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The Crash Predictors Are Wrong, Here’s Why

On The Market Podcast Presented by Fundrise
38 min read
The Crash Predictors Are Wrong, Here’s Why

The housing market is confusing, to say the least. In 2020, at the start of lockdowns, nearly everyone you spoke to had the opinion that the housing market was headed straight for a crash. Not only was this wrong, but it was the opposite of what the data was saying. While mainstream news outlets and “2008 crash bros” were painting a picture of foreclosures, price drops, and bottomed-out demand, Logan Mohtashami was singing a far different tune.

Logan had been looking diligently at the data (like he does most days over at HousingWire) and he saw patterns that didn’t at all reflect the last recession. Instead, Logan predicted a runup in prices, hot buyer demand, and very low rates of foreclosures. In a time when almost everyone with a public voice was calling for an apocalyptic housing scene, Logan predicted much differently.

Now, two or so years later, we can see just how right he was. We’ve brought this beloved data-first housing market deep diver onto the show to answer some of our most burning questions. Logan hits on how housing inventory got so low, what will force demand back down, why new property taxes are bad news for buyers, and the smartest move an investor can make in 2022.

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Listen to the Podcast Here

Read the Transcript Here

Hi, everyone. Welcome to On The Market. I’m Dave Meyer, your host, joined today by Kathy Fettke. Kathy, how are you?

I’m doing great. And so excited for this interview. I always learned so much whenever I listened to Logan.

Well, I actually remember when we were first reaching out to different people about finding people to be hosts of this show, you had told me that you were a fan of Logan, and I’m a big fan of Logan. And so I knew it would be a great pairing for both of us to get to interview him today. Why have you followed him for so long? What about Logan’s work do you find so reputable and reliable?

Well, he’s accurate. He’s right. And the people I followed for many years, let’s just say they were more in the negative camp, which in some ways served me because I was cautious and careful. And I have people who listen to what I say and I would rather veer on the side of caution. But a lot of these people really were wrong. They were wrong year after year, after year.
So to find somebody who’s been right year after year, after year, and really understands it. And he’s not trying to sell anything. He’s not a real estate agent or a broker or a mortgage broker, he’s retired. So it’s just refreshing and it’s helped me to stay positive at a time when negativity is just everywhere, everywhere and it’s hard to know what kind of decisions to make.
And so for me, when I can see hardcore data, solid data, and when it’s explained to me in a way that I can understand, which is what Logan does, it’s a lot to take in. And so following him on HousingWire’s helpful because it takes a little time to truly understand what he’s saying.
It just gives a lot of relief. I’ve said many times, the more information you have, the less fear you’ll have. Fear usually comes from lack of information. So once you have the information, then you just know what to do.

I could not agree more. I think his track record is great. He has such a good way of explaining really complex topics. So if you want more from him after you listen to this interview, you should definitely check out his work on HousingWire. And I’ll also add, he’s just a fun guy to talk to. He’s very enjoyable. He’s got a very good way of making housing market data, which can be dry, very, very interesting.
So with that, let’s just get into this because I want to give as much time as we can to Logan. So with that, let’s welcome Logan Mohtashami, the lead housing analyst for HousingWire. Logan Mohtashami, thank you so much for joining us On The Market today. We are really excited to have you here.

It is great to be here with you guys.

For people who don’t know you yet, Logan, could you tell us a little bit about your background as a housing market analyst and your current position at HousingWire?

Yes. Currently, right now I’m the lead analyst for HousingWire. I joined them toward the end of 2019. My family’s been in banking since the late 1950s. I worked in the mortgage industry all the way up to 2020. I created my own financial blog in 2010 and I just basically talked about the housing market for many years and then made it to a full data analyst of the economy and housing in 2015. And one thing led to another, and now I became a lead analyst for HousingWire. So pretty much all I do is look at charts all day and night and nerd out and nothing else.

Well, thank you for joining us. I know Kathy and I are both huge fans. So we’re geeking out to have you here a little bit. You, in a lot of your writing on HousingWire, have a very unique and data-driven opinion about where we are with the housing market. And we want to dig into a lot of the details here, but can you give us just a high level overview of your feelings about the housing market as it sits now in 2022?

