Dave:
Hey, everyone, welcome to On the Market. I’m your host, Dave Meyer, joined today by Kathy Fettke and James Dainard. How are you both?

Kathy:
Wonderful. Survived a hurricane and an earthquake in the same day.

Dave:
Yeah, you had a little bit of a one-two punch there.

Kathy:
Well, it wasn’t really a hurricane, but for Californians it was like a Category 4, so we survived it.

Dave:
But tell everyone what you told James and I you’re going to go do later today.

Kathy:
I’m going to go surf those hurricane waves just so I can say I did.

Dave:
That’s just so badass. I would be so terrified, but that sounds very fun if you’re competent enough to do that.

Kathy:
Yeah, we’ll see. We’ll see.

James:
Yeah, my roof did spring a leak. I was sitting in my house and all the rain, it was like a slow, slow drizzle. It was actually a normal Seattle day for this tropical storm. It was just rainy and drizzly, but all of a sudden, I started hearing the dribble in the hallway and I’m like, “Oh no.”

Dave:
Yeah, I thought Seattle, like you said, this is just a normal occurrence where it just rains nonstop.

James:
It was like a four out of 10 for a normal Seattle day. It was just a January 18th normal day.

Dave:
Well, I’m glad you’re both okay, and hopefully, it doesn’t turn into anything more than that. We’re going to tangentially actually talk a little bit more about this today because we’re going to talk about insurance costs because we have a correspondence show where Kathy, James, and myself have all brought a relevant news story to the show and we’re going to talk and discuss about the implications of each of them. In addition to talking about insurance costs, we’re also going to be talking about mortgage rates and how those keep going up and new home sales and what Warren Buffett is doing about it. So you’re definitely going to want to listen to each of these stories and understand how they may impact your financial decisions.
But first, we have a little game to play. In this game, we’re going to be talking about housing inventory, which I feel like is the word of 2023 and I have three questions for you and see how well each of you do on this. The first question, James, let’s start with you, is, which month and year had the lowest housing inventory in recent history? We’re talking the last five years.

James:
I’m going to go April 2022 because the market was just … I mean, we were selling everything way over … There was nothing for sale. I think, in our local market, we were down to … It was under half month’s worth of inventory. So that’s what I’m going with. It was the hottest I’ve ever seen it.

Dave:
So this was when rates had already started going up and everyone had FOMO and they were just buying anything that came on the April 22?

James:
Yeah, they were just starting to step on those rates, but then the people with locked in rates were in that frenzy to get the rest to lock in and get closed. So that’s my prediction.

Dave:
All right, Kathy.

Kathy:
I am going to say March of 2022 for the same reasons. It was the time to get in before rates went up and there was already a frenzy.

Dave:
Well, I wanted to guess something around then, but I’m going to guess … I actually don’t know the answer to this off the top of my head, but I’m going to say May of 2020 because that’s when everything just stopped and maybe that what happened. So the answer, Kathy, you’re so freaking good at these, you’re always get them right, is March 2022 was exactly correct. Maybe you cheated or maybe …

Kathy:
No, no, I have-

Dave:
… you’re just really good at this.

Kathy:
I do quarterly housing updates at Real Wealth and I have this Altos Research slide and I talk about it all the time. So that one, I knew.

Dave:
Dang. Okay, all right. Well let’s see if you can do this next one. How many homes were on the market as of July 2023? You can round to the nearest thousand. We won’t ask you to get it exactly correct.

Kathy:
July 2023, I want to say, I’m going to really botch this one, but it was somewhere around 400,000, 420. I’ll say 420, 420,000, but I’m talking single family homes.

Dave:
Okay, and, James, what about you?

James:
You know what? I also just did a market update, so I think it’s about 1.5 million homes if I remember right.

Dave:
Okay. So the answer is 647,000 homes and this is according to realtor.com. And, Kathy, just so you know, the way they measure this is active single family and also condo townhome listings. So only about 650,000 in July in 2023, which brings us to our final question, which is, how many homes were on the market in July 2016? So if we go back seven years, how many homes were on the market? James, what do you got?

James:
Back then, the market was a lot more … I’m going with about a million homes because I would think there’s about 30 to 40% more.

Dave:
Kathy?

