Dave:
Hey, everyone. Welcome to On the Market. Today, you have me, Dave Meyer, Kathy Fettke, and James Dainard. Kathy and James, how are you?

Kathy:
Great.

James:
Good. The sun’s back out in California.

Dave:
Yeah, you were over in my neck of the woods in Northern Europe for a while, and you saw how bad the weather is here.

James:
That weather’s emotional out there. It was like it would rain for two hours and then it’d be sunny and then it’d be raining for two hours. It was almost like a tropical storm in Seattle collided together.

Dave:
Yeah, it’s very unpredictable, it’s very gray, but once it turns this time of year, it starts to get better. I think you just got the tail end of it, but unfortunately, it’s not like where you both live and sunny and glorious all the time.

Kathy:
It’s been cold, but we were supposed to be in Amsterdam right now. We at least had talked about it, so what’s the weather like? Would we have enjoyed it?

Dave:
Yeah, it’s super nice out right now. Actually, as your daughter knows, I just had lunch with Kathy’s daughter who is here visiting, which was super fun to see her, but yeah, it would’ve worked out great. I think we’re going to have to do that next year for our two-year On the Market anniversary. We’re going to have to do an Amsterdam trip.

Kathy:
Yes.

Dave:
Maybe we’ll do a meetup.

James:
Oh, a European takeover?

Dave:
Everyone listening, everyone come to Amsterdam. We’re going to do a European party and Amsterdam’s a good place to party. We’ll have a good time.

Kathy:
That sounds like a great party.

James:
Can we do it on Yacht Week though?

Dave:
Oh, we got to go to Croatia for Yacht Week. That’s where you want to be, so let’s do that next summer. All right. Well, we are here to talk about real estate and we have a really cool show for you today. We’re going to do a roundup on the housing market and some of the economic indicators that we are watching and that you can be watching to make sense of the very confusing market that we’re in. And honestly, a pretty changing, rapidly changing market right now, even faster than normal. And just so you all know, we’re going to be talking about a report I wrote, and if you want to follow along, download it, read it, get my full thoughts about what happened in the housing market in the first quarter of 2023, you can download that for free. It’s at biggerpockets.com/q2report, it’s Q2, like quarter two, report. So go check that out and you can see everything that James, Kathy and I are going to be talking about today. We are going to take a quick break, but then we’re going to dive into our Q1 roundup of the housing market.

Dave:
All right, let’s get into this thing. There’s so many things to talk about, and I know we talk about some of these things a lot, but if you, Kathy, had to pick one indicator that you think summarizes or epitomizes the Q1 housing market, what would it be?

Kathy:
Ooh, one indicator. If we’re talking about housing in general, I’ll pick multifamily housing and say that the indicator that I’ve seen, because I just got back from a couple of conferences, it’s interest rates again, I mean, what a boring thing to say, but interest rates are really causing complete devastation in multifamily, not in all, but in many. And we did see a 229-million dollar foreclosure in Houston.

Dave:
Whoa.

James:
Whoa.

Kathy:
Yeah, as in perhaps one of the first ones to go down. If you were looking at 2% interest rates and now, most of those multifamily are adjustable if they didn’t have rate caps, most did, but some didn’t, they are dealing with payments that are unsustainable, they just can’t pay them. So I was just at a multifamily conference literally a few days ago and there was a lot of pain, a lot of people trying to figure out how they’re going to avoid foreclosure.

Dave:
Wow. All right. Well, that is foreboding and very interesting to hear because when I see interest rates now, they’re down from where they were in November and in February. And from everything I’ve heard in the residential side of things, it seems like now that rates are down in the mid-sixes, some buyer activity is coming back.

Kathy:
There was a huge difference because I was actually at two events in Dallas, one was a multifamily conference and the other was my event, which was single-family and also a focus on our single-family fund and they were about 20 minutes apart, so I was running back and forth between the two events. And the sentiment couldn’t be more opposite because people in the single-family sector are not feeling the pain because either the portfolio that they already own is locked in generally in 30-year fixed rate or even if it’s five or 10-year, they were not feeling any pain in their buy and hold properties. And in fact, they were there, it was 150 people there and a packed bus of people ready to buy more and very excited to buy more because of the fixed rate debt. It has come down, mortgage rates for single-family is tied, it’s different than on the short-term.

Kathy:
So over at the other conference, with multifamily, they are tied to the SOFR and they are definitely more tied to what the Fed is doing, whereas the single-family mortgage rates are tied to more what the bond market is doing. So to see the dramatic difference of how the multifamily investors, their world has changed so dramatically if they’re not on fixed rates, and for many of them where their rate caps are due and the bill is really just nothing they could ever have imagined, it could be the difference of 20,000 to 200,000 a month or even more. And then some of the people who bought coastal also saw massive increases in insurance, so it was really devastating to see how they’re feeding these properties.

Kathy:
They’ve stopped doing distributions and putting all that money into just trying to keep the property afloat, but with the first major foreclosure, I don’t know if it’s the first, but the one that have really hit headline news because it was a syndication, it was people, a lot of investors lost everything in that, including the bank. The bank lost about 20 million as well. So it was two completely different worlds that I experienced, in the single-family not feeling the pain and in the multifamily feeling a world of hurt.

