\n<\/p>\n
Mortgage rates<\/strong><\/a> are ravaging the real estate market, but Warren Buffett is bullish on housing<\/strong>. With interest rates<\/strong><\/a> at twenty-year highs<\/strong>, almost any house is unaffordable to the everyday home buyer. And, with rising insurance costs<\/strong>, commercial real estate investors face HUGE policy hikes that are eating away at any leftover cash flow. But is this just the storm before the calm\u2014have the price hikes peaked, and could we be in store for a more affordable market<\/strong>?<\/p>\n All the doom and gloom can seem scary; thankfully, Dave Meyer<\/strong>, James Dainard<\/strong>, and Kathy Fettke <\/strong>have brought their financial flashlights to make things a bit brighter. In today\u2019s correspondents show, we\u2019re talking about Warren Buffett\u2019s latest move to invest in some of today\u2019s top home builders<\/strong> and why \u201caffordable\u201d housing<\/strong> may be where the REAL money is made in real estate.<\/p>\n Besides Buffett, we\u2019ll also touch on the growing <\/strong>insurance crisis<\/strong><\/a> across the United States, who it\u2019s impacting the most, and why Kathy\u2019s latest bill jumped 600%<\/strong> (c\u2019mon, Kathy). Could this insurance squeeze make the commercial real estate crash even more lucrative for buyers? Lastly, we\u2019re talking about one of the most underground topics of 2023\u2014mortgage rates<\/strong>. They\u2019re climbing fast, but this could be a sign of lower rates to come!<\/strong><\/p>\n Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: James: Dave: James: Dave: James: Dave: James: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: James: Dave: James: Dave: Kathy: Dave: James: Dave: Kathy: Dave: James: Dave: Kathy: Dave: James: Dave: Kathy: Dave: Kathy: James: Kathy: Dave: Kathy: Dave: Kathy: James: Dave: Kathy: Dave: James: Dave: James: Dave: James: Dave: James: Dave: Kathy: Dave: James: Dave: James: Dave: James: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: James: Kathy: Dave: James: Dave: James: Dave: James: Dave: James: Kathy: James: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: James: Kathy: Dave: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\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. I\u2019m your host, Dave Meyer, joined today by Kathy Fettke and James Dainard. How are you both?<\/p>\n
Wonderful. Survived a hurricane and an earthquake in the same day.<\/p>\n
Yeah, you had a little bit of a one-two punch there.<\/p>\n
Well, it wasn\u2019t really a hurricane, but for Californians it was like a Category 4, so we survived it.<\/p>\n
But tell everyone what you told James and I you\u2019re going to go do later today.<\/p>\n
I\u2019m going to go surf those hurricane waves just so I can say I did.<\/p>\n
That\u2019s just so badass. I would be so terrified, but that sounds very fun if you\u2019re competent enough to do that.<\/p>\n
Yeah, we\u2019ll see. We\u2019ll see.<\/p>\n
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\u2019m like, \u201cOh no.\u201d<\/p>\n
Yeah, I thought Seattle, like you said, this is just a normal occurrence where it just rains nonstop.<\/p>\n
It was like a four out of 10 for a normal Seattle day. It was just a January 18th normal day.<\/p>\n
Well, I\u2019m glad you\u2019re both okay, and hopefully, it doesn\u2019t turn into anything more than that. We\u2019re going to tangentially actually talk a little bit more about this today because we\u2019re 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\u2019re going to talk and discuss about the implications of each of them. In addition to talking about insurance costs, we\u2019re 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\u2019re 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\u2019re 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\u2019s start with you, is, which month and year had the lowest housing inventory in recent history? We\u2019re talking the last five years.<\/p>\n
I\u2019m going to go April 2022 because the market was just \u2026 I mean, we were selling everything way over \u2026 There was nothing for sale. I think, in our local market, we were down to \u2026 It was under half month\u2019s worth of inventory. So that\u2019s what I\u2019m going with. It was the hottest I\u2019ve ever seen it.<\/p>\n
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?<\/p>\n
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\u2019s my prediction.<\/p>\n
All right, Kathy.<\/p>\n
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.<\/p>\n
Well, I wanted to guess something around then, but I\u2019m going to guess \u2026 I actually don\u2019t know the answer to this off the top of my head, but I\u2019m going to say May of 2020 because that\u2019s when everything just stopped and maybe that what happened. So the answer, Kathy, you\u2019re so freaking good at these, you\u2019re always get them right, is March 2022 was exactly correct. Maybe you cheated or maybe \u2026<\/p>\n