Kathy:
This is going to be a wild guess, but I feel like right now we’re about half of where we were, so if we’re … I would say 1.2 million.

Dave:
It is 1.46 million.

James:
Whoa.

Dave:
So we are well under half of total inventory according … Again, this is according to realtor.com in inventory. So as I was joking before that this is the word of the year in the housing market for 2023, it makes sense when inventory or supply really in any sort of marketplace drops that dramatically, obviously, some wonky and weird things are going to happen and we all know what’s happened with this inventory dropping throughout 2023. So pretty good job. You were directionally correct about all of these, so I know these are very difficult. So great job on these.

Kathy:
Directionally correct, I’m going to put that on my wall.

Dave:
That’s what analysts say when you’re wrong, but you want to sound right. They’d just say, “It was in the right direction.”

James:
“That’s perfect.”

Dave:
“You were right.”

Kathy:
“Good for you. You get a trophy.”

Dave:
No, you nailed one, Kathy, and, James, you were pretty close, so we’ll give it to you.

James:
Yeah, I was also really far off on one of them, so-

Dave:
That’s all right.

Kathy:
That’s okay. Just keep selling them, man. Just keep going.

Dave:
All right, well we’re going to take a quick break and then we’ll be back with our three stories to discuss. Kathy, let’s start with you. What story did you bring today?

Kathy:
Mine is from Fortune and it is titled Warren Buffett Just Made a Big Bet on the US Housing Market. Okay, so that should get your attention, right? Because usually he knows a thing or two about where to invest. So this article says, “On Monday, Berkshire Hathaway disclosed to the US Securities and Exchange Commission that it made investments in three major homebuilders, D.R. Horton, Lennar and NVR.” But what should be noted here is that most of the investment went to D.R. Horton. And D.R. Horton is known for creating the starter homes, the more affordable homes, which is what is needed in today’s market. Over the past decade, there has been more household formation than new home creation and any new homes that were being built, generally were in the higher end because you can make a bigger profit from that.
And so this affordable housing, the new supply, it’s just not there. And yet, this is a time when we have a massive Millennial bubble of first time home buyers between the age of 30 to 34, forming families, having babies, pets. They want their first home and that first home is just not there. So when Warren Buffet does something, you should probably pay attention. I really wish someone had given me a little insider information here because stocks have just gone up crazy in these homebuilder stocks. So I look at this like 2012. In 2012, when the market was crashed and there were foreclosures everywhere and people were afraid to buy real estate, Warren Buffet went on CNBC and said, “Man, if I could …” He didn’t say man, but he said, “If I could buy a couple hundred thousand homes and put them on the rental market, I would if I knew a way to manage that.” And then suddenly the institutional investors woke up and said, “That’s what we’re going to do.”

James:
They’re like, “Yeah, we’re going to go do that. Thanks, Warren.”

Kathy:
So it’s just we know … At least, the National Association of Realtors says that over the past decade there is 6.5 million homes that weren’t built that needed to keep up with the household formation. So how quickly can we get there even with Warren Buffett’s money? I don’t know. I just hope they don’t overbuild, because when he says something, everybody jumps in, but this is … Perhaps, this inventory problem will get solved over the next few years.

Dave:
I’m curious if Warren Buffett made any commentary about this yet or is this just through SEC filings?

Kathy:
I don’t see anything in here that has a quote from him.

Dave:
So I was just hoping, he was like, “Yes, we’re going to put all of our money in Spokane,” or whatever. I don’t know. We could all just follow him. Like all the stock traders do, they just follow him around. But in real estate, we can’t just follow Warren Buffett around unfortunately.

Kathy:
I think it’s really everywhere. I don’t know that there’s a specific market. D.R. Horton is nationwide, and nationwide, there’s issues with affordable housing. And I can tell you, I’ve said this before, but it is really hard to create affordable housing in today’s market. Even though the cost of goods has come down a bit since 2020 and 2021 when builder supplies were out of control, prices have come down, but they’re still too high. And in our own subdivision in Utah where we were required to do 30% affordable, it cost us about $850,000 to build an affordable town home, just a town home and we have to sell them or required to sell them for about 375,000. So it’s costing us more than double to build it. So I don’t know how D.R. Horton’s going to do it, but I know that is their thing. That’s what they do. Maybe they’re not as custom as the homes we’re building, but they’re going to get them up somehow.