James:
Doesn’t this remind you a little bit of the 2008 liar loans and that’s why we’re not seeing the issues? They did such a good job verifying people’s income the last five, 10 years to buy your single-family house that you had to be under a certain DTI, they really verified the income so you could weather a storm if you had consistent income, whereas, the multifamily space became the liar loans the last three years. A lot of these banks, they were signing off on really juiced up performance and they were giving them credit for that. People were forcing the deal to get paid and so they were maybe under budgeting these properties and getting too aggressive in there. And I feel like that’s why this is coming to fruition in a bad way because people were buying on greed for the multifamily.

James:
They weren’t buying to invest, they were buying to get a deal done, and that’s never a good thing, right? The best deal you can ever do is the deal you pass on sometimes, but when you’re ready to go and people, there was so much greed in the market, were starting to see the pain come around now. And I think it was also just a bunch of over [inaudible 00:08:06] performers that they were not accurate. Even with the rates changing and everything, they were going in already very, very slim and there was zero room for error. And this cost of money and these insurance and the rents declining a little bit, it can be very detrimental.

Dave:
Yeah, it seems like generally speaking, if you had to summarize Q1 in terms of interest rates, I would say the residential market adapted quicker than I thought, I’ll just say that. And I do still think prices nationally are probably still going to come down a little bit this year, but the bottom is not falling out and we’re starting to see things actually start to pick up seasonally. But to me, everyone I talk to in commercial is just waiting for the shoe to drop. We haven’t even seen really the beginning of the pain that it seems like everyone is expecting. Well, I guess Kathy, as you’re saying, we’ve seen the beginning of it, but it seems like there’s a long way to go.

Kathy:
Yeah, and I did actually talk to a few lenders and I don’t know how bad it will be because it may be that the lenders decide to do something creative and extend the loans, or I don’t know what they’re capable of being able to do in a situation where the cash flow of the property is not enough to cover the debt service, right? I don’t know what you do besides foreclose, so I think there are more. And it was hard to watch. I could not agree more with James that it feels like the same thing, only this time with multifamily and not single-family, I still am a strong believer that single-family’s on, or one to four units, conventional is on solid ground because of the loans.

Kathy:
It’s the adjustable loans that took down the housing market in 2008 because when those loans adjusted, people couldn’t pay, very different situation. It was a credit bubble, but, well, I guess similar, it was a credit bubble. The bridge lenders were giving money for the renovation too, so yeah, so you could get I think up to at least 80% LTV, maybe more, plus renovation costs. So that my mentor was really firm with me. He’s an older guy and he’s like, “Do not go over 65%”. Well, I couldn’t get a deal at 65% that, but he said there’s reasons why you want to stay at 65% LTV with multifamily because it can be volatile.

Dave:
Yeah. So I guess we’re going to have to see how that goes, but thank you for the insights. That’s super helpful. Let’s move on to a second indicator, which is the reason we’re in this situation, which is inflation. And as everyone knows by this point, inflation is why interest rates have been hiked, that’s what the Fed is trying to get under control. And as of this recording, which is in the middle of April, we have data now for the first quarter of the year and what we’re seeing is that inflation, at least the headline CPI has come down to 5%. It was peaked back in June at 9.1%, which is good. That is good and encouraging.

Dave:
The flip side of that though is the “Core CPI”, which is what the Fed honestly really cares about because it’s a better prediction of future inflation, is at 5.5 or 5.6% actually and is not coming down nearly as much. It was at 0.4% last month, so even if you annualize that out, that’s still almost nearly 5%. So I’m curious, how are you guys seeing inflation right now? In one respect, the numbers are coming down, but I’m not quite sure this is enough for the Fed to take their foot off the gas.

James:
I’m happy to see that the trends in the reporting are shifting the right way. As a consumer that buys a lot of products for real estate construction and just in general, I’m not-

Dave:
Boats.

James:
… boats, but yeah, I don’t even want to talk about the boat bills right now. I don’t think that’s an inflation issue, that’s just a boat owner issue, but it’s… I mean, I’m still paying a lot right now. Everything is expensive. I mean hotels, flying, buying materials. The only thing I am seeing a little break on is the labor market a little bit, but it’s-

Dave:
Okay.

James:
… but materials in general are… Now, we can get them a lot quicker now and we’re not in this like, we can’t get a product and we’re having to pay outrageous product just to get it, but everything is substantially more money. I mean, all my building material costs are 20%, 30% more and there’s not a lot of ease going on and we’re trying to negotiate and we still can’t get it down.

Dave:
And is it higher than it was but stable, or is it still going up?

James:
I would say it’s stable. We see where it goes like little dips in valleys, right? It’s almost like the housing market right now. It’s like teetering, but it’s staying flat. It dips and then goes up, it’d come with the interest rates. Same thing’s happening with material costs. And we are doing certain things, like we are just ordering in advance, buying out stuff early. We just bought 10 sets of appliances all at one time just to lock a price in. And so you just have to get a little bit more creative, but I’m not seeing it on the pricing. And honestly, I think part of it too is the vendors, they can sell it cheaper, but the demand is still there and so the pricing is just fixed right now. I do think there’s some things that are never going to come back down.

Dave:
Oh, for sure.

