Buckle up for a candid review of the 2024 market! Chris Seveney takes a critical look back at his own forecasts, dissecting what he got right and where his crystal ball might have been a bit cloudy.  From real estate trends and interest rate predictions to the wild world of seller financing, he doesn’t shy away from analyzing the accuracy of his calls.  Join Chris as he breaks down the forces that shaped the market this past year and offers insights that could help you navigate the year ahead.

—

Watch the episode here

 

Listen to the podcast here

Was My 2024 Crystal Ball Correct? – 2024 Year-End Review (Part 1)

I will talk about what I got right and what I got wrong in 2024. Every year at this time, I do an episode talking about my expectations and anticipations for the upcoming year. Many prognosticators will throw so much spaghetti out there. It’s so convoluted. You could look at it and say, “You’re always right. You’re always wrong.” I’m the type of person who is going to be honest about what I get right and what I get wrong. I might do another episode on what I am predicting for next year. If I take out the “magic crystal ball” or my proverbial fidget spinner that I can spin to answer my questions.

A Look Back At 2024 Predictions

Let’s take a look back at what I was predicting in 2023, and see whether I hit those or not. Let’s start. First is item number one. I made the prognostication that we will see an increase in mortgage inventory in 2024. That’s pretty upfront and an easy one to predict because 2023 had extremely low inventory. It did start picking up as the year went on. For us, it was still what we thought was historically low.

Part of this also was based on our relationships. As we continue to build relationships, it continues to bring more loans into the portfolio. In 2023, we were talking about seeing about $300 million a quarter, and how that started picking up in quarters 3 and 4, where we started seeing some weeks where we had $300 million. In 2024, we’ve seen billions of dollars per quarter.

In 2023, I was talking about at the end of the year, we were seeing an uptick in down payment assistance loans and second position loans that were $5,000, $10,000, and $15,000. We’re seeing those in the tens of thousands. What did we see this year? I saw some of those loans. I saw a significant number of what I’ll call scratch and dent loans. These are ones we typically don’t buy, but they went into default within the first six months. What we did see a significant uptick in is defaulted residential transition loans, which were formerly known as bridge loans or fix and flip loans.

In the second half of this year, there was a significant uptick in those types of loans. The other area where we’ve seen a big increase in loans is the reverse mortgage department which is borrowers who get a reverse mortgage, and then they pass away and the property is underwater. HUD has put out between their two pools over $1 billion and that’s going to continue into 2025, which we’ll talk about in future episodes.

My first prognostication of seeing an increase in inventory was like picking the low-hanging fruit. I will say I was right. As I said, I’ll talk further about in my next episode what I think 2025 is going to bring. The second was the bis-ask price will close the gap. We’re not going to see 2018 prices again. In 2023, we saw a significant gap between the asking price and the bid price. Based on that, I mentioned property values could decline, taxes insurance increase, and sellers are going to be more willing to sell assets.

I’d expect the reforming loan market to stay within the 9% to 12% return range, and NPLs are ticking back up into the high teens and that 20%-plus range. In 2023, on some of these MPLs, there were reforming rates. Partly, that was due to the influx of the money the government was printing. Everyone was so cash-rich that they needed to invest it. What do we do with this? As that money started to slowly work its way out of the system, we’ve seen an increase in product as well.

If you increase supply, what happens now? The spread did come much closer. As the year has gone on, it has continued to work better and better for buyers of loans. We’ve recently picked up a non-performing loan in a non-judicial state at close to a 35% discount. Whereas in 2023, that would have been probably a 15% discount.

It continues to move. Some sellers have not gotten with the program and are still asking a significant number for their loans. I’ll share a story of there. There was one fund out there that was buying loans from another fund and they were leveraging it and paying a premium for these, thinking that they could take advantage of the limited supply to turn around and flip these and sell them without doing a lot of work on them.

Unfortunately, the market was not playing ball with them. Unfortunately, they essentially went under. Investors right now are not hearing anything. I didn’t even know this was a fund. I thought it was a group of investors or two guys running investments and so forth. Now I’m hearing that people invested some serious coin bits in these people and they disappeared. It was based on the business model of I buy hot, the buyers’ fools theory, where you can pay a price and hope that’s a sucker who’s going to pay more than you. Unfortunately, there wasn’t a sucker who is going to pay more than what you did. They caught with them and unfortunately, we’re not able to liquidate those because that spread kept creeping.

Real Estate Prices: Was I Right or Wrong?

The third one is probably the one that’s always going to be contested. I thought real estate prices would decline in most markets even if interest rates did drop. I was saying this because I thought if rates drop significantly, we would see an initial quick bump. When I look at things, small businesses are tightening their belts, bank liquidity is tightening, and income is not keeping up with inflation. Something has got to give. As I mentioned, I don’t think it’s going to crash. I don’t see significant gains, especially in these lower-price markets.

Now, let’s take a look at that. Depending on which analysis you use, home prices are up year over year, or they are not up year over year. In certain markets, home prices are softening. In Florida, Texas, and Kansas City, we’re starting to see those prices often. I also believe that from the data that’s out there right now, there are a lot of properties that are sitting on the market for longer periods of time that have had price drops or are not willing to drop their price.

