2022 Housing Market Recap: Will It Get Worse Before it Gets Better?

Dave:
Hello everyone and welcome to this episode of On The Market. Today, we’re going to be talking all about the state of the housing market, how our expert panel is going to be sharing stories about what they’re seeing in their individual markets, we’ll be diving into the broad economy and what is happening on the housing market as a whole. Let’s jump into it.

Dave:
Welcome my friends to this episode of on the market. Thank you all so much for joining us today. I have my expert panel and friends with me today, Mr. James Dainard. How’s it going man?

James:
I’m doing well, Dave, how are you?

Dave:
All is well. Thank you. Kathy Fettke coming to us from California. How are you Kathy?

Kathy:
Doing great. Happy to be here.

Dave:
Thank you. And Henry from his new office in Arkansas. What’s going on?

Henry:
What’s up buddy? Yeah, don’t mind the construction happening in here. No big deal. We’ll be fine.

Dave:
That looks like a nice new spot. We are actually going to do something a little bit different today. The theme of our episode is going to be a market recap. If you’ve been listening to On The Market over the last couple weeks, you know that normally, at the top of the show we sort of do a market recap. It’s called Between The Headlines, I read some headlines, and we get some reactions.

Dave:
But since we’re going to be talking a lot about the most recent housing market data, news, information about the economy for the majority of this episode, for the beginning, I want you to get some local headlines. So from each of our panelists, I would like to get a story that best characterizes and demonstrates what you are seeing right now in the housing market. Henry, let’s start with you. What do you got for us? What are you seeing down there in Northwest Arkansas that you want to share with everyone?

Henry:
The housing market is slowing down a little bit, that’s for sure. There are less offers coming in on houses but still, I just talked to my real estate agents who are the super smart people and then I just get to tell people what they say and sound smart. My real estate agents who do all my listings, what we were just talking about is, the housing market is… There’s more houses on the market now than there was a year ago. So there was about 500 and 500 or so a year after 2020 and now, there’s about 615 so that’s gone up. But to supply the demand, to feel the demand that we have for housing, we need to be at about 4,000 to 5,000 houses, right? Supply is still very low compared to demand and what we’re seeing is, I’ve got a house that was listed right before the first interest rate hike a couple of a couple of months ago, right?

Henry:
And so, we had got all the way to closing and then the buyers backed out so we had to stick it back on the market but with new higher interest rates. And so, pre-interest rates going up, we had that house listed. It was maybe on the market for three or four days and we had five, six offers, right? It was pretty quick. It’s a higher priced home than the average home here in Northwest Arkansas so we didn’t get the 20 offers that we would get on a lower priced home but we got about five or six. So we picked the one, didn’t get to closing, re-listed it, and it took us, maybe it’s been on the market for about just under two weeks and we got an offer. But we got a solid offer, right? And to put that in perspective, the house when I bought it, we planned to sell it for 275, right?

Henry:
But because the market was on fire, we ended up actually listing it for 310 and the offer we accepted originally was 315, that didn’t close. And so, we went ahead and re-listed it back at 315 and we got an offer for 300. And so, if I were to record that as a statistic, statistics would say, “I got an offer under asking price,” right? And then everybody would say, “Oh, the offers are down and people aren’t getting asking price anymore,” but I was aggressive in my listing. I listed it above the 275 that we planned on selling it for when I originally bought it and ended up getting an offer at 300. I’m still 25 over where we were shooting for, which is amazing.

Henry:
Things are slowing down a little bit. There are less offers on homes and I think that’s due to rising interest rates and people being priced out, some of the market being priced out of buying because that’s what happened with the seller. The bank basically told them they couldn’t afford the home. I guess their interest rate was unlocked, I’m not quite sure the full situation but they backed out because their lender said, “We don’t think you can afford this.”

Henry:
We’re seeing some of those people get priced out but we’re still getting offers, they’re just taking a little longer to sell. James and I talked about this off air, right? We’re still getting multiple offers and it’s sitting on the market for two weeks, that’s not a long time on the market. We’re just spoiled. We’re spoiled. We’re used to putting a house on the market and in two hours you got seven cash offers and it’s just not the norm, right? We got spoiled for a while and now it’s slowing down a little bit but it’s still very, very low supply compared to the demand.

Dave:
Yeah. That’s a great story for you. I’m glad to hear that you were still able to sell it for what? Over what you had originally underwritten it for. That brings up a good point about data analysis in today’s day and age that I just want to make a point of. In a shifting market right now, for everyone listening to this, you might start hearing some statistics like inventory is up 20%, that’s about what Henry just said. It was at 500’s, now it’s at 615, that’s a 20% increase in inventory.

Dave:
But if you look at what you’re comparing it to 2022-2021, you have to consider that 2021 was all time low inventory. So a 20% growth from where we were last year, relative to the historical context, is still really, really low. So just some advice out there, if you want to get a sense of these numbers, you’re interested in inventory, housing sales, look at pre-pandemic numbers. That is probably going to be the best way for you to really compare what’s going on in the largest sense. See what numbers in 2022 are versus 2019, that’s going to tell you all the story you need to know. All right, Kathy, what’s going on in California? Much different market, different strategies going on. What are you seeing?

