Foreclosure Crisis or Not? Rick Sharga

Jason Hartman welcomes Executive Vice President of Marketing at RealtyTrac, Rick Sharga. They start the episode by talking about the effect of Covid on the housing market and the millennials’ approach in terms of buying and renting. Rick also distinguishes between foreclosures and opportunities and the expectations for each sector of the commercial real estate environment.

Announcer 0:01
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Announcer 0:12
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Jason Hartman 0:29
It’s my pleasure to welcome a returning guest back to the show, and that is none other than Rick sharga. He is Executive Vice President of Marketing at realty Trac, the country’s leading provider of foreclosure information for investors. He’s got a wealth of knowledge. And if you are watching on video, we will be sharing some slides throughout the presentation. But if you are not watching, we will try and make those slides understandable to you if you’re listening in audio only format. So Rick, that’s a hint there. So let’s go ahead and dive in. Rick, welcome. How you doing?

Rick Sharga 1:03
I’m doing well. We have to stop meeting like this every 10 or 12 years.

Jason Hartman 1:07
Yeah, I know. We need to do it more often, don’t we? It’s good to have you back. And now you’re coming to us from my old hometown Irvine, California, right?

Rick Sharga 1:16
Yep. I actually live just south there. But realty Trac is headquartered right, right smack in the middle of Irvine. So we’re out here in sunny Southern California. Fantastic. Good stuff.

Jason Hartman 1:25
Well, you know, everybody is asking Rick, is COVID going to cause a housing crash? Is there a bubble prices are higher than they were at the prior peak in 2006? And look what happened back then? I’m sure you hear all this stuff all day long, like I do. And, you know, I just don’t think there’s going to be a big giant foreclosure crisis, unless we’re talking about maybe New York City, la San Francisco, you know, some of these urban areas I think are really under a lot of stress. But But what are you what are your thoughts? What are you guys researching at realty Trac?

Rick Sharga 2:00
Well, I think you’re spot on Jason, the the, and the cities you mentioned, interestingly, are typically cities where you don’t see huge foreclosure problem, because their homeownership rates very low. If you go to Manhattan in particular, virtually nobody owns a home in Manhattan, it’s mostly mostly all renters. So now there’s a couple things right now you were talking about the housing market, and COVID has not slowed down the housing market even a little bit. And that’s kind of surprising, given the fact that we’ve had the most significant drop in the economy on a monthly basis, really, since they’ve been cracking the numbers, the GDP dropped 31.4%, I believe, in q2, we’ve never seen anything like that. The good news, and there actually is good news is one, it was actually an expected drop. So people saw it coming. And it wasn’t because the economy was bad. It was because of this pandemic and the need to shut businesses down. And the second thing that was good about it is that it was lower than a lot of forecasters to projected, there are people talking about 45 50%, GDP drops, and we went up to 31%. And it’s been recovering since. So from an economic standpoint, about half the jobs that we lost have been recovered. And one of the reasons we haven’t seen housing fall off, like a lot of people would have expected in a recession of the size is because of the nature of the job losses. We really have seen most of the job losses and a handful of market segments travel tourism, restaurants, retail, hospitality, entertainment. And those industries tend to be made up of employees who are hourly wages. So they’re not making a ton of money. They tend to be younger, they tend to be less formally educated. And so they tend to have very low homeownership rates. So this has been a recession that has really hit renters a lot harder than it’s hit homeowners, and a lot harder than it said, potential homeowners. So we’ve seen all those people that were on the sidelines, taking advantage of these historically low interest rates to go in and buy houses that they’ve been thinking about buying. In fact, one of the things that pandemic actually did was accelerated trend. We started to see millennials stop being urban renters and start being suburban homeowners, right. And apparently COVID-19 reminded them that being quarantined in a 700 square foot apartment with a toddler wasn’t as much fun as they expected. Or worse than that. Listen, I

Jason Hartman 4:29
have several millennial friends living in New York City Living in 550 square feet and in a very strict lockdown environment, by the way, where the whole point of living in a city was to have all that great entertainment and the Broadway shows and you know everything and all of that just evaporated overnight, you know.