That number is staying a little bit inflated right now in regards to where pricing is. One thing to remember about real estate pricing is to think about the time it takes to close on a property. I’m recording this on December 5th, 2024. If somebody put something under agreement today, that’s not getting recorded until probably the end of January when that property closes. That data isn’t coming out till probably March, April, or probably May even when they’re looking into that first quarter data. The real estate is usually about six months behind.

I’ll give my prognosis for next year where I think things are going to go. This one, I am not going to say I was right. I also am not going to say I was completely wrong either. I think investors who were envisioning pricing to continue with that pace are getting burnt. That’s why when I go back to the inventory like fix and flip loans, for example. We bought some non-performing loans which are properties that are completed for sale on the market. I bought them at a very big discount. The borrower thought when they were finished, she would get $650,000 for them. Now, they’re listed in the low fives, and can’t move them. To me, that’s a 20% drop.

Now, are you seeing that across the board? No, but if you look at people in Austin, Florida, and places where insurance has gone nuts, that is part of the cause. It goes back to what I said earlier. Salary is not keeping up with inflation. I want to remind people that even if inflation goes to zero, that just means prices aren’t going up anymore. It doesn’t mean they’re going back to where they were in 2019. Everything has already gone up 25% or whatever the number is, so it’s going to be stuck there.

The Seller Finance Market: A Recipe for Disaster?

I saw a few people recently posted online, “I’ve got a 2.5% or 2.9% raise this year, which is keeping up with “inflation,” which I’ll be the first to tell you, I think inflation is a lot higher than what the government throws out there. I am not a conspiracy theorist in any way, shape, or form, but I look at what I pay for stuff. I think things have gone up since 2019 a lot more than 25%, but who’s to say? That was number three. Real estate prices.

Number four, this is the one I will probably say I got wrong. I mentioned that we would see significant cracks in the seller finance space. I thought this would be a slam dunk. I thought this because I saw a number of people selling on subject-to in these low rates or seller financing with very poor underwriting. A person can’t get a loan from a bank, so they’re going to go get 95% or 100% financing from a homeowner. These homeowners also jacked up the price. A $200,000 property is selling for $250,000.

For this one, I still think this is coming. When you hear my next video, I’m going to talk about this. I think it’s just taking a little bit longer and I underestimated the time. If prices continue to stay where they are or soften, unemployment increases, which I thought was going to happen. Back to data, it keeps getting changed month over month. We have a new administration coming in. They want to cut a significant number of government jobs, which has been the primary driver of jobs for the economy.

If unemployment increases and you’re in a seller-financed property that’s underwater and they have no equity, they’re going to do what they did in 2012 and 2010. They are going to say, “Screw it,” and walk away, “You got nothing. Go ahead and foreclose. Take the property back. You can’t get a deficiency against me. I don’t have anything else.” With those 500,000 new properties or whatever that case is and multifamily coming online, there are reports out there that rents might soften a little bit. Lately, it’s been cheaper to own a home than it has to rent in some locations. If that flips and people are underwater, people aren’t idiots. They’re going to go, “I can go rent for a lot cheaper than I can buy. I can’t afford this.” This is what is going to happen.

The Mortgage Note Space & Competition

Those were some of the things that we took on coming up within 2023. If I were to grade myself on this, I would probably give myself a B-minus in regard to where I thought things would turn out within the past year. Some of the other things that I mentioned throughout the year were that we would continue to see fewer people involved in the mortgage note space. The gurus or trainers are trying to beef it up saying there’s going to be this wave of foreclosures coming. I never predicted that. I’ve always said there is going to be an uptick in bankruptcy because of all that equity, which we have seen that significant uptick in bankruptcies.

I’m going to another episode on the New York Fed report that came out that talks about delinquencies and everything. That will be a part of my 2025 prediction. What has happened in the note space? The gurus who are teaching non-performing loans now have spun it and gone over to seller financing space. One guru who does subject-to and all this other stuff has this audience and people are fascinated with this type of investing in the seller financing side of things.

They were seeing a big influx of people wanting to get into that seller financing space, but not something I personally want to get involved in on the seller financing side. Here’s my reason behind it. There’s nothing wrong with a very good seller finance loan. I talk about this all the time. Fred and Tracy have very good systems down in regard to that seller financing space. They are somebody I highly respect and provide great content out there on those types of deals.

As I mentioned earlier, the types of deals where people are poorly underwriting these and other things, they’re making it seem like it’s very simple to do. What I’ve seen people look to do and I’ll use a caveat that people think real estate is easy because it’s been easy in the last few years, which it hasn’t been easy. It’s been lucky but easy in some ways. When I started seeing people who are going on the MLS. They get a $200,000 home, trying to get it under agreement for $175,000, only to turn around and sell finance to somebody for $200,000 and $210,000.