Kathy:
Well, just to add to what you just said, the March inventory was what? 52% below 2019 levels. So yeah, it’s still really low. That brings me to where we’re at, just a recent deal I was looking at as a passive investor, looking to invest in somebody else’s deal, a syndication. A lot of people are doing that today and of course, the syndication business has been promoted all over the place. I looked at this apartment in Arizona that a pretty experienced operator was looking to raise money for and he was classified as a B class neighborhood. But when we did our research, it was not… Rated 3 out of 10 schools and the crime rates were really high and based on everything we were seeing, it was more like a C-, D neighborhood.

Kathy:
So I went back to the operator and was like, “What are you seeing that I’m not seeing?” and he’s like, “Oh no, no, no. It’s definitely a B neighborhood.” I found that interesting that what I was finding was very different than what he was seeing. I would need to get out there and go see it for myself to verify or again, you can call local realtors or local property managers if you don’t want to make the trip that’s probably what I’ll do first. But my point being, I think in this kind of market, when inventory is so low and it’s getting harder and harder to find opportunity, sometimes people start to get a little soft on their underwriting and start to do things maybe they wouldn’t have done a year ago or two years ago.

Kathy:
Investors might say, “Well, I did their past deal. So this next one, I’m not even going to bother looking at or diving into it or doing the research,” so just be careful. As a passive investor, that doesn’t mean you should be passive at the onset. You still got to do your homework because it’s your money, it’s your money. When you read documents on a deal like that, a syndication, especially if you’re an accredited investor, all the risks will be stated in those offering documents. That basically, if the deal goes bad, too bad, you lost your money. You have no recourse. You’re an accredited investor and should know better. If you’re not accredited, even more so. You’re building to become one which is basically a million dollar net worth so you don’t want to lose your money.

Kathy:
Just make sure that if you’re investing in anybody else’s deal that you still go through the process to make sure it makes sense and that the underwriting is solid. Another thing about this that I walked away from is that it’s, again, a bridge loan. This is a rough time to be in short term lending because we don’t know where the market’s going and it’s hard to underwrite when you don’t know what interest rates are going to be in this changing environment. I don’t personally think they’re going to change that much more, go up that much more, but you just don’t know.

Dave:
Yeah, it’s a great point. It’s not really the right time to be fudging your underwriting. It seems like we’ve been in this period where, for the last three years, like everything’s going up, if people fudged a little bit, it was probably masked by this rampant appreciation that we’ve seen. But from what we’re hearing so far and some of the things I’ve been seeing personally, it seems like the market is in a transitionary phase and that is not when you want to get loose on your numbers, that’s when you want to buckle down and really make sure your numbers are airtight. Thank you for sharing. James, up in Seattle, doing a ton of deals all the time, what are you seeing?

James:
I have definitely seen a slow down in the velocity of money right now. When rates were so cheap, everybody was flinging offers like Kathy just kind of mentioned, they’re breaking rules. Because I mean, they had the excuse, right? I’ll break my rules because money’s so cheap. Now, we’re getting to a point where money’s more expensive, pricing’s expensive, and people are just slowing down. We’re a very active brokerage up in the Pacific Northwest. Right now, we have about 50 listings. All the listings are either renovated product or new built construction. What I have noticed is the amount of showings have dipped quite a bit to where we’re seeing… We saw about an 85% drop in showing activity in the last two weeks, on this last Fed rate hike, which is a pretty drastic drop in the amount of bodies out looking.

James:
What that comes down to is, we’re at this peak, peak price of pricing where people are still paying that top dollar like what Henry just said where, we’re performing in deals and we’re still listing them about 5% to 10% higher than we perfoma them at. And now, the cost of money has gone up so much to where people’s payments are 30%, 32% higher than what it was four to six months ago, that it’s just slowing people down. We are still selling everything within the two week factor though. We’re selling it either at list or within 5% of list. Again, our performa numbers… I mean, our list price on average right now is about 15% to 20% over performa. And so, things are still moving quickly, we have seen inventory increase slightly. But again, like what you said, it’s those data stats and facts that are not good… You got to watch out for the data traps.

James:
Like, “Hey, inventory increased 20% but we’re still at two and a half to three weeks of inventory in the market.” We need appreciate… For us to start depreciating and things to pull back, we have to be over five months of supply in the market so we have a long ways to go. But what I do see, is we’re getting a little bit of a snap back off peak pricing. Not actual value but the peak, peak pricing, I’m seeing about a 5% hit off that and we’re not seeing as many multiple offers and that kind of speaks to the 30% increase in mortgage costs. Because on average, we were selling properties 10% to 20% above list when the money was cheap and now, we’re selling them 5% below. That’s about a 25% difference which is about the same as the mortgage rates on the cost of what you have to pay in your monthly payment.

James:
So just really, don’t fall into the weird data traps. Just pay attention to what’s actually going on. Most of what I’m doing right now is I just call brokers and figure out what their activity is. What’s your activity, how many bodies are coming through, and if you’re putting out good product, it still sells. We listed one yesterday at 1.9 and we’ve already had three requests for pre-inspections this morning. Things are still moving if you’re putting out the good product. The junk is sitting though, don’t put out junk or that’s where you’re going to wait for that buyer.

