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The housing price decline won’t be nearly as bad as predicted, says A.I. landlord who is building a single-family-home empire

October 29, 2022, 11:00 AM UTC
Sean Dobson, Chairman, Chief Executive Officer, and Chief Investment Officer for Amherst.
Courtesy of Amherst

For the best A.I.-aided view of where home prices are trending, you can’t do better than consult Sean Dobson. He’s CEO of the Amherst Group, a firm that manages around $16 billion in real estate assets. In addition to making loans on older, middle-market commercial properties and running a huge mortgage-backed securities portfolio for investors, Amherst purchases and builds single-family homes specifically for rental. It now owns and leases 45,000 such properties, a cache that places Dobson’s privately held, Austin-based outfit third in the nation behind Invitation Homes at around 80,000 dwellings for lease, and just below American Homes 4 Rent at roughly 60,000.

I first wrote about Dobson in 2019 for a Fortune story titled “Meet the A.I. Landlord That’s Building a Single-Family-Home Empire.” In that piece, I described how Amherst deployed artificial intelligence to establish market prices in 1,000 zip codes covering 30 major metros, based on comparable sales and the age and condition of the houses in each submarket. Amherst then bids at numbers that ensure the property will provide a strong return on investment, including the often substantial renovation costs that average $40,000 per house. It rehabs the properties, and rents them to low- and middle-income families that can’t yet afford to buy or can’t qualify for a mortgage.

The scale of Amherst’s intelligence-gathering operation provides the housing industry’s deepest, quickest insights into the trends in each locale where it’s buying, chiefly cities in the Sunbelt and Midwest that account for around two-thirds of America’s homes. Amherst tracks such fundamentals as shifts in inventory, asking-price reductions, contract and closing prices, and time-to-sale virtually instantaneously. Put simply, Sean Dobson has a digital finger on the pulse of all things housing.

This computer geek and college dropout who grew up in a trailer at an East Texas state park is also a real estate savant who not only views the current trends up close, but excels at foreseeing changes in mortgage rates, incomes, and demographics, and interpreting where those trends are likely to drive prices in the years to come. Until recently, Amherst was buying 1,000 homes a month and ramping fast toward its far higher full capacity, all part of Dobson’s epic plan to assemble a portfolio of 1 million rental homes over the next decade, a number that would give Dobson one of every 15 single-family dwellings for lease in the U.S.

But over the past year he’s gradually lowered his pace of purchase to a few hundred a month. Why the downshift? The pullback began in late 2021 when Dobson viewed many of his key markets as getting excessively pricey. He throttled back harder this year as mortgage rates jumped from 3% as recently as February to 7% in mid-October. Dobson reckons that by waiting, he’ll get better deals in the next couple of years as prices fall. Once values settle where Dobson thinks they belong, or overshoot below what he considers normal levels, he’ll reaccelerate his purchases. The 1 million home target, he assures me, remains in his sights.

Exclusively for Fortune, Dobson provided Amherst’s latest analysis for prices both nationwide, and in 20 metros that the firm follows closely, and in most of which it owns large numbers of single-family rentals. Amherst’s data present a far less bearish stance than you’re hearing from many real estate pundits, and especially the media. The Amherst outlook augurs big declines in such overcooked cities as Phoenix, Seattle, and Denver, but a slightly down to relatively flat trajectory in most of the still-affordable Southwestern and Midwestern markets where Amherst concentrates. All told, the numbers that Dobson furnished Fortune show U.S. prices overall falling just 5.0% over the next three years, from September 2022 through September 2025. For the 12 months entering September 2023, Amherst expects nationwide numbers to be flat, meaning the pace of declines will quicken in the two out-years. But Dobson expects prices to rebound starting in late 2025.

Dobson says prices must fall, but that the looming damage is greatly exaggerated

During an interview at Amherst’s Manhattan offices near Midtown’s Bryant Park, and a follow-up by phone, Dobson asserted that most observers are overestimating the damage from rising rates, and undercounting two offsetting forces that bolster prices. “Our view is far more sanguine than that of others who are not as close to the data,” Dobson told me in the phone call on Oct. 14. He faults the media for positing drastic declines that don’t match the numbers and currents he’s seeing. “The pessimism has more to do with headlines than economics,” he adds. “The negative narrative is making people afraid of buying. The sentiment is bad, but the math isn’t bad.”

Dobson acknowledges the heavy downward pressure exerted by the jump in home loan costs. “That’s a giant bucket of cold water,” he told me. “It means people are paying an additional $900 a month on a $300,000 mortgage. The 150 basis point jump in the last couple of months added a lot of pain.” But the standard view that the monthly nut almost exclusively guides home prices is completely misguided, he charges. The idea is that when rates double, as has happened, buyers will demand price reductions big enough to keep monthly payments on the same house not too far above where they were before—meaning drops far into the double digits are coming.

