\n<\/p>\n
Homebuyers are gearing up for a hot summer housing market <\/strong>as demand starts to surge. At the beginning of 2023, nobody thought it possible that we\u2019d be in the position we\u2019re in today. Days on market have shrunk <\/strong>in some areas as listing attendance explodes <\/strong>and buyers\u2019 home-owning dreams resurface. But it\u2019s not all sunshine and rainbows in the world of real estate; something bleak is on the horizon for large-scale investors<\/strong>.<\/p>\n We\u2019re halfway through Q2 of 2023, and the real estate market is changing fast<\/strong> month by month. Multifamily buyers<\/strong> are sitting on the sidelines, foaming at the mouth to dig in on deals that will soon be dead<\/strong>, but primary residence shoppers are facing another challenge. With a lack of inventory<\/strong><\/a> and mortgage rates<\/strong> on the verge of falling again, the buyers who were kicked out of the market last year are hungry to get back in the game.<\/p>\n Don\u2019t know whether now is the right time to buy your next rental property<\/strong>? Kathy and James give up-to-date advice on what they\u2019re pursuing in today\u2019s market and whether or not now is the time to get aggressive. If you want to get the data these (and many other) experts use to make their investment decisions, check out Dave\u2019s newest <\/strong>Q2 housing market report<\/strong><\/a>!<\/p>\n Dave: Kathy: James: Dave: James: Dave: Kathy: Dave: Kathy: Dave: James: Dave: Kathy: James: Dave: Dave: Kathy: Dave: James: Kathy: Dave: Kathy: Kathy: Kathy: James: James: Dave: Kathy: Kathy: Dave: Dave: James: Dave: James: Dave: James: Dave: James: Dave: James: Dave: Kathy: Kathy: Dave: Kathy: Dave: Kathy: Dave: James: James: Dave: James: Dave: James: Kathy: James: Kathy: James: Dave: Kathy: Dave: Kathy: Kathy: Dave: Kathy: Dave: James: Dave: James: Kathy: James: Kathy: James: Dave: James: James: Dave: Kathy: Kathy: Dave: James: James: Dave: James: Dave: James: Dave: James: Kathy: Dave: James: Dave: Kathy: Kathy: Kathy: Dave: Kathy: Dave: James: Dave: Kathy: Dave: Kathy: Dave: James: James: James: Dave: James: James: Dave: Kathy: Dave: Kathy: Kathy: James: Dave: James: Dave: Kathy: Dave: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: James: Dave: James: Kathy: James: Dave: Dave: \u00a0<\/p>\n<\/div>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Hey, everyone. Welcome to On the Market. Today, you have me, Dave Meyer, Kathy Fettke, and James Dainard. Kathy and James, how are you?<\/p>\n
Great.<\/p>\n
Good. The sun\u2019s back out in California.<\/p>\n
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.<\/p>\n
That weather\u2019s emotional out there. It was like it would rain for two hours and then it\u2019d be sunny and then it\u2019d be raining for two hours. It was almost like a tropical storm in Seattle collided together.<\/p>\n
Yeah, it\u2019s very unpredictable, it\u2019s 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\u2019s not like where you both live and sunny and glorious all the time.<\/p>\n
It\u2019s been cold, but we were supposed to be in Amsterdam right now. We at least had talked about it, so what\u2019s the weather like? Would we have enjoyed it?<\/p>\n
Yeah, it\u2019s super nice out right now. Actually, as your daughter knows, I just had lunch with Kathy\u2019s daughter who is here visiting, which was super fun to see her, but yeah, it would\u2019ve worked out great. I think we\u2019re going to have to do that next year for our two-year On the Market anniversary. We\u2019re going to have to do an Amsterdam trip.<\/p>\n
Yes.<\/p>\n
Maybe we\u2019ll do a meetup.<\/p>\n
Oh, a European takeover?<\/p>\n
Everyone listening, everyone come to Amsterdam. We\u2019re going to do a European party and Amsterdam\u2019s a good place to party. We\u2019ll have a good time.<\/p>\n
That sounds like a great party.<\/p>\n
Can we do it on Yacht Week though?<\/p>\n
Oh, we got to go to Croatia for Yacht Week. That\u2019s where you want to be, so let\u2019s 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\u2019re 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\u2019re in. And honestly, a pretty changing, rapidly changing market right now, even faster than normal. And just so you all know, we\u2019re 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\u2019s at biggerpockets.com\/q2report, it\u2019s 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\u2019re going to dive into our Q1 roundup of the housing market.<\/p>\n
All right, let\u2019s get into this thing. There\u2019s 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?<\/p>\n
Ooh, one indicator. If we\u2019re talking about housing in general, I\u2019ll pick multifamily housing and say that the indicator that I\u2019ve seen, because I just got back from a couple of conferences, it\u2019s 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.<\/p>\n
Whoa.<\/p>\n
Whoa.<\/p>\n
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\u2019t have rate caps, most did, but some didn\u2019t, they are dealing with payments that are unsustainable, they just can\u2019t 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\u2019re going to avoid foreclosure.<\/p>\n