Rick Sharga 4:50
So so we are one of the things you and I were talking about before we got online is we are seeing a flight to the suburbs and we are seeing it in particular In some of the higher priced areas like New York and San Francisco, I would expect we might see some in the Pacific Northwest as well. Miami is seeing a little bit of that right now. So people are looking for more space, they’re able to work from home now. And that trend probably isn’t going to go away, although it will modify over the years. So they’re not worried about a commute. They’re not worried about being right in the middle of the area. And they’re looking for a place big enough to have a home and office, Home Office, they’re looking for a little bit more space so they can move around. And candidly, there’s a perception that it’s healthier there. So from a geographic standpoint, the fastest growing segment when it comes to home sales right now is the distant suburbs, right up against rural areas. And it’s it’s an interesting phenomenon that we’re seeing that would have been hard to predict seven or eight months ago.

Jason Hartman 5:49
Yeah, so let me run this idea by you. Back in 2012, I started talking a lot about the autonomous vehicle that I’m looking forward to. And now they actually have it in Phoenix, by the way, way Moe launched, it’s fully 100%, autonomous ride hailing service. And there is no human there overseeing that car, this time around, it’s completely autonomous. And so what I said is that that would take the pressure away from high priced real estate markets, because ultimately, and it’s taken a long time to play out, obviously, this isn’t happening right away. But ultimately, it would make the prime location less meaningful than it’s ever been in human history. And with COVID, we’re seeing that too, you know, we’re seeing people move leave those kind of what we call prime areas, to the sort of secondary areas that we you know, people living in Manhattan always looked down on people that lived in the suburbs, right? Not anymore. Now, it’s now it’s what everybody wants?

Rick Sharga 6:50
Well, you can’t underestimate the or you can’t overestimate the impact those those autonomous vehicles are going to have on commercial real estate going forward. And when you start to get into autonomous delivery services, imagine that so suddenly, you’re not gonna need big parking garages taking up, you know, a lot of commercials, you’re not going to need drivers for those autonomous trucks.

Jason Hartman 7:12
You talked about, by the way, just to give you a metric on that, that I read once they estimate that 40% of a typical city 40% of the city’s real estate is used for parking. I have no doubt. I mean, can you imagine if that need goes away? what that would do to the real estate market in those places? Because suddenly you have 40% more land? Yeah, no, it’s

Rick Sharga 7:36
Yeah, it’s great prices vacancies. On the other hand, there might be a mini boom in construction is you’re repurposing all those things. Very true. Yeah. But one of the things we do want to talk about, because you mentioned that, we saw that boom and bust cycle back during the Great Recession, we saw prices spike and and there’s a lot of concern among people that we might be in another bubble, or that home prices are going out of control. And if you just look at a linear progression of prices going up over the last few years, we did hit a new high all time, in terms of median home sales price, both in California and the country in July, I think it was $310,000, nationally and over 500,000, California. But if you factor in for inflation, if you factor in wage growth, and if you factor in interest rates, home buying power is actually much stronger than it was back then. And in fact, if you look at the monthly mortgage payment this year, compared to last year, because of what’s happened to interest rates, even though median prices were an all time high mortgage payments were lower. So there’s there’s some rationality to what’s going on.

Jason Hartman 8:43
You are you’re speaking my language, my friend, I just did my own study. And I did two presentations on this so far. And I’ll tell you, it is absolutely amazing. Now, I did not adjust for wage growth. I simply adjusted for interest rates, home prices, and inflation. Okay, those three things, okay. And guess what? The 2006 median price home was $657 more expensive than today’s median price home, adjusted for inflation and interest rates. So real estate has gotten cheaper. You know, I don’t know what everybody’s so worried about. Now, granted, you know that I’m being a little bit snarky, because, of course, we’re going with the idea that people are buying a house on a payment, not a price, which is mostly true, but you know, the price does matter. And one more thing that doesn’t take into account. So I’m just going to, you know, in, in balance on balance, I’m going to say it doesn’t include property taxes or insurance which will index higher with a higher price home. But just on the principal interest the p&i mortgage payment $657 cheaper than it was 14 years ago today.

Rick Sharga 9:56
Now, it also varies by price here so it If you’re looking for affordable properties at an entry level position, you know, good luck, we’ve seen prices go up on a percentage basis, much higher at the at the lower tier than we’ve seen at the upper tier. And candidly, I wouldn’t be terribly surprised to see some price corrections at the high end of the market in some of the more expensive metro areas. So if you’re looking at coastal California, the Bay Area, Pacific Northwest, maybe some pockets like Austin, and maybe maybe even areas in Chicago and New York, those properties were probably overpriced to begin with, again, would not be surprised to see prices correct in some of those markets. But But in terms of a bubble, doesn’t seem likely we’re not seeing it in terms of prices as a multiple of rental prices. We’re not seeing it in terms of a difference in in median price versus median income in those markets. So it, it doesn’t look like a bubble. Last time. We saw prices go up because of bad lending practices. This time we’re seeing prices go up because of economics one on one. It’s supply and demand.

