Exploring the Build to Rent Trend: Impacts on Texas Housing and Mortgage Rates

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What's up, World Wide Web? This is the Texas Real Estate and Finance podcast market update for the week of May the 7th. So if you live in North Texas, like I do, then you're feeling great right now because the Mavs and the Stars have both moved on to the second round of the playoffs. And that means we're one step closer to having another champ in North Texas following in the Rangers' footsteps from last spring.

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You see, it's always good to have teams advancing in the playoffs in any area of the country. And not just for the fans and the vibe of the city, but also economically. Because people are happy, they're out watching the games, and restaurants and hotels and many other businesses will reap the benefits from this.

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I myself owned a couple of restaurants in my previous life, and we would always have great revenue whenever a team would get into the playoffs and make a really good run. So I hope all my North Texas businesses out there are enjoying these runs as well. Because right now, there's never a night without something to watch.

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Now, I know we're not here to talk about sports, but I'm excited about it, so I get to tell you about it because I get to talk on this thing, and that's what I do. Okay, now that my personal interests are out of the way, what are we getting into on today's market update? Well, just like always, we're going to discuss mortgage interest rates and where they're at at this point, and why there might be some signs that we may be getting a little relief here in the next few months. There's lots of economic data to cover.

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Then we'll go through national and local housing trends by the numbers. Listings are up and inventory's up as we head into the summer. We got a few updates on the NAR case and when those settlements are actually going to take effect.

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Zillow has taken the first stab at how to structure these new buyer rep agreements, so I'll tell you what they've come up with. And finally, we're going to cover some quiet news on the corporate takeover of the real estate industry and why you should care. But first, as always, if my ramblings each week bring you even the slightest bit of helpful information or entertainment, then help a crazy old ball man out and share this with your network.

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We are growing by the day and you guys are why. So just give me two seconds of your time and hit that like button. I would really, really appreciate it.

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All right. So in the lead off spot, as always, today is mortgage interest rates. Okay.

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So as of right now, the average 30 year interest rate is around 7.25, especially after the softer than expected jobs report last week, which if you've been listening to the show, you've known I've been expecting this from quite some time now, even with the numbers still being quite sus on this jobs report, it's still showing softening. So why is this important? Well, first off, you have to remember that the Fed has a dual mandate. They are stable prices and full employment.

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So here's some of the data from the jobs report. So back in April, we added 175,000 jobs to the economy, which was well short of estimates of 204,000 jobs. So that's a pretty big mess.

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Also in this report that went kind of unnoticed is that there were two revisions for March and February that overall revised the total number of jobs down 22,000. And the thing is, is that there's still quite a bit of wiggle room inside these reports for messing with the numbers. So there's this thing called the birth death model.

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And these, this model is used to estimate the number of small business job openings that are available and being taken away. And using this model and these estimates, the BLS reported that they added 363,000 jobs to the economy. But when you look back at what ADP reported, which is actual payrolls from company, they only estimated 38,000 jobs from this segment of the market.

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You see, the BLS doesn't have the ability to get small business data very quickly on such a large scale. So they have to do this modeling. And basically they're just estimating how many businesses open and close by births and deaths and how those numbers are correlated with job openings from the past.

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Whereas ADP gets an actual sample from these businesses. It's not the whole number, but just a sample size. And then they base their estimates on that sample.

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And usually these numbers should be somewhat similar without such a huge spread. So if you took out that calculation of 365,000 jobs, that was just essentially a made up number using modeling, then we would actually be down 175,000 jobs, not up. This is how they mess with the numbers to show you what they want.

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And you know, to be fair, stats are really hard because you can't actually survey everyone. So they do have to take a guess. So they have to use modeling and they have to use statistics to try to give a rough number of what to expect.

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But all this guessing allows for a lot of messing with numbers based on what you want the story to reveal. And the BLS household survey, which actually calls people and then takes a sample to estimate the numbers only show 25,000 jobs at it. So there's a big gap there as well.

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And with all these numbers and all this changing, the unemployment rate actually did go up. It went from 3.8% to 3.9%. And if we get to 4.1 or 4.2 or maybe even 4.0, this would be something that could trigger the Fed to start cutting rates. Now also affecting rates this week is what the Fed actually stated at the meeting.

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So Jerome Powell stated that the Fed will look to slow the reduction of treasuries from 95 billion a month to 60 billion a month, which means that they could become a net buyer of treasuries reinvesting in the market. Now mortgage backed securities, which actually affect mortgage rates, are going to keep running off at the same pace they have been. But primarily this is because the Fed hasn't been able to run them off naturally because people are not refinancing their homes.