Dave:
Yeah. One of the things I’ve noticed, James, is I was looking for some small multi-family properties in a few different markets and it seems like people who are putting those on the market are continuing to hope that people are acting out of emotion and are still just willing to accept these really high priced, ridiculous offers. But if it’s a small multi-family, it’s going to be an investor that is buying that and with higher rates at 6% or even higher than that for a real estate investor, it seems like being able to underwrite the deals at the prices that they were at even a month or two ago seems unrealistic. Do you think there’s going to be a slide back in prices anytime soon, at least for the junk that’s coming on the market or do you think that things are just going to flatten out right now?

James:
I think there’s going to be a transitionary period because right now, rents are still increasing. I do think rents are going to keep going up and the value of multi-family is based on the income. Like right now, I have a triplex listed, it’s on the top end of the market, it’s in a great neighborhood, we’re getting very steady showings on it or interest in the building and all of a sudden… Every week that goes by though or every month that goes by, we’re getting more income on that building. I just raised rents 25% on that middle unit. And so now, the list price actually looks better than what it would if it was a hundred thousand dollars cheaper and so…

James:
But you always have to watch for that transition snap back period because things have to settle down, rates are, I think they’re like six and a half to six and three quarters right now on that product. The mortgage brokers are also telling me that’s going to settle down a little bit, the banks just kind of got to jump on it. So I do think you’re going to see more opportunity, you’re going to have more time to actually evaluate these assets correctly, and write your offer accordingly but things are still going to move around at this point.

James:
If you’re in a market where the rents are at the top end, yes, I think there’s going to be a slide back. I mean, it’s going to go down with the rates, right? Cash flow needs to be at a certain percentage. But if you have upside in your rent market, I think it’s going to balance out with the rates over time, over the next 12 months to where you can still buy with the higher rate but the income’s up and it’s going to balance out.

Dave:
All right. Great. Thank you all for your local headlines. We’re going to get all into the housing market, both on a national level and talk a lot more about what we think is going to happen over the next couple of months. But first, we have to take a break and then we’re going to talk all about the economy in general and whether or not we are heading for a recession. We’ll be right back after this.

Dave:
All right. For our Due Diligence section today, we are going to be talking about headlines. Normally, we do this at the top of the show but since this is a market recap, market update show, let’s dig deep into everything that is going on in the economy right now. I want to start first, a little bit away from real estate. We’re going to get back to the housing market, we’re going to get back to real estate investing, but I think it’s helpful to understand the full context of the US economy right now. Kathy, can you tell me one or two things that you’ve been looking at over the last month that you think best demonstrate the state of the US economy?

Kathy:
Well, we just have had a shock, a shock to the market, something that none of us have ever experienced before. Such massive declines or increase in unemployment to what? 22 million people out of work overnight to then four months later, the recovery. It was fast and furious. All the data lines were out of whack. It’s been turbulent, shall we say? When you go out surfing and you’re in the middle of the tidal shifts from in the inflow to the outflow, it’s a little bumpy out there. It’s not the best time to be surfing because there’s a lot going on and that’s where we are. A lot of the headlines are comparing now to crazy and unusual. I do believe we’re going to settle down and get back to normal and that’s great.

Kathy:
That’s what I’m watching. Everybody’s watching for a recession and most people are just terrified of that idea. For good reason, right? The last couple of them were pretty intense but we have a very different situation today where there’s 11 million job openings, right? It’s robust out there. It would take a lot to fall into recession and with that said, there are going to be sectors more affected than others, right? The ways that we had to operate over the last two years bubbled up certain companies, right? That maybe now, as things go back to normal, they’re going to have to lay people off. I’ll give you one example, the mortgage industry. As rates go up… I mean, think about it. When rates were low, mortgage broker companies could not hire fast enough to keep up with demand.

Kathy:
Now interest rates are up, who wants to refi, right? I mean, I don’t. I’m sure if you’ve got a lot of cash to take out, you might still take the higher rate but mortgage companies are laying people off. So anything that bubbled up as a result of the pandemic may be coming down and that’s what we need to be paying attention to, which companies are those. But real estate, we didn’t oversupply the market with real estate. That’s not where we are. We don’t have an oversupply of property. If anything, we’re underdeveloped. It’s been hard to get new properties up and running… Just get new home sales up. Trust me, it’s hard. We can’t even get the garage doors we need or the washers and the dryers and the refrigerators to close to get these properties on the market. It just depends, again, on what bubbled up. And I would say, in having to hire and having to deal with pandemic related issues and now, as things settle down, they have to lay people off.

Dave:
Thank you. Just to put some numbers behind some of the things that Kathy was saying, I follow Housing Wire. I think you do as well, Kathy, but you see, almost once a week now, major mortgage companies laying people off, that’s likely going to continue as refi activity and probably purchase activity also declines over the next couple of years. You mentioned that there are 11 million job openings which is enormous and is roughly two jobs for every person looking for a job in the United States right now. And before, Henry, I’m going to pass it to you because I do want to understand if you think there’s a recession coming. But just want to define quickly before we do that, what a recession even is and the definition is two consecutive quarters of GDP dropping. And so, there are all sorts of flavors of recession that are possible.