No, no, I have-<\/p>\n
\u2026 you\u2019re just really good at this.<\/p>\n
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.<\/p>\n
Dang. Okay, all right. Well let\u2019s 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\u2019t ask you to get it exactly correct.<\/p>\n
July 2023, I want to say, I\u2019m going to really botch this one, but it was somewhere around 400,000, 420. I\u2019ll say 420, 420,000, but I\u2019m talking single family homes.<\/p>\n
Okay, and, James, what about you?<\/p>\n
You know what? I also just did a market update, so I think it\u2019s about 1.5 million homes if I remember right.<\/p>\n
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?<\/p>\n
Back then, the market was a lot more \u2026 I\u2019m going with about a million homes because I would think there\u2019s about 30 to 40% more.<\/p>\n
Kathy?<\/p>\n
This is going to be a wild guess, but I feel like right now we\u2019re about half of where we were, so if we\u2019re \u2026 I would say 1.2 million.<\/p>\n
It is 1.46 million.<\/p>\n
Whoa.<\/p>\n
So we are well under half of total inventory according \u2026 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\u2019s 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.<\/p>\n
Directionally correct, I\u2019m going to put that on my wall.<\/p>\n
That\u2019s what analysts say when you\u2019re wrong, but you want to sound right. They\u2019d just say, \u201cIt was in the right direction.\u201d<\/p>\n
\u201cThat\u2019s perfect.\u201d<\/p>\n
\u201cYou were right.\u201d<\/p>\n
\u201cGood for you. You get a trophy.\u201d<\/p>\n
No, you nailed one, Kathy, and, James, you were pretty close, so we\u2019ll give it to you.<\/p>\n
Yeah, I was also really far off on one of them, so-<\/p>\n
That\u2019s all right.<\/p>\n
That\u2019s okay. Just keep selling them, man. Just keep going.<\/p>\n
All right, well we\u2019re going to take a quick break and then we\u2019ll be back with our three stories to discuss. Kathy, let\u2019s start with you. What story did you bring today?<\/p>\n
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, \u201cOn 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.\u201d 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\u2019s 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\u2019s 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, \u201cMan, if I could \u2026\u201d He didn\u2019t say man, but he said, \u201cIf 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.\u201d And then suddenly the institutional investors woke up and said, \u201cThat\u2019s what we\u2019re going to do.\u201d<\/p>\n
They\u2019re like, \u201cYeah, we\u2019re going to go do that. Thanks, Warren.\u201d<\/p>\n
So it\u2019s just we know \u2026 At least, the National Association of Realtors says that over the past decade there is 6.5 million homes that weren\u2019t built that needed to keep up with the household formation. So how quickly can we get there even with Warren Buffett\u2019s money? I don\u2019t know. I just hope they don\u2019t overbuild, because when he says something, everybody jumps in, but this is \u2026 Perhaps, this inventory problem will get solved over the next few years.<\/p>\n
I\u2019m curious if Warren Buffett made any commentary about this yet or is this just through SEC filings?<\/p>\n
I don\u2019t see anything in here that has a quote from him.<\/p>\n
So I was just hoping, he was like, \u201cYes, we\u2019re going to put all of our money in Spokane,\u201d or whatever. I don\u2019t know. We could all just follow him. Like all the stock traders do, they just follow him around. But in real estate, we can\u2019t just follow Warren Buffett around unfortunately.<\/p>\n
I think it\u2019s really everywhere. I don\u2019t know that there\u2019s a specific market. D.R. Horton is nationwide, and nationwide, there\u2019s issues with affordable housing. And I can tell you, I\u2019ve said this before, but it is really hard to create affordable housing in today\u2019s 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\u2019re 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\u2019s costing us more than double to build it. So I don\u2019t know how D.R. Horton\u2019s going to do it, but I know that is their thing. That\u2019s what they do. Maybe they\u2019re not as custom as the homes we\u2019re building, but they\u2019re going to get them up somehow.<\/p>\n
Well, Kathy, I stayed in one of their units and I can tell you, D.R. Horton\u2019s 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\u2019re buying such huge sites in the middle of the outskirts, that path to progress areas, they\u2019re able to attain dirt a lot cheaper than infill metro. In addition to when they\u2019re 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\u2019s where the market\u2019s 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.<\/p>\n
