Welcome to Episode #78 of the Fatal Conceits Podcast…
They’re sometimes called “California refugees.” But they hail from New York and Illinois, too…
You’ll find them in sleepy little towns in Florida… Texas… Arizona… Nevada… and across the sunbelt… basically anywhere that doesn’t suffer oppressive taxation, creeping government, woke school curriculums, high crime, homelessness, drug epidemics…
The pandemic didn’t birth this trend, but it sure did accelerate it. Presently, California is losing about 370,000 people per year, a record rate.
In today’s program we’re joined by MN Gordon, editor and publisher of the Economic Prism newsletter and former California native. Earlier this year, Mr Gordon packed up his family and headed east to find his own American Bolt Hole. We begin today’s discussion with his fascinating story… then talk about Opendoor - as both an idea and a company - and what’s next for real estate in the US.
Please enjoy our discussion and leave your own comments and ideas regarding the best places in the US to live below…
Cheers,
Joel Bowman
P.S. For those inclined to read rather than listen, please find a lightly edited (for clarity) transcript below…
TRANSCRIPT:
Joel Bowman:
All right. Well, welcome back, dear listeners, to the Fatal Conceits Podcast. As you know, by now, it's a show about money, markets, mobs, and manias, not necessarily in that order. If you've not already done so, please head over to the Bonner Private Research substack page. You can find us at bonnerprivateresearch.substack.com, where there are now hundreds of articles on everything from high finance to lowly politics and everything in between. There's plenty of research reports there, of course, by our macro analyst, Dan Denning and investment director, Tom Dyson, as well as plenty of Bill Bonner's daily musings. You won't find them anywhere else.
And in addition, of course, there are many more conversations just like this on the Fatal Conceits Podcast. Grab that at the tab on the top of the page. And speaking of which, I'm delighted today to welcome a newcomer to the show. Mr. MN Gordon is the Editorial Director and Publisher of the Economic Prism Newsletter. I'll provide a link in the transcript to this, so you can head on over there. In particular, check out the library. You'll find plenty of usual suspects from Messrs. Hayek to Hazlitt to Mises, and all the rest of those free market oriented kind of gentleman. So, without further ado, Mr. MN Gordon, welcome to the program.
MN Gordon:
Hey, Joel. Morning. Thanks for having me on.
Joel Bowman:
Yeah, not a problem. Not a problem. Now, we've got so much to talk about, as is the case whenever we sit down these days. We had the remarks from Mr. Powell yesterday. There's real estate to discuss, credit markets, the dollar, on and on. But one thing I wanted to start with here is a story I read over on your Economic Prism website, and I think it's really instructive. I think a lot of people in America are thinking along these lines at the moment, and that is your exodus story from California. Why don't you just kick us off by telling us a little bit about how you got out of the Sunshine Tax State?
MN Gordon:
Yeah, you bet. Yeah, I'm a native of Southern California, born and raised there and worked for many years there in my career. And over the years, it just became more and more intolerable of a place to be. Certainly, the high taxes and wacky politics have always been a part of California, but it really turned ugly or just more and more intolerable during the COVID lockdown that had taken place.
And my wife and my kids, we were just eager to get out and try something else and look for a place that maybe has a lighter touch from the government, more favorable tax policies, lower cost of living. So, we certainly found that in Knoxville, Tennessee. We moved out here in July, so we've been here for several months and we're really enjoying it so far. Really, really liking the green and wet conditions, not being in perpetual drought...
Joel Bowman:
Must be a nice change.
MN Gordon:
It is a nice change, for sure. And yeah, certainly more of a freedom feel here, no state tax, and lower cost of living, so it's turning out to be a really great move for us.
Joel Bowman:
Fantastic. Yeah, my wife and I were just in Austin, Texas a couple of months back and ran randomly into a group of people who referred to themselves as "California refugees." There are these pockets of similar people, it seems like, all around the country, in Austin, in other states. You guys looked at a few other places, Arizona, Nevada, Texas, Florida, but none of them floated your boat for various reasons. What was your criteria?
MN Gordon:
Yeah. That's right. I think for us, it was really finding that lower cost of living, finding somewhere that had very good access to nature. I grew up at the beach and really connected with the beach in my youth and into my early adulthood. And the older I got, the more appealing the mountains became for me. California certainly has mountains that you can go to, but they're kind of tinder boxes. You don't really want to spend much time in them, and certainly wouldn't want to live there.
And all the mountains in East Tennessee, we've got quick access to the Smoky Mountains here, and while they're certainly more subtle, the peaks are lower and what have you, they really are livable and very beautiful and enjoyable to spend time in. So, that was certainly something that attracted us to this area.