Dave:
As Kathy said, the great recession was the worst financial situation since the Great Depression that took months for things to recover, all sorts of housing areas of the economy we were affected. Technically, in March 2020, we were also in a recession but a lot of people didn’t even notice because there was so much other stuff going on. So just want to define what we’re talking about here. But Henry, I’m curious, do you think we are heading for a recession because a lot of major news outlets, a lot of data analysts are saying red flags, warning signs are flashing, how do you read the situation?

Henry:
So will there be a recession by the definition you just held? Well, maybe, probably, right? But in most people’s eyes, right? When people think recession, they think things falling or dropping out of the sky and getting well below what’s necessary or needed, right? Do I think we’re going to get there? I don’t think so, man. I think we are going to recess back to some things closer to normal, right? We talked about it a little bit when we were talking in the last segment about the housing market, but we’ve had super inflated numbers in almost all commodities, right? Especially in real estate. And so, for things to recess, yeah, they might recess back to normal level or even slightly above normal but because we got accustomed to such inflated housing prices or we got accustomed to such low interest rates as interest rates are up now to 5% and 5.5%, 6%, if you’re an investor it’s a little higher, that’s still really low.

Henry:
And so, to think about yeah, yeah, it’s different. It’s worse than it was, but what was, was amazing. Coming down a little bit, yeah. I mean, it’s healthy. It’s what’s needed, right? And so, are we going to go into a similar to the great recession? I don’t think things are going to get that bad but I do think we’re going to see things start to shift. I think inflation is the scariest thing that’s out there right now because people don’t know. There’s a certain subset of people who don’t know how they’re going to be able to afford basic needs, right? As those prices keep rising, but the income that they have isn’t increasing. And so, you may have to start seeing some of these people shifting out of the jobs that they have into newer jobs, hoping that they can get higher paying jobs because with so many openings, employers are willing to pay more to bring people in.

Henry:
And so, you might have to see some of the people who need to make more money shifting jobs just to do so hoping to get some of those higher paying. But I think I read something this morning about the Fed encouraging companies to stop hiring, right? Because they’re willing to pay so much more and that helps drive inflation up as well so who knows what you’re going to see? But I think, if people want money there’s money out there, it just might require you to get a little uncomfortable, make a change, maybe take on a second job. But employers are willing to pay more because we need employees to drive these companies and the companies drive the economy.

Dave:
I should explain some of the red flags and recession indicators that have been flashing. One of them is the yield curve, if you guys have heard of that. That basically forecasts investor’s, bond investor’s, sentiment about the economy and although it briefly inverted for a couple of days, it is not fully inverted which is what the real indicator is. If you are following what the yield curve does, it does have to invert for quite a while for it to be an indicator of a recession. And even when that happens, it usually takes about 18 to 24 months after the inversion for a recession to hit. There’s another really good recession predictor that is called the leading economic indicators or the leading economic index that tracks 10 different leading economic indicators. And when that starts to fall, usually four to six months after that, we start a recession.

Dave:
But both of those very reliable predictors of recessions are not currently pointing to a recession, just so everyone knows where we are, as of this recording, early May 2022. One of the other recession indicators that I have seen is about durable goods, consumer spending, specifically around tech companies. All of these tech companies are getting hammered. I’m sure you guys have seen this, right? I mean the NASDAQ right now is down 28% since the beginning of the year which is wild. A lot of people, unfortunately, are losing money there. But the idea is that, if these companies like Amazon and Facebook who drive a lot of economic activity are getting hammered, they’re going to slow down their hiring. So James, I mean you are in one of the biggest tech centric markets in the country in Seattle, Amazon is there, Facebook has a big presence there. Are you worried at all that these big giant companies that have been such an economic powerhouse for your area are going to slow down and it can have an impact on Seattle and maybe on the country in general?

James:
I’m not too concerned about Seattle and its local market and what the big tech businesses are doing because they have spent so much money buying buildings, expanding, and putting this… Microsoft right now has a campus that they’re going to be building out for the next 10 to 15 years in the expansion. Facebook just bought one of the biggest buildings in downtown Bellevue. Everybody’s… Google’s expanding through. These are plans that are already put in play and they cannot be slowed down at that point so the jobs are coming here no matter what. In addition to… In our local market, we don’t have income tax and when there is times of liquidity issues, inflation’s eating things up, money’s costing a little bit more, the more income that people can keep is going to make that market even more attractive.

James:
And so, I’m not overly worried about the tech companies over the next 5 to 10 year period. Now, in the next 60… Or not, six months or so, I could see… I’m a little bit concerned because a lot of it is more about mindset thing than anything else. Because the stock, Amazon Stock got pounded the last two weeks. It is still 35% above where it was at in 2018 before the pandemic. And so, those are things that I’m tracking on, things that I’m investing in, things that I’m looking at, where do I think the market’s going to go is where was that 2008… Because when we were going into the pandemic or right before the pandemic, the economy wasn’t doing… I mean, it was doing well but it was starting to flatten out. Housing wasn’t spiking, stocks weren’t spiking. It was just going into a very steady, slow growth period.