James:
Well, Kathy, I stayed in one of their units and I can tell you, D.R. Horton’s finished package is not the same, but they build a really good house, especially for that first-time home buyer, entry-level builder. And I really liked this article because Warren Buffett likes to invest in services and things that are in high demand and being able to build efficiently is very difficult right now. These big track homebuilders like D.R. Horton, because they’re buying such huge sites in the middle of the outskirts, that path to progress areas, they’re able to attain dirt a lot cheaper than infill metro. In addition to when they’re building that many homes on one site, it is so much more efficient, which will drive down your costs.
As inventory and housing shrinks and shrinks and shrinks, they need this product because it is affordable and that’s where the market’s absorbing right now. And big builders, they know how to build the right way for the right price that will allow everybody to continue to still be a homeowner because of the cost to build.

Dave:
Yeah, I see this as a good thing. I don’t really know a ton about D.R. Horton in particular and their business model, but I think anything that happens that encourages affordable housing in this country would be very beneficial. Obviously, some people were expecting prices to dip and make homes more affordable, but that hasn’t happened. Affordability across the country is at a 30-or 35-year low and so this is a huge problem that we talk about all the time. And so hopefully, these builders and investors are seeing a path to creating more affordable housing inventory so more people can, like Kathy said, achieve what they want to in terms of their financial situation and homeownership.

Kathy:
Yeah, you make a great point because a lot of people thought with interest rates going up last year that the housing market would crash. There were headlines everywhere about that and everybody was wrong. Because what higher rates actually did was make the market worse and more stuck because you’re just not going to sell your house, you’re not going to put it on the market, and therefore, there’s nothing for sale. The only thing that’s going to be for sale is new homes and that’s why new home sales are up 23% versus existing home sales down 20%. That’s what’s for sale.

Dave:
Yeah, this is an encouraging story, but I think it has to be a bigger trend. I just looked this up, but D.R. Horton, which is the biggest homebuilder in the country by volume since 2022, in the year ending June 30th, 2023, they built 83,000 homes. That’s remarkable. It’s insane. But even if they ratcheted up 20%, which would be big, that’s really not making a dent in the total amount of homes that are needed, especially in this category. And so hopefully, other builders are encouraged and maybe learn something on how to efficiently build these more affordable homes, so that we can get a significant amount of them on the market.
I don’t know what number is necessary to really chip away at that huge shortage, but I think D.R. Horton would need to quadruple in size to really make a difference in the next few years on their own. All right. Well, that’s a great story. Thank you, Kathy. James, what do you got for us?

James:
We’re talking about the squeeze right now. For us investors, we’re getting squeezed on all sides. You’re getting squeezed on your debt costs. It’s a lot more expensive and also insurance and that’s what this article talks about is, Commercial Real Estate is in Trouble. Climate Change is a Part of the Problem and this is reported by Time. And what this article talks about is the cost of insurance, especially in areas that are susceptible to a natural disaster like hurricanes and earthquakes in the same day.

Dave:
At the same time.

James:
At the same time.

Dave:
You’re going to need a whole new category of insurance.

James:
Yeah, I don’t know what kind of coverage you need. Yeah, you need earthquake and hurricane. So that’s causing problems for commercial real estate, especially in retail in those spots because rent growth has been very small, especially since the pandemic and commercial real estate’s already getting squeezed. We’ve been hearing about this for the last six months, right? Rates are going up. Notes are starting to balloon out. And in addition too, cost of insurance is way, way up, especially in areas like Denver because the wildfires or in Houston with the natural disaster and Miami. And it’s a big deal, because from 2017 to 2022, the cost of retail rent only increased by 0.4% annually, whereas the cost of insurance increased by 9%.

Dave:
Wait, did you just say retail? So we’re talking about … You said commercial insurance, but this is not for multifamily, it’s specifically for retail?