There's a difference between luck and ease. Real estate hasn't been easy, it's been luck. Things are changing. Share on X

That person could not have bought the loan with conventional financing, and they’re trying to figure out a way to get financing on that loan and this person might give it to them or do seller financing. They call it creative. To me, that is going to end up being a recipe for disaster. It’s like giving your kids matches to play with. It might be fun for a little bit for them, but eventually, they’re going to get burned.

I mentioned that I’ve seen a decline in competitors because it has gotten hard. It’s now up to the management of the asset. In real estate in the last few years, you could just buy an asset and do nothing, and it would make money. In notes, that hasn’t been the case. You need to work hard, push, and stay on top of things.

Don't underestimate the power of managing your assets well. In real estate, you need to work it hard, push, and stay on top of things. Share on X

Another was what was going to happen to some of these investors who were investing based on lines of credit. As I mentioned previously, one company that was buying high and trying to sell high was getting a line of credit from that seller. That line of credit was in the double digits. There’s another fund I know out there that had a line of credit that jumped up, and they were originating commercial loans. I mentioned this in 2023. Now they had a loan at say 5% and 6%. They’re writing loans at 8%, 8.5%, and 9%, so they have a yield spread of 3%. All of a sudden, their rate went up to 9.5% and they are writing loans at 8.5% and 9%, the yield is a negative spread. That’s not good.

Raising Money & The Challenges Ahead

Another thing I mentioned was raising money. Raising money was going to get harder. That has been true. It has been a lot more challenging to raise money in 2023. Why? Because the government hasn’t printed what they didn’t pass. Also, remember that real estate is an alternative investment. A lot of people look at maybe 10%, 20% of their money should go into an alt. Everyone has heard about the issues and a lot of the other asset classes in real estate; commercial, multifamily, self-storage, and short-term rentals.

It's been much harder to raise money this past year. Real estate is an alternative investment, and people have been burned in other asset classes. Share on X

The interest rates have caused a lot of havoc. Because of that, people who had a $100,000 investment that they thought they were going to get out to reinvest, that money are either still tied up. That money might be gone. People have less money to invest and they’ve been burned. After you’ve been burned, is that something you want to turn around and invest in it? Typically, not. It has been much harder. Fortunately, we were able to increase the size of our company by about 50% in 2023. That has been great for us from that standpoint. We continue to look forward to next year.

 

The last one I’ll talk about, I’m thinking now that I mention these items that I’m going through my second list, I might give myself a B for my grade, and bump it up from a B-minus to a B. This one, I think I hit the nail on the head, which was interest rates are not going to go down unless the market crashes, and they haven’t.

When people heard the Fed was going to drop interest rates, they thought mortgage rates were going to go down significantly as well. I’ve preached in the past that mortgage rates are tied to the ten-year treasury. When the government is selling a significant number of bonds, big supply and there’s no demand, people are going to want a little more money for those, so they’ll sell it at a little bit of discount to increase their yield spread.

 

If you’re an investor, let’s say you were given $1 billion of Monopoly money. You can buy bonds and you can buy them at a discount that will yield you 4.5%. What is the premium you want to pay for a 30-year mortgage-backed security? In the past, typically, around 2% is what that premium has been. If mortgage-backed security is at 6.5%, that’s where rates are going to fall because that’s what investors are willing to pay for that asset.

If treasury yields dropped and treasury went down to 3%, rates would go down. The only time I can see that happening is when people want to get to a safer haven when the stock market is still on fire and everything else. People haven’t gone to that safe haven. I still think eventually, something has to give. I’ve mentioned this in the past where we have a whole generation right now who is just getting into the workforce and/or has been in the workforce for 5 or 10 years that cannot afford a home because it’s so expensive.

One or two things are going to have to happen. Either they’re going to hopefully have family that got a lot of money and can give them, which is probably not the case. They’re either going to be locked out of being able to buy a home for a significant period of time, or prices come down, and we have something that I don’t want to say a crash, but a softening that allows them back into the game.

Something has got to give. I don’t know which one. I think it’s going to be prices often, but who knows? The way it is today is you have two generations that struggle to be able to buy a home. I’ve been in my home now for over a decade and I’m not going anywhere. I’ve got a nice low interest rate. I’m sitting on a nice equity cushion at this point in time. I have no interest in selling. For me, I don’t have skin in this game. I can grab my popcorn and watch and provide an opinion that is unbiased and unfiltered. If I had to look at 2023, that one that I was right about is where everyone was predicting interest rates would go back down, I did not predict that would happen and I was correct.

Something's got to give in the housing market. We've got two generations struggling to buy a home. Either prices come down or they're locked out. Share on X

Interest Rates & The 2025 Outlook

For 2025, watch what my estimate is there to see what I’m going to predict for 2025. I hope you enjoyed this episode of Was I Right or Was I Wrong in 2024. As always, make sure to leave us a like. Leave us a review. For any questions, as always, feel free to reach out. Thank you, all. Happy New Year.

Important Links

• 7e Investments
• 2023 Year-End Review: The 7e Investments Fund And The Dynamic Market Landscape With Lauren Wells on Apple Podcasts