Not so, says Dobson. The first overlooked factor he cites, and a big one, is the rapid rise in incomes. “The view that the only determinant is interest rates ignores the powerful impact of increasing wages,” says Dobson. “Incomes are the other side of the seesaw from mortgage rates in setting home prices. We saw no middle-income wage gains for decades. Now it’s happening big-time. Higher rates are a headwind, but rising incomes are a huge support and tailwind.” Indeed, wage growth hit a year-over-year rate of 6.7% in August, double the average of 3.3% from 2015 to early 2020. “Keep in mind that people are getting those big increases on 100% of their incomes, and housing costs are only part of their expenses,” says Dobson. “If a family is making $100,000 and gets a 7% raise, that $7,000 increase offsets a big part of the extra cost of going from an old mortgage at 4% to a new one at 7%.”

The second positive force, says Dobson, is a continuing dearth of homes for sale. “We’ll keep seeing a lack of supply,” he says. “People who have a 3.5% or 4% mortgage will be reluctant to put their homes on the market, because if they sell, they’ll have to pay a 7% rate when they buy another home. That causes a ‘lock-in’ effect. A 3.5% mortgage becomes as much an asset as the house. That ‘stay-put’ phenomenon will keep supply from loosening too much.” The collapse in demand foreseen by many bears isn’t coming, either. “People will buy houses when they need a place to raise their families,” says Dobson. “That need doesn’t go away with higher rates, especially when incomes are rising fast.” Pushing back on the doom scenario, he predicts that when prices reach their lows, they’ll still be higher than at the peak of 2019.

Amherst’s numbers show huge declines in overheated markets, but a much smaller drop for the U.S. as a whole

Dobson provided Fortune with three sets of numbers from Amherst’s proprietary databases. The first displays month-over-month price changes from April 2021 to August of this year, for 20 metros and for the entire nation. The reversal since April is extraordinary. That month, every city posted increases except for the unchanged Seattle. The big turn came in July, when 15 markets moved into minus territory, and the U.S. went negative for the first time, easing 0.5%. Hardest hit over the past three to four months are Seattle (–10.4%); Austin and Denver (–5.3%); Fort Myers, Fla. (–4.3%); Phoenix and Salt Lake City (–3.4%); Dallas (–3.2%); and Tucson (–2.4%). Three of the most jarring shifts happened in the Sunshine State. After rising 28.7% from July 2021 to July 2022, Miami dropped 1.2% in August. Orlando experienced a similar yearly jump through July, then flattened in July and August, and Jacksonville—which logged a 25%, 12-month gain through June—fell a total of 1.3% in survey’s two final months.

Though the boom suddenly deflated, the chart, viewed in its entirety, is far from frightful. Seven markets, including Houston, Columbus, and Kansas City, continued to advance in August, and two others, Nashville and Atlanta, experienced tiny drops of 0.1%. That means almost half the 20 metros were positive-to-flat as of August.

Second, he shared projected price changes in the five “top” and “bottom” markets, for the 12 months from August 2022 to August 2023, and for three years from the starting point. At the bottom of the bottom are Seattle at annual and three-year declines respectively of 18% and 33% and Austin at minus 15% and 36%. The three others in the laggards’ bucket are Denver (–18% over three years), Phoenix (–29%), and Las Vegas (–30%).

Surprisingly, Amherst forecasts pretty strong gains for all five in the “top” category over the next year. It sees Houston as the best performer, rising 11%, followed by Oklahoma City (+9%), Charlotte (+8%), Nashville (+7%) and Columbus (+6%). But interestingly, and this plays into Amherst’s acquisition strategy, it views all but Oklahoma City as declining between August 2023 and August 2025, reversing part or all of the increases over the next year. For example, its scenario has Nashville retreating 7% in the two out-years, nixing all of the near-term increase.

In a shot at the bears, Amherst foresees no price declines from current levels over the 12 months through September 2023, followed by a decline average of 2.5% a year in the 24 months ending in September 2025. Hence, Dobson’s view of modest declines over three years followed by a resurgence in late 2025 run strongly against the tide.

Finally he shared a three-part data set: changes in inventory, percentage of homes for sale purchased within 60 days, and share of listings that show price reductions. Amherst presents numbers for the five cities each that register in the lowest and highest tiers across the three measures. The bottom group encompasses Phoenix, Denver, Tampa, Nashville, and Las Vegas, while the top bin consists of St. Louis, Cincinnati, Kansas City, Columbus, and Greensboro, N.C.

