
And this trend just indicates a growing interest in single family rental homes as a stable investment class for big capital investors. Now, the White House did propose two tax credits aimed at easing the housing market's challenges, subject to congressional approval. Number one was a $5,000 annual tax credit for middle class first time homebuyers for two years, although right now the middle class kind of remains undefined. And they also offered a one year tax credit for up to $10,000 for middle class families selling their starter home to another owner occupant resident. But that is contingent on the home being below the area median price.

Mike Mills (Host) | 00:06:40 to 00:07:16
So Powell's comments overall highlight how the Fed's response to inflation, higher interest rates, temporarily dampens housing demand but doesn't resolve the underlying supply issues. And as rates begin to stabilize, demand will likely surge again, further exacerbating the supply problem. So this is just another example of someone in the know that isn't an old mortgage podcaster sharing with the public that as rates start to come down, prices are going to go up. And the reason again, is because we don't have enough homes for sale. And with more and more builders getting a better premium for build to rent properties, the inventory and new construction could be dominated by private capital in the coming years, which would mean even less available homes for the average American to buy.

Mike Mills (Host) | 00:07:16 to 00:07:36
Look, Jerome Powell's testimony is just a reminder that these days in real estate, expecting cheap housing is like expecting your teenager to want to hang out with you. It sounds realistic in your head, but in reality your expectations are overly optimistic. You just aren't that cool. All right, let's deviate a little bit from real estate for 1 minute and focus on a little bit of good news. So did you know that the CFPB just made a small change that might mean a little extra cash in your wallet each month?

Mike Mills (Host) | 00:07:36 to 00:08:12
So thanks to a new rule detailed recently by unusualwales.com, credit card holders can breathe a sigh of relief as late fees are being drastically reduced to $8 per incident. Now, this change, contrasting sharply with the previous $32 average, is scheduled to kick in 60 days following the Federal register's announcement. It is a critical step towards reducing the financial strain on over 45 million Americans promising significant savings in addressing a long term standing loophole in the credit card fee adjustments process. So the CFPV finalized this rule on March 5 that caps late fee credit card payments at $8 per pop. And like I said, this is a significant reduction from the industry's previous average of $32.

Mike Mills (Host) | 00:08:12 to 00:08:40
So the reform addresses a loophole from the Credit Card Accountability, Responsibility and Disclosure act of 2009, which allowed large credit card issuers to adjust fees for inflation annually. And since the CArd Act's implementation, late fees had risen from an average of $23 in $2010 to $32 in 2022. And american households spend an average of 14 billion a year on late fees. But with this new rule, they're expected to save over 10 billion annually. Now, this rule is part of a broader initiative by the Biden administration to reduce what they call junk fees.

Mike Mills (Host) | 00:08:40 to 00:09:07
But it's not going to affect credit card issues, ability to adjust interest rates or credit limits to manage your late payments. Look, in today's economy, where every dollar counts more than ever, this new CFPB rule feels like a breath of fresh air. It's not just about saving on late fees. It's a signal that regulatory bodies like the CFPB are actively seeking ways to protect consumers in a fluctuating market. This move, in my opinion, could encourage more responsible financial management and possibly inject a bit more consumer spending into the economy.

Mike Mills (Host) | 00:09:07 to 00:09:21
So reduction in late fees might actually be good for the economy as a whole. Oh, and at $8 a pop, late fees are practically a steal. But just remember, just because it's on sale doesn't mean you need it. So please pay your credit card bills on time, folks. All right, now let's get back to a little bit more on the housing shortage.

Mike Mills (Host) | 00:09:21 to 00:09:49
So, did you know that household formations outpace single family home construction by 7.2 million homes in 2023? So we got more and more families, but still not enough homes for them. So what does this mean for the future of home prices? So, a recent Realtor.com analysis revealed that the US housing market is currently short up to 7.2 million homes due to over a decade of underbuilding. And despite an increase in new construction, the gap between household formations and available housing continues to grow, with a slight reduction when you're including multifamily homes.

Mike Mills (Host) | 00:09:49 to 00:10:19
Now, the shortage has prompted a shift towards more affordable new construction, with an uptick in homes sold under 400,000 in 2023. But significant gaps between housing needs and permits were still noted in specific areas like Texas and Florida, highlighting specific regional challenges. And the article also dives into the demographics of new construction buyers, noting that they tend to trend younger, wealthier and more pet friendly. So if you want a new home, probably got it on. So this deficit has been attributed basically to underbuilding relative to the rate of population growth for almost over a decade.