James:
It’s just people have realized that they can get that much money and it is, especially your mechanicals in construction, those costs are stuck. I don’t think they’re moving.

Dave:
Yeah, it’s pretty rare for prices to go back down once they go back up. I mean, yeah, like food, energy, those things tend to fluctuate, but in terms of durable goods, that’s why the Fed is more concerned about these sticky prices, like this kind of stuff you’re mentioning James, because it doesn’t really go back down and they really have to get it under control. Kathy, do you think, given what you know about Fed policy and inflation, do you think we’re in store for more interest rate hikes?

Kathy:
The Fed has made it really clear what their target was and it was to get over 5% in the overnight lending rate and we’re getting close, but not totally there where they said that we’d be. So I’ve expected that they were going to continue to raise rates until they get there, so I do think we’ll see another small rate hike, but based on some of the research and some of the interviews that we’ve had and people I’ve talked to, one is MBS Highway and he is very, very bullish on the idea that in May, we’re really going to see things change with inflation and that because of the year-over-year data, like you said in your report, inflation really peaked last summer. Now when we get to this summer and we’re comparing today’s numbers to last year, which were very high, everything’s going to look a little bit better on a year-over-year basis.

Kathy:
So it’s his very, very strong opinion that we’re going to see much, much better inflation numbers and that as a result, mortgage rates for conventional, not, again, this couldn’t be more opposite than multifamily or commercial loans, but in the residential that we will see rates come down in mortgage-backed securities for one to four unit. And when that happens, there could be another frenzy in real estate because we do, again, according to your report, inventory levels in housing just keep coming down and because it’s so stuck, like you said, and as soon as rates come down, there could be multiple offers again, there could be a buying frenzy, which is why we’re buying like crazy, but the opposite is true for the adjustable rates. If you’re tied to the Fed fund rate or the SOFR, you’re going to see rates continue to rise.

Dave:
Yeah. And just so people know, what Kathy’s talking about is if you’re getting a loan on a multifamily or office or retailer commercial, the bank’s underwriting and where they borrow from and basically how they consider rates is very different than it is in residential and so it is very possible and seemingly very probable that rates for commercial and rates in residential might head in different directions over the course of this year.

Kathy:
And they have been.

Dave:
Yeah, and they have been. Exactly.

Kathy:
Yep.

Dave:
Kathy, you hit on something that I want to move on to Another indicator, which is basically demand. It seems like every time there is a slight decrease in interest rates, mortgage rates, demand just keeps coming back to the market. It just seems like people are just waiting on the sidelines. And even when they go down, not even that much, it seems like demand comes back into the market. And I’ve heard this anecdotally speaking to agents and lenders, but the Mortgage Bankers Association does a survey every single week of how many people are applying for mortgages and you can see every time there’s a dip in residential mortgage rates, there is a spike in the number of applications, and I’m honestly surprised. I personally thought more people would be sitting on the sidelines of waiting it out, but James, I’m curious to see what, in your business, are you seeing this, especially in a market like Seattle that has seen probably one of the biggest corrections in the whole country?

James:
Yeah, I’m definitely surprised with the amount of buyers I’m seeing coming through housing right now because we saw on these West coast or expensive market cities, we basically saw a 15% to 20% compression off-peak pretty quickly. And then now, what we’ve seen, I think part of it has to do with rates because the rates have been swinging just a little bit, but it’s not that impactful for what we’ve seen over the last nine months. I think this is all psychological, it’s people are really… Because I’m seeing the inventory, like in Washington, there was a couple stats that came out this month that were very interesting to me. One is days on market went down by 35% last month, so homes are now selling for 35% faster. They went from 28 back down to 16, which is a big, big drop in a month.

James:
Inventory is back down to two to three weeks or two to four weeks worth of inventory, whereas it was creeping up more in certain neighborhoods. And so what’s happening is there is a lot of FOMO in the market where people are watching things sell and there was this stall out and they saw this sudden drop and now, they’re seeing things just trade and they’re also seeing things trade close to list price and people will wait that 90, 120 days. And so it’s a psychological thing to where, I mean, buyers are just getting back in the mix no matter what, but we are seeing, I mean, on some homes, I was getting two showings a month on that would’ve been like 90 days ago, we’re getting 20 to 30 showings a week.

Dave:
Oh my God. Whoa.

James:
It is crazy. The weirdest thing is people aren’t moving still. It’s like they’re still in this confused lamb.

Dave:
They just want to go see some stuff?

James:
Yeah. It’s like they either want to be opportunistic and low ball like crazy, or I don’t need to call it low ball. They’re offering what they think it’s worth. And the other thing is that they’re looking for any reason not to buy the house, but they’re still out looking. And so what that tells me is there’s buyers in the market no matter what, and if you’re putting the right product out, things will sell. But we did sell three homes over the list price last weekend.

Kathy:
Wow.

James:
It depends really on your price points. And so as you’re an investor or a flipper developer, focus on those markets, or not the markets, focus on the sale price that moves. We know where our two sweet spots are in Seattle. And if you’re listing below a million bucks and you’re a certain type of product, it is selling and it will sell very quickly. And so a lot more buyers, a lot more movement going on in the last 30, 60 days. It’s actually looking… I feel a lot better about the market after the last 60 days.