So when we talk about housing economics, it’s pretty much demographics and mortgage rates, affordability. The previous expansion from 2008 to 2019, I always said, “This would be the weakest housing recovery ever.” And what I mean by that is not prices, it’s just mortgage demand, housing starts, new home sales. These things would not get to certain levels until we get to years 2020 to 2024.
And why I picked that period, household formation works up. People, it’s very easy, they rent, they date, they mate, they get married. Three and a half years after marriage, they have kids. Years 2020 to 2024 was going to be this very unique once in a lifetime bump in the millennials. Currently, ages 28 to 34 are the biggest in US history. So when you put them, move-up buyers, move-down buyers, cash buyers, investors, you got really stable replacement buyer demand there.
The only problem that could happen is that if you look at total inventory data, especially going back to the 1980s, we started to see inventory slowly falling from 2014 all the way down until about 2018, ’19. And then if demand picks up during this period, guess what? We could crack down to all time lows with this massive demographic patch, with low mortgage rates, something that we’ve never seen in our lifetimes. That can be problematic because that could create forced bidding.
And to me that is the primary reason in terms of the growth rate of pricing from 2020 to 2021, and even here in 2022. And the concern was if home prices grew above 23% in a five year period, it could be problematic for my sales forecast. Boy, it got smashed in two years. So when rates rise with that much price growth, you could see a hit on demand.
But even as we are talking today, total inventory levels are still near all time lows and that’s the problem. And I think that explains some of the firmness that we see in the home price data is that we need total inventory levels, this is the NAR data. I know a lot of other people have different numbers. We need that number to get back to 1.52 to 1.93 million. That is a normal sane marketplace.
We started the year, I think at 870,000. We’re a little bit above a million now. Inventory is very seasonal. It rises in the spring and summer, it falls in the fall and winter. So we kept on doing these new all time lows going into the fall and winter months. That was not a good thing.
And we could see what was going on early in 2022. We were seeing forced bidding action, not because there was a credit boom or anything, none of the demand data looks like anything we saw from 2002 to 2005, but it’s escalated prices to the point that it becomes more problematic with mortgage rates rising.
But now we’re not talking about four to 5% mortgage rates, we’re talking about 6% plus mortgage rates. So the savagely unhealthy housing market is now taking another turn and it’s different in the sense that homeowners now on paper financially look great. They have a fixed payment. Their wages have rised every year. Their cash flow is excellent. They have nested equity.
These are not the stressed sellers that we saw from 2006 to 2011. So I think the main discussion or talking points I’ve had is when we talk about inventory credit, credit was getting worse in 2005, ‘6, ‘7, and ‘8. What I mean by credit getting worse, people were filing for foreclosures and bankruptcies all those years. Then on top of that, the job loss recession happened while credit was getting tighter.
So the 2006 to 2011 period, going back to the 1980s was the only time that we saw escalation inventory. So people trained themselves to thinking, “That’s what’s going to happen, people are going to rush to the market and sell their homes and be homeless or rent at a higher cost or…” No.
Traditionally, a seller for the most part is a buyer, right? So they’re going into the selling process thinking, “Well, I’m going to buy X home.” Well, when inventory got to all time lows, guess what? Some of them were going, “Oh, maybe not. I don’t know if I could even get a house, even if I sold mine.”
So we need balance. Balance is a good thing. Early on in the year, I said, “We need higher rates.” Actually in February of 2021, I was talking about we need higher rates, but wasn’t going to happen last year or this year. So we’re starting to get inventory to rise, but we’re still far from the levels that I would unlee or take away the savagely unhealthy housing market off.

Logan, when you explain this, it all seemed so obvious, looking back, that inventory level’s going down, demand… I knew that 2020 was going to be the highest demand because if you look at demographics, you can just see historically, this is when this huge group of people will be at first time home buying age.
But why are you one of the only economists that could see it so clearly? And I mean, even our federal reserve that is supposed to be monitoring this stuff was accommodating the housing market until just this year and rates didn’t go up until March when the damage was already done. So it just like why? What’s going on?

So there is a mindset that a lot of people have. It’s what I call the 2008 syndrome. And when you come out of 2008 and you don’t realize the economic expansion wasn’t like 2008, when any kind of recessionary data comes, you believe that we’re going to have this major crisis. So this is why the America’s back recovery model was very important.
COVID came in, everybody paused, but the economic data was actually getting better toward the end of 2019 and actually the first two months of 2020. But everybody’s trained to think that, “Oh, listen, housing’s going to crash, we cannot allow housing to crash again. That created too much damage for families and everything.”
So when I retired my model in 2020, I was like, “Hey, we’re good.” But guess what everybody was talking about? Forbearance. So part of the thing that I did in the summer of 2020 was I created the term forbearance crash bros. It’s a bunch of people that were going to talk about forbearance. None of them have credit profile backgrounds, you could see this.
And I said, “Listen, forbearance is going to come off.” Why? Because if you read the jobs data in October of 2020, majority of people that made $60,000 or more already got their jobs back. A home owner, their financial profiles are a 100,000 plus. So they were good and people are just going to get off of forbearance. So we went from five million forbearance data early. It’s under 500,000 right now. It’ll be under 300,000 soon.
So that was never going to be the issue, but the mindset was, “Hey, guess what? We can’t let housing crash.” And inventory levels were getting worse in 2021. So I think the 2008 syndrome is people were trying to fight the deflationary aspects of having a credit de-leveraging crash.
And that wasn’t here because credit looked excellent. Why? Because mortgage credit looked really good and we never even had a mortgage credit boom. I tell people this, if you look at mortgage debt expansion adjusting to inflation, negative, still from the housing bubble peak. So there wasn’t any kind of this big credit boom, or there’s no exotic loan debt structures after 2010. That’s all gone.
So that’s the aspect, I think in 2021. And I still believe it would’ve been hard for rates to rise without global bond yields and global rates rising together, but people did not understand how bad the inventory situation was.
And then everybody thinks millennials can’t buy homes, nobody can buy homes, home prices are up. And then all of a sudden, guess what? After 2020, after the 10% price growth gains, we were having 15 to 20%. So people weren’t trained to think that way because they’re always told Americans are struggling, there’s no middle class. None of that stuff made sense, right?
We just had the longest economic expansion in history. If it wasn’t for COVID, we’d be still in the longest economic expansion because that 2008 mindset and then the secondary is being really bearish on the internet or on TV or anything that’s really popular, right? So I always say, “My work is boring.”
So two things about me, economics done right should be very boring and you always want to be the detective, not the troll. That’s not very sexy to talk about, but again, math, facts and data matter, the rest is storytelling. We don’t do storytelling here, we are doing boring economic modeling work.