James:
And then, all of a sudden the pandemic hit, they infused all this money and it hockey sticked up at that point. For the tech stocks, we’re not too… In the short term, there’s always that overcorrection like, “Hey, we’re losing all this money. My stocks are going down.” They’re just being decompressed a little bit, but I don’t think on the long term, it’s really going to factor in with the no income tax and then the plans that are already in place.

Dave:
Yeah. That’s a good point. You’re seeing these investments that are long term and are probably created and thought of well on a time horizon that doesn’t really even matter to what’s going on right now. There’s a 5 year, 10 year investment thesis by Microsoft or whomever that is really can’t be slowed down and is probably going to keep money coming in.

Dave:
One thing that you’ve talked a lot about, James, that I want to talk about is construction costs. You actually put out a great video on the On The Market YouTube channel that people should definitely check out about how to hedge against inflation and increasing construction costs. The CPI came out yesterday. It was at 8.3% which is down 0.1% year over year from March. But just so people understand, that just means year over year it’s down, prices still actually rose from March to April 0.3%. Prices are still going up, the growth rate is slowing down a little bit, but I’m a little hopeful, right? I’ll take some nuggets of good news where, where I could get it. Are you seeing anything, James, are you seeing anything reflected in your building costs or materials that indicate that inflation might at least be peaking? I don’t think we’re flattening out but maybe the crazy runaway price increases are starting to slow down.

James:
I still think we have a good six months that creep in the market. Because we’re still in this weird balance period where we don’t have enough labor and then, there’s also things are costing more. The lack of labor, lack of resources is driving pricing up dramatically fast. I mean, we’re not talking about 8% in the construction world. If your tile guy adds 20% to his bid, that’s just what he’s going to add to your bid. So we’re seeing these jumps with the lack of people out there and the labor shortage. And then, the cost of goods are still going up. We still are having issues getting access to materials. Things are taking longer still and we’re still 25% above where we were a year ago on construction costs.

James:
And so, when these reports about inflation come out, I reference them but I don’t ever think they’re correct for what I pay in my daily. It may be correct for a lot of different consumers but for me as consumer, I buy a lot of flooring, I buy a lot of wood, I buy a lot of everything to build these homes and those things are still expensive, they have not came down that much. I think that it’s going to get a little bit worse with this Ukraine… With the conflict overseas, we’re going to see a little bit more shortage of materials and it’s going to cost things to spike a little bit more.

James:
In addition to the cost of energy, which is going to continue to go up, that is coming down to our bottom line as well and going to drive pricing higher. Our contractors are charging us more if they have to drive a long ways. Suppliers, delivery is starting to cost us more if we want things dropped off. And so, any time stuff that you need to drive your economy like energy goes up, the rest of it’s going to keep going. So I do think in the construction world, we still have another 10%, 20% in increases over the next up until the end of the year unfortunately.

Dave:
Kathy, you mentioned something similar at the top of the show that you were still having a hard time finding appliances. Are you still seeing the same type of inflation impacting your business and what are you doing about it?

Kathy:
Yes and yes and it’s just taking longer. It is just taking longer to get these homes finished. And then, the buyers who have been in contract for a year waiting for the house to be finished are suddenly finding that they don’t qualify anymore. These are definitely tough times for builders and new home builders are usually affected first by rising interest rates. We’re affected and fortunately, we’re building in markets that are in high demand where there’s not a lot of inventory. Like I’ve said, we have a development in Park City where we’re still very much under the price per square foot of anything else in Park City. It’s one of those markets where it’s really hard to get anything built anytime anyway. So we still have demand, there’s people who can put $3 million cash and they don’t need a loan. That’s the kind of market.

Kathy:
But in general, new home builders will feel it first and we’re definitely going to feel it. People thought they were going to be locked into low interest rates and that’s how they got into contract to begin with. We’re going to be flexible, obviously, and let them walk if they can’t qualify because we know that we will find a buyer who can. But there might be some people who are stuck in contracts they can’t get out of and they can’t qualify for the new loan.

Dave:
One thing I’ve really wanted to ask you specifically, Kathy, for the last few weeks is, do you think that construction rates are going to go down right now? Because what we’re seeing in the data is that, for the last couple of years, the number of construction permits pulled, the number of construction starts has started to go up, but completions have flatlined. People just can’t complete them. And so on one hand, the housing market, we all know is shortage of supply long term, housing unit shortage so we need more housing inventory. But in a rising interest rate environment, especially with increasing construction costs and inflation, is it an attractive time to build or… Because for a while, builders have been able to pass along the increased costs to consumers but now, with inflation, rising interest rates, I’m just wondering how you’re thinking about this.

Kathy:
We’re not rushing to do more new home construction. I do think it’s risky. It’s always risky, it’s always risky. When we were buying land, we started in 2010 so not as risky then because we were getting land for 10 cents on the dollar. We bought 4,200 lots outside of Tampa for $16 million that it had been $160 million just a year before in escrow.

Dave:
Can I get one of those?