Kathy:
That’s why you need such a good real estate agent, if you’re using one, because you better be able to know how to list it properly.

James:
Yes. Yeah. And that’s key right now is putting that magical list price on it, there’s two approaches. You either go high because you know the buyers are coming in, depending on where your demographics and who your buyers are, they’re going to come in 2% to 5% off list just naturally, or you price it a little low. And if you price it low right now and you have a good product, the frenzy starts. I think we had six offers on one house and it was 800,000 in Snohomish County where the median home price is $670,000, so we were $130,000 above the median home price and we still had that much action, which is really, really promising.

Dave:
Wow, that’s unbelievable. Well, let’s talk about the flip side of demand now. We’ve covered inflation, we’ve covered interest rates, we’ve covered demand. I think as we’ve talked about before, but I want to revisit here, to me, the reason that the market is still showing some signs of life is just that there is such low inventory. It’s just remarkable to see that while people were saying it was going to spike and home prices were going to crash because inventory was going to surge, it’s just absolutely not happening right now. And that combined with strong demand seems to be creating a housing market that is pretty robust right now. Kathy, I know you’re in a single-family fund and buying single-families. Are you finding it hard to find properties right now?

Kathy:
Not at all.

Dave:
Oh, okay.

Kathy:
We’re trying to grow our fund as quickly as we can because there’s more opportunity than we can keep up with, but what we’re buying is not what a first time home buyer would buy because it’s got issues, right? We’re buying stuff that does need to be fixed up and that a bank wouldn’t lend on as is, and that’s why we’re getting massively steep discounts on them because what we’re noticing is that our competitor isn’t there today where our competitor is not the first time home buyer because we’re buying homes that need fixing. And usually, a first time home buyer doesn’t have the time, knowledge or money to do that. But what we don’t have right now is a lot of competition from other investors and I think that’s because our fund, we’re raising money, we’re raising cash and we’re buying these properties with cash, so we don’t need a loan.

Kathy:
So a flipper might say, “Wow, I don’t know if I can make these numbers work with today’s financing or with hard money loans” or maybe they can’t even get those loans. Whatever it is, we are really not seeing competition, wholesalers that just maybe wouldn’t have come to us before are coming to us now because they’re just maybe aren’t the buyers, or whatever it is, I feel like we’re the only ones out there playing the game in the area that we’re in where in addition to all these opportunities, there’s nothing but growth happening, so it’s just mind-boggling to me. I was, again, just there. There’s freeway expansions and there’s cranes everywhere and new development and chip manufacturing coming in and yet, we’re still buying stuff for under 100,000. My last purchase was 65,000. We had to put 20,000 in it, it’s worth 200. I can’t make this up. And every time I say this, I’m like, “Ah, why’d I say that? Because now, everybody heard it and now, I’m going to have competition”.

Dave:
Well, they probably don’t have cash.

Kathy:
Maybe.

Dave:
But just for context so people know, back in the fallout of the great recession in the 2012, 2015 timeline, inventory used to be right around 2 million housing units. Prior to the pandemic, it was about 1.5 million. Now, we’re at a million, so we’re still down 33% prior to pre-pandemic levels. And yes, they have come up a bit from where they were last year, but we’re still talking about insanely low levels. And I do want to be clear that housing prices can fall with low inventory, we’re seeing that in a lot of markets, but it does, at least in my mind, provide a backstop for prices. If there is demand and there is always some buyers and inventory is so low, it just can’t fall that much. Inventory, if there were to be a crash, has to go up. So I don’t know, I just think that this is fascinating, and we’ll get into one other topic about why this is going on, but James, first just wanted to get your opinion on inventory and what you’re seeing.

James:
I’m not in the same market as Kathy because it is hard to find a deal right now.

Dave:
You can’t find anything?

James:
No.

Kathy:
You can’t find a $65,000 house in Seattle?

James:
No, I’m finding a $65,000 permit fee, but [inaudible 00:25:16] then architect and plan fees, but I would say there’s deals… What it’s came back to for us is, and we’re just rebuilding our systems for it is like Kathy said, if it’s a hard project, it needs a lot of work. That stuff’s not moving that quickly because cost of money’s up, the people, they don’t have good control in their construction. And then also just the jurisdiction issues where things, these cities can take a really long time on things, which means your debt… So all the cost of money, timelines and construction costs has got people out, so we are getting really good buys on the major fixers. I just paid $740,000 for a house and the house next door sold for 1.4.

Kathy:
Wow.

James:
And they’re model match houses, and I’ll be nicer, and there was zero competition on that house because it just needed so much work. And so if it’s a clean product, there is no inventory, there’s nothing to buy. But if it needs work, we’re able to get some deal flow in, and we’re doing less deals but better margin deals, much, much better margins.

Dave:
That’s so interesting because I was a guest on a podcast the other day and the host asked me what strategies I thought were good and I’m not a flipper, but I was saying that I think it seems like a good time to flip because not all homes and prices decline and accelerate at the same rate. We on the show talk about home prices on a national level, which is far too broad, but even talking about it on a regional level is probably too broad because like you said, fix and flips tend to, in downturns, fall further than stabilized asset, which just gives you more margin just right off the bat even though expenses are high.