James:
It referenced more about retail, but also in multifamily. Multifamily has also gone through the roof. I know in Houston alone, the premiums have spiked dramatically. And so what’s happening to these investors, especially if they bought over the last couple of years, is they’re getting squeezed because they didn’t perform out this insurance premiums to spike this high. Insurance companies are having problems making … There’s been reports that they’re having problems starting to cover these claims and they can be insolvent, which is a massive issue because of all these natural disasters.
And so what’s happening is it is not just retail, multifamily syndicators, especially ones that bought in the last year or so, they did not anticipate this and now their debt costs are also creeping up and so they’re getting squeezed on all sides and it could become a major issue. And it could also hit the residential homeowner too, because as pricing, or like we were just talking about, as inventory shrunk to all-time lows in that April and March of 2022, people were really stretching themselves even with those low rates. And now property taxes have reset, it’s getting more expensive and their insurance is also going up in these areas, flood insurance, hurricane insurance. Insurance companies are starting to drop coverage, which is making it harder to find, right?
State Farm just dropped or they are not going to be issuing any new policies in California and same with Allstate. And now Farmers Insurance is setting limits on California. So as the amount of coverage shrinks, the premiums could continue to grow and it could start to really cause an affordability crunch.

Dave:
Kathy, show us your insurance bill in California. We want to see that.

Kathy:
I won’t. We have a house up the road that we put an illegal deck on and put in windows without permits and didn’t really know that we needed permits for those, but we knew. Anyway, we got a violation. So we still have that property and it’s rented. The insurance on that property went from 2,000 a year to 12,000 a year. So we are absolutely negative cashflow on that and we would love to sell it, but we have to carry these violations and you have no idea what it takes to get … It takes years to get permits for a deck. I know, I know. But insurance, most people where I live in California, they cannot insure to the value of the home. It’s just not there anymore. California mandated insurance that goes to a million dollars. There’s a lot of areas in California where you can’t rebuild for a million.
So it is definitely an issue. It’s a huge issue in Maui. Many of those people that lost their homes were not insured properly. So there’s two parts to this. Make sure you’ve got somebody who understands your policy and what it covers. And believe me, you won’t understand that. As normal people, we’re not meant to understand what’s in that insurance policy. You need an expert to review it to make sure you’re covered 100%. And to James’s point, I interviewed a bunch of people. We actually did a YouTube video for On The Market if you want to check that out, I interviewed a bunch of commercial investors or apartment investors at a Dallas event. And yes, they are getting hammered.
And, Jimmy, you said their costs are inching up. No, no, no, no, they are mileing up. It’s not inches, it’s miles, the insurance. Imagine with my insurance going from 2 to 12 million, I mean 2,000 to 12,000, with these multifamily, you’ve got to put zeros. If they were paying 200,000, they’re paying 2 million or whatever it is. They cannot afford these new expenses because rents are simply not going up in a way to keep up with that and then add the mortgage payments that, again, did not double, almost tripled in some cases. So people in multifamily are in a world of hurt, not all, but many and I’m just thankful that I’m in … We have five syndications in, guess what? Home building.
So for a minute there during COVID, it was a scary thing to be in, a scary investment in new homes because like, “Oh, is this market going to crash?” And no, it just turns out it’s going to be a good investment to be bringing on new supply. Unfortunately, the affordable housing we’re bringing on in Utah still is around $2 million, so not that affordable.

Dave:
So what do operators do in this scenario, right? I don’t see insurance going down, right? It’s not typically something that fluctuates. It’s something that trends upward or shoots upward in this case over time. And if rent, which I believe is … Rent growth is suppressed right now and, at least in my opinion, will stay suppressed for a little while. What happens now?

James:
Well, there’s a couple things you can do as an operator to drive this cost down, but unfortunately if you’re already midstream, it’s a little too late and you have to reperform the deal. Because you can take certain steps with your insurance companies, if you do a certain amount of improvements, it can reduce your insurance liability, right? In Washington, if we install a lot of drainage or any of these areas that have flooding issues and you install extra drainage that will help prevent the building from being damaged, it can actually reduce your cost or certain types of roofing, all these things or retrofitting your building, taking it up to a new standard, so the building’s more secure will help your policies.
But the issue is that costs more money and you need to account for that when you’re in feasibility or you’re going to perform out that deal. And so many of these syndicators might have to look at, “What’s the cost analysis?” If they have to spend a certain amount, will it get their insurance premium down? And they’re going to have to either raise more capital and put more money in the deal to try to drive the premiums down or they’re going to have to absorb it and wait for the rents to keep going, but it’s not … You’re getting squeezed. And so it’s really going to change how people are underwriting in these markets that are susceptible to this.
Like upfront cost, you either need to factor in a higher insurance premium increase or put more money into the building upfront to drive those costs down.