Joel Bowman:
And you mentioned your wife and kids, obviously it was a more appealing environment for a family in addition to just the great outdoors and having easy access to the lush Smoky Mountains. What about things like schooling? I'm interested in this, in particular as a father of a young daughter, what were the kinds of, I don't want to call them grievances, but complaints that you had pre-COVID, did you find those exacerbated with lockdowns and that kind of thing? Was that prevalent where you were in Southern California?
MN Gordon:
Yeah. Yeah, so that was also a big part of it. So, my son is 15, he'll be 16 next month or later this month actually. And so, he's in high school and the school he was going to, the local public school in Long Beach, has about 4,000 kids there, and they shut it down, of course during COVID. And when they reopened it, it really seemed like that the kids just went back and were really wild or what have you.
Anyhow, it just turned into a rough situation. There was an incident where the school safety officer ended up shooting and killing a woman that was fighting one of the students right in the street, in front of the school.
Joel Bowman:
Wow. Oh my goodness.
MN Gordon:
Yeah. So, it was really crazy. And then, just during COVID and this prevalence of this woke ideology that had seemed to come into the school. Several years ago, the state of California created a third alternative when you apply for a driver's license. So, you can be male, female, or X, right?
Joel Bowman:
Oh, right, okay. Yep.
MN Gordon:
Yeah. And so, all of a sudden then my son's got a teacher that is clearly a mister, but he goes by Mx, because that's what's on his driver's license, and just a lot of that kind of nonsense.
Joel Bowman:
That teacher didn't happen to be the biology teacher, did they?
MN Gordon:
Right, yeah.
Joel Bowman:
Creates a little conflict.
MN Gordon:
Yeah. So, we were eager to get out of there for those reasons, and certainly don't want to be too negative on it here, but that was also certainly part of the factors in our decision to leave.
Joel Bowman:
So, how have you found it then in Tennessee? Because one of the things that you mentioned in the article, and actually one of the things that this group of "California refugees" impressed upon me when we met them in Texas, was exactly what you would said, which is, "Don't California our Tennessee." Or, "Don't California our Wyoming." Or whatever it is.
We think of places like Tennessee and like Texas as brimming with Southern hospitality and very warm and welcoming, but I can see that there would be a little reticence when you see this brigade of California number plates just teeming over the hills. How have you found the welcome there in East Tennessee?
MN Gordon:
Right. Yeah, I mean, overall the welcome's been great. The people are very friendly and accommodating. We certainly have gotten some odd reactions from people when we say we're from Long Beach, California, and just moved here. And we have gotten some, very few, but some people that seem visibly outraged or what have you, that we moved here. We had one experience where we stopped by the lake marina and were talking to the lady at the boathouse, and she found out we were from Long Beach, and she really started questioning why we would move there and so on. And I think that's what it is, they're protective of the Tennessee that they have. Right?
Joel Bowman:
Right.
MN Gordon:
They don't want liberal policies coming in and taking over the schools or the government, whether that's limiting freedoms or increasing taxes, or creating these massive social programs that you have in California. So, I think that's what it comes down to. And they'll warm up to you pretty quickly once you start talking with them.
Joel Bowman:
Yeah. One of the things I liked that you mentioned in your article, is that a lot of times people think that those who are coming from California or maybe Illinois, or New York, or wherever else, and seeking refuge elsewhere, they think maybe they do want to bring their woke policies or what have you to the school boards there. But actually, it's people like yourself who know full well, have been on the front lines of this, who see it for what it is. It's really gotten to a fever pitch just in the past few years, and you see exactly what has happened upfront, whether it's at the school, or with taxes, or real estate prices, crime, homelessness, drug problems...
MN Gordon:
True.
Joel Bowman:
So, I find actually a lot of the people who have moved away from those places, they may have been very progressive to begin with. They moved to the Bay Area and then all of a sudden they see the end game of those policies and they think, "Oh, I've got to get out of here. Even if I'm centrist or if I vote a little left, this has just gotten out of hand here."
MN Gordon:
Right. Yeah. I think that's certainly accurate. I think people that are looking to leave California or other liberal dominated cities are looking to get to places that have greater freedom and are not wanting to recreate the situation that they're escaping from.
Joel Bowman:
Right. So, then let's talk about the nuts and bolts of your exodus with regards to selling your home. You mentioned that you had a story with regards to Opendoor. And for those readers listeners who are perhaps unfamiliar, I actually wrote something similar about Zillow a couple of weeks ago, one of these online real estate market makers. They wear various hats, I guess. But what was your experience with unloading California real estate and getting into the Tennessee market?