James:
Yeah, and it’s like the rules that got broken the last two to three years with the… The market was so hot, it was also people were breaking the rules. If you’re buying certain types of product, I would say that the margin shrunk 10% to 15% on all those products. And if you’re putting in that much, it’s like people are buying big fixers to make the same amount of margins they would on a cosmetic fixer, and that’s not how it’s supposed to work, right? The stuff that you have to rip down, reconstruct, deal with numerous… That you’re in that deal for a year, you’re supposed to be making more money because A, your capital’s outlaid for double the time and then B, it’s just substantially more brain damage.

James:
And so it’s gotten back to the stuff that’s hard work, you get rewarded more. And if it’s not that hard work, you’re not going to get rewarded that well because even the last 12 to 24 months or 24 to 36 months, the stuff that wasn’t hard was making a ton of money because the appreciation factor. And so I think those days are over, but you can get back to, if you want to put in the work, you want to put in the energy, you can get that good buy, and they are out there. I mean, we have bought then better deals the last six months, but we just bought fewer of them.

Dave:
Well, I do want to get to one of my favorite indicators of Q1. I think this, to me, is maybe the number one thing which is new listings. Basically, this is the number of people who put their house up for sale. It’s different from inventory just so everyone knows because inventory is how many things are for sale at a given time, so it factors in both how many properties go up for sale and how quickly they come off the market. But new listings just basically measures how many people decide they’re going to sell a home, and it is just absolutely in the gutter right now. It is down about 25% year-over-year and falling. It’s going down more and more and more. People just absolutely do not want to sell right now. And I’m curious what you guys make of this. We’ve talked about this, there’s the lock-in effect, there’s a couple other reasons that we’ll get to, but do you think this is sustainable? Do you think this is the new normal where people just aren’t going to be selling their homes?

Kathy:
I don’t know if it’s the new normal, but if you’re locked into a 2% or a 3% or 4% interest rate, it sure is tempting to just stay put versus looking at a very limited amount of inventory out there and having to pay more for it. A lot of people just did not realize that today’s homeowners are probably in the best position ever. Their payments, compared to their income, is the best it’s ever been, at least in the data that I look at because they’re locked in at a fixed rate, but we’ve seen wage growth and then of course, appreciation. So for them, for people to walk away, there would have to be a really good reason. Even if they’re moving, even if they’re going somewhere else for a new job, they might be thinking, “Maybe I should just keep the house and learn how to be a landlord” and just rent it out.

Kathy:
I’ve heard that from a lot of people saying, “I just don’t think I want to let go of this interest rate”. And like you said in your report, a lot of people don’t realize that buyers or sellers, it’s usually somebody who sells a house who buys another house. And if someone’s not selling, they’re not buying. So it’s just like this stuck inventory and I don’t really see it changing until rates get to a point where people are like, “Okay, maybe at 5.5”. There’s some psychological thing about 6%, I don’t know what it is, but when it gets into the fives, it’s like, “Okay, that’s acceptable. I could do that”. So could you go from a 2%, 3% or 4% to a 5%? Sure. Were you going to go to a 6%? Maybe not. And again, MBS Highway says that’s what he’s predicting is going to happen this summer is we’re going to get down into the fives, which is why he thinks that we will start to see things unlock a little bit this summer.

Dave:
Oh, yeah, that will be very interesting to see. If you listen to our last episode, we had Tim Birkmeier, who’s the president of Rocket Mortgage come on and he was confirming a lot of things Kathy just said. Number one, he told us, if you didn’t hear this, that the average American has $170,000 of equity in their home right now, which is a record, which is unbelievable. And he also said that they’re seeing a big uptick in HELOCs and Cash-Out Refis right now even at higher rates. And he said that when they talk to these people who are doing this, they’re taking out money to improve their own homes and do renovations because rather than doing a move up like they would normally do, in normal times, they’d sell their home and maybe trade up to a larger home, they’re just renovating their homes and staying in place. And this is a trend in how people are dealing with higher interest rates where they can’t really afford to trade up like they normally would.

James:
Yeah, I wonder if that the Cash-Out Refis though, because I don’t see a whole lot of inventory switching up or much movement in because there isn’t any pain in the market yet. It’s weird, we’re in this weird recession, on the in and out, but there’s still, like you talk to the day-to-day American that is the home buyer buying a lot of the product, they still, there isn’t that pain. The labor market’s good, the job market’s good. And so until something happens like that, it’s probably going to stay where it’s at.

James:
I mean, one indicator I would think, if they’re saying there’s a huge uptick in Cash-Out Refis is because there was so much liquidity in the market for two years and people got really drunk on the liquidity. They were drinking it, it was just like part of their day-to-day life. You look at how people spend money today, it is substantially different than it was 36 months ago. And I feel like a smart guy told me one time, once you turn that faucet on, he told me to stay frugal because once you turn the faucet on, it’s really hard to turn it off. And I feel like America turned the faucet on, on full blast-

Dave:
The whole country.

James:
… and they don’t know how to turn it down, but that’s why we’re seeing these Cash-Out Refis, and I mean, that would be the dangerous part, right? They’re pulling out more liquidity and it’s like this bandaid that is just going to float for another 12 to 24 months, but that’s going to end poorly typically and so that’s actually a stat I want to track now, like how many Cash-Out Refis were going on, and is that constantly increasing?