Well, trolls aren’t sexy either. But I worked in the housing… I worked in broadcasting for years. That was my career prior to real estate. And it’s a known thing that if it bleeds, it leads. You got to lead with fear and shock because that’s how you get an audience. That’s how you get people to tune in.
So listen, the headlines are often wrong, don’t put your faith in that. But what’s confusing is when the experts are wrong, Logan, and that’s what I’m saying. Where do you go for data? People are using these charts on FRED, the federal reserve, St. Louis fed with inventory saying nine months. What is that?

That’s the interesting part. One of the mistakes I’ve always seen people make, and stock traders do this a lot actually, they go to FRED, FRED is the online website where you could get all the data, and they type in monthly supply. So when they type in monthly supply, they actually see the monthly supply for the new home sales market, which is a very small marketplace compared to the existing home sales market.
So if you look at it and you think, oh no, look, there’s nine months of supply, there’s no housing shortage, it’s all fake news. And then I retweet to them and go, listen, we have two rules, we don’t talk about fight club, and we don’t talk about the new home sales monthly supply data as the existing home sales, because the existing home sales market is at 2.2 months.
And then on top of all that, the nine months of supply, six months of that are homes that are not even started yet. You can’t sell dirt. You got to build it. And what’s the problem we have? Completion data is taking forever. It’s so long to finish a home, so that six months is already gone. You can’t even put that in there. It’s ghost supply.
Then out of the other three months, 2.2 months of that are homes under construction and only 0.8 months of that is actually homes that are finished. That’s it. So that’s not a very exciting story to talk about because you can see the completion data’s taking so long.
I think housing economics is unique in the sense it’s really boring. It’s just demographics, affordability, jobs, household formation and people try to make it into this really Titanic event. And part of the article I just wrote for HousingWire, I’ve documented all the crash calls and the reasons why going from 2012 to all the way to here, to this point, and they were all wrong because they took the headline version instead of looking at the data.
So if you’re going to listen to people, listen to people about data, but you always want to ask for their sales forecast. That’s the trick. No trolling person can hide their housing takes unless they give you a sales forecast. And once they do, boy, that doesn’t sound too crazy.
And if people had done that over the last five or six, seven years, they would realize that when you get that answer, you can’t really hide because it’s really rare in America, post 1996 to have home sales under four million. Authentically, it only really happened one time toward the end of 2008. And you could look at the data going back to the late ’70s that post 1996 is very unique. We have more people, rates are lower.
So this is the world we live in. I’m trying my best to make it as entertaining as possible, but still be my boring self. And hopefully some people have enjoyed it over the years because I would say that the majority of the forecasting and calls have been right, especially in 2020 and 2021, in trying to highlight the concern that home prices can escalate in this kind of environment, not crash 20, 30, 40, or 50%.

Well, I find it very entertaining when you call out forbearance crash bros. So please keep that up. I think it’s very enjoyable.

Well, I can’t anymore. They’re dead. It’s over. Rest in peace.

There’ll be a new one. There will be more people-

Oh yeah.

… on YouTube who continue like they-

[inaudible 00:17:05] probably a new one, but they were special. Oddly enough, I was actually going to stop writing at the end of December 2020. I was just going to do one economic expansion and a recession and expansion, and then I thought to myself, “Boy, I’m not going to let these forbearances people get off.” I was just bombarded every day, these videos and these YouTubes. And then I went into Clubhouse.

Oh, wow.

Then they were like, “The people from Arizona in Clubhouse were just living in some alternate universe. And I thought to myself, “You know what? I can’t let them slide. 2021 is going to be like… We have to worry about home prices accelerating.” So when I used to go on Bloomberg Financial in the start of the year, I said, “No, no, no, don’t worry about forbearance crash, worry about home prices overheating.”
And I kept on doing it over and over again and every single forbearance report, it got lower and lower, lower. And finally, it gets to a point where you just say, “Rest in peace, you guys were great entertainment for me.”
Economic cycles come and go. Home prices can fall. At some point I created a model for that on HousingWire recently, but it wasn’t them. They have lost their privilege to ever talk about housing again after being wrong from 2012 to 2022. I call them the housing bubble boys 2.0.
And they’ve always said that prices have to go back to 2012 levels, right? For some reason, 2012 levels were their call because every bubble means price has got to go back. So they started at 2012 and it’s just been a collage of failures, and over and over again. And I’ve documented it. And some of these people are friends of mine. So it’s just fun for me to take a dig at them.

Well, thank you for fighting the good fight.

That’s why he came out of retirement.

Yeah. So in a sense, I thank them because I really like it. What am I going to do? I’ll work for HousingWire and just talk about economics all the time.

So one thing Logan that I’ve learned a lot from you about is just about long-term inventory trends and how important inventory is to the housing market. And I talk about this a lot on various forums and people are always wondering, and I never have a great answer for it, why has inventory been declining over this long-term? And do you think it’s ever going to reverse? What’s going into this long-term trend?