Yeah, I see this as a good thing. I don\u2019t 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\u2019t 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.<\/p>\n
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\u2019re just not going to sell your house, you\u2019re not going to put it on the market, and therefore, there\u2019s nothing for sale. The only thing that\u2019s going to be for sale is new homes and that\u2019s why new home sales are up 23% versus existing home sales down 20%. That\u2019s what\u2019s for sale.<\/p>\n
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\u2019s remarkable. It\u2019s insane. But even if they ratcheted up 20%, which would be big, that\u2019s 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\u2019t 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\u2019s a great story. Thank you, Kathy. James, what do you got for us?<\/p>\n
We\u2019re talking about the squeeze right now. For us investors, we\u2019re getting squeezed on all sides. You\u2019re getting squeezed on your debt costs. It\u2019s a lot more expensive and also insurance and that\u2019s 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.<\/p>\n
At the same time.<\/p>\n
At the same time.<\/p>\n
You\u2019re going to need a whole new category of insurance.<\/p>\n
Yeah, I don\u2019t know what kind of coverage you need. Yeah, you need earthquake and hurricane. So that\u2019s 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\u2019s already getting squeezed. We\u2019ve 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\u2019s 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%.<\/p>\n
Wait, did you just say retail? So we\u2019re talking about \u2026 You said commercial insurance, but this is not for multifamily, it\u2019s specifically for retail?<\/p>\n
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\u2019s happening to these investors, especially if they bought over the last couple of years, is they\u2019re getting squeezed because they didn\u2019t perform out this insurance premiums to spike this high. Insurance companies are having problems making \u2026 There\u2019s been reports that they\u2019re 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\u2019s 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\u2019re 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\u2019s 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.<\/p>\n
Kathy, show us your insurance bill in California. We want to see that.<\/p>\n
I won\u2019t. We have a house up the road that we put an illegal deck on and put in windows without permits and didn\u2019t really know that we needed permits for those, but we knew. Anyway, we got a violation. So we still have that property and it\u2019s 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 \u2026 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\u2019s just not there anymore. California mandated insurance that goes to a million dollars. There\u2019s a lot of areas in California where you can\u2019t rebuild for a million.
So it is definitely an issue. It\u2019s a huge issue in Maui. Many of those people that lost their homes were not insured properly. So there\u2019s two parts to this. Make sure you\u2019ve got somebody who understands your policy and what it covers. And believe me, you won\u2019t understand that. As normal people, we\u2019re not meant to understand what\u2019s in that insurance policy. You need an expert to review it to make sure you\u2019re covered 100%. And to James\u2019s 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\u2019s not inches, it\u2019s miles, the insurance. Imagine with my insurance going from 2 to 12 million, I mean 2,000 to 12,000, with these multifamily, you\u2019ve got to put zeros. If they were paying 200,000, they\u2019re 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\u2019m just thankful that I\u2019m in \u2026 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, \u201cOh, is this market going to crash?\u201d And no, it just turns out it\u2019s going to be a good investment to be bringing on new supply. Unfortunately, the affordable housing we\u2019re bringing on in Utah still is around $2 million, so not that affordable.<\/p>\n
So what do operators do in this scenario, right? I don\u2019t see insurance going down, right? It\u2019s not typically something that fluctuates. It\u2019s something that trends upward or shoots upward in this case over time. And if rent, which I believe is \u2026 Rent growth is suppressed right now and, at least in my opinion, will stay suppressed for a little while. What happens now?<\/p>\n
Well, there\u2019s a couple things you can do as an operator to drive this cost down, but unfortunately if you\u2019re already midstream, it\u2019s 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\u2019s more secure will help your policies.