Dave:
And, James, do you think those same pieces of advice are applicable to residential real estate as well?

James:
Yes, I do, because also if you have a short-term rental or any kind rental property out of state, Kathy just mentioned, I mean, that’s a single family house. 2,000 to 12,000 is detrimental to your performance and your cashflow. And so you really have to count for this going forward and it’s going to be an issue across the board and I think it could. For me, I don’t like dealing with those weird variables like that. That will make me stay out of those markets because I like to just buy things that are more stable with more steady growth. I think it could slow the demand in some of these seasonal areas, especially with the Airbnb markets.

Dave:
Oh, yeah. Based on what Kathy was saying, I have an Airbnb in Colorado in the mountains and I can’t get the full property insured, their full replacement cost because of the wildfires. And just in the last two years, we’ve had evacuations and all sorts of things that are … They’re not doing it for no reason. There is risk. And so it’s definitely something you’ll have to consider as a home buyer. And, James, to your point out, if people can’t afford it, home prices might negatively be impacted in those markets.

James:
Yeah. And then also it’s like what’s going to happen with these lenders if these properties start to become very underinsured because people can’t cover their premiums. That could be a major pressure point or they can do that forced-placed insurance, which is extremely expensive.

Dave:
Yeah. I don’t know how this all works out, but something … I wonder if we’ll start to see more … Like in Florida, they have a state insurance. I forget what it’s called, but they have an insurer of last resort basically that’s sponsored by the state government there and I wonder if we’ll start to see that in other places.

Kathy:
Well, that’s what we have.

Dave:
You do have that in California too?

Kathy:
It’s called California FAIR Plan and lender … It’s the insurer of last … It’s California basically.

Dave:
So basically … But you still buy a policy, right? So you buy …

Kathy:
Yeah.

Dave:
… a policy essentially from a government agency?

Kathy:
I don’t know quite how it works. Maybe California backs it. I’m not sure, but that’s what you can get if you can’t get insurance. And it’s not great. It’s not the best insurance. Like I said, it’s caps at a million and, “Find me a house along the coast that you can rebuild for a million.”

Dave:
Yeah, well, this is definitely something we should keep an eye on, because in recent years, we’ve seen this start to go up. I know, in Florida, premiums have gone up 40% in the last few years, as James said. Certain places in Texas. I’m sure in some of the places that have been recently impacted by natural disasters, we’ll see that as well. So definitely something to keep an eye on because it’s one of those sneaky things. For, I don’t know, the first 10 years I invested, I never even really thought about it. It just would go up like 3 or 4% a year and you’d have a pretty good sense of it, but it is becoming a real variable and that can impact your bottom line. As James said, that level of uncertainty is obviously unappealing to anyone investing.

Kathy:
You know what’s interesting though, Dave? I had mentioned I bought a brand new duplex in Palm Coast, which is pretty close to the coast in Florida. But because it’s brand new, our insurance is really low. So I think there is this belief that no matter what you’re going to pay a lot, but if you have a property that was built to today’s standards …

Dave:
Interesting.

Kathy:
… the insurance is much, much lower. So people think that it’s a bad investment to buy a new home because it’s more expensive, but when you add all those factors of less repair costs and lower insurance, it’s really … Actually, we’re cash flowing really well on it. Plus, we got that low rate because we were able to negotiate with the builder to pay points to pay the rate down.

Dave:
That’s a great point. And just going back to the short-term rental I was talking about, your HOA and different things can do things as well. We’re a “fire-safe community” where they do fire mitigation and they built cisterns and all these different things with the intention obviously of saving homes, but it also helps bring down insurance costs if you can show that you, like Kathy said, have a modern home that is built up to modern standards and the community is proactive about trying to reduce any potential risk.

Kathy:
Yeah, and to that point, one of our employees actually bought a home right where that last massive hurricane went through. Which town was it in Florida?

Dave:
Was it Fort Myers?