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When people hold an interest rate of 4% or less and the market rate is at seven like it is right now, the likelihood that a mass amount of people are going to refinance and therefore pay off their current existing loans and start a new one is very low. So if that's not occurring, then there's not going to be a big runoff in MBSs. So you're not going to see the Fed run those off because they're waiting for the market to take place and start doing it on its own.

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So the Fed's not going to be a net seller of those anytime soon because they also don't want to flood the market because these things aren't running off on their own. But they probably will start to sell off treasuries sometime in June. These are kind of like stock buybacks causing fewer treasuries to be circulating and therefore driving up the price, which is a good thing for the bond market overall and will have a net positive effect even on mortgage rates.

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Now, Powell also said that as it stands right now, they have no intention of hiking rates. So anybody out there talking about how the Fed may start to look to hike rates, at least according to what the Fed is telling the public, that's not in the cards currently. And they did reiterate this several times throughout the press conference.

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As a matter of fact, they still said that there are possible intentions to still cut rates this year. And why would they say this? Well, because if the unemployment rate continues to go up, this would be the thing that causes the Fed to start cutting rates. Small changes in unemployment wouldn't trigger this, but bigger changes would certainly trigger a Fed rate cut.

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And if inflation does start to come down, it could be even greater. So at the next jobs report, if they get a surprise like a 4.1 or a 4.2% unemployment rate, that's certainly going to get their attention. He also stated that he doesn't think that stagflation is going to be an issue.

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I do think that that remains to be seen. Just like they said, inflation was transitory back in 2022. Just because they're telling you it's not an issue doesn't mean it's not going to be.

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And just so you know, stagflation is when prices continue to climb, which they are, but spending and consumption are down, which they are also starting to show happening. So when prices are up and spending's down, that's stagflation. So we'll see what happens.

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But if the economy goes into some form of stagflation, that's probably worst case scenario because you have a contracting economy with higher prices and then everybody's in trouble. So we're certainly not rooting for that to happen. And one more little weird thing is the jobless claims continue to show some really odd numbers.

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Last week, there were 208,000 claims, but that's almost exactly the same as it was the week before. And continuing claims are also the same as they were from the previous week. This is all very strange.

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And as I talked about it last week, these numbers that are so similar from week to week are very unusual and are causing a lot of pundits out there to start asking questions because in many ways, this isn't statistically possible. So right now, we're still having mortgage rates over 7 percent. But if unemployment starts to tick up at a greater pace or even some slight small moves in inflation downward, that could change the math of all this really, really quickly.

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So stay tuned. All right, let's get into the housing market. So nationally, after two weeks of significant increases, inventory growth slowed down pretty heavily last week compared to a year ago, but overall is still on the rise, which is a little bit unusual this time of year.

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So the weekly inventory changed from April 26 to May 3rd. The weekly number of inventories rose from 556,000 to 559,000. But at the same time last year, inventory fell from 421,000 to 420,000.

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So year to year, there was a decline. But week to week, there was an increase. So the trend on a weekly basis is showing that inventory is going up.

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But there was a small blip of inventory coming down from this time last year. Now, the all time inventory bottom on a weekly basis was back in 2022 at 240,000 homes. And the most recent inventory peak in 2023 was 569,000.

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And just for a little context to give you an idea of where we are overall, back in 2015, weekly inventory rose over a million homes that week at the same time. Now, new listing data has been a positive story all year, and we've seen consistent growth from the 2023 levels, which saw the lowest recorded levels of new listings ever. Now, purchase application data did not move very much again last week.

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It's down 2% week over week and 14% year over year. So we're down a pretty good chunk from last year. Oh, and by the way, any growth we see in this data in the future, you have to remember that we're working from some of the lowest historic levels that we've ever seen, because buyer applications are way down.

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And hopefully, we can get some rate relief to increase that number a little bit this year. Now, moving on to the local Texas market, right now, Texas and Florida lead the way in listing data. But they are also two of the most populous states in the country.

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So it can be a little misleading when compared to other national listings. But they have been growing at a faster pace than any other state right now. Texas went from being 10% of the national listings in 2019 to now representing 17% of the national listings.

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But you got to remember, this is a statewide number, because the metro area of Dallas did not experience a big lift in listings compared to the rest of the state. And we're still waiting on data from April. But according to Redfin, home prices in Texas were up 1.7% year over year in March.