Jason Hartman 11:03
Yeah, absolutely. And the lending has been pretty darn conservative this time around. So do we do we have a concern for a big foreclosure crisis? Rick, that’s, you know, a lot of lot of my very capitalist vulture capitalist friends are saying, Oh, I’m ready, I got my war chest. I’m gonna buy properties like crazy this time. I’m not gonna miss it. Let’s,

Rick Sharga 11:25
let’s distinguish a little bit between foreclosures and opportunities. Do I think we’re going to see more foreclosure activity? Well, first and pictures scenario, or 40 million people file for unemployment, where we don’t see some more foreclosure activity. Having said that, I mentioned earlier that a lot of the job losses have been among renters, not homeowners, renters typically don’t get foreclosed on. There could be some Fallout among landlords, if they happen to be in an area where there are bands on evictions, and the tenants stop making payments. But so far every study I’ve seen shows the tenants have continued to make payments at almost the same rate they’re making a year ago.

Jason Hartman 12:07
And you know what that amazes me. I think there’s more of this, these rent strikes in larger multifamily properties that are owned by institutional investors. But in our network with our investors, people are paying their rent very nicely. And what’s interesting about it, too, is even though they’re they have these various eviction moratoriums, you can still literally while your tenants occupying the property, go and sue them for to get a judgment for the money, even though you can’t evict them physically. So they know they’ve got to pay and one way or another, you know, the rent is being paid most of the time. So yeah,

Rick Sharga 12:45
so invest investor I’ve known for a long time as at rental properties. He said he’s had to evict one person so far. And that person was fully employed, but was trying to game the system. Yep. And six other tenants have worked out payment plans with him. Other than that, he’s collecting everything on time. And and anecdotally, I’ve heard that same sort of story repeated over and over and over. So will we have more foreclosures? In fact, you’d ask for slides, I have a slide I can show you on this. So my colleagues that Adam and I know Todd data was just on your your program not too long ago, have done a look at what we might be seeing. So if you look at what we’re seeing in terms of potential foreclosure activity, prior to the pandemic, we were at historically low numbers of foreclosures. So in a normal year, about 1% of loans are in foreclosure. Before COVID-19, we were looking at about a half a percent. So that meant about 250,000 borrowers were in some stage of foreclosure, those are all on hold right now. Because of the foreclosure moratorium. The forbearance program from the cares act will put people into a protected state really until next March, when that program finally expires. So we don’t really see much activity coming back to market until the second half of 2021. We’ll see if the moratoria end in January, we’ll probably see those 250,000 properties start to work their way through the system will also we’re already starting to see this will also probably see states relax moratoria on properties that are vacant and abandoned. No reason to keep them in that state. So you’ll be able to foreclose on them. But we won’t really see most of the activity until after the forbearance program. So Adam took a look at kind of a best case, worst case and middle case. And that that would give us an incremental number of foreclosures ranging anywhere from about 200,000 more to about a half a million more on top of the 250,000 that will be released. So in that worst case scenario, you wind up with about 750,000 properties in foreclosure in 2021, which is three times where we were but that only takes us to about one and a half percent of loans being in foreclosure. Right. And at the peak of the foreclosure crisis, that was 4%. So we’re nowhere near where we were during the Great Recession.

Jason Hartman 15:08
And by the way, it cut out for just a moment you said 4% at the peak back during the Great Recession, right? That’s correct. Okay,

Rick Sharga 15:16
so this is 1.5% versus 4%. Is that the number? That’s correct. And personally, I wouldn’t be surprised to see us maybe reach up to 2%, depending, depending on how the borrower is coming out of forbearance, are able to perform and get themselves kind of recent reset. So far, they’ve been doing very well as they exit forbearance. A lot of people who I talked to, are concerned about the fact that there’s still 3 million people in forbearance programs, and doesn’t that mean, we’re gonna have 3 million people in foreclosure? And the answer is no, right? So far, about 8% of the people exiting the forbearance program have gone delinquent? That’s not default. That’s delinquency. Sure. And if we have that kind of success rate going forward, there won’t be a huge influx of those people defaulting on their loans.