Well, when we look at inventory, the long-term of let’s say the NRA’s listing data, two to two and a half million is normal, right? And I’m not one of these people that in the previous expansion, people say, “Oh, we have record breaking.” Yeah, we have no homes to buy. If we had more home sales, we’re going to… I was never one of those people. I was like on eye. I said, no, when demand picks up inventory falls, sales can rise. So historically, those are your levels. The only time we really got down to 1.5 million was in the early ’90s and then rates shot up and then inventory increased. But here it was very unique. From 1985 to 2007, people were living in their homes five to seven years and inventory channels were still normal.
But from 2008 to 2022 people are living in their homes 11 to 13 years, right? In some parts of the US, it’s 15 to 18 years. I know myself, I’ve lived in my home for 18 years. If you look at the structural build out of all the homes in America, there’s a common theme from 1975, the median square foot was 1,500. It got up to 2,700 in 2004. So we’ve been building bigger and bigger homes with family sizes getting smaller. So in a sense, the product that we make has one and done, if the person acquires a home like that. If you’re living in an older home, or of course it’s going to be too small, so naturally people move up in their ’40s, they tend to move out. But because demand is somewhat stable, it keeps a lid on historical inventory between two to two and a half million.
And when you get toward 1.5 million, boy, you’re reaching areas that are not good, except that’s still functioning. Whether, if rates are high enough, there’s no credit boom, so it keeps housing at steady. But here’s 2020 to 2024. It’s different. So inventory just collapsed to all time lows and all of a sudden, here’s this big demographic patch. So you just have simply too many people looking at too few homes. And because of that, because people make money, home buyers make money, dual household incomes, investors, cash buyers, you put them all together, boy, it’s the hungry, hungry hippo game of the 1980s. Everyone is trying to get that ball except there’s only two or three balls out there. So people are left out and you created this force bidding. This is why last year I talked about it. Well, it’s a really unhealthy market.
But when we got past my 23% home price growth level, and then 2020 came and things were getting so bad early in January and February, then you’re going, “Oh God, we’re about to hit another 20% year over year growth metric.” And if you look at the case schuler index, it’s still growing over 20%. Now that data lags a few months. So don’t look at that as forward indicating, but it is. So we literally have basically 40 to 45% home price growth trends in two and a half years. That’s not normal. And that’s not because sales levels are booming. It’s just because we had simply a raw shortage of homes and we got caught. And when you get caught, you pay the price for it. And we all pay the price for it because everyone is happy to sell their homes at the highest price ever, right?
So I got to have said, “As a collective whole, home builders and home sellers have too much pricing power.” And they’re only going to do things for their own interest. That’s what humans do. So for the housing market, it could get really insane in this kind of environment because inventory is too low and rates are too low and mortgage buyers run the show, right? A lot of people think that, “No, this is all investors.” No mortgage buyers run the show. So when rates rise, housing should cool down. And it cool down in the previous expansion, whenever rates rise and here we are, we’re seeing a cool down again, but it just, we got caught. So when you get caught, you pay the price and this is how we have to deal with it. And the historical data always showed this. But again, not the most exciting thing to talk about.

Well, the rate of change is what can be so shocking, prices going up so much in just a couple years time, inventory’s so low, rents going up. And now my goodness, just in the last few months, mortgage rates up so dramatically, I think they are over 6% today. And I don’t know, maybe if they’ll continue, but this is a shock to the system. And when I read Facebook group postings and talk to people at conferences, like I was just at yesterday with 1200 people, people are freaking out because and I’m hearing things like, “Oh my goodness. Instead of selling my house in two days, it’s taking two weeks.” So they’re really-

Oh my gosh.

… really freaking out about that. But that is not normal. They just don’t know it’s not normal.