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At the same time, the number of homes sold fell by 9.29%. And the number of homes for sale rose by 15.2%. In March of 2024, there were 136,000 homes for sale in Texas, which is up 15.2% year over year. The number of newly listed homes was up 42,000, up from 8.9% last year. And the average monthly supply right now is four months, which is about the same compared to last year.

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But a lot of that inventory in the four-month number includes a lot of homes that aren't completed yet. There's a lot of new builds factored into that number that you can't actually purchase. So the actual homes available for purchase right now might be closer to somewhere to three months for sale.

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Now, in March of 2024, 14.5% of homes in Texas sold above the list price still. And this is down about 2% from last year. And there were only about 29% of homes that had price drops, which is up from 27% from last year.

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And right now, the 10 most competitive cities to get a home in Texas, number one, Euless, number two, Coppell, number three, Carrollton, number four, Louisville, number five, Weston, number six, Farmers Branch, number seven, Plano, number eight, the Colony, number nine, the Woodlands, and number 10, Allen, Texas. So right now, listings are increasing with the higher rates and the migration has slowed into Texas, causing some less demand. But prices are still going up.

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And in certain areas of the state, you are still competing with multiple offers. However, there are deals to be had out there, just not in the cities that I just listed. But they are out there if you're willing to drive a little bit further.

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All right, let's move on to the latest updates in the lawsuit land. So I know we're all tired of hearing the story and would like for us to all just be able to move on, but you gotta know what's happening so you can prepare for things as they start to change. So there has been a date that's finally been decided as to when all these changes are actually gonna take place.

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And they did push it back a little bit. Now, the business practice changes outlined in the National Association of Realtors Commissioned Lawsuit Settlement Agreement will go into effect on August 17th of 2024, according to a letter sent to members on Friday by NAR chief legal officer, Katie Johnson. She stated that multiple listing services that opted into the agreement have until September 16th of 2024 to implement policy changes and be considered as released parties.

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Although Johnson and NAR recommended that all of the MLS choose to opt in and should implement them by August 17th. So again, these changes include eliminating and prohibiting the quote, requirement of offers of compensation in the MLS between listing brokers or sellers to buyer brokers or other buyer representatives, as well as prohibiting MLS participants, subscribers and sellers from making any offers of compensation in the MLS to buyer broker or other buyer representatives. This also is gonna require compensation disclosures to sellers, as well as prospective sellers and buyers.

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It will require MLS participants working with a buyer to enter into a written agreement with that buyer prior to touring a property. Now, in a communication that was distributed to members NAR chief legal officer and chief member experience officer, Katie Johnson, explained that the deadline will provide a three month window for NAR members and MLSs to prepare to implement the policy adjustments. She stated that our settlement requires NAR to implement the practice changes no later than the date plaintiffs can issue class notice.

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Though the preliminary settlement approval process, we know the earliest date of class notice to be is August 17th. We're announcing these important changes now to ensure NAR members and MLSs have ample time to prepare. NAR also sent out an email earlier last week, clarifying the upcoming contract changes.

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Listing brokers need to sign a contract from buyers before showing them homes, even in dual agency, meaning if the buyer goes direct to the listing broker. Contracts are required even for virtual and video tours and buyer contracts must have a defined commission. They can't just settle for whatever's being offered by the listing broker.

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Now also in NAR news, Home Services of America, which was the last remaining brokerage defendant in the landmark Sitzer Burnett case, has agreed to pay 250 million in damages to settle lawsuits that will change agent compensation across America. Redfin has also joined the growing list of real estate brokers that have settled the commission lawsuits as well. In a document filed with the Securities and Exchange Commission on Monday, the brokerage announced that it had reached a nationwide settlement agreement on Friday with the plaintiffs in the consolidated Gibson and Oompa Commission lawsuits.

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That was dumb. As part of the settlement agreement, Redfin has agreed to pay 9.25 million into a qualified settlement fund within 30 days of the court's preliminary approval of the agreement. The filing did not detail whether the firm agreed to any business practices changes as part of the settlement agreement.

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So now that the Sitzer Burnett case is fully settled and approved with a date of enforcement, we might all be able to start moving on with our lives in this new normal, assuming that the Department of Justice doesn't throw us any curve balls between now and August 17th. But it has been pretty quiet on that front. So at this point, I don't think anything's going to change.

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Speaking of the new normal, Zillow has decided to take the first shot at interpreting the new rules and adjusting business practices, especially as it relates to buyer rep agreements. So right now, Zillow is offering a non-exclusive contract for home tours ahead of the rule change going to affect this summer. Zillow touring agreement is meant to promote transparency and make it easier for homebuyers and agents to arrange showings, said Errol Samuelson, Zillow's chief industry development officer, in a blog post and an email shared with Real Estate News.