Kathy:
Yeah. You’re probably going to do okay on that, right? But today that’s not the case. That’s not the case, it’s hard to get anything cheap. So to have to pay top price for land and then increased construction labor… You can’t even find labor. Increased material costs, you better have thought it out. The national builders are a little better off because they’re well capitalized and maybe they’ve got warehouses where they’ve got supplies and materials and so it might be easier for national builders. But for the little guys like us, it’s definitely getting more challenging and I can tell you, we’re not personally rushing in to do more. Not right now.

James:
One thing I wanted to point out was we sell 250 to 300 sites a year to builders, we sell to investors and builders. And in the last two weeks, builders have dropped their pricing 30% on lots and adjusted their terms by twice the closing timeframe. They are no longer… What that comes down to though is they were breaking all their own rules the last 24 months. They were closing quick, they were sitting on lots with leverage, and they were pressing the exit prices. And then, they’re doing this little pullback right now. But the thing is, we’re educating sellers to where they need to get a deal done now because the builders are going to adjust with the rates. I think we’re only going to see a short term blip in the market for purchases on the lots but eventually, the market value to lot is the market value to lot and that’s only what a builder will pay.

James:
And so, we have to wait for sellers to kind of get adjusted to the new pricing, builders are going to get back to their sweet spot, and then transactions will still move forward. So I do think building isn’t going to slow down. There’s going to be a little blip in the market and then that’s also going to add to the housing crisis because there’s not enough inventory coming out. So you still may see the good exit prices but I do think that the days of getting overpaid for your lot are over. There are going to be fair numbers based on what the build out percentage is and then the offer will be structured accordingly.

Kathy:
Yeah. I mean, I think I mentioned it before. I was really happy that we were bringing in affordable housing in some of these markets in Reno and Carson City and Bozeman, Montana. We were so happy to be providing homes for around $300,000 to $400,000. We can’t do it now. We’ve had to reprice everything. In Bozeman, I think I mentioned, it’s double now. We’re up to double what we were expecting to sell these for and our profits have gone down. So it’s not like we’re just capitalizing, just raising prices because we want to, we have to. Everything costs so much more and significantly more. There was no way to forecast this three or four years ago when we bought the land.

Kathy:
But you know, that’s somewhat normal for home builders because you’re buying land, it can take years to get the entitlements then years to get it up and running and you don’t know where the market’s going to be. So it’s usually a riskier investment anyway and I, of course, knew that going into it and our investors knew that going into it. You just hope that the market’s good and for us, it really was, the last few years to be able to be a seller was where you wanted to be. Now, the market’s changing so it’s a little… It’ll be interesting moving forward. But again, like you said, supply is what’s needed, we need affordable housing, how do you build affordable housing? I don’t know how anymore.

Henry:
What’s your definition of affordable?

Dave:
That is unfortunate. Obviously, on the affordable housing front, it would be great if the country saw more affordable housing coming in. For anyone who’s listening to this and trying to forecast for themselves what might happen, one of the key levers in the housing market is this low supply, low inventory. Although demand is likely to drop and we are starting to see some indicators that this demand is starting to drop because of higher interest rates, if demand goes down but inventory and supplies stay super low, it’s not going to have the impact of prices either flattening or going negative. When you see like, “Okay, so how does supply go up?” or, “How does inventory go up?” There’s only two or three ways that can happen.

Dave:
One is construction. It sounds like that’s not really going to keep going at the same rate that it is. The other is foreclosures. I don’t know if any of you guys listen to the interview I did with Daren Blomquist on the BiggerPockets Real Estate show, but there’s just no chance of a foreclosure crisis happening right now. For anyone who is predicting that, that’s just not happening.

Dave:
And then, third is just new listings and no one wants to list their home right now. Have you guys heard of the lock in effect that’s going on?

Henry:
No.

Dave:
It’s basically-

Kathy:
Yes.

Dave:
Yeah. So the lock in effect is basically this idea that no one wants to sell their home because 90, 90% of homeowners have an interest rate under 5% right now. No one wants to sell their home, go into a high price market, and pay more interest. So it’s something to think about when you’re trying to figure out what’s going to happen with the housing market. And again, none of us really know, we make educated estimations of what’s going to happen. But somehow, if prices are going to moderate or go down, we need more inventory and all three of those, Henry, I’m curious what you think. All three of those, to me, don’t look very likely to be moving in the right direction.

Henry:
No, I agree. No, I think prices are going to continue to rise especially with everything James and Kathy just talked about, right? Supplies cost more which means the housing prices have to increase, heck for some builders even to break even. They’re not even looking to make a ton of money here, right? And so, the price has to increase and then guess what? People are paying it. And so, if people are paying it, then we’re saying that’s what we think the housing market is worth, right? And so, the price continues to go up. It’s this circle of circumstances that are happening, that are causing the housing market to go up and that’s the only way right now. Of those three situations, I think building is the only way you’re truly going to get more inventory.

Henry:
And so, yeah, I think people are going to continue to build. You’re right, James, I think these builders are starting to realize that they can’t pay what they were once paying because now, they’re trying to buy land for cheaper, right? And then, build for whatever they can build for and then price it at the highest price point that they can in order to make a little bit of money. And so, is building as attractive as it was 2, 3, 4, 5 years ago? No, absolutely not. But people are still going to build. And for the normal, little guy, Kathy called herself little and I’m teeny tiny in comparison to building. Because I’m only building, when I get land super cheap or free, right? And so, when I’m buying property that either has extra land or land that I can subdivide or houses on it that are getting torn down, right? When I’m basically getting the land free, that’s where I’m looking to build.