But the issue is that costs more money and you need to account for that when you\u2019re in feasibility or you\u2019re going to perform out that deal. And so many of these syndicators might have to look at, \u201cWhat\u2019s the cost analysis?\u201d If they have to spend a certain amount, will it get their insurance premium down? And they\u2019re going to have to either raise more capital and put more money in the deal to try to drive the premiums down or they\u2019re going to have to absorb it and wait for the rents to keep going, but it\u2019s not \u2026 You\u2019re getting squeezed. And so it\u2019s 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.<\/p>\n
And, James, do you think those same pieces of advice are applicable to residential real estate as well?<\/p>\n
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\u2019s 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\u2019s going to be an issue across the board and I think it could. For me, I don\u2019t 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.<\/p>\n
Oh, yeah. Based on what Kathy was saying, I have an Airbnb in Colorado in the mountains and I can\u2019t get the full property insured, their full replacement cost because of the wildfires. And just in the last two years, we\u2019ve had evacuations and all sorts of things that are \u2026 They\u2019re not doing it for no reason. There is risk. And so it\u2019s definitely something you\u2019ll have to consider as a home buyer. And, James, to your point out, if people can\u2019t afford it, home prices might negatively be impacted in those markets.<\/p>\n
Yeah. And then also it\u2019s like what\u2019s going to happen with these lenders if these properties start to become very underinsured because people can\u2019t cover their premiums. That could be a major pressure point or they can do that forced-placed insurance, which is extremely expensive.<\/p>\n
Yeah. I don\u2019t know how this all works out, but something \u2026 I wonder if we\u2019ll start to see more \u2026 Like in Florida, they have a state insurance. I forget what it\u2019s called, but they have an insurer of last resort basically that\u2019s sponsored by the state government there and I wonder if we\u2019ll start to see that in other places.<\/p>\n
Well, that\u2019s what we have.<\/p>\n
You do have that in California too?<\/p>\n
It\u2019s called California FAIR Plan and lender \u2026 It\u2019s the insurer of last \u2026 It\u2019s California basically.<\/p>\n
So basically \u2026 But you still buy a policy, right? So you buy \u2026<\/p>\n
Yeah.<\/p>\n
\u2026 a policy essentially from a government agency?<\/p>\n
I don\u2019t know quite how it works. Maybe California backs it. I\u2019m not sure, but that\u2019s what you can get if you can\u2019t get insurance. And it\u2019s not great. It\u2019s not the best insurance. Like I said, it\u2019s caps at a million and, \u201cFind me a house along the coast that you can rebuild for a million.\u201d<\/p>\n
Yeah, well, this is definitely something we should keep an eye on, because in recent years, we\u2019ve 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\u2019m sure in some of the places that have been recently impacted by natural disasters, we\u2019ll see that as well. So definitely something to keep an eye on because it\u2019s one of those sneaky things. For, I don\u2019t 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\u2019d 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.<\/p>\n
You know what\u2019s 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\u2019s brand new, our insurance is really low. So I think there is this belief that no matter what you\u2019re going to pay a lot, but if you have a property that was built to today\u2019s standards \u2026<\/p>\n
Interesting.<\/p>\n
\u2026 the insurance is much, much lower. So people think that it\u2019s a bad investment to buy a new home because it\u2019s more expensive, but when you add all those factors of less repair costs and lower insurance, it\u2019s really \u2026 Actually, we\u2019re 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.<\/p>\n
That\u2019s 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\u2019re a \u201cfire-safe community\u201d 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.<\/p>\n
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?<\/p>\n
Was it Fort Myers?<\/p>\n
Fort Myers, yeah.<\/p>\n
Cape Coral? Yeah.<\/p>\n
He just bought a new home there and the storm came through right over him and the devastation \u2026<\/p>\n
Wow.<\/p>\n
that storm caused and nothing happened to his house.<\/p>\n
Interesting.<\/p>\n
So it does matter. It does matter to have a home that\u2019s built today\u2019s standards.<\/p>\n
That\u2019s good advice. All right, well, for our last story, I\u2019ve got one for you and it\u2019s about something you would never guess, but it\u2019s interest rates and mortgage rates, because although we talk about it all the time, they\u2019re 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\u2019ve 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\u2019ve seen a lot of fluctuations and variations, but it\u2019s mostly been in the mid-6s and the high 6s. Now recently, they\u2019ve 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\u2019ve been going up. And so I expect, as of this reading, what is it today? The 21st of August, we\u2019re 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\u2019s happening at a time when you usually see that seasonal decline in housing activity. And so to me, I\u2019m just curious, we\u2019ve seen the housing market be more resilient than I thought it would be, but I\u2019m 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.<\/p>\n
I\u2019m definitely feeling it slowing things down. And part of that is just that seasonal slowdown, is \u2026 I mean, the pandemic made us forget about these seasons a little bit because it didn\u2019t matter, but I\u2019m seeing the showing activity drop pretty rapidly right now. I know mortgage apps are way down week over week and it\u2019s 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\u2019t 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\u2019s across the board.