Dave:
He did say that some of it was for debt consolidation, like to pay off credit card debt because you can get a Refi at a lower rate than a credit card debt, but that’s not a great position to be in.

James:
That just goes back to over-leveraged.

Dave:
Yeah.

James:
America is over-leveraged. Credit card debt is at its all time high. People, they’ve shredded budgets, budgets that Dave Ramsey would be very sad. People, they’re loose with their funds right now.

Kathy:
Well, I wonder, I’m wondering, we got a credit line or an equity line on our house and it was 9% or something like that. So it was one of those things we got just in case we need it, but we’re not using it, but I think it shows up as if we did. So I’m curious if some people are just getting these equity lines and not using them but just keeping them.

Dave:
That’s true.

James:
That’s a valid point.

Dave:
Yeah.

Kathy:
Yeah. I’m not sure how much on the credit report it shows whether it’s been used or not, but when I was in mortgages, it would show up as you’ve used it because you’ve got that credit available. But I had this really interesting conversation with one of our investment counselors at RealWealth, who honestly, these people, they know more than me at this point, but Leah, one of our investment counselors, said she just refied some of her investment properties that she had at very low interest rates and she refied at a higher rate to take the Cash-Out because she had so much equity in this fourplex that she had bought a few years ago in Florida, and I’m like, “You got to be kidding me. You went from a three to a six and took the Cash-Out, why would you do that?”

Kathy:
And she enlightened me on her thinking there, is that if you have several hundred thousand of equity sitting there making zero and you average it out, even if you’re borrowing at 4% on half of the property but you’re getting zero on the other half, in her mind, she’s like, “I’m better off just paying a little bit more, getting that money out and reinvesting” because she’s at a phase in her life where she’s an acquisition, she’s in her early 30s and she’s not looking for the cash flow.

Kathy:
And I told her, “Good, because we want to keep you as an employee so don’t get cash flow today”. That she’s really looking at acquiring in markets that are growing because that’s her plan, and that was really enlightening to me. I would never have done that, just cash out in a higher rate, but when she added up all the numbers and put it in her spreadsheet for what her 10-year goal is, it made sense.

Dave:
That’s super interesting. Yeah, I mean, as opportunities increase, you might see that a little bit more just because if there are deals like the both of you are talking about, you probably want to get a little liquidity even if you’re sacrificing cash flow.

Kathy:
Yeah.

Dave:
All right. The last indicator I want to talk about was rent. Rent is still up year-over-year 7%, but the pace of change is coming down pretty consistently. In a lot of markets, we’re starting to see that rent is flat or even starting to decline, particularly in multifamily. Curious what you both are seeing. James, are you seeing any changes to rent in your market or your business?

James:
No, the rents have stayed pretty… We saw it in the luxury condo market where if stuff was like 5,000 it came down into the low 4000s, which definitely could be detrimental. Luckily, we don’t buy a lot of that product. Our rent growth is actually still stable. We’re staying 97% full in our whole portfolio and we’re still getting our steady increases. And I think that just comes back down to the cost of rent is substantially cheaper than the costing to own right now in Washington. And until I see that metrics close, I think we’re… Now, I don’t think we’re going to see the rapid growth we’ve seen in the last 24 months, but we haven’t seen much adjustment at all. It’s very stable, there’s still way more demand than there is product, and as long as you’re in that right wheelhouse, things are leasing up pretty quickly.

Dave:
Nice. What about you, Kathy?

Kathy:
We were way too conservative in the underwriting for our fund because the rents are coming in much, much higher and they continue to climb, and that’s been the case that we’ve seen in all the markets that we focus on at RealWealth. I think the reason for that is we’re already looking for… That’s just part of our metric. We’re looking for areas that have job and population growth, but that are still really affordable for the average person in that area. So because it’s still affordable but there’s growth, we’re seeing prices increase and rents in those markets, which has surprised me.

Dave:
It is surprising me. I still think it’s going to slow down, but in certain markets, obviously, like Dallas has such strong population growth and I’m not surprised to hear that, but on a national basis, it’s still higher than I at least expected it to be.

Kathy:
Yeah.

Dave:
All right. So that is where things stand in terms of some of the major indicators that we are watching. Of course, interest rates are pretty volatile, inflation is falling, but is still higher than I think anyone wants it to be. Prices are down a little bit, inventory is not budging, demand is still pretty good, so we’re in a really interesting time for the housing market and I’m fascinated to see Q2. I think this is going to be really interesting to see. We had a little bit of correction, now we’re showing signs of life. I think it’ll be really fascinating to see what happens. James, I’m curious if you had some advice for people how to navigate, let’s say the next three months. Usually, we talk about 2023, but given the way things are, I think you have to look even almost at a shorter time period for some decisions. So how would you recommend people navigate the next couple of months?

James:
I mean, the biggest thing for any, and I know for me is always just staying on top of what my buy box is. It changes from quarter to quarter based on what I’m seeing in the market, right? As the market changes, you have to change up what you’re going to buy and why. And so for us, it’s about we just redid our buy box again, what fix-and-flip properties are we going to buy? What kind of development product are we going to buy? What is our expected returns? And as long as we know, if everything hits that return, we are pulling the trigger on it so just stay on top of it. But I would just say, don’t be greedy, run your numbers very conservatively, and if it hits all the numbers, then buy on that. I think where people are getting in trouble, like we were talking about earlier with the multifamily, is people are being too aggressive on their performance.