Kathy:
Fort Myers, yeah.

Dave:
Cape Coral? Yeah.

Kathy:
He just bought a new home there and the storm came through right over him and the devastation …

Dave:
Wow.

Kathy:
that storm caused and nothing happened to his house.

Dave:
Interesting.

Kathy:
So it does matter. It does matter to have a home that’s built today’s standards.

Dave:
That’s good advice. All right, well, for our last story, I’ve got one for you and it’s about something you would never guess, but it’s interest rates and mortgage rates, because although we talk about it all the time, they’re doing something interesting. The Wall Street Journal reported just a couple of days ago last week in the middle of August, the end of August, that the average mortgage rate rose to 7.09%, which is the highest level in more than 20 years. And we’ve been talking about high interest rates, but just for context, up until the last few weeks, we had peaked for the cycle back last November, November of 2022.
And then in 2023, we’ve seen a lot of fluctuations and variations, but it’s mostly been in the mid-6s and the high 6s. Now recently, they’ve shot up. Last week, the reading was at 7.1% and I was just nerding out here before and looking at treasury yields before and they’ve been going up. And so I expect, as of this reading, what is it today? The 21st of August, we’re recording this. I expect that mortgage rates this week will probably shoot up to 7.3 or maybe 7.4. So it is really going up. And I think the really interesting thing here is that it’s happening at a time when you usually see that seasonal decline in housing activity. And so to me, I’m just curious, we’ve seen the housing market be more resilient than I thought it would be, but I’m curious if you guys think that this upward, this new leg up on the mortgage charts will maybe take some wind out of the housing market in the next couple of months.

James:
I’m definitely feeling it slowing things down. And part of that is just that seasonal slowdown, is … I mean, the pandemic made us forget about these seasons a little bit because it didn’t matter, but I’m seeing the showing activity drop pretty rapidly right now. I know mortgage apps are way down week over week and it’s getting expensive. I felt like the market was actually very fluid when the rates were about 6.6, 6.75. It was like that perfect, I think, affordable pricing in there, but as median home prices continue to keep going and we haven’t seen that dip, the rates could cause it to come down because the buyer activity had dropped pretty substantially in the last 30 days, at least in our market. And it sounds like it’s across the board.
Because it is expensive. You run these mortgage, you’re like, “Man, is it worth it?” And if they’re thinking, “Is it worth it?” they’re going to sit on the sidelines for a little bit.

Kathy:
To me, this again comes down to the high-priced versus the low-priced markets. In a low-priced affordable market where the homes are maybe 200, 300,000 a market where Henry’s in, the impact is really not going to be that much. It’s going to be a few dollars, maybe $12 a month in payment difference from what it was just a few months ago. So in those markets, yeah, I don’t think it will matter and it hasn’t over the past 18 months, but in the higher-priced markets, absolutely that payment is hugely different when rates go up. So the big question is, will they continue to rise or they come down? Nobody knows. I think one of the reasons that they spiked is because the Fed is reducing its balance sheet and selling off some of their mortgage backed securities and they flooded the market and the sales were not good.
And the way the bond market works is, if you want to attract investors, you have to give them a good return, right? So you have to give them a better return, which means higher rates. And then if people are scared, then they don’t care. They just want their money safe. And so even if bonds are selling for 2% or zero or whatever, people just buy them because they’re afraid to put their money anywhere else. And that’s not the case today. So what this reflects is that a strong economy combined with the Fed reducing its balance sheet. So I have been in the camp of, “I think rates are going to come down,” and yet, there are so many factors with the big one being the Fed reducing its balance sheet and flooding the market with these bonds which drive prices up.

Dave:
Yeah, I, unfortunately, have been on the hire for longer train for a few months now and think this is probably what we’re going to see for a little while. I think they will come down in 2024, but I think, for now, we’re going to see this. And part of me wonders, James, you mentioned affordability, which is obviously the major factor, but I always am curious if there’s this psychological impact here too where it’s like things are starting to go, rates were peaking, they started to go down, people started to get comfortable, maybe feeling like, “Okay,” they’ll maybe be able to refinance in the next couple of months or next couple of years and things will get even better for them. And now the fact that rates are reversing and shooting back up is just discouraging people, just psychologically even beyond the actual dollars and cents of it.