Because it is expensive. You run these mortgage, you\u2019re like, \u201cMan, is it worth it?\u201d And if they\u2019re thinking, \u201cIs it worth it?\u201d they\u2019re going to sit on the sidelines for a little bit.<\/p>\n
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\u2019s in, the impact is really not going to be that much. It\u2019s 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\u2019t think it will matter and it hasn\u2019t 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\u2019t 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\u2019re afraid to put their money anywhere else. And that\u2019s 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, \u201cI think rates are going to come down,\u201d 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.<\/p>\n
Yeah, I, unfortunately, have been on the hire for longer train for a few months now and think this is probably what we\u2019re going to see for a little while. I think they will come down in 2024, but I think, for now, we\u2019re 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\u2019s this psychological impact here too where it\u2019s like things are starting to go, rates were peaking, they started to go down, people started to get comfortable, maybe feeling like, \u201cOkay,\u201d they\u2019ll 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.<\/p>\n
Yeah, and I think it\u2019s 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\u2019s average. And then the cost of money\u2019s gone up. So people are just like, \u201cIt\u2019s not worth it,\u201d and I definitely feel like that is a psyche that \u2026 I mean, we see the market. It\u2019s like a seesaw. It goes up. It\u2019s just like this weird quick movement and it\u2019ll 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\u2019s very pulsating and it does have to do with the rates. And one thing is, if Jerome Powell starts \u2026 If he starts hinting that the rates are going to go up again, then there\u2019s this little surge because people get FOMO. So I think a lot of it is psychological right now.<\/p>\n
Yeah. That doesn\u2019t sound very good. Average or bad inventory at a very high price, it\u2019s not a very good sales proposition. Hopefully, that\u2019s not what you\u2019re telling your clients, James.<\/p>\n
No, well, luckily, we\u2019re looking for the uglies, so we can find those. And then right now, the good thing is, if you\u2019re bringing a really good product to market and it\u2019s in that affordability range, it is still gone. They\u2019re moving quickly, but like Kathy said, the high end is people are being selective. They want what they want and they should.<\/p>\n
Yeah, yeah. If you\u2019re going to pay a lot of money for something, it\u2019d better be something you like.<\/p>\n
Yeah, feel good about it.<\/p>\n
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\u2019s question comes from Travis. He asks, \u201cCan you get a HELOC, which is a home equity line of credit, on a rental property or is it just your primary residence?<\/p>\n
That\u2019s a tough loan to get.<\/p>\n
You could probably get one, but you\u2019re going to pay double digits for that.<\/p>\n
You can. The money\u2019s 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\u2019s the struggle, is you can\u2019t 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\u2019re expensive, and a lot of times, you just can\u2019t quite get the money that you\u2019re looking for out of it, so it\u2019s not quite worth it. But credit unions are a great way to go for this.<\/p>\n
I think one of the things you have to think about is put yourself in a lender\u2019s 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\u2019re going to make payments on your primary residence because it\u2019s the place that you live as opposed to a rental property. And so that\u2019s 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\u2019m sure hopefully you\u2019re a responsible investor and make your payments, but they just see it as less safe. And especially in interest rate environments like this, they\u2019re 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.<\/p>\n
There\u2019s a lot of trapped equity that people are trying to tap and it\u2019s hard. I saw a really interesting post on, I think it was Instagram and somebody said, \u201cYes, I refi\u2019d my rental property from a 2% to a 7% rate because it\u2019s going to challenge me to find deals that make more than 7%.\u201d I thought, \u201cOkay, I\u2019m just going to sit here in my 2%. I don\u2019t need that challenge.\u201d<\/p>\n
Wow.<\/p>\n
But if you\u2019re going to get a HELOC at 10, 12%, whatever it\u2019s going to be on that investment property, the 7% all of a sudden sounds really good.<\/p>\n
Right, that\u2019s true. That\u2019s a good point. That\u2019s not the philosophy I would use. That\u2019s like those people who go running with a weighted jacket just to make it harder on themselves. Running\u2019s hard enough. I don\u2019t need to make it any harder.<\/p>\n
Did you mean my husband? Yeah, that guy.<\/p>\n
Does he do that? He would.<\/p>\n
He would.<\/p>\n
That makes sense. Rich is a beast. He probably doesn\u2019t even notice this on.<\/p>\n
He has three people on his back too.<\/p>\n
Right.<\/p>\n
Yeah, it\u2019s 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\u2019t forget to give us a review on either Apple or Spotify and we\u2019ll 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.<\/p>\n