Henry:
But I’m not looking to build and sell, I’m looking to build and hold, right? Because the numbers just don’t make sense when you compare the long term wealth I can generate from the building versus the not so great profits I might get if I sell it. So from the super little guy who’s looking to do one off, like maybe I should build something new instead of going and buying something existing as a rental, I think you need to look long and hard at buying something existing.

Henry:
And so, the other factor you didn’t talk about when you talked about increasing inventory is infill. I think cities are getting really, really more comfortable with the idea of infill. And so, that can mean allowing allowances for ADUs and being a little more creative on adding units to existing properties or allowing you to split lots they normally wouldn’t split or to modify setbacks so you can have more space to build. I think cities are starting to understand that we’ve got to do something to increase the number of houses that we can provide to people. And so, you’re going to start to see a little more creativity with infill, I think, in certain markets, for sure. I think it’s starting to trickle and spread to markets that maybe weren’t so open to it before. And so, that’s another way you can potentially get more housing.

Dave:
That’s a great point. I think in Washington, James, the governor came out and said that they’re going to allow upzoning in all of the major cities so that is a really good point. But Kathy, did you want to add something?

Kathy:
I just wanted to say, I loved what Henry said about getting… I’ll build if the land’s free. At first, I laughed and then I thought, “You know what? We did that.” We bought land in Reno for, I don’t know, $13 million or it was $12,500,000, got the entitlements which really increases the value of the land, sold half the lots for what we paid and we were sitting on the rest of the lots at a zero basis. So it is possible to still do stuff like that and that’s how you can make the numbers work.

Dave:
That is definitely creative. Henry, I want to get back to something you mentioned at the top of the show where you’re saying that you’re getting less offers or hearing about less foot traffic on the sell side, but is that leading to more opportunities and less competition on the buy side?

Henry:
So speaking for myself, I haven’t seen much difference in my ability to purchase property mainly because, we’ve talked about it a little bit before, when you’re buying off market you’re typically buying a situation and market conditions don’t always indicate… Like everybody’s got a situation no matter if the market’s hot or the market’s cold, right? And so, I haven’t seen a slowdown in my ability to purchase property.

Henry:
Now traditional buyers, yeah, obviously it’s more difficult, right? Because there’s less houses out there. But when you’re buying off market, man, now, we’ve been… We haven’t had a problem buying when inventory was low, we weren’t having a problem buying when inventory was higher. Now, obviously, what I’ve been willing to pay has increased because the exit prices have increased.

Henry:
And so, I was talking with my business partner last week and I remember we would go look at houses a couple of years ago and not buy them because they didn’t hit our criteria. Somebody wanted five grand over what we were willing to pay, we were saying no, and boy, I wish I’d have bought all those, right? Hindsight’s 2020, right? We made the best decision we could knowing what we knew then and I wouldn’t tell anybody don’t change your numbers now, especially now, there’s so much uncertainty in the market. But yeah, no, we haven’t had a problem buying and I wish I would’ve bought everything I made offers on prior to 2022.

Dave:
Yeah. Don’t we all? I feel like that’s the story of the last seven years of my life. It’s like you read the numbers and it was too tight and you’re like, “Eh, just take them all. I should’ve just took them all.” James, curious, what do you think? I know you’ve said that you think opportunities might be coming because of some of this uncertainty. Where do you see opportunities and when do you think they’ll be coming around for people who are looking to jump into the market?

James:
Yeah. I think the opportunities are going to be more available once the market… Right now… I mean, we have to remember that these rate hikes are pretty recent. I mean, the impact of money has only really been hitting us for four to six weeks and that takes time to work itself through the market, slow things down and then reset seller’s expectations. Because as investors, we can only buy the now. What Henry said is correct. You don’t make up your… You buy in the now. So whatever market conditions you are, you have to adjust your numbers accordingly. And so for us, when money was extremely cheap and in the low threes, we knew things were going to kind of appreciate up so we would buy in the slimmer margin. We wouldn’t factor appreciation in our deals but we would buy on thinner margins.

James:
Now with all the risk in there, we have to go back to our 2018, 2017 metrics of where we have a certain expectation on our cash on cash return and if it doesn’t hit that, we move on. Part of doing that is just educating sellers and that part of that education process makes us slow down for three to four months because people have to realize it and they also have to get that same FOMO that we’re just talking about right now. Investors have FOMO that, “Hey, we didn’t keep every house from 2018.” Sellers are also starting to get FOMO of, “I might not sell my house at the right time and I’m going to lose a bunch of money.” I have noticed that has been happening in the very, I would’ve expected this to take four to five months, but we’re getting sellers reaching around that we’ve been talking to for five, six months that are asking to get in contract now.

James:
Because they want to lock in that deal, they’re feeling uncertain and honestly, it’s the right move for them too. You are locking in your deal now, if you get… On a builder, we’re trying to close these on a long basis and we’re educating them that we need the long basis because we don’t know what’s going to happen with money, we need to reduce our costs, and if they give us the right terms, we can lock in a deal now and give them non-refundable earnest money and they have a deal set in stone.