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Now, the touring agreement is good for up to seven days and only covers touring activities. Per the agreement, the buyer would not pay any fees for touring services. But if additional services are requested, the buyer and agent would need to work out a separate more detailed agreement.

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So in the same blog post, Samuelson wrote that the buyer agreements can provide transparency, promote open conversation, and foster alignment between the two parties. However, insisting that a buyer sign an exclusive long-term agreement with an agent, perhaps before even meeting the agent, feels a little premature. That's why Zillow has created a non-exclusive touring agreement and we're making it available for use to the entire residential real estate industry, Samuelson added.

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So in this case, Zillow is still working with and trying to help agents navigate this transition and giving the first solution to a problem and testing to see how it works. I think it's a good idea. Let your buyer agent show some homes without expecting compensation for a short amount of time and keep things casual, as they say.

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That process will make the next step of establishing compensation on an offered contract easier and more comfortable now that the agent and the buyer have an established rapport. Look, I'm not usually a big fan of Zillow and what they've done to our industry as a whole, but with homes.com biting on their heels right now, a little competition in the mega corporate listing sites is a good thing for agents. So I welcome the help and I welcome the competition.

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All right. And finally, speaking of corporate interest, that leads me to our main topic of the day, which is the quiet, yet steady takeover of real estate by big corporate interests. Now, to be fair and clear about this before I start right now, the segment of the market that is currently owned by what I would call institutional money, not your mom and pop investors is still very small.

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As a matter of fact, in June of 2022, a report estimated that roughly 574,000 single family homes nationwide were owned by institutional investors. And this is defined as entities that own more than 100 of these homes. It only comprised about 3.8% of the 15.1 million single unit rental properties in the US.

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Now this is pretty old data and it's been kind of hard to find data more recent that gives an updated number of this, but it's not like 30% or anything. It's still a small segment of the market. However, this trend has been steadily going up, especially in certain parts of the country.

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And to prove my point, here's just a few headlines that have been quietly reported over the last 24 months. So real estate investors bought a record 18.4% of homes that were sold in the United States in the fourth quarter of 2021. And that's up from 12.2% the previous year.

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This is according to Redfin. And earlier this month, Redfin estimated that roughly 13% of all the homes sold in the final quarter of last year were single family homes bought by investors. But they did not parse out the big investors from the small investors.

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But even if they did, many of these big investors use small LLCs that they set up to make cash purchases that roll up to much larger entities that are hard to track. And three corporate landlords control nearly 11% of single family homes available to rent in the Metro Atlanta area's core counties. According to new analysis led by Taylor Shelton, a geographer at Georgia State University.

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And in this report, he clarified exactly what I just stated, that many large companies in the United States operate through smaller companies called limited liability companies or LLCs for short. In the case of corporate landlord companies, these LLCs help protect the larger parent companies from liability or legal actions that tenants might take. Shelton also said that corporate landlords tend to have a lot of LLCs to protect themselves.

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In fact, in the core Metro Atlanta counties in this study, Fulton, Clayton, DeKalb, Gwinnett, and Cobb, the three largest landlord companies have more than 190 LLCs between them. And these LLCs have multiple addresses, which make it incredibly difficult to trace the ties between their location and their parent companies. So also in a recent article by Lance Lambert of Resi Club, former guest of the podcast, our homes for rent CEO, John Saxon made a very bold claim.

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He said that despite spiked interest rates, his company plans to go from 4,200 built to rent homes to between 25,000 to 30,000 homes across the Southeast over the next four to six years. And alongside the 4,200 homes currently owned in an operation across the Southeast, our homes for rent has an additional thousand units under development and under contract right now. And these units consist of single family homes or attached townhomes and build to rent communities with the largest markets located in Atlanta, Charlotte, Raleigh, Orlando, and Tampa.

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He goes on to say, what I think the built to rent industry and the single family rental industry to a lesser degree is doing is filling the void that has been created by this millennial cohort that have come along and said, I want to be a renter for longer, but now I want to live in a home instead of an apartment. So is that true? Millennials want to be renters and don't want to own properties. I think that's insane.

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But if you're a millennial, let me know. I'm curious to know what you really think. Do you want to rent or do you want to own? And according to a report published on Thursday by Rent Cafe, which utilized data from its sister company, Yardi Matrix, there were a record breaking 27,000 built to rent homes completed in 2023, marking a 75% increase from 2022 and a staggering 300% increase since pre-pandemic levels in 2019.