So it’s my main talking point over this period of time, when days on market are a teenager, nothing good happens because pricing could escalate. When days on market get above 30, we’re back to normal. It’s like 30 and plus is normal. That was the 2014 to 2019 marketplace. Monthly supply was over four months. That was the normal period. We’re at 2.2 months today, the last report, the new one it’s going to be probably higher than that. And the days on market is still a teenager and we have to find a way to get off of these levels because it’s simply, it’s creating too much price damage. I think trying to explain that to people and some people are getting there, they think housing is like the stock market. What I say is that last year was interesting.
There was a wall street analyst who said we were 20% oversupplied, that when the mortgage rates get to 4%, the dynamics of housing will change. Well, if you look at the history of inventory levels, they don’t really just shoot straight up unless you have forced credit selling. So how I try to explain it is you’re basically saying an educated, positive cash flow homeowner is going to willfully put their homes On The Market to sell at a 20, 30, 40% off the market bid just to get out at all costs, to be homeless or rent at a higher cost. So if you told your wife or your husband, “Guess what? They’re going to slap you in the face.” What are you talking about? Why are we leaving? Because I’m afraid. I’m like those stock traders who as soon as one technical level is broken, I sell. Well, they can sell like this, right? Housing, boy, a willing seller is different because they have to obtain shelter.
An investor is different, investor does not have any shelter tied. So it’s the cost of shelter to your own capacity, to own the debt. So they have to know that they’re going to obtain another house once they sell. And the problem with rent inflation going up so much is that now you’re getting hit on both sides, rental vacancie’s down, home buying vacancies down. So here we are, we’re getting hit on both ends.
And I think that was the shocking thing. It was so hard for me to convince people that prices could accelerate out of control. But trying to explain, I remember telling the Washington Post this early in 2021, I said, “Listen, shelter inflation is about to take off and that’s going to lead the CPI inflation data much higher because 43% of CPI is shelter inflation. 25% of that is rent because guess what? We have 32 and a half million Americans that are right in their shelter age and they need somewhere to live.” So we just got stuck in a really bad area on inventory on both fronts. And people had money and they had to bid up or they had to pay more rent.
And part of the problem with housing in terms of homeowners being so good, talk about the best hedge against inflation is that very low fixed mortgage rate, because your shelter cost as a renter goes up, right? So your energy cost, your food cost or everything rises up, but a homeowner doesn’t have that. So a lot of the charts that I like to show is if you look at your mortgage payment as a percentage of disposable income, all time lows, right? So all these homeowners who are staying in their homes longer, their wages rise every year.
And then there was three refinance waves that happened post 2010. So when we look at how many people, how many Americans have rates under 3%, 12.6% have under 3%, then you look at the next level, three to 4%, how many? 38.2% have mortgage rates between those levels. Then you look at four to 5%, okay, that’s about almost another 30% right there. So everyone has these low rates of their wages of rises. So they’re living a very comfortable life. So when they see these inflationary datas and they see rent inflation pop up like friends of mine’s, boy, five, $600, $700, your rent go from 2100 to 2,822, they don’t have that impact because they have a fixed debt product. So the willingness to sell, you’re really selling because you know you’re going to buy something. So the inventory’s a wash. And that’s why if you look at inventory in the last four decades, it stays within a channel.
And then there’s times that it breaks out. And at times that it breaks low, but really two to two and a half million is normal. The 2006 to 2011 period was historically unique because you had a credit boom, a credit bust, demand getting weaker, credit getting tighter, supply increasing. And not a lot of people know this, the majority of loan delinquents actually came from cash out homeowners, not home buyers. Latin still to this say not a lot of people… The majority of defaults because they were serial cash out refinancing. We call debt on debt transfer and the debt structure was so exotic. And then when home values went down, boy, they were just underwater, flushed out recast rate. None of that is happening at all. So I always show people the credit stress data that the federal reserve shows us every quarter and bankruptcies and delinquencies were falling FICO Score cash flows were great.
I mean majority of the country is over 760. We just have a different homeowner now, and it’s in a sense problematic because these aren’t the stock traders running to sell their growth stocks within two seconds, right? Housing is usually a very long process compared to it. Why? Because housing debt is different. Margin debt with stocks, they move one-to-one, right? Housing debt also prevents you from really like selling your homes at 20, 30, 40% off because you have to negotiate with the bank, right? If you can’t discount your house that much, especially unless you have unbelievable nested equity. Homeowners don’t usually do that in terms of destroying their wealth. So you need a forced credit cell. That’s a job loss recession. That’s a different kind of conversation. None of that was happening here.
And for some reason, everybody started thinking 2008, which my running joke is it was never 2008, it was actually 2005. 2005 is when housing peaked. 2005 is when the credit started getting worse and things were declining. So they don’t even got the year right. They keep on saying 2008 because that was where the reception was. So there are people with economic models who do this, that could actually show and try to explain it. And the doom and gloom took over from 2012 to 2021. So a one-trick pony is always going to be a one-trick pony, right? So you just have to look at the historical data references. And that’s why that last article that I wrote for HousingWire, I literally documented every single thing from 2012 all the way to 2020 and showed why, what they were saying and what actually happened and what the data was. So once people visually get to see that, they go, “Oh, I was lied to for 10 years, they got me.” And I say, “Yep, they got you.”

2005 was also when I was a mortgage broker. So it was a different mentality where our business was just so stable and steady because people would refi every six months to one year. I had consistent business with the same customer who just wanted to do these cash out refis. And many people were just even living off that very, very different today. Who would do a cash out refi today just to take money out at a higher rate? But one of the new… There’s always somebody looking for the thing that’s going to topple the housing market. The grifters will never go away, but for good reason, nobody wants to go through that again. One of the big headlines right now is yes, mortgages are fixed for the most part. But what about those sneaky little property taxes? There’s some areas where people bought 10 years ago and they’re paying a lot more in taxes than they expected.