James:
So just go with the median. Like for us, when we’re pulling comparables or even rent comps, sale comps, whatever it is, we’re using the median, not the high. And so as long as you’re staying in the middle, we’ve seen a lot of stability the last three to four months, you’re not going to get hurt that bad. I mean, there’s going to be a little bit of upside, little bit of downside, and then try to time what you think’s going to happen in the market. We do think, I don’t think rates will be in the fives in the summer, but I do think they could be in the high of fives by the end of the year.

James:
And that’s why I’m going after big projects because they’re huge margins and then the timing works. By the time I go to sell that, my rate will be cheaper to my next consumer. And so it’s funny, we were getting out of the big projects and now, we’re going right back in because it works best with the buy box in addition to it goes to my core beliefs of I think rates will fall. And if you’re timing that right, it’s going to click out a lot better.

Dave:
That’s great advice. James, I’m just curious, is your buy box, is that something [inaudible 00:40:58] you said quarterly or do you do it even more frequently than that?

James:
I mean, it depends on the trends. And I would say right now, we can go more quarterly because the market’s very stable for the… I would say from May until October, we were checking it every 30 days because there was so much more volatility in the market. The money went up what, 40%, 50% during that time. It was when there was that much volatility in the market, you want to do it constantly. But right now, we’re doing it about quarterly. And then me and my business partner get together, we figure out what we also are evaluating what’s working best for us, and actually randomly right now, building homes is more consistent than flipping for us because it has all and it has everything to do with the labor market, has nothing to do with the product, what we’re buying, the margins, it’s the professionals that we’re working with and the timelines they can get things done in.

James:
And in addition to as inflation, like we’ve been talking about, has been starting to go down, they’ve been more consistent with the pricing coming down with that trend, whereas, your remodel contractors are a little bit flying by night, so they’re not. And so just based on that one principle alone in efficiencies and cost, we’re buying a lot more dirt than we are fix-and-flip. And so it’s your buy box, there’s so many little indicators to form that. And I would say if you want to buy anything right now, buy what you’re good at and then you will be safe.

Dave:
All right. Great advice. Kathy, what’s your advice?

Kathy:
Very similar, not surprisingly, but I’m going to compare it to yoga and the tree pose, and if anybody knows what I’m talking about, it’s where you stand on one foot and you’ve got the other foot up and then you’ve got your hands up to make it a tree, and it’s a really easy way to fall down and wobble a lot, right? And the whole, the key to doing tree pose correctly is to look far away in the distance and focus and not look around you or anyone around you who’s wobbling because you’ll probably fall.

Dave:
I was wondering where that was going, but you brought that one around. That was good.

Kathy:
Bringing it back. You’ve got to be super clear what your long-term plan is and focus on that and don’t let all the wobbliness around you affect that plan. Know what you want. And again, in the case of Leah, our investment counselor, she knows what she wants, she’s building a portfolio. She’s young, she doesn’t need the cash flow right now. She knows what she’s looking for and she runs it through the spreadsheet and it works, even at a higher interest rate. She’s leaving a low interest rate for a higher one because she can deploy more cash that way. So have your focus, be clear about it, and don’t look at anything else, just focus. Keep your eye on the horizon, as they say it, Marcus & Millichap. That’s the big one. And it all really depends on what you’re trying to do. If you’re trying to buy your first home, maybe it’s a home you live in, does it matter what’s happening?

Kathy:
Again, does it matter what’s happening? If you need a place to live and you can still rent out rooms and house hack, you’re going to have to pay somebody something. So knowing that there’s a possibility that mortgages could go down, if you’re just trying to buy your first home, please get active in the next couple of months because it could get harder very soon, whether it’s your primary or an investment property. And I know a lot of people and I can already see the comments, “Oh, well, you’re in real estate, so of course, you’re going to say, ‘Oh, now is always the time to buy’”, but really, it really is. And we could talk next summer. Even if I’m wrong and let’s say rates go up, well, then you got today’s rates.

James:
That’s true.

Dave:
Yeah, that’s a very good point. All right, I love that. B, do your tree pose and look beyond all the instability right now and try and focus on your long-term goals. I think that’s always a good advice for real estate investors. All right, thank you guys for, first of, all reading my report. If anyone wants to check this out and wants to understand some of the more nuanced data and information that is dictating the performance of the housing market right now, highly recommend you check it out. It’s completely for free on BiggerPockets. Just go to biggerpockets.com/q2report. Before we get out of here though, I have one question from our audience that is very relevant for our conversation today. This question came from the BiggerPockets forums, and if anyone listening wants to ask us questions, that is a great place to do it. This question comes from Mathias Yonen who said, “What websites or sources do you guys use to inform yourselves about the market in any shifts and trends that occur?” James, what about you? What sources do you use most?