Jason Hartman 16:10
I agree with you. And you know, what else economists always seem to fail to account for, is they fail to account for any sort of reaction, of course, the lenders are going to do something, they’re going to do workouts, short sales, loan modifications, you know, they’re not just going to sit there, and especially now, Rick, because we’re better at this. Now. You know, we just went through this 1012 years ago. So now the world is ready and adjusted. And, you know, you look at how quickly the Federal Reserve react, how quickly the government reacted. This is not the old world we lived in, and I’m just talking 1012 years ago. Now the banks are ready to deal with this problem much more so than they were during the Great Recession.

Rick Sharga 16:56
Well, a lot of good news here, really the the industry, the banks, the lenders work hand in hand with the government this time to avoid massive defaults. And anybody who’s been in the mortgage industry for any amount of time will tell you it’s much better, much easier to work with borrowers and keep them out of default, than it is to let them to vote and try and fix things afterwards. And that’s, that’s the problem we had last night. A couple market dynamics are very, very different this time than last time as well. Last time, the market was overbuilt, so there was more supply than there was demand for new housing. This time, it’s just the opposite of most people that I follow. believe we have a net deficit of 300 to 400,000 properties a year, demand is extraordinarily high. And here’s the big thing. We have a record number, a record amount of homeowner equity in the market right now six and a half million dollars, and it goes up every month as home prices go up. That gives most of these Adams numbers suggest that 70% of homeowners have at least 20% equity in your properties. If you’re a distressed homeowner with 20% equity in a market that has a desperately short amount of inventory for sale, humans much better options than ever losing your home to foreclosure auction, which is why I said earlier, I think we’re going to see default activity go up. But I don’t necessarily think that means you’re going to have a lot of foreclosures, or a lot of bank owned properties. I think a lot of these things are going to get resolved much earlier than the foreclosure auction through a traditional sale or in some instances, rarely, I believe short sales.

Jason Hartman 18:31
That’s a great summary. Thank you for that. So think about the differences. Now, folks, we have a housing shortage now versus an excess supply of overbuilding, which we had last time due to, you know, the crazy lending which you know, was also money was lent to the developers who just built wantonly. And then we have a much better equity position for people. We don’t have all the ninja loans and the liar loans in the market, you know all that subprime toxic stuff is not there. And you know, we’ve got people who aren’t underwater in a market where they got 20% equity, and they can easily sell. It’s just not the same thing. I wish it was the opposite. I’d love to see some big giant opportunity because I’m ready to pounce too, but it’s

Rick Sharga 19:15
well, you have to be careful what you wish for people. People think they want that kind of inventory around but they really don’t. Because if that’s there, it means nobody’s buying. Yeah, and so you can buy all you want, but the reading and or selling your problem. One of the other headlines I wanted to let a little little bit of the air out of the balloon on is we’re seeing all these doom and gloom headlines about serious delinquencies increasing. And that’s true, and you’re gonna see headlines saying, you know, more serious delinquencies during the Great Recession and all time highs. And by the way, that’s exactly how the forbearance program was supposed to work. All of those loans that are seriously delinquent right now, virtually all of those loans are in the forbearance program. And not only are they going to be Six months delinquent, but at some point, they could be 12 months delinquent. And that’s still okay because that’s what the program was supposed to do. If you actually look at new delinquencies, 30 day delinquencies, they’re down month over month and year over year. So what we’re seeing is really kind of a bookkeeping anomaly, if you will, even though the borrowers technically aren’t delinquent because of the cares act, their loans are being counted as delinquent because there’s no payments being made. But if you’re in forbearance for a full year, you haven’t made a single payment, and you come out of forbearance and agree to a repayment program, you’ve gone from being a year delinquent to current overnight. And that’s the other reason you’re not going to see a lot of activity until later next year. Because if somebody comes out of forbearance in March, they’re not technically going to go delinquent again for another three to four months. And that’s assuming they miss consecutive payments coming out of the forbearance program. So again, just something for your your viewers, your listeners to keep in mind as they’re going through these these numbers they see in the in the headlines, serious delinquency, this case, doesn’t necessarily equal a lot of foreclosures coming. It’s just really kind of a an unintended consequence of the way the program is set up.