So those people’s wages have also gone up a lot too. So I know this especially in Texas, a lot of people say, “Your taxes have gone up.” The homeowner is fine because their cash flow is fine. This is why the federal reserves, FICO Score data is useful in that, The reason you have a good FICO Score is because your cash flow is good. So whatever increase you’ve taken on property taxes, your refinance that you have done has taken some of that hit away, but also your wages rise every year. It’s funny. It’s like people don’t know that people’s wages rise each year. So what happens in an inflationary market is that your cost of living goes up. So your wages go up as well. So it’s not a one zero negative here. Your cost goes up and you have nothing to offset it.
So the homeowner is still in a really good position. The home buyer now has a problem, right? Because home prices have accelerated so much and now you have the biggest shock. I mean, in theory, I can make a case that mortgage rates have gone up 4% really in a short amount of time, because the lowest rate I remember is about two and a half percent. And you see some quotes at six and a half. That’s not normal. That does not happen. So I never really believed in what do we call the mortgage rate lockdown premise that people just won’t move because they have a certain low mortgage rate. People move every single year for their own reasons. But we’ve gone to the point to where at 6%, that home you want to buy up is a little bit more difficult. So the rate lock in a sense is an affordability lock. That’s part of the issue that I’m seeing that could be the case going out, which means that inventory stays in, right?
And traditional sellers, a traditional buyer, what’s happened in the last few years is that people had all this equity, they sold and they went to areas that were cheaper, right? That’s what the work from home model. I mean, I generally would’ve believed people would’ve moved anyway, even though COVID don’t work from home. But now, boy, you have all this nested equity homes outside of California still looks super cheap to everyone. So theirs was like, “Yeah, this is great. I could put 70%, 80% down, mortgage rates don’t matter to me at all.” Now the question is that, does that homeowner get a buyer of his home at 6% plus mortgage rates so that person could actually go and buy another?
It becomes more problematic now because we have taken such a hit on affordability. It’s something I’ve never seen happen within such a quick period of time. Now, as someone, as part of team higher rates, which nobody likes me because of that, to create balance in the housing market, to get inventory up, four to 5% mortgage rates would’ve done that naturally. That was the summer of 2020 premise of minds, the 10-year yield gets above 1.9, 4%. The rate of change of housing will slow down. Well, now we’re 3.4 and a half percent on the 10-year yield, which means 6% plus mortgage rates. Now the mortgage backed security is stressed. That is a problematic issue for home buyers.
But the home seller is also in such a position that… They’re not going to discount their homes at 20, 30% off. And that’s part of the problem is that it’s going to be a grind. And I think the grind is always my biggest concern because when you have a high velocity housing market, you got to boom and you got a bus you got to crash and home prices are well below per cap income. So you got a stable housing market for many years. Here we’re stuck and stuck to me was always the biggest problem. So I’m looking at this period, everything that I thought that could go wrong has gone wrong and then a bunch of other things on top of that. So for me, it’s just a different outlook, but it was never about home prices going back to 2012 levels or positive cash flow homeowners selling their homes at a major discount. It is just going to be this struggle between really good demographics and affordability now, and a home seller that could just sit there and wait.
And that was part of one of the things with COVID. A lot of people thought, “Oh God, everyone’s going to rush to sell their homes.” Boy, as soon as COVID happened, people took their homes off the market. And then as soon as everyone back… Six weeks later, people got back to living. They put their homes On The Market and the demand was stable, and the inventory level started to break. So that’s the struggle with inventory and demand. And this is the first time that we’re… In recent history, people are going to see how an affordability crisis really impacts the majority of buyers and what does that do for the inventory channel. So I get to nerd out to the other side for the next few years, but it was never going to be what the crash people have talked about for 10 years, different marketplace, different backdrop, different credit setting. It’s much different this time around.

So you’re saying that right now you think that we might be entering a period of almost stagnation in the housing market? Is that what you’re saying?

Well, purchase application data is backed down to 2009 levels, right? That’s how fast the decline is. Now, I would argue… Lot of people say there’s a 73% peak to bottom drop from 2005 to where we were. Some of that data lines were pushed up higher because there was a surge of makeup demand. So purchase application data is at 2009 levels. Where’s the inventory? I always say people here we’re in 2009 levels again, right? 2008 was your holy grail, okay? We’re here. We’re one year ahead. What happened to the inventory? That’s part of the problem. So demand can fall. I just hope that sellers get realistic with that. So you have some kind of a fluid functioning marketplace. In 2018, when mortgage rates got to 5%, that was ground zero of ish-housing. Really people were talking about 20, 25% home price declines, inventory didn’t grow that year. Purchase application data was never negative really, only three weeks.
So the inability to read data has tainted a lot of views. Now you see a noticeable decline. I mean, the one thing I got wrong this year is that I thought when rates get above 4%, I thought, we’d even have more purchase application demand. So far, it’s held up better than I thought, but we’re now five, 6%. It’s after the home price, this is a serious material change because in the previous expansion rates rise, sales trends fall, rates fall, sales trends grow up. That’s always been the case, right? We had nice little equilibrium. We never had the price growth in the previous expansion like we did now. So there is a material damage done to the housing market when you have 45% home price gains in two and a half years.
So even if rates come back down it’ll be more of a stabilizer effect, but we just got caught and we’re paying the price for it with unbelievable home price or… And again, don’t worry, nobody sheds a tear for our homeowner. They have never looked so good on paper. So they have a good… Home buyer is a struggling person right now, especially a single renter that’s looking to buy, oh man, it’s got to be even more savagely unhealthy for that group. So yeah, there’s issues in the housing market, it’s just different than what people perceive it to be.

I’ve heard some experts say that we hit the peak of inflation, that we hit the peak of mortgage rate increases and that has not proven to be true, at least not this month. So do you see inflation continuing and also mortgage rates increasing?