MN Gordon:
So, I used Opendoor. They refer to themselves as an iBuyer, I guess that's the buzz word, but essentially they use their digital pricing models to make offers on houses, cash offers, and then they make light touch-ups to the houses and then flip them back onto the market.
And so, it was about June of this year when we were looking to sell our house, and I'd heard a bunch of commercials on the radio about how easy it is to sell your house with Opendoor. So, I reached out to them and got a price quote, and it was a price quote that I was certainly happy with and was ready to take. However, I wanted to just see what sort of price I could get, perhaps I could get a better price if I went with the traditional approach.
And so, I got an agent and they staged the house and took a bunch of nice pictures and had open houses over a series of two weekends. And this was early June, so it's right when the mortgage rates had spiked up above 6% for the first time. And while we got a lot of traffic, we didn't get any offers. So, it was, "We really need to get out of California. We want to get into Tennessee before the next school year starts."
And so, I went back to Opendoor, and this was maybe three weeks after my initial offer and spoke to the same person there who had given me the initial offer. And so, he came back with a new offer that was actually higher than the first one that they had given me. Clearly they weren't recognizing what was going on with the market. And so, certainly I jumped at that offer and took it.
Joel Bowman:
Yeah. Congratulations.
MN Gordon:
Their process was really simple. I got all my stuff moved out, took some pictures, uploaded it to the website, put the keys in a lockbox that they had mailed me on the door, and I left. Right? And then they wired the money to my account and it was really smooth and simple.
But then after that, I've been following what's been going on with that house, my former house. And so, about two weeks after I had sold it to Opendoor, they had put it back on the market. They had gone through and really just done some interior painting on the walls, nothing major. We had some more colorful paints, and so perhaps they just wanted something more neutral, who knows? And so, they put it back on the market for 60,000 less than they bought it from us for. So it was-
Joel Bowman:
Wow. What was the timeframe there? That was just a few weeks?
MN Gordon:
Yeah. It was literally two weeks after they'd bought it from us. So, I don't know why they didn't recognize that before they bought it from us, but after they bought it, clearly they realized that they'd paid too much. They put it on for 60,000 less, and then it still hasn't sold. They've been dropping the price every several weeks. And so, we're going on 110 days and it's over $110,000 less than what they bought it from us for.
Joel Bowman:
My goodness.
MN Gordon:
Yeah. So, it was pretty wild. And so, that got me into really looking at Opendoor as a company and what's going on. And I wrote an article a couple weeks ago about it, and it seems like there's countless examples out there of my experience. In my article, I cited one in Colorado where Opendoor had paid close to $780,000 for a house in April, and then listed it for 870,000 and it didn't sell until October. So, about six months later. And when they sold it, it was for a $154,000 loss.
Joel Bowman:
Oh, wow.
MN Gordon:
Yeah. So, I'm not quite sure how the company expects them to make money that way...
Joel Bowman:
It's difficult to make up losses on volume.
MN Gordon:
Right. Right. So, from what I can gather, they have these digital pricing models or these algorithms that they use, and somehow they just missed it. That when interest rates rise, that it's ultimately going to cause the prices to drop, right? And interest rates or the price of credit really is fundamental to the markets, and especially those that rely on large quantities of debt.
So, the housing market's a prime example of a market that's really sensitive to interest rates. And so, as the rates rise, the house prices eventually must adjust downward to balance out the monthly mortgage payments that people have. And so from what I can gather, Opendoor was projecting this trend outward that they had seen over the last several years. And when the inflection hit, they just missed that, missed what was happening with the rising rates, and continued to load up on houses that they would eventually have to sell for a loss. So, a wild ride going on there at Opendoor.
Joel Bowman:
Yeah. It's amazing too, that this happened, as you say, in the summer months of this year, because Opendoor had a forward example in Zillow. I may have to double check the years here, but I think it was in 2019, 2020, Zillow did something similar, where it used one of these AI algorithms to extrapolate straight lines into the future, which is never a good undertaking when you're dealing with human behavior and all of the complexities of something like a real estate market, which can be hit by things like pandemics, or economic downturns, or rapid interest rate hikes, all of which we've seen in the past couple of years.
And Zillow really got caught out as well, where they had just onboarded, almost automatically, this huge inventory of houses and properties that the algorithms had weighed and decided were worth X amount and hadn't factored in or adjusted for reality, let's say. And all of a sudden, they were left with this enormous inventory, which of course, has a carrying cost. And then, if they can't rent out, they have to sell into a falling market, which can exacerbate the problem that in some ways they kind of caused in the first place. But it's interesting that Opendoor wouldn't have seen that as an example and maybe tweaked their own machine learning a little bit in anticipation of exactly this.