Wow. All right. Well, that is foreboding and very interesting to hear because when I see interest rates now, they\u2019re down from where they were in November and in February. And from everything I\u2019ve 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.<\/p>\n
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\u2019t 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\u2019s 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\u2019s different than on the short-term.<\/p>\n
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\u2019re 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\u2019re feeding these properties.<\/p>\n
They\u2019ve stopped doing distributions and putting all that money into just trying to keep the property afloat, but with the first major foreclosure, I don\u2019t know if it\u2019s 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.<\/p>\n
Doesn\u2019t this remind you a little bit of the 2008 liar loans and that\u2019s why we\u2019re not seeing the issues? They did such a good job verifying people\u2019s 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\u2019s why this is coming to fruition in a bad way because people were buying on greed for the multifamily.<\/p>\n
They weren\u2019t buying to invest, they were buying to get a deal done, and that\u2019s never a good thing, right? The best deal you can ever do is the deal you pass on sometimes, but when you\u2019re 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.<\/p>\n
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\u2019ll 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\u2019re 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\u2019t even seen really the beginning of the pain that it seems like everyone is expecting. Well, I guess Kathy, as you\u2019re saying, we\u2019ve seen the beginning of it, but it seems like there\u2019s a long way to go.<\/p>\n
Yeah, and I did actually talk to a few lenders and I don\u2019t 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\u2019t know what they\u2019re 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\u2019t 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\u2019s on, or one to four units, conventional is on solid ground because of the loans.<\/p>\n
It\u2019s the adjustable loans that took down the housing market in 2008 because when those loans adjusted, people couldn\u2019t 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\u2019s an older guy and he\u2019s like, \u201cDo not go over 65%\u201d. Well, I couldn\u2019t get a deal at 65% that, but he said there\u2019s reasons why you want to stay at 65% LTV with multifamily because it can be volatile.<\/p>\n
Yeah. So I guess we\u2019re going to have to see how that goes, but thank you for the insights. That\u2019s super helpful. Let\u2019s move on to a second indicator, which is the reason we\u2019re in this situation, which is inflation. And as everyone knows by this point, inflation is why interest rates have been hiked, that\u2019s 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\u2019re 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.<\/p>\n
The flip side of that though is the \u201cCore CPI\u201d, which is what the Fed honestly really cares about because it\u2019s 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\u2019s still almost nearly 5%. So I\u2019m curious, how are you guys seeing inflation right now? In one respect, the numbers are coming down, but I\u2019m not quite sure this is enough for the Fed to take their foot off the gas.<\/p>\n
I\u2019m 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\u2019m not-<\/p>\n
Boats.<\/p>\n
\u2026 boats, but yeah, I don\u2019t even want to talk about the boat bills right now. I don\u2019t think that\u2019s an inflation issue, that\u2019s just a boat owner issue, but it\u2019s\u2026 I mean, I\u2019m 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\u2019s-<\/p>\n
Okay.<\/p>\n
\u2026 but materials in general are\u2026 Now, we can get them a lot quicker now and we\u2019re not in this like, we can\u2019t get a product and we\u2019re 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\u2019s not a lot of ease going on and we\u2019re trying to negotiate and we still can\u2019t get it down.<\/p>\n
And is it higher than it was but stable, or is it still going up?<\/p>\n
I would say it\u2019s stable. We see where it goes like little dips in valleys, right? It\u2019s almost like the housing market right now. It\u2019s like teetering, but it\u2019s staying flat. It dips and then goes up, it\u2019d come with the interest rates. Same thing\u2019s 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\u2019m 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\u2019s some things that are never going to come back down.<\/p>\n
Oh, for sure.<\/p>\n
It\u2019s 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\u2019t think they\u2019re moving.<\/p>\n