James:
Yeah, and I think it’s discouraging in two ways, right? Inventory is really low, so what you can buy is pretty disappointing right now when you look in most markets. It’s average. And then the cost of money’s gone up. So people are just like, “It’s not worth it,” and I definitely feel like that is a psyche that … I mean, we see the market. It’s like a seesaw. It goes up. It’s just like this weird quick movement and it’ll go for a two-week run and then it goes stale for two weeks and then it goes for a two-week run. And so it’s very pulsating and it does have to do with the rates. And one thing is, if Jerome Powell starts … If he starts hinting that the rates are going to go up again, then there’s this little surge because people get FOMO. So I think a lot of it is psychological right now.

Dave:
Yeah. That doesn’t sound very good. Average or bad inventory at a very high price, it’s not a very good sales proposition. Hopefully, that’s not what you’re telling your clients, James.

James:
No, well, luckily, we’re looking for the uglies, so we can find those. And then right now, the good thing is, if you’re bringing a really good product to market and it’s in that affordability range, it is still gone. They’re moving quickly, but like Kathy said, the high end is people are being selective. They want what they want and they should.

Dave:
Yeah, yeah. If you’re going to pay a lot of money for something, it’d better be something you like.

James:
Yeah, feel good about it.

Dave:
All right, well, those are our stories for today. Before we get out of here, we do have a crowdsource question which comes from the BiggerPockets forums. And today’s question comes from Travis. He asks, “Can you get a HELOC, which is a home equity line of credit, on a rental property or is it just your primary residence?

James:
That’s a tough loan to get.

Kathy:
You could probably get one, but you’re going to pay double digits for that.

James:
You can. The money’s super tight right now on that product. The loan to value needs to be fairly low on that. I think you have to be below 70% loan to value and so that’s the struggle, is you can’t really tap too much into the equity right now, but their products are out there. Some of the major banks have been bringing that back. Your local banks are looking at it a little bit right now. There is options, but they’re expensive, and a lot of times, you just can’t quite get the money that you’re looking for out of it, so it’s not quite worth it. But credit unions are a great way to go for this.

Dave:
I think one of the things you have to think about is put yourself in a lender’s shoes. They are going to offer the lowest rate on a primary residence because they know, at the end of the day, if you get into financials, bad situation, you’re going to make payments on your primary residence because it’s the place that you live as opposed to a rental property. And so that’s why HELOCs are generally considered great options, because a lot of times, the interest rate is similar to that of a 30-year fixed rate mortgage because lenders see it as very safe. Whereas when they look at your rental property, I’m sure hopefully you’re a responsible investor and make your payments, but they just see it as less safe. And especially in interest rate environments like this, they’re going to be increasing their risk premiums to make sure that they cover themselves. So probably not the best time to look for one, but you could.

Kathy:
There’s a lot of trapped equity that people are trying to tap and it’s hard. I saw a really interesting post on, I think it was Instagram and somebody said, “Yes, I refi’d my rental property from a 2% to a 7% rate because it’s going to challenge me to find deals that make more than 7%.” I thought, “Okay, I’m just going to sit here in my 2%. I don’t need that challenge.”

Dave:
Wow.

Kathy:
But if you’re going to get a HELOC at 10, 12%, whatever it’s going to be on that investment property, the 7% all of a sudden sounds really good.

Dave:
Right, that’s true. That’s a good point. That’s not the philosophy I would use. That’s like those people who go running with a weighted jacket just to make it harder on themselves. Running’s hard enough. I don’t need to make it any harder.

Kathy:
Did you mean my husband? Yeah, that guy.

Dave:
Does he do that? He would.

Kathy:
He would.

Dave:
That makes sense. Rich is a beast. He probably doesn’t even notice this on.

James:
He has three people on his back too.

Kathy:
Right.

Dave:
Yeah, it’s just the whole. All right, well, thank you both for joining us today. This was a lot of fun and thank you all for listening. We appreciate it. If you like this show, don’t forget to give us a review on either Apple or Spotify and we’ll see you for the next episode of On the Market. On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett. Editing by Joel Esparza and Onyx Media. Research by Puja Gendal. Copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify datapoints, opinions and investment strategies.