James:
So I use a lot of local sources because I think that depends on what kind of investor you are. I’m a backyard investor, so everything that I’m doing is very localized because we’re tracking really counties and cities. I mean, I reference the national, but I mean, and because I’m a broker, I use a lot of Northwest MLS. We use MLS data. I don’t really want to get people’s opinion on data, I just want the core stats so I can then interpret them myself. So most of the time, it’s done through the MLS or NAR, just stats and trends rather than someone telling me what they think. Maybe I’m just [inaudible 00:46:25] and I want to make my own opinion.

Dave:
That totally makes sense. What about you, Kathy?

Kathy:
I’m the opposite. I like to listen to what other people think and how they interpret the data. And so far, my two favorites are HousingWire and Marcus & Millichap, they both offer a lot of data and they take that data and interpret it. And sometimes I agree, sometimes I don’t, but I love that. And then the third way is just boots-on-the-street. Like I have said before, we’ve got property management companies that we work closely with in 15 to 20 different markets, and we have regular weekly conversations with them to see what’s going on, so we know real time what’s happening out there, and that’s important to us because the local market is not the national market, right? So we get that local information combined with the more broad.

Dave:
Great, both excellent advice, local information and getting those expert opinions about from people who really understand the data are great. If you are the kind of person who likes to check out data, some sources that I recommend are, the FRED website is great, but it’s not really up to the minute. You usually get things, some things, a month or two late, but it really does have good information on a localized level if you want to understand macroeconomics. If you want to understand housing dynamics, I think Redfin offers really good data as well. They have a data center where you could download all sorts of information about a lot of the indicators that we were talking about today, like inventory, new listings, that sort of thing.

Dave:
And then the last thing I’ll say is we had Mike Simonsen from Altos Research on I think episode 98 a couple weeks ago, and he now works with HousingWire and his company is all about tracking data in real-time for the housing market. And if you go on HousingWire, they have active inventory home sales data for the current week, which is just about as fast as data as you can get for the housing market. So those are just a couple of the sources that I personally use. And you can always follow me on Instagram @thedatadeli. I put out lots of content about where to find data.

Kathy:
I was just going to say that. I was like, “Wait a minute, and you”, I mean, your most recent report was so in-depth and it had the mixture of the data with the interpretation of it and wow, definitely make sure people know where to get that and all of your reports because they’re like little books. I don’t know how you’re writing so many of them, but it’s really packed full of information.

Dave:
Oh, well, thank you. All right, well, thank you both. I appreciate you being here. This was a lot of fun. Kathy, if people want to connect with you, where should they do that?

Kathy:
Realwealth.com or @kathyfettke at Instagram. And if you’re interested in learning more about the fund, it’s growdevelopments.com.

Dave:
Sweet. I love your new studio, by the way. It looks good.

Kathy:
Do you like it?

Dave:
Yeah.

Kathy:
Rich chose the color, pink.

Dave:
It’s perfect.

Kathy:
Representing the ladies over here.

Dave:
Yeah, it looks very nice. Very professional.

James:
I thought that was representing his underwear color.

Dave:
James, what about you? Where can people find you? Just come to the boat or-

James:
Yeah, just come to the boat whenever it’s open, you can hang out, but it’s-

Kathy:
Good to know.

James:
… best way is just Instagram, @jdainflips or jamesdainard.com.

Dave:
All right, great. Well, thank you both. And if you want to connect with me, you can find me on Instagram where I’m @thedatadeli. Again, if you have questions for us, like the one that we answered today, BiggerPockets has forums, we have an On the Market forum. Just tag any one of us and we will review any of them and might select some of yours for our parting thoughts here on the show. Thank you all so much for listening. We’ll see you next time for On The Market.

Dave:
On The Market is created by me, Dave Meyer, and Kaitlin Bennet, produced by Kaitlin Bennet, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

In this article

Barbara Corcoran understands real estate arguably better than anyone else. And while most of us know her from Shark Tank, Barbara swims in a league of her own as one of the most successful real estate investors and brokers in New York City. She knows the up-and-coming areas, the overpriced hipster neighborhoods, the streets to stray away from, and which will make you rich when owning real estate. And while Barbara has made a killing, she’s done it in a way foreign to almost any other real estate investor.

If you want to know the “formula” for making a fortune, this is the episode to tune into. In it, Barbara uncovers the exact way she finds the hottest rental markets before anyone else, why she consistently overpays for properties, the reason you should partner on almost EVERY deal you do, and why small-time investors are MUCH more likely to succeed than the big players.

Not only that, but Barbara also shares her past failures and why falling flat on her face was what she needed to see great success. She talks about her infamous word-of-mouth campaign that sold out an eighty-unit apartment complex in hours, the “Corcoran Report” that landed her on the front page of The New York Times, and why you MUST talk to waiters whenever investing in a new area.

Click here to listen on Apple Podcasts.

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In This Episode We Cover:

• Barbara’s investing formula that will make you a FORTUNE (if you take the risk!)
• A terrible first real estate investment and a crucial finding Barbara learned from failing
• Overpaying for properties and why savvy investors don’t worry about the purchase price
• Cash-out refinances and why Barbara is ALWAYS taking money out of her properties
• Almost unbelievable marketing moves that Barbara made to boost her business
• Whether or not buying with today’s “high” mortgage rates is a mistake
• Why taking a night drive could be your key to finding the best real estate markets 
• And So Much More!

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.