Yeah, it\u2019s 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\u2019s why the Fed is more concerned about these sticky prices, like this kind of stuff you\u2019re mentioning James, because it doesn\u2019t 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\u2019re in store for more interest rate hikes?<\/p>\n
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\u2019re getting close, but not totally there where they said that we\u2019d be. So I\u2019ve expected that they were going to continue to raise rates until they get there, so I do think we\u2019ll see another small rate hike, but based on some of the research and some of the interviews that we\u2019ve had and people I\u2019ve talked to, one is MBS Highway and he is very, very bullish on the idea that in May, we\u2019re 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\u2019re comparing today\u2019s numbers to last year, which were very high, everything\u2019s going to look a little bit better on a year-over-year basis.<\/p>\n
So it\u2019s his very, very strong opinion that we\u2019re going to see much, much better inflation numbers and that as a result, mortgage rates for conventional, not, again, this couldn\u2019t 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\u2019s 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\u2019re buying like crazy, but the opposite is true for the adjustable rates. If you\u2019re tied to the Fed fund rate or the SOFR, you\u2019re going to see rates continue to rise.<\/p>\n
Yeah. And just so people know, what Kathy\u2019s talking about is if you\u2019re getting a loan on a multifamily or office or retailer commercial, the bank\u2019s 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.<\/p>\n
And they have been.<\/p>\n
Yeah, and they have been. Exactly.<\/p>\n
Yep.<\/p>\n
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\u2019ve 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\u2019s a dip in residential mortgage rates, there is a spike in the number of applications, and I\u2019m honestly surprised. I personally thought more people would be sitting on the sidelines of waiting it out, but James, I\u2019m 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?<\/p>\n
Yeah, I\u2019m definitely surprised with the amount of buyers I\u2019m 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\u2019ve seen, I think part of it has to do with rates because the rates have been swinging just a little bit, but it\u2019s not that impactful for what we\u2019ve seen over the last nine months. I think this is all psychological, it\u2019s people are really\u2026 Because I\u2019m 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.<\/p>\n
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\u2019s 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\u2019re seeing things just trade and they\u2019re also seeing things trade close to list price and people will wait that 90, 120 days. And so it\u2019s 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\u2019ve been like 90 days ago, we\u2019re getting 20 to 30 showings a week.<\/p>\n
Oh my God. Whoa.<\/p>\n
It is crazy. The weirdest thing is people aren\u2019t moving still. It\u2019s like they\u2019re still in this confused lamb.<\/p>\n
They just want to go see some stuff?<\/p>\n
Yeah. It\u2019s like they either want to be opportunistic and low ball like crazy, or I don\u2019t need to call it low ball. They\u2019re offering what they think it\u2019s worth. And the other thing is that they\u2019re looking for any reason not to buy the house, but they\u2019re still out looking. And so what that tells me is there\u2019s buyers in the market no matter what, and if you\u2019re putting the right product out, things will sell. But we did sell three homes over the list price last weekend.<\/p>\n
Wow.<\/p>\n
It depends really on your price points. And so as you\u2019re 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\u2019re listing below a million bucks and you\u2019re 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\u2019s actually looking\u2026 I feel a lot better about the market after the last 60 days.<\/p>\n
That\u2019s why you need such a good real estate agent, if you\u2019re using one, because you better be able to know how to list it properly.<\/p>\n
Yes. Yeah. And that\u2019s key right now is putting that magical list price on it, there\u2019s 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\u2019re 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.<\/p>\n
Wow, that\u2019s unbelievable. Well, let\u2019s talk about the flip side of demand now. We\u2019ve covered inflation, we\u2019ve covered interest rates, we\u2019ve covered demand. I think as we\u2019ve 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\u2019s 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\u2019s 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\u2019re in a single-family fund and buying single-families. Are you finding it hard to find properties right now?<\/p>\n
Not at all.<\/p>\n
Oh, okay.<\/p>\n