For inventories, the rankings from least-bad to worst run Las Vegas, Nashville, Tampa, Denver, and Phoenix. All experienced increases in listings of 17% to 35% over the supertight stock that prevailed in August of last year. Still, the number compared with the relatively normal market in August 2019 supports Dobson’s argument that even in places where for sales signs are sprouting fastest, inventories remain slim. In every one of the five bottom cities, listings are still lower by double digits than in that last pre-COVID summer. Amazingly, the five “top” metros actually posted shrinkage in inventories from August of last year, meaning meager supplies got even leaner. St. Louis had the largest decline, followed by Cincinnati, Kansas City, Columbus, and Greensboro.

Moving to the “60-day absorption measure,” the numbers in the “bottom” cities are far worse than last year. In August 2021, over 70% of all listings were selling within two months in Phoenix and Denver; today, the pace has dropped to 35% and 48% respectively. That’s not as bad as it appears: In most of the five, today’s lower selling rate is still on par with 2019.

By contrast, in Cincinnati, Columbus, and Greensboro, shoppers are still purchasing over-two thirds of everything on the market within 60 days, and almost 60% get sold over that span in St. Louis and Kansas City. Those numbers have held steady versus last year. As for share of listings showing price reductions, all of the bottom five but Nashville show stunning increases over last year, with Phoenix going from 12% to 48%. The top markets camp featured a much smaller rise versus 2021, and its cities generally harbored a smaller proportion of homes at reduced prices than in 2019.

Dobson foresees that mortgage rates will fall

Dobson emphasizes that Amherst owns only small numbers of homes in what became the superhot, and currently most overpriced, venues. “We have small allocations in Phoenix, Las Vegas, and Seattle, and none in Austin,” he says. “Those types of markets are supply-constrained and subject to extreme volatility. They are the big price movers. They’re the high-beta tech stocks of the housing market.” Instead, Amherst concentrates in cities where ample new building keeps prices relatively stable and housing affordable. His big markets include Atlanta, Dallas, Houston, Charlotte, Nashville, Orlando, and the southwest coast of Florida. In those locales, he believes prices will pretty much track the national average: declines in mid-single-digits over the next three years, with some variability around that mean, of course. That’s why his strategy of lying low for now, and multiplying purchases after prices glide lower, makes sense. “There is a significant lag between the higher rates and the actual sale prices of homes,” he observes. “We’ll wait for the market to find a new support level. We’re in no hurry.”

Though it’s big on Florida’s Gulf Coast, neither Amherst nor most of its renters—suffered too heavily from Hurricane Ian. “We own around 8,000 houses within a few dozen miles of ground zero, Fort Myers,” says Dobson. “We only have about 50 where people had to move out.” Amherst is working closely with those folks to provide short-term housing and financial support as it works to repair the homes. Despite huge price gains in cities like Fort Myers, Cape Coral, and North Port, Dobson doesn’t predict Las Vegas– or Seattle-size cratering in those markets. “That region had a sudden income increase when high earners from New York and New Jersey moved there,” says Dobson. “People who make more money than the locals moving in caused a demographic shift.” He does caution, however, that if the exodus from the Northeast were to stop, for example, because potential new arrivals so fear more Ian-like calamities that they stay home or seek other warm climes—prices could fall sharply. That’s a possibility, he says, but not his base case.

The contrarian Dobson is also taking an unconventional view on mortgages. The Amherst model positing 5.0% nationwide declines over the next three years assumes relatively strong income growth of 3% a year. It also projects that if wages fall from the undertow of a recession, 30-year mortgage rates are likely to decline from the current 7%. In fact, Dobson believes that based on fundamentals, they’re bound to shrink in the next few years. He operates a big mortgage securities trading business, and no one has a better understanding of that marketplace. During the 2008–09 housing crisis and beyond, Dobson made $10 billion for his investors from shorting mortgage-backed securities as millions defaulted on their home loans. The current scenario, he says, is the antithesis of the prelude to the Great Financial Crisis. Mortgages rates are too elevated at 7% to stay there, and hence the bonds that back them are supercheap.

Dobson says that a typical spread between the 10-year Treasury yield and 30-year mortgage rate is two points. He believes that the 1.7% “real” interest rate on the 10-year is about one point too high, and should be at around 0.7%. He also believes that the three-point margin of the mortgage rate over the long bond is one point too high, and will revert to the “normal” single point.

Hence, Dobson predicts that the 10-year will retreat to a 3% yield, and that the mortgage rate spread over the long bond will return to 2%. When that happens, rates will fall to the sum of the two, or around 5%. That doesn’t mean home prices will explode again in the next few years for a simple reason: The pullback in home loan costs will likely coincide with a hit on the other side of the seesaw, a fall in wage growth from a superfast clip. But what he sees as an inevitable fall in rates will be good for housing’s future. Dobson’s views run counter to the currently super-gloomy groupthink about housing. But take them seriously: The A.I. landlord boasts a long record of going against the crowd. And Dobson’s got a knack for choosing the road less taken that’s the right road.

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