MN Gordon:
Yeah. Right. Who knows? That seems like a good example that they could have learned from. Perhaps they thought they were smarter. I don't know.
Joel Bowman:
So, what's happened with the price of Opendoor, the share price of Opendoor you mentioned had cratered. What's going on there?
MN Gordon:
Yeah. So, the share price is really circling the toilet bowl here. I think it peaked at around $35 per share in early 2021, and now it's down to somewhere around $1.80 or so.
Joel Bowman:
Wow.
MN Gordon:
That's a loss of over 95%. And meanwhile, the company recently laid off 20% of their staff. So, a ugly situation for the company. Perhaps that's an opportunity for, I wouldn't call it investing, maybe speculating, but when I was doing research for that article on Opendoor, I came across some writing from an analyst named Luke Lango, who writes for InvestorPlace. And so, he made the statement that, "Opendoor today could be like buying Amazon in 1997." And that seemed like a bold claim to me, but who wouldn't want to have bought Amazon in 1997?
Joel Bowman:
Right. Another company that, of course, was cut in half any number of times on its way to what it would eventually become and has, along with the rest of the tech sector, come off considerably since its highs, at whatever it was a year ago or something like that. But yeah, you do see these ... I mean, 95%, it would be maybe generous to call it a dip. That's pretty much a hatchet job.
MN Gordon:
Right.
Joel Bowman:
But at some point, somewhere, assuming there's not bankruptcy and insolvency, there's going to be an attractive discount, 95%. What was your experience like with Opendoor? It seemed like it was pretty open and shut, right?
MN Gordon:
Yeah. Yeah, I mean, as far as the company, their user interface was really simple and entering my info into the website and then contacting the actual staff person there, who we did a walkthrough on Zoom and what have you. As far as going through the close and getting the money credited to my account. I mean, they certainly operated like a professional business, so they weren't winging it, I guess, as they were going. So, in that sense, they seem to operate like a good business. Who knows if they can survive these losses that they're taking? And their share prices is reflecting that.
Joel Bowman:
Yeah. I wonder what these big, mass buyers, whether they be the BlackRocks or the big funds of the world, but also outfits like Redfin, like Opendoor, like Zillow, that are just automatically vacuuming up these thousands or tens of thousands of residences. I wonder what that does for that old adage that real estate's about "location, location, location."
If the buying and selling is going to be done by artificial "intelligence" that just algorithmically determines what entire regions are worth and then comes in with enough capital, enough muscle to move markets, if we're not going to have severe aberrations like this more in the future. It's interesting to think about.
MN Gordon:
Yeah, that is an interesting idea. And I don't know if they ultimately end up owning a lot of these houses that they can't sell, without taking a major loss, if they end up just becoming these large scale renters or what have you, until the market bounces back. I don't know. That's certainly a interesting idea to think about.
Joel Bowman:
All right. So, mate, what's on the future for you guys now that you've made the exodus, now that you're out in Tennessee, what have you and the family got programmed for the next couple of years? You've got a bit more schooling for the kiddos and then?
MN Gordon:
Yeah. My son's wrapping up high school here over the next few years. I've got a daughter who's 10, she's in fourth grade, and we homeschool her through a co-op, where she goes to school two days a week. And that was something that we started back in California. She was in first grade when the pandemic hit and we just couldn't have her on Zoom calls seven hours a day, trying to learn that way. So, that's when we switched to homeschooling. And it's turned out to be a really good thing for her.
But yeah, as far as long-term plans, I mean, we're trying to settle in and make this our home and become connected to the community here, and getting out and exploring the city and the surrounding areas. And so yeah, I guess that's our short-term and long-term plans are to get connected here.
Joel Bowman:
That's fantastic. We've got our macro analyst, Mr. Dan Denning up there freezing on the high plains of Laramie at the moment. A couple of years ago, he did a bolthole project, where he drove thousands of miles around the country looking for the best spots with his particular checklist of what he wanted in various places.
But it does seem like there are a lot of people who are peering over their own fence and thinking, "Hey, maybe there's not a better life for me somewhere else." So congratulations, mate. Best of luck with you and the family out there in East Tennessee. It's a place I haven't visited, so I'll maybe put that on the to-visit list in the future.
MN Gordon, thank you so much for your time today, mate. And I'll include a link to Economic Prism and please, readers, listeners, viewers, what have you, head over there and check out Mr. Gordon's work. And of course, check out our own substack page. Again, that's bonnerprivateresearch.substack.com. And we'll catch you again next week.
MN Gordon:
Great. Thanks, Joel.
MN Gordon on the California Exodus