We\u2019re trying to grow our fund as quickly as we can because there\u2019s more opportunity than we can keep up with, but what we\u2019re buying is not what a first time home buyer would buy because it\u2019s got issues, right? We\u2019re buying stuff that does need to be fixed up and that a bank wouldn\u2019t lend on as is, and that\u2019s why we\u2019re getting massively steep discounts on them because what we\u2019re noticing is that our competitor isn\u2019t there today where our competitor is not the first time home buyer because we\u2019re buying homes that need fixing. And usually, a first time home buyer doesn\u2019t have the time, knowledge or money to do that. But what we don\u2019t have right now is a lot of competition from other investors and I think that\u2019s because our fund, we\u2019re raising money, we\u2019re raising cash and we\u2019re buying these properties with cash, so we don\u2019t need a loan.<\/p>\n
So a flipper might say, \u201cWow, I don\u2019t know if I can make these numbers work with today\u2019s financing or with hard money loans\u201d or maybe they can\u2019t even get those loans. Whatever it is, we are really not seeing competition, wholesalers that just maybe wouldn\u2019t have come to us before are coming to us now because they\u2019re just maybe aren\u2019t the buyers, or whatever it is, I feel like we\u2019re the only ones out there playing the game in the area that we\u2019re in where in addition to all these opportunities, there\u2019s nothing but growth happening, so it\u2019s just mind-boggling to me. I was, again, just there. There\u2019s freeway expansions and there\u2019s cranes everywhere and new development and chip manufacturing coming in and yet, we\u2019re still buying stuff for under 100,000. My last purchase was 65,000. We had to put 20,000 in it, it\u2019s worth 200. I can\u2019t make this up. And every time I say this, I\u2019m like, \u201cAh, why\u2019d I say that? Because now, everybody heard it and now, I\u2019m going to have competition\u201d.<\/p>\n
Well, they probably don\u2019t have cash.<\/p>\n
Maybe.<\/p>\n
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\u2019re at a million, so we\u2019re still down 33% prior to pre-pandemic levels. And yes, they have come up a bit from where they were last year, but we\u2019re still talking about insanely low levels. And I do want to be clear that housing prices can fall with low inventory, we\u2019re 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\u2019t fall that much. Inventory, if there were to be a crash, has to go up. So I don\u2019t know, I just think that this is fascinating, and we\u2019ll 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\u2019re seeing.<\/p>\n
I\u2019m not in the same market as Kathy because it is hard to find a deal right now.<\/p>\n
You can\u2019t find anything?<\/p>\n
No.<\/p>\n
You can\u2019t find a $65,000 house in Seattle?<\/p>\n
No, I\u2019m finding a $65,000 permit fee, but [inaudible 00:25:16] then architect and plan fees, but I would say there\u2019s deals\u2026 What it\u2019s came back to for us is, and we\u2019re just rebuilding our systems for it is like Kathy said, if it\u2019s a hard project, it needs a lot of work. That stuff\u2019s not moving that quickly because cost of money\u2019s up, the people, they don\u2019t 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\u2026 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.<\/p>\n
Wow.<\/p>\n
And they\u2019re model match houses, and I\u2019ll be nicer, and there was zero competition on that house because it just needed so much work. And so if it\u2019s a clean product, there is no inventory, there\u2019s nothing to buy. But if it needs work, we\u2019re able to get some deal flow in, and we\u2019re doing less deals but better margin deals, much, much better margins.<\/p>\n
That\u2019s 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\u2019m 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.<\/p>\n
Yeah, and it\u2019s like the rules that got broken the last two to three years with the\u2026 The market was so hot, it was also people were breaking the rules. If you\u2019re buying certain types of product, I would say that the margin shrunk 10% to 15% on all those products. And if you\u2019re putting in that much, it\u2019s like people are buying big fixers to make the same amount of margins they would on a cosmetic fixer, and that\u2019s not how it\u2019s supposed to work, right? The stuff that you have to rip down, reconstruct, deal with numerous\u2026 That you\u2019re in that deal for a year, you\u2019re supposed to be making more money because A, your capital\u2019s outlaid for double the time and then B, it\u2019s just substantially more brain damage.<\/p>\n
And so it\u2019s gotten back to the stuff that\u2019s hard work, you get rewarded more. And if it\u2019s not that hard work, you\u2019re not going to get rewarded that well because even the last 12 to 24 months or 24 to 36 months, the stuff that wasn\u2019t 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.<\/p>\n