Mike Mills (Host) | 00:10:19 to 00:10:48
And despite a recent uptick in construction, the significant gap is not something that's going to fix itself anytime soon, because from 2012 to 2023, almost 17.2 million new households were formed. But in that same time, we only had 14.7 million housing starts. That occurred from 2012 to 2023. That's over 3 million homes short. Now, the good news is that the share of new homes sold under $400,000 rose to 43% in 2023, and price cuts and other incentives were more commonly offered by builders in 2023 as well.

Mike Mills (Host) | 00:10:49 to 00:11:17
However, with this to recent price and these incentives, the tradeoff became constructing smaller units to enhance affordability. And right now, millennials now represent nearly half of the new construction buyer market, making a demographic shift towards younger, more affluent buyers. And these buyers prioritize newness and the ability to customize and the location, with a significant emphasis on a builder's reputation and the community overall appeal. So since I've been doing this for 15 years, I've seen the housing market go up and down. But the current shortfall of 7.2 million homes is really unprecedented.

Mike Mills (Host) | 00:11:17 to 00:11:48
It's really clear from the article that while we're making strides in addressing this through new construction and seasonal increases in listings, the road to rebalance the housing market has a long way to go. Still, and particularly the increase in affordable new construction in certain parts of the country is promising. But real estate is local, and although nationally we might see some trends in some areas towards slightly more affordable housing, many areas are still not. And more often than not, this affordable housing comes with a tradeoff for size and location. So in order to solve this problem, it's going to require us not just building more homes, but building homes smarter and more efficiently.

Mike Mills (Host) | 00:11:48 to 00:12:08
But the story just sheds light on an issue that affects us all, directly or indirectly. The housing shortage is not just an industry problem, it's a societal one, with ramifications for community stability, economic growth and individual well being. Because as an industry, we know and can see this shortfall affecting our clients on a day to day basis. But many in the country don't even realize that it is a problem. It's like the frog boiling slowly in water.

Mike Mills (Host) | 00:12:08 to 00:12:36
As a country, we won't realize the full depth of the problem until it's too late. Less and more expensive homes for sale means more renters, and more renters means smaller pool of buyers and sellers, and therefore less people able to access the american dream that we were all promised. As an industry, we have to be aware and we have to keep educating our clients about what's going on in the market so they can make informed decisions about their own future. So if you've got clients waiting for the housing market to balance out, you might want to let them know that it's more likely that popcorn ceilings are returning to popularity. We all know how much everybody love those.

Mike Mills (Host) | 00:12:36 to 00:12:47
All right, let's move on to the main topic for today. So have you heard this from your clients before? I really want to buy a home, but it's just too expensive right now, and renting just makes more sense. Well, these days, as real estate professionals, we hear this all too often. And you know what?

Mike Mills (Host) | 00:12:47 to 00:13:12
Right now, at this point in time, if you just look at the dollars and cents often, it does save you more money to rent rather than buy right now. But the key to that sentence is right now, because right now, renting is cheaper than buying. In many cases, it's just a fact. But you have to always remember that when you buy a house, that money that you pay each month for that loan stays the same or can even decrease when interest rates get better. Yes, taxes and insurance can go up, which can make your mortgage payment increase as well.

Mike Mills (Host) | 00:13:12 to 00:13:35
But you can fight your taxes and you can shop for cheaper insurance. But when you pay rent, you pay what you're told to or agree to, and rent, like home values, all always goes up. But in the past, it's always been the case that if your landlord jacks up the rent on you for some reason, then you can always find a new place to rent. You had options. But what if I told you that these options are getting more and more limited and that all the information in the news lately about how realtors are colluding with each other to set commissions, which, by the way, is a gross exaggeration.

Mike Mills (Host) | 00:13:35 to 00:13:57
But I digress. But that story is overshadowing a trend in the rental markets that many renters are unaware of, and that rent price fixing might be an even bigger issue that very few people are paying attention to. So I've talked about this company before on the podcast, but let me again introduce you to a company called Realpage. Who is Realpage? Well, Realpage is a Texas based software company that, among other things, helps landlords big and small set rents.

Mike Mills (Host) | 00:13:57 to 00:14:26
Realpage was founded in 1998 and offers technology based services to the real estate sector. Its market dominance increased after acquiring a major competitor in 2017, and by 2020, Realpage managed over 19.7 million rental units across various clients. And why do so many landlords love using Realpage? Well, rents have significantly increased over that time, with Realpage's data showing a 27% growth over just three years now. This product has led to scrutiny from the Department of Justice in over 20 class action lawsuits that you probably even haven't heard about.