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And additionally, there's a pipeline of at least another 45,000 built to rent homes expected to be delivered in 2024, 2025 or 2026. This is a segment of the market that is growing and growing really fast. And builders are being tied up in areas for these built to rent.

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So they're still building just not for the average consumer to purchase, only for big money and large hedge funds. Now you're going to see headlines about these corporate buyers becoming net sellers or even getting out of it altogether. But realize right now, everyone is somewhat backing off of real estate, but there are plenty of large companies out there accelerating their buying and positioning themselves to be big players as the market starts to shift.

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And remember, a person's housing expense, be it their mortgage or their rent, is typically the largest single expense on their household budget. So if you were a large company trying to find more ways to get new streams of revenue from the consumer, where's the place that has the most opportunity and the biggest return on your investment? That would be, of course, housing. It's a large dollar amount and an expense that almost everyone has to pay.

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And oh, by the way, the asset that's being leveraged to collect this cash flow is continually appreciating and worth more and more every year you hold it. So you have a cash flow line item that has to be paid every single month. That line item is continually growing every single year.

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So you have more future revenue and it's associated to an asset that if you own it, adds one more layer to your balance sheet and an ability to leverage future capital for other investments because it continues to appreciate. So this is a no brainer if you're an investor trying to find ways to continually grow your portfolio. So why hasn't this been done at a greater pace before now? Well, that's because the industry has been so very localized and controlled by local realtors.

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And before now, it has always been relatively achievable for the average consumer, which means that there were always a little bit more competition for these assets. Well, this is starting to shift now with home prices becoming more and more unaffordable for consumers due to the lack of supply. This has eliminated much of the competition for these assets in certain parts of the country.

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And it's given a unique opportunity for a company with capital and know how to come in and start buying and building these assets because we all have to live somewhere. And buying a home is not an option anymore for a lot of Americans. So what can we do about this? Well, unfortunately, as an individual, not a whole lot, just like many other industries in our country have been taken over by large corporate interests.

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Real estate is just kind of the next one in line right now. So if I'm an individual and I have the means, I would say buy as much real estate as you can because it's getting more scarce and rents are going to continue to go up. Now, right now, there is a little bit of an oversupply of rentals when you factor in multifamily like apartments.

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So at this moment, getting a mortgage for an investment property and then having enough rent to cover that and cash flow can be a little tough because rates are so high. But rents are going to continue to go up because they're not building as much multifamily properties right now. So as those properties stabilize and more and more people move into it, those rents are going to increase and interest rates are going to come down.

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So if you can make it work right now, then I say go for it. And if you're a realtor, share this information with your database. They need to know that real estate is slowly becoming a thing that only the uber wealthy can afford and they have to get on the train right now before it's too late.

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It still could take several years. This isn't something that just happens overnight, but make no mistake, it is happening and people need to pay attention. So as a person, there isn't much you can do about it.

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But as a group and a community, we can fight back. You just have to spread the word and let people know what's going on and how to fight it. Well, my friends, that is all for today.

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So right now, rates are starting to slide down a little bit. Hopefully that trend continues. Inventory is going up some.

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Hopefully that trend continues. All the NAR chaos is starting to settle in a little bit and create some new norms in our industry. So there are a lot of positive things moving in the right direction at this moment in time.

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Things are still a little bit slower than most people would like, but there does seem to be some light on the horizon. You just have to hang in there and keep fighting that good fight every single day. And if you can sell to families and people and not LLCs and companies, I know that your job is to get the highest dollar value that you can for your sellers.

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But your job is to also protect the industry from threats coming in. And whether it feels like it right now or not, we are currently in a battle against big money and the future of homeownership for Americans. And we have to hold the line.

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I'll be here doing my part and I hope you will too. All right. So join me on Thursday as I welcome Scott Carson to the podcast.

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Scott is a very successful podcast host, but also the managing member of WeCloseNotes.com, an Austin-based, defaulted note buying company. And he's going to share with us some great insight with just one other way that you can make money in the real estate industry. It has a lot of great opportunity for income if you know how to play the game right.

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And he's coming here to tell us all about it. So be sure to tune in to the live podcast on Thursday and ask any questions you might have or you can catch the replay on Friday. I hope everybody has a great week.

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Go Mavs, go Stars, go Rangers. But until next time, be great humans and keep grinding because life is what you make it. So make it great.

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See you guys.