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\u2019s 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\u2019re 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\u2019s going down more and more and more. People just absolutely do not want to sell right now. And I\u2019m curious what you guys make of this. We\u2019ve talked about this, there\u2019s the lock-in effect, there\u2019s a couple other reasons that we\u2019ll get to, but do you think this is sustainable? Do you think this is the new normal where people just aren\u2019t going to be selling their homes?<\/p>\n
I don\u2019t know if it\u2019s the new normal, but if you\u2019re 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\u2019s homeowners are probably in the best position ever. Their payments, compared to their income, is the best it\u2019s ever been, at least in the data that I look at because they\u2019re locked in at a fixed rate, but we\u2019ve 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\u2019re moving, even if they\u2019re going somewhere else for a new job, they might be thinking, \u201cMaybe I should just keep the house and learn how to be a landlord\u201d and just rent it out.<\/p>\n
I\u2019ve heard that from a lot of people saying, \u201cI just don\u2019t think I want to let go of this interest rate\u201d. And like you said in your report, a lot of people don\u2019t realize that buyers or sellers, it\u2019s usually somebody who sells a house who buys another house. And if someone\u2019s not selling, they\u2019re not buying. So it\u2019s just like this stuck inventory and I don\u2019t really see it changing until rates get to a point where people are like, \u201cOkay, maybe at 5.5\u201d. There\u2019s some psychological thing about 6%, I don\u2019t know what it is, but when it gets into the fives, it\u2019s like, \u201cOkay, that\u2019s acceptable. I could do that\u201d. 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\u2019s what he\u2019s predicting is going to happen this summer is we\u2019re 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.<\/p>\n
Oh, yeah, that will be very interesting to see. If you listen to our last episode, we had Tim Birkmeier, who\u2019s 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\u2019t 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\u2019re 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\u2019re 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\u2019d sell their home and maybe trade up to a larger home, they\u2019re 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\u2019t really afford to trade up like they normally would.<\/p>\n
Yeah, I wonder if that the Cash-Out Refis though, because I don\u2019t see a whole lot of inventory switching up or much movement in because there isn\u2019t any pain in the market yet. It\u2019s weird, we\u2019re in this weird recession, on the in and out, but there\u2019s 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\u2019t that pain. The labor market\u2019s good, the job market\u2019s good. And so until something happens like that, it\u2019s probably going to stay where it\u2019s at.<\/p>\n
I mean, one indicator I would think, if they\u2019re saying there\u2019s 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\u2019s really hard to turn it off. And I feel like America turned the faucet on, on full blast-<\/p>\n
The whole country.<\/p>\n
\u2026 and they don\u2019t know how to turn it down, but that\u2019s why we\u2019re seeing these Cash-Out Refis, and I mean, that would be the dangerous part, right? They\u2019re pulling out more liquidity and it\u2019s like this bandaid that is just going to float for another 12 to 24 months, but that\u2019s going to end poorly typically and so that\u2019s actually a stat I want to track now, like how many Cash-Out Refis were going on, and is that constantly increasing?<\/p>\n
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\u2019s not a great position to be in.<\/p>\n
That just goes back to over-leveraged.<\/p>\n
Yeah.<\/p>\n
America is over-leveraged. Credit card debt is at its all time high. People, they\u2019ve shredded budgets, budgets that Dave Ramsey would be very sad. People, they\u2019re loose with their funds right now.<\/p>\n
Well, I wonder, I\u2019m 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\u2019re not using it, but I think it shows up as if we did. So I\u2019m curious if some people are just getting these equity lines and not using them but just keeping them.<\/p>\n
That\u2019s true.<\/p>\n
That\u2019s a valid point.<\/p>\n
Yeah.<\/p>\n
Yeah. I\u2019m not sure how much on the credit report it shows whether it\u2019s been used or not, but when I was in mortgages, it would show up as you\u2019ve used it because you\u2019ve 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\u2019m like, \u201cYou got to be kidding me. You went from a three to a six and took the Cash-Out, why would you do that?\u201d<\/p>\n
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\u2019re borrowing at 4% on half of the property but you\u2019re getting zero on the other half, in her mind, she\u2019s like, \u201cI\u2019m better off just paying a little bit more, getting that money out and reinvesting\u201d because she\u2019s at a phase in her life where she\u2019s an acquisition, she\u2019s in her early 30s and she\u2019s not looking for the cash flow.<\/p>\n
