Is the Housing Market About to Collapse? w/ Melody Wright

I thought a good place to start kind of digesting this was, you know, talking about the housing market bubble, if you want to use that word, everyone does. But you've highlighted something recently I thought really kind of gets to kind of the issue in the market that we're seeing. Home sales are the worst we've seen in over 30 years, as you said, and we've also had a population increase since that time of 20%. So it would make sense that there would be, you know, a higher demand for these things, right? So what is the reason for this frozen lake? Is it people not wanting to refinance, people not being able to afford homes? Like what, in your view, is driving this huge decline in home sales that we've seen specifically? The largest driver is unaffordability. This is the most, some would argue, you know, that it's the most unaffordable on record. And it really is. You can kind of make minor arguments against that, but it's really bad. And so what's driving that is, you know, we just have not seen wages keep up with inflation. And right now your median home price for existing homes, think of this, you've got to think of the housing market as the new homes and the used homes. And right now, the used homes, that median price is around $420,000. Our median, our household median income, not individual, household median income right now is around $80,000. If you're making $80,000 a year, you can comfortably afford a house for about $275,000 or $300,000. And so what happened is all the investors piled in, they were buying for short-term rental, long-term rental, and some just, you know, were buying to fix and flip to sell them. This was a big part of the game. And that kept those median prices up. Meanwhile, though, on the new home side, you've seen those prices just really tumble is the best way to put it. They've restated prices. So it looks a little better than it did, but what you're seeing for the, so this is just quickly a stat. Since 2012, new homes have averaged about $50,000 more than existing homes. They are now less. That shows you just how out of whack the market is, but unaffordability is the biggest driver. So just, I want to move on to some other questions here, but just so our audience understands, why is that so out of whack that that flip has happened? Explain that just so everybody understands why. Well, I mean, with most things, if you're going to buy a new coat versus a used coat, which one is going to be more expensive? Theoretically, these homes are being built to new coats, you know, all kinds of different things that you don't have on those existing, it's new, a new roof, for instance, an existing home, you might have to replace that roof in five years. So simply put, it's because it's new. Right. So it's new in the market should be prioritizing that, but that is flipped. So now existing homes are selling for more. So what we're describing here is this bubble, right? Which is that there is a lot of inventory on the market that's not being bought up because people can't afford it and sales have dropped. So now what a lot of people are kind of anticipating is that the prices of homes will eventually collapse because there's no demand, the prices will come down. And people have been looking at ways to kind of see where that's coming from. I wanted to ask about something. You've been tracking 85 oddly specific towns in the country to get sort of a leading indicator on when this correction might happen. I would love for you to explain to our audience how you identified those, what's your thought process there? Why are these vacation towns so important as a leading indicator in the market here? Sure. So I did kind of a combination when I chose those towns and I crowdsourced some of them. Like, of course, I did your most important metropolitan statistical areas or MSAs, all the big ones. But I kind of crowdsourced as I was hearing from investors all over the country for these markets that got heavily into short-term rentals, like for instance, Galveston, Texas, or Cape May, New Jersey, where people were buying up these homes to do short-term rental because during COVID families went nuts. You would have families of like 20 going to these places and want the perfect location. So then you had people they weren't satisfied with just kind of buying up those existing homes. They started building, building for spec, building for short-term rentals here. And so I knew that because people got into these markets so heavily with that speculation, they would be kind of bellwethers. They would tell me first when things were starting to turn. And sure enough, they did. So Austin, of course, would have been on my list one way or the other. But in Austin, you have 15,000 Airbnb slash Vacasas or short-term rentals. And you don't need 15,000. You have a whole lot of other things in Austin too. But Austin was one of our first indications of what was going on. And Nashville, Tennessee, which is if you go downtown, it is nothing but Airbnbs. So great. That makes a lot of sense. I think that people need to kind of come up with some way of getting their hands around the idea of the market as a whole. And I thought that was a really interesting approach of looking at those specific markets, those 85 towns. So I want to kind of like step back a little bit here. There's a lot of people saying we have like an affordability crisis. And so we need to build a lot more affordable housing. At the same time, we're seeing tons of homes go unsold. How can there be both a shortage and an excess of supply at the same time? Or is somebody misreading the market here? They're totally misreading it. In fact, I don't think they're misreading it. I think that they know that the inventory shortage narrative has been pushed out there. And so they have to speak to it because it has been the drum that this industry has marched to that there is a shortage. Now, I will absolutely tell you there are no affordable homes out there. That is a fact. But what we have is a misallocation of inventory. We have 15 million vacant homes in this property. That's not even including those seasonal homes. The boomers have first, second, third homes. And then as well as the institutional investors. And so essentially, you've got the situation where people misread the market, as you say, and thought because there was so much activity, all these bidding wars, those weren't you and me. Those were institutional investors and even kind of what I would call larger mom and pops. That is so many folks. And what they did, John, quickly, is they looked back and they said, oh, well, we did all this building, you know, during the GFC, but we haven't built at all. Well, we pulled forward demand back then. And then during COVID proper, we also pulled forward demand. So Harvard's done, they do a demographic study every year on household formation. And they said we absolutely what we're facing in the future because of that pull forward demand is a lot less demand. And then you have to consider that the boomers are aging out and we'll lose 15.6 million of them by 2035. And they own the majority of the homes. Yeah. So this is, I think, something I was, I was going to get into, but it's kind of a big topic, which is like, how do demographic shifts impact this, right? Like you said, like new home, new family household formation is declining. People waiting later to get married and start families. Boomers are starting to bring their, their inventory onto the market. How much of a driving factor is that in all of this? Is that like, yeah. How, how are you thinking about these demographic shifts in terms of like the changing needs of housing for the country, I guess, like how much of an impact is that having? Well, it's massive. Right. And so if you think about it, I I'm helping several people right now who have inherited properties that they simply cannot afford. Are there some sort of problem? Because we've seen because of those accelerating home prices, we've seen property tax increase. We've seen insurance, just go bananas. We've seen replacement costs. And so these kids, they don't have those incomes to support those homes. And so often what you're finding is that they're selling those homes. And so right now, the average household size, I quickly, what do you think the average household size in the United States is? Oh man, you put me on the spot. Three. Right. And I remember back when we used to talk about it being like 4.2, like I was, I was younger. But in reality, it's around 2.5. Okay. And so what we've done, and that has just been going, that average house has been going down. Well, for the first time last year, it didn't because homes are consolidating because they no longer can afford. But I have a friend, Kenny Cap PhD, who does demographic work, who says, what do we want to get down to one house per person? I mean, is, is that what the kind of country we want to live? Because it leads to productivity, right? Like, you know, we, we don't have enough workers. We're not, we're not birthing babies at replacement rate right now. And so we're going to lose productivity, we're going to lose the ability to afford the homes that we even have, even though they're already unaffordable. And so I think the shift is massive. And there are so many people that just aren't understanding what's coming next. 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