Jason Hartman 21:13
I think that’s a very important distinction. So thank you for that. And this chart is from the Mortgage Bankers Association, the MBA, you know, what else is that you don’t see this same situation of people with with no options right now they’ve got the options. We talked about that a moment ago. So it’s just a very, very different scenario that people are in, you know, these aren’t under qualified homeowners like they were before in legal systems ready to deal with it better.

Rick Sharga 21:43
So you want to talk about options. I think that’s one of the reasons the forbearance program is working as well as it is so far. Keep in mind that historically, if a lender did I did a forbearance, what that meant was, they were going to allow you to miss payments for a certain period of time. When that forbearance was over, you owed all of those deferred payments in lump sum, in a pandemic like this, with unemployment being what it is, if they follow those same rules, you basically just be delaying foreclosures for a few months, right. But that’s not the case. The forbearance program, as part of the cares act, basically stipulates if you have if you have any government back loan, the preferred repayment plan is to just tack on those missed payments, till the very end of your loan. So you’re going to come out of forbearance, and not owe any of that money, until you’re really done repaying your loan, you basically lengthened your loan, that’s a great deal for the borrower, it really is another, there’s some minor, you might have some tax money that you have to make up for some insurance payments, you have to make up. But as people are exiting the program, 92% are exiting in a positive way, either. There’s a loan modification, and you mentioned that we know more about how to do that today than we did. Back in the day, a surprising number of these loans are being paid off, whether that’s because the homes being sold at loans being refinanced, that’s a very positive outcome. There’s other kinds of payment deferral programs, there’s repayment plans that are being put in place, but the majority are just being reinstated, or they’re cancelling forbearance, and continuing to make their payments on time. So I do believe the number of non current loans will increase as the number of people exiting forbearance increases. But again, that even at that point, it doesn’t mean that they’re not going to work with their service, or to come up with a better option, or that won’t be able to sell the property on the open market. So I again, if you just look at the numbers, and you look at the options borrowers have available these days, there’s a lot of reasons to be cautiously optimistic.

Jason Hartman 23:51
You know, one other point we didn’t mention, Rick, is that there aren’t all these adjustable loans in the marketplace. You know, we had we had so many borrowers last time around get payment shock, because maybe in in 2002 or so, you know, they took out a three one arm or a five one arm, and then that adjustment came along and there was it was like looking, you know, I’m sure a lot of people have seen, you know, a snake swallow a mouse or something. And it’s called fat in the middle. It’s pretty disgusting to look at. But you know, I thought once like my science class or something in junior high, I think, and you know, it’s got that big, that big bulge, and that’s what the adjustable rate mortgages were last time around. There was this big bulge there were two of them from the three one arms and the five one arms that were so popular. And when they adjusted, the people got payment shock and went right into default. So don’t have that nowadays. It’s a you know, the new, the new lending regulations eliminated a big problem from those arms, those arms in many cases, those adjustable rate mortgages were given to borrowers who could only afford to move into a property because of that teaser rate that they started with. Right

Rick Sharga 24:58
and now They’d have to qualify based on a much higher monthly payment. So even if they have an adjustable rate loan with a low initial payment, they’re qualified before they get the loan to be able to make the higher payment higher payment. And there’s just not that many people using adjustable rate mortgages lately, right? There really aren’t. I’m actually more can so So two things for investors. One is, if you’re going to be looking at at deals from distressed properties as we go through this cycle, I believe that most of the deals are going to be prior to the foreclosure auction. And that’s part part of the sales pitch here. I hate to do this, but sites like realty Trac and other sites out there will give you access to properties in the early stage of foreclosure is really where you should be focusing rather than at the auction, or at the Oreo category where the bank will have already repossessed though.