Mike Mills (Host) | 00:14:26 to 00:14:54
And recently, ProPublica revealed that Realpage used sensitive data to recommend higher rates, possibly violating antitrust laws. And the company's practices have been linked to the national rent crisis, with housing advocates describing the impact on tenants as devastating due to the lack of rent control regulation. In fact, the District of Columbia attorney general filed a complaint against Realpage for automating pricing in a way that maximizes landlord revenue. And the Department of Justice is investigating realpage right now and other landlords for potentially violating the Sherman act. So why does all this matter?

Mike Mills (Host) | 00:14:54 to 00:15:31
Well, the rise in corporate landlords that use algorithms like Realpage's software to set and raise rent prices systematically has led to a significant increase in rent, notably in Phoenix and Tucson, with renters seeing up to 76% hikes since 2016. And this was documented in a recent class action lawsuit out of Arizona. And the Department of Justice supports these tenants claims, stating that automating anticompetitive practices is very illegal. The controversy has spurred other legislative efforts in states like Colorado to curb the use of algorithms and rent pricing altogether. Overall, the situation underscores a much broader problem of corporate and foreign ownership of single family homes, also contributing to the housing crisis and for your clients.

Mike Mills (Host) | 00:15:31 to 00:16:07
By continuously renting in such a manipulated market, individuals may end up paying significantly more over time compared to owning a home. And overall, this makes a strong case for the financial benefits of buying a home, even right now, because at least you can offer control over living costs and the potential to build equity for the future. So, beyond the obvious, why is all this so critical to be aware of and understand? You see, the use of rent setting algorithms by corporate landlords, highlighted by the case against Realpage, has propelled a nationwide debate on housing affordability and market manipulation. As rents continue to soar due to these automated practices, tenants and housing advocates are calling for action against what is seen as a monopolistic approach to rental pricing.

Mike Mills (Host) | 00:16:07 to 00:16:45
And while there does seem to be some progress and litigation in getting some of these corrected, it doesn't mean it won't continue to be a mainstay in how companies set rent, because more and more private equity groups are becoming landlords in America. They own apartment complexes and single family homes all over the country. And there's a big trend among large builders for the build to rent product that builds homes for these large equity groups that never see the open market and instead are traded like stocks between the big money players. And if you think this problem is just going to go away because people have filed a few lawsuits, I think that's being a little naive. Because if you look at where other industries have trended over the years and use them as a barometer to see where all this stuff is headed, you can see it doesn't usually end well for the consumer.

Mike Mills (Host) | 00:16:45 to 00:17:06
Just look at telecom some, but not many. Remember the days when FCC required that the Bell company divest its assets and split into many companies, like Bell, South Pacific, Telesys, Southwestern Bell around here, and so on and so on. Now, 30 years later, we're back at just four. Verizon at and T, Sprint and T Mobile. Oh, and in 2020, after seven years and three failed attempts, Sprint and T Mobile actually merged.

Mike Mills (Host) | 00:17:06 to 00:17:27
And now we just have three. And if you think housing is going to be immune from this, you're just not paying attention to what's going on around you. Big companies and big money will continue to buy more property, build more rentals, and develop software to fix rent prices so that if your rent goes too high, you can't move because the other place's rent is just as high because it was all set by the same algorithm. It won't happen overnight, but it will happen. So what can you do?

Mike Mills (Host) | 00:17:27 to 00:17:52
Well, you should try to do everything in your power to get a home that you known that isn't controlled by someone else. And if you're a realtor, you need to impart the importance of this to your clients. Yes, you want to sell real estate, but what you really want to do is keep real estate as an option for people not to have to be at the mercy of large money interests for something as critical as their housing. Don't be okay with renting just because it's a little cheaper right now, because in the long run, the costs of renting will outweigh the short term costs of buying. But that's just one crazy podcaster's opinion.

Mike Mills (Host) | 00:17:52 to 00:18:08
What do you think? Let me know. All right, guys, that's all for today. The thing I want you to take away from these stories today is that homeownership is becoming harder and harder, and the longer someone waits, the more expensive and challenging it's going to get because we don't have enough homes for everyone. And now we're competing with big corporate interests more and more for this dwindling commodity.

Mike Mills (Host) | 00:18:08 to 00:18:20
So get it while you can, because the crash ain't coming. At least not for residential real estate. Thank you guys for sticking around and tuning in each week. I really appreciate each and every one of you. I hope you have a great spring break and I hope your business is heating up right now because it's time to make hay while the sun is shining.

Mike Mills (Host) | 00:18:20 to 00:18:27
So let's all get to work and make this a great year. And remember, be great humans and keep grinding. Life is what you make it. So make it great. See you next week.