And I told her, \u201cGood, because we want to keep you as an employee so don\u2019t get cash flow today\u201d. That she\u2019s really looking at acquiring in markets that are growing because that\u2019s 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.<\/p>\n
That\u2019s 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\u2019re sacrificing cash flow.<\/p>\n
Yeah.<\/p>\n
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\u2019re 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?<\/p>\n
No, the rents have stayed pretty\u2026 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\u2019t buy a lot of that product. Our rent growth is actually still stable. We\u2019re staying 97% full in our whole portfolio and we\u2019re 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\u2019re\u2026 Now, I don\u2019t think we\u2019re going to see the rapid growth we\u2019ve seen in the last 24 months, but we haven\u2019t seen much adjustment at all. It\u2019s very stable, there\u2019s still way more demand than there is product, and as long as you\u2019re in that right wheelhouse, things are leasing up pretty quickly.<\/p>\n
Nice. What about you, Kathy?<\/p>\n
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\u2019s been the case that we\u2019ve seen in all the markets that we focus on at RealWealth. I think the reason for that is we\u2019re already looking for\u2026 That\u2019s just part of our metric. We\u2019re 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\u2019s still affordable but there\u2019s growth, we\u2019re seeing prices increase and rents in those markets, which has surprised me.<\/p>\n
It is surprising me. I still think it\u2019s going to slow down, but in certain markets, obviously, like Dallas has such strong population growth and I\u2019m not surprised to hear that, but on a national basis, it\u2019s still higher than I at least expected it to be.<\/p>\n
Yeah.<\/p>\n
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\u2019re in a really interesting time for the housing market and I\u2019m fascinated to see Q2. I think this is going to be really interesting to see. We had a little bit of correction, now we\u2019re showing signs of life. I think it\u2019ll be really fascinating to see what happens. James, I\u2019m curious if you had some advice for people how to navigate, let\u2019s 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?<\/p>\n
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\u2019m seeing in the market, right? As the market changes, you have to change up what you\u2019re going to buy and why. And so for us, it\u2019s 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\u2019t 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.<\/p>\n
So just go with the median. Like for us, when we\u2019re pulling comparables or even rent comps, sale comps, whatever it is, we\u2019re using the median, not the high. And so as long as you\u2019re staying in the middle, we\u2019ve seen a lot of stability the last three to four months, you\u2019re not going to get hurt that bad. I mean, there\u2019s going to be a little bit of upside, little bit of downside, and then try to time what you think\u2019s going to happen in the market. We do think, I don\u2019t 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.<\/p>\n
And that\u2019s why I\u2019m going after big projects because they\u2019re 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\u2019s funny, we were getting out of the big projects and now, we\u2019re 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\u2019re timing that right, it\u2019s going to click out a lot better.<\/p>\n
That\u2019s great advice. James, I\u2019m 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?<\/p>\n
I mean, it depends on the trends. And I would say right now, we can go more quarterly because the market\u2019s very stable for the\u2026 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\u2019re doing it about quarterly. And then me and my business partner get together, we figure out what we also are evaluating what\u2019s 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\u2019re buying, the margins, it\u2019s the professionals that we\u2019re working with and the timelines they can get things done in.<\/p>\n
And in addition to as inflation, like we\u2019ve been talking about, has been starting to go down, they\u2019ve been more consistent with the pricing coming down with that trend, whereas, your remodel contractors are a little bit flying by night, so they\u2019re not. And so just based on that one principle alone in efficiencies and cost, we\u2019re buying a lot more dirt than we are fix-and-flip. And so it\u2019s your buy box, there\u2019s so many little indicators to form that. And I would say if you want to buy anything right now, buy what you\u2019re good at and then you will be safe.<\/p>\n
All right. Great advice. Kathy, what\u2019s your advice?<\/p>\n