Here’s the interesting dynamic with this discussion. So before the year start, my main thing is that global yields could rise, which that potential to rates will go up. Mortgage rates and the bond yields didn’t really rise until we saw the Russian invasion. And then the long end of the market quickly got up high. The fed is playing catch up to that. The growth rate on core inflation and core PCE is starting to fall. The headline inflation with energy and food, that is starting to pick up. And the reason I’m not a seven, eight, nine, 10% mortgage rate guy, is that I don’t believe the economy’s strong enough to get to those levels, because inflation is too much money chasing two food goods. Well, we don’t have any fiscal disaster relief going anymore, we just have household formation, and we don’t spend like we did during COVID.
So COVID-19, durable good spending just escalated beyond belief, right? A lot of that is buying for your homes. I talk at the Peloton effect. A lot of people want Peloton. It’s the bikes. Nobody’s buying those bikes anymore like they used to. So you have this big durable spike in some of the inflationary data that tends to correct itself, unless you are a really big economic growth person, right? So if economic growth picks up, inflation picks up, there’s no demand destruction done out there. I’m not in that group. So we already see some of the weakness in the data, but the headline inflation is really being pushed by energy prices and food prices. So the core is already starting to fade the headline, is it. In theory when the economic data starts to get worse, the bond yields will go down with it or they’ll get ahead of that. Hasn’t been the case now.
So we’re still in that tug of war. When does this price inflation on goods and services and higher interest rates impact the economy enough to where bond yields start to go down and mortgage rates start to go down. That’s the tug of war. And for myself, I have a six flag recession model that historically we back tested. Of course, you want to take COVID out of the equation. Four of my six recession red flags are up. The last time that happened really was in 2006. The other two came up that year. So there are slowing economic data that we’re seeing, but it’s not to the point to where some people thought we were in a recession in Q1. Well, real sales were positive, production was positive and employment was positive. There’s no time in history we’ve ever had a recession when those three things are positive.
So we don’t have recessionary data yet, but we see softness and weakness in the data. And traditionally, you’d see bond yields go down, but the federal reserve and everybody’s really pressed on doing enough destruction damage to get inflation down, really hard to do with energy prices at food prices on that. Traditionally, what happens is that before the first fed rate hike, the dollar gets stronger. If Peter Schiff’s listening. And then what happens is that the energy gets hit. We saw that in 2015, ’16, the dollar got stronger and oil prices fell. We don’t have that anymore because we have some of the supply issues. So there’s so many different variables that we’re dealing with this post-pandemic economy, but I’m not in the cup that the US economy is that strong to where growth and inflation, and wages, and consumption can just keep on skyrocketing and that will send rates and inflation higher. Population growth has been falling for years, productivity rate or growth has been falling for years.
So there’s limits to what we can do. A supply driven some of these headline inflation data is problematic because even you have declining demand, I say this about housing, right? Declining demand in housing, we have price growth. Some of the data’s still showing 15% of price growth, nothing like what we saw in the previous expansion, that’s supply driven. So some of the inflationary data is supply driven. But when the economy slows in theory, like it always has, bond yields go down with it. But the Russian invasion of Ukraine really put some variables out there.
And also the variables of possible more conflicts coming out. It’s not really talked about much, but we don’t know when this ends and we don’t know if there’s going to be a second front. So everyone has to be mindful. There’s different things right now that are impacting, but we can see it already. Some of the core inflation and core PC data starting to fall, nothing spectacular or anything, it’s still very elevated. But that would be consistent with stable demand, not super growing. Like our real sales, retail sales are high, but they’re not growing like they did in 2021. So there’s limits to what you can do with the US economy and inflation.

If you were a active real estate investor, and I’m not sure if you are, but if you were, what would you be doing and what would you not be doing today?

Well, in terms of investment, migration data is really critical because what’s happened is that there’s parts of the US that never had a lot of construction, because not a lot of people live there, right? So people are moving to areas where it’s cheaper because they have money. Now, a lot of those towns and cities have just seen unbelievable rent and inflation growth. So if you’re an investor, I would suppose you first have to look at renting or properties that could rent, especially in areas where there’s not a lot of inventory and maybe the home price have escalated so much that there’s going to be rental demand there. Again, everyone’s costs cooperates that everyone’s on their own on that. But that is where you know there’s going to be either home buying or rental demand. And all these single family rental companies, people say, “Oh, this is crazy or egregious like.” They’re five to 6% of the sales for new homes, they’re not very big.
But as home prices have accelerated and rates have gone up, there is a case to be made about more rental demand than home buying demand. So there’s areas that you want to look at where there is not a lot of construction that have been done for over the years and there’s people moving there, and there you have a demand products. There’s parts of the US that there’s not much inventory but, boy, you got to be really wealthy to buy in there. I was looking at my paying my mortgage and my mortgage lender said, “Oh, look at homes in your neighborhood. The median price is 2.4, five million.” I was like, “Yeah. No, thanks.” So those areas probably wouldn’t touch, but rental demand has a valid case in areas where maybe price have accelerated so much that the local population doesn’t have that kind of supply in there. Home buying, there’s areas where inventories picking up, we’re seeing in California, we’re going to see it in other areas. So there’s supply competition coming up there and the builders are already thinking, “Oh God, rates are at 6%.”
My buyer qualified at 3%, three and a half, maybe 4% pushing it, five or six can’t. So they’ve got to find buyers or they’re most likely just give incentives and get some cancellation. So be careful of certain areas that you’re going to see an increase in supply in if you’re trying to remodel a home and then sell it because there’ll be more competition. But areas that have rental demand picking up that don’t have a lot of supply, that seems safe.

Where? Where?

Anywhere where you see migrations, small towns, the Carolinas are still doing well in that. But their prices have gone up so much that you’ll you’ll have spillover, right? That to me is… I’m not a real estate investor, so it’s different in my mindset but supply and demand always works with anything on the investment side. You have to go to where the migration data is and areas that still need a lot of supply. And the areas that have not been built are these kind of small towns. There’s going to be areas in the Carolinas that, cities that nobody have heard of. And it’s going to be really cheap there compared to that. So so much of the action, let’s say Tampa, Aust, all these big cities have already seen so much price inflation. But there’s gyms everywhere, right?
There’re just places that you probably haven’t heard of. I mean, look at Montana. Montana’s prices have gone like 40, 50, 60%, and nobody could even name five cities in Montana. But people [inaudible 00:50:20], the flyover states are called to flyover states for a reason. Boise has been saturated by so much California money, you can see what’s going on there. But there are areas that people can live and still not very expensive, especially from out of town money.

But what areas are, would you say, on the verge of being overbuilt?