Jason Hartman 25:55
One other element to that is now we have a lot of big institutional players in the game. So how do you see that playing out in California, they want to make a law. Gavin Newsome is behind this one. The institutional buyers can’t buy foreclosure properties. Talk about a markets version, they’ve actually already passed that law, they passed that

Rick Sharga 26:18
Oh, my gosh, and then 70 Bill 1079. And they haven’t excluded them. But what they’ve done is put a 45 day hold to allow nonprofits or tenants to go and buy those properties. So right, basically, I have to outbid invitation homes or BlackRock, in order to buy that property, which doesn’t seem horribly likely in most cases. But yeah, that’s that you check with a real estate attorney or somebody who follows that if you’re if you’re looking at at an end, the law has not gone into effect yet. But it’s there. It’s another yet another wonderful move on on part of the California State Government. Yeah. So the institutional buyers, look, there’s the guys that have gone out and bought properties to rent. And then there’s the ibuyers, the open doors, right, offerpad and Zillow, who are probably going to do very well for themselves, once there is more distressed inventory on the market. But if you think about their value proposition to a seller, it’s certainty of transaction and speed of closing. Right now, if you put a property on the market that’s priced properly, in a lot of cases, you’ll sell it in a week, right are less, and you’re gonna have multiple bids on the property from both home buyers and local investors. So the value proposition the institutions have is meaningless at the moment. And the institutional guys, the really big guys who have bought properties, I think their role in the market has been grossly overestimated. I was telling somebody earlier, it’s like one of those urban myths that won’t go away like alligators in the suburbs of New York. If you look at the fact that there are 16 million single family rental units today. Yeah, they collectively they own less than 2%.

Jason Hartman 27:57
Yeah, I mean, everybody thinks, oh, invitation Homes is so huge, they’ve got like 80,000 homes. And that’s true, that is big. as investors, we all wish we could be that big a deal. But in terms of the overall market, it’s a drop in the bucket. It’s just nothing. So I don’t see them being a big player.

Rick Sharga 28:14
The other area of opportunity, though, that I would see for investors is is in the commercial market. So if you have people looking for distressed assets, we’re already starting to see a higher number of commercial foreclosure properties pop up on our website, then we would have expected this early in the cycle will start way more when you say commercial, can you define what type of commercial? I mean, obviously, there’s a huge difference between multifamily hotel office and retail and industrial. So I hate that word commercial like, Well, you

Jason Hartman 28:43
know what segment of it right here point,

Rick Sharga 28:45
I don’t expect to see a lot of industrial foreclosures. Yeah, market is going to come out as a winner because Amazon’s still looking for distribution locations. And we need more cloud computing centers. Now that everybody’s working from home. Retail and hospitality are both getting hammered right now. So if you’re looking even at at kind of low dollar, retail opportunities, restaurants, small shops, all sorts of retail establishments, we’re starting to see pop up and retail was kind of already on the edge before the pandemic. Oh, sure. The hotel industry is looking at occupancy rates below 40%, which is less than half of where they were a year ago. I can tell you from my days at auction calm that we sold a lot of limited service hotels, your Hilton Garden inns and Marriott Fairfield suites to small investors who may not have the capital to get through this this long recession. So hospitality and retail are both going to get hit pretty hard. I think there might be some short term disruption in the apartment sector, because of what we talked about the fact that we have a large number of small investors who may not be able to collect rent for the time being and may have to sell off in order to salvage their their own personal financial situation. offices, I think are going to be protected for a while, only because at least the lease terms tend to be a little bit longer. And I think the landlords are probably going to try and work things out with the tenants rather than go through the foreclosure process.

Jason Hartman 30:13
But with all the remote workers, I mean, are people coming back to the office? You know, you look at the big tech companies, they’ve said, Everybody can work at home indefinitely, or for the next year and a half. And I think people might get kind of spoiled and used to that, you know, but they’re going to need a bigger house, that’s for sure. Yes, to have, nowadays, houses need to home offices and places for the kids to study. So you know, it’s not just like one home office anymore?

Rick Sharga 30:37
Well, again, that’s one of the reasons for that trend acceleration we talked about earlier, with people moving from urban centers out into the suburbs, and even the distance suburbs. jury’s still out on how much office utilization We’ll see. Hard to imagine that New York and San Francisco remain ghost towns forever. But I think the the dynamic will shift quite a bit. If you’re going to reopen an office, you have to manage to have enough space per worker to have social distancing, to maintain health standards. And I think you’ll start to see some regulations come into play there. So while you may have fewer people going into offices, they’re going to be more spaced. Yeah. Yeah. And the other the other thing that I think Mark Zuckerberg, Facebook has been talking about this, since you mentioned the tech companies, I think you’re gonna see more decentralized locations and office workers. One of the trends I saw through the second quarter is, while office sales overall had dropped, we’re seeing more of an incidence of suburban office sales. So you might be seeing more movement towards second and third year offices, as the Facebook’s and Twitter’s and Googles of the world, realize that it might be cheaper for them to have an office in Omaha, and pay Omaha wages and moved to San Jose.