Very similar, not surprisingly, but I\u2019m going to compare it to yoga and the tree pose, and if anybody knows what I\u2019m talking about, it\u2019s where you stand on one foot and you\u2019ve got the other foot up and then you\u2019ve got your hands up to make it a tree, and it\u2019s 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\u2019s wobbling because you\u2019ll probably fall.<\/p>\n
I was wondering where that was going, but you brought that one around. That was good.<\/p>\n
Bringing it back. You\u2019ve got to be super clear what your long-term plan is and focus on that and don\u2019t 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\u2019s building a portfolio. She\u2019s young, she doesn\u2019t need the cash flow right now. She knows what she\u2019s looking for and she runs it through the spreadsheet and it works, even at a higher interest rate. She\u2019s 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\u2019t look at anything else, just focus. Keep your eye on the horizon, as they say it, Marcus & Millichap. That\u2019s the big one. And it all really depends on what you\u2019re trying to do. If you\u2019re trying to buy your first home, maybe it\u2019s a home you live in, does it matter what\u2019s happening?<\/p>\n
Again, does it matter what\u2019s happening? If you need a place to live and you can still rent out rooms and house hack, you\u2019re going to have to pay somebody something. So knowing that there\u2019s a possibility that mortgages could go down, if you\u2019re 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\u2019s your primary or an investment property. And I know a lot of people and I can already see the comments, \u201cOh, well, you\u2019re in real estate, so of course, you\u2019re going to say, \u2018Oh, now is always the time to buy’\u201d, but really, it really is. And we could talk next summer. Even if I\u2019m wrong and let\u2019s say rates go up, well, then you got today\u2019s rates.<\/p>\n
That\u2019s true.<\/p>\n
Yeah, that\u2019s 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\u2019s 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\u2019s 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, \u201cWhat websites or sources do you guys use to inform yourselves about the market in any shifts and trends that occur?\u201d James, what about you? What sources do you use most?<\/p>\n
So I use a lot of local sources because I think that depends on what kind of investor you are. I\u2019m a backyard investor, so everything that I\u2019m doing is very localized because we\u2019re tracking really counties and cities. I mean, I reference the national, but I mean, and because I\u2019m a broker, I use a lot of Northwest MLS. We use MLS data. I don\u2019t really want to get people\u2019s opinion on data, I just want the core stats so I can then interpret them myself. So most of the time, it\u2019s done through the MLS or NAR, just stats and trends rather than someone telling me what they think. Maybe I\u2019m just [inaudible 00:46:25] and I want to make my own opinion.<\/p>\n
That totally makes sense. What about you, Kathy?<\/p>\n
I\u2019m 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\u2019t, but I love that. And then the third way is just boots-on-the-street. Like I have said before, we\u2019ve 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\u2019s going on, so we know real time what\u2019s happening out there, and that\u2019s important to us because the local market is not the national market, right? So we get that local information combined with the more broad.<\/p>\n
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\u2019s 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.<\/p>\n
And then the last thing I\u2019ll 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.<\/p>\n
I was just going to say that. I was like, \u201cWait a minute, and you\u201d, 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\u2019re like little books. I don\u2019t know how you\u2019re writing so many of them, but it\u2019s really packed full of information.<\/p>\n
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?<\/p>\n
Realwealth.com or @kathyfettke at Instagram. And if you\u2019re interested in learning more about the fund, it\u2019s growdevelopments.com.<\/p>\n
Sweet. I love your new studio, by the way. It looks good.<\/p>\n
Do you like it?<\/p>\n
Yeah.<\/p>\n
Rich chose the color, pink.<\/p>\n
It\u2019s perfect.<\/p>\n
Representing the ladies over here.<\/p>\n
Yeah, it looks very nice. Very professional.<\/p>\n
I thought that was representing his underwear color.<\/p>\n
James, what about you? Where can people find you? Just come to the boat or-<\/p>\n
Yeah, just come to the boat whenever it\u2019s open, you can hang out, but it\u2019s-<\/p>\n
Good to know.<\/p>\n
\u2026 best way is just Instagram, @jdainflips or jamesdainard.com.<\/p>\n
All right, great. Well, thank you both. And if you want to connect with me, you can find me on Instagram where I\u2019m @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\u2019ll see you next time for On The Market.<\/p>\n
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.<\/p>\n