The areas that you’re going to see the biggest increase in supply are the places that got hit the most on price growth, California, Austin is going to get hit, Boise’s going to get hit in terms of growth of supply from where we are now. So anybody going into those markets that have seen 34, I mean, I think Austin’s up over 100% in two years. Okay? So San Francisco, you want to stay away from that. I think their listing is almost back to 2006, 2007 levels. So the high-cost metro areas that have a lot of mortgage buyers, they get impacted the most when rates rise.
So there’s going to be more competition in the high price, growth cities, especially the ones that people were moving to. Because you now don’t know if that person is going to move to those areas with higher rates. This is something we have to see over the next six months is that, do those home sellers get a buyer they want and that massive equity and go around and purchase homes in cheaper states. But again, the areas that grew the fastest mortgage, demand’s going to slow down inventory, days on market will grow for them more competition there.

All right, Logan. Thank you so much for joining us. I know Kathy and I would love to talk to you all day, but we do have to wrap this up. For anyone who wants to connect with you, where can they do that?

All my work is on HousingWire, HW+, there’s a Logan VIP 50 code. If you wanted to use that to be a HW+ member, you can get that. On my blog, loganmohtashami.com. It’s free to the public. It just basically has the podcast interviews that we do with HousingWire every Monday. And my name, I’m really am a total nerd. So my Instagram page is just basically stories of videos of going over charts. And my Twitter account is just full of charts and me fighting the American bears all the time. So just my name, you could Google it. HousingWire has all my work there. All the conferences where I speak with other economists, HW+ members get it. My blog is open, it’s just by name.com and you can get some of the podcast hearings there.

All right, great. And I personally vouch for the HW+, I am a member and read everything that comes out there. It’s really valuable for anyone listening, who wants to stay on top of all this news. Logan, thank you so much. We would love to grab your phone number so we can call you when Kathy and I have more questions and hopefully have you back on the show someday.

Sounds good.

God, that was very fun, Kathy. One of the coolest parts of being on this podcast is getting to talk to people who I consider heroes and role models and people who I look up to and was very fun talking to Logan. I know you follow him closely. You’ve you’ve met him before. What were some of your main takeaways from this interview?

Well, this interview and just following him is being able to look at the data the right way. And so many people miss it, even really highly trained economists and experienced economists. Certainly when you see headlines from hedge fund managers, it can be scary, but they’re talking about something different than what we’re talking about here on real estate and in particular flipping or buying old or whatever we’re doing here. So it just hard to sift through all the massive information we get. So to find someone like him, who just… Logan just seems to just plow right through it and get to the gold, and I am truly grateful.

One of the things we were chatting before the show started and you were telling me about a conference you were at recently, and we won’t talk about who, but you saw someone that was bumming you out and making you feel bad. I feel like Logan just makes me feel better about the housing market in general. He just has such a command of all the data that it really makes you feel confident that he’s right. I know no one has a crystal ball, but he might have a crystal ball. If anyone does, it would be him.

He has been incredibly accurate, just it. And in my company, we have boots on the street all across the country. So I am able to get real time data like in March of… Maybe it was April of 2020, May of 2020, I would do daily webinars to figure out what’s going on. And the real time data of our property managers nationwide and so forth, they were like, “We don’t know what’s going on. All we know is we have more demand than ever and rents are going up.” And it was contrary to everything we were seeing in the headlines. So for me, that’s where I’ve gotten my information, but it’s really nice to be able to get that verified with these kind of facts.

Yeah, absolutely. And it’s really interesting to hear his take on what might happen next, because there’s obviously all these headlines about the market’s going to crash or it’s going to keep going up. But I hadn’t really considered the risk of stagnation and this stuck. Housing market’s definitely something I’m going to be thinking about going forward. Anything you learned here today that you think will impact some of your strategies over the next couple of months or years?

Yeah. His last statement about being really cautious about the markets that have bubbled up. So to speak, the last few years. I’ve been looking at those markets, even though it’s not normally where I look, but I… Again, you got to be careful where you get your data. And when I talk to certain people, they’re just bullish on, I won’t say the cities. But in my gut, that is what I would think is wow. I don’t think I want to be in a place where prices went up 40% last year. That’s usually, you missed it already. You want to go to the place that’s going to do that next year, right? So it is having me rethink where I will focus.

All right. Well, just like that. I mean, Logan is such an authority that he might be able to change your mind.


Well, Kathy, thank you for joining us. Really appreciate it. If anyone wants to connect with you, where can they do

With me, realwealth.com and also @kathyfettke is my Instagram.

All right, great. And anyone listening to this, we really appreciate if you would give us a review on either Spotify or Apple, or if you’re watching this on YouTube, make sure to subscribe to the, On The Market YouTube channel, where we have all sorts of great content from Kathy, myself and our other hosts coming out regularly. Thank you all so much for listening. We will see you again next week. On The Market is created by me, Dave Meyer and Kalin Bennett. Produced by Kalin Bennett. Editing by Joel Ascarza and Onyx Media. Copywriting by Nate Weintraub and a very special thanks to the entire bigger pockets team. Your content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.


Watch the Podcast Here

In This Episode We Cover

  • How to dig ourselves out of the housing inventory hole we’ve created
  • The “forbearance” myth that most housing market forecasters missed
  • Why buying a home may be the smartest hedge against inflation of the decade
  • Property taxes and why homeowners should (or shouldn’t) start to worry about them
  • Housing markets to look out for that may see demand drop after huge appreciation pumps
  • Why investors need to look at data “the right way” instead of relying on prominent internet forecasters
  • And So Much More!

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.