Jason Hartman 31:44
No question about it. Yeah. And also, a lot of the big companies have talked about doing sort of this, like hub and spoke concept like the airlines do with their office space. So we’re obviously reading the same stuff, you know, and so little sort of conference center types of bourbon offices, you know, where people can go and work can get out of the house and have a change of environment and still, you know, have some social distancing, but but not go in as often. It’s interesting, the world sure is changing, isn’t it?

Rick Sharga 32:12
It sure is, in ways that none of us could have imagined in January.

Jason Hartman 32:16
Yeah, this is this 2020 has been quite a year of the year of acceleration, you know, changes, again, that were already happening. But now, it’s just moved the future up 510 years sooner. Rick, one thing we didn’t talk much about is the different price segments of housing or, you know, different types of markets, like our investors like to invest in these linear markets, you know, with lower priced housing, that’s $150,000. Certainly not California type properties. It seems like the shortage is more severe in this lower price, linear market housing than it is in more expensive markets. Do you have any data on that or any thoughts you want to share? Well, you’re

Rick Sharga 32:58
absolutely correct. One of the reasons for that is that none of the inventory being built is being built in the lower price tiers. And one of the reasons for that is it’s so expensive for builders to build a property. Fannie Mae estimates that it costs a builder $80,000 across the country before they break ground $100,000 in California, that doesn’t include the increased building costs, because of raw materials going up, labor costs going up. So you’re just not going to see a lot of new inventory being built at the entry level. In fact, some of the builders have shifted that kind of stock into build build for rent properties. The other problem is, we have a historically low level of existing home inventory for sale. So there are people sitting in those prices, the properties that would sell the lower prices, who simply aren’t putting the properties on the market, because they’re not sure if there’s something for them to buy. They’re not sure how stable their economic situation is because of the recession. And candidly, they may be uncomfortable going out looking for a new house for fear of catching the virus. So until we start to see a little more building activity, that frees up some of the properties at the lower end. And until we see people more willing to list their properties. We’re going to continue to see a shortage of inventory at that part of the price year. And we see the cost of construction materials like especially lumber lately, just some guy rocketing now, that’s going to tone down a little bit when you look at the lug nut lumber futures market, it’s, you know, has signs of toning down a tad but still very expensive. And that’s just going to keep the upward pressure on so we really do have an affordable housing crisis in this country, don’t we? And there are no easy solutions. I was talking to somebody yesterday about Vice President Biden’s notion of having a first time buyer credit tax credit of $15,000

Jason Hartman 34:50
that’ll just make more first time buyers and push the prices up. It’s exactly what I was gonna

Rick Sharga 34:54
say all over again. You know, it’s it’s a well intended approach that doesn’t really Understand the market dynamics. Of course, I keep going back to what Ronald Reagan said the scariest words in the English language are from the government and I’m here to help.

Jason Hartman 35:08
I love it. That’s one of my favorite Reagan quotes. He was so great. He said some of the best quotes there. They’re awesome. Well, Rick, this has been really, really phenomenal. Anything you want to just wrap it up with any thoughts, any advice for investors,

Rick Sharga 35:22
there are going to be investment opportunities I would be looking at at rental markets as short term opportunities, whether it’s traditional rental or Airbnb, I would keep my eye on low dollar commercial assets in the retail and hospitality space in particular. And again, I would I if you’re looking at the foreclosure market, I would be looking at the early stage foreclosures as where a lot of the activity is going to be taking place. So you have to tune your game up and be ready to approach those distressed buyers of those distressed homeowners rather and not wait for those properties come to auction.

Jason Hartman 35:54
Good stuff. And of course, which website Do you want to give out? Just realty trac.com

Rick Sharga 35:58
Yep. So visit us realty crack calm. There’s no k on realty Trac, Arielle t, y, tra, AC, sign up for our blog. If you want to follow this kind of stuff. It’s free, nothing required other than your email address. And if you like this kind of information, feel free to follow me on Twitter, or reach out to me on LinkedIn. I’m not hard to find. It’s just Rick sharga.

Jason Hartman 36:19
Excellent. Good stuff. Rich chakra, thank you so much for joining us. It was a pleasure. We’ll have to do it sooner than another 10 years. Absolutely.

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