James:
If they wait, we’re just educating that if they’re going to wait, our offer is going to go with the interest rates. So if they go up another half point, our offer could come down a half point. The logic has to be worked into the market because there has been none for the last 18 months and people have to kind of reset themselves, look at buying, but I think it’s going to be a little bit of a gap in deal flow until people kind of realize.

James:
That’s why we’ve been buying more deals on market than off market because the wholesalers and the sellers haven’t realized that on the off market. But the on, they’re getting hit with what the market will actually pay. As inflation rips, construction costs are higher, people don’t want to buy these fixer properties either. They got to get a more expensive loan, pay elevated construction costs with a mindset that it could be a little bit risky. And so, those type of properties aren’t transacting well on the market.

James:
And so, we’ve been buying a lot more on market and as those data points hit the market, we can actually show off market sellers that we’re paying them actual market value. And so, you got to wait, you got to work through the cycle for a good… I think we have another four to eight weeks before we really get the data points and then you can educate people and then it’s going to reset what people’s expectations are.

Dave:
I’m sure there are people listening to this right now who are shocked and so excited that you said that there are on market deals right now that people can be buying.

James:
I’ve been buying on market deals for the last… There’s great buys on market. You just got to look at them a little bit different.

Dave:
Flips or buying hold or what kind of deals?

James:
We buy 50%, 55% of our flips on market. Burr style properties, we… It also depends on your market, we’re in a very heavy value add market. A lot of the deals that do go down on market, you have to know how to do construction, put the right plan in place, and to mitigate risk. And so, they’re a little bit more complex and that’s why we’re able to buy more on market.

Dave:
All right. This has been great advice from all of you as always but we do have to move on to our next section. But before we do, Kathy, give us the parting words here. What opportunities do you see in the market over the next couple of months that everyone listening to this should be paying attention to?

Kathy:
Oh, pressure’s on. It sounds so boring but we’re just doing what we’ve been doing for 20 years, buying in the markets that are still somewhat affordable, comparatively speaking. I like to stay under the average home price nationally and I like to stay in the median price of the area if it’s a growing area. So that gives me, and I’m talking buy and hold, that gives a big renter pool of people who can afford the rents. Again, especially in areas that are growing, that would be the Southeast. I kind of said, I don’t know how to build affordable housing but we’re still buying brand new homes there for under $300,000 in an area where that’s pretty affordable for people coming from the Northeast.

Kathy:
So people are leaving the Northeast, going to the Southeast, and it’s cheap. It’s the same thing we’ve been doing for a long time. It’s not exciting. It’s not the forced appreciation that Jamil was talking about. We’re not fixing things because I’m not going to go fix something out of state, I don’t have that ability. We’re just buying homes in the path of progress, renting them out, forgetting about them having a property manager watch them, and watching the values grow and enjoying a little bit of cash flow. Not a lot, but knowing these are long term investments, that’s what we’re doing. Simple.

Dave:
This is why we always come to you, Kathy, for the relaxing advice. It’s just like, “I just buy stuff and then I don’t do anything and then I’m just relaxing and it’s all lovely.” That sounds great. Thank you again for your advice. We’ll be right back after this for the Crowdsource.

Dave:
For our Crowdsource section today, we have two calls to action for you. The first, we are going to ask for a shameless help from all of you. If you appreciate all of the advice that Kathy and James and Henry have given today, please give us a five star review either on Spotify or Apple. It is a huge help to us as we are trying to grow our community, our source, and give all this amazing information to you each and every week.

Dave:
The second thing is to join the BiggerPockets On The Market forums. We talked about this the other day. We now have forums where you can interact with all of us, interact with each other, share data, share information about what’s going on in the market, and specifically, we have launched a On The Market consumer… Or excuse me, On The Market investor sentiment survey.

Dave:
None of you all know this yet, but what we’re going to be doing is periodically checking in with our audience to get their feelings about the market. I know how you guys feel about the market but want to know, do you think it’s a good time to buy, is it a good time to sell, how much you think rent’s going up over the next couple of months or next couple of years, and we’re going to aggregate all this data, I’m going to analyze it, and I will share it periodically so everyone here can keep track of what’s going on with our audience.

Henry:
That’s super cool.

Kathy:
Awesome.

James:
I mean, that’s actually really good information for us.

Henry:
Right.

James:
We’re going to get to know what the demand from investors is.

Dave:
Well, right? So there’s all this sentiment about home buyers. The idea came from the… There’s home buyer sentiment, there’s consumer sentiment, that are really good indicators of what’s going to happen in the economy, but why not real estate investor sentiment? I haven’t seen anything that is at the level of someone like me who owns a handful of properties. We see builder sentiment, we see institutional sentiment. So we want to get a sense of what regular real estate investors, people who are pursuing financial freedom are thinking about the real estate market.

Dave:
You can also share any feedback you have for us in these surveys about what you’d like to hear and what you think we could do better. So please, if you appreciate all this information just leave us a five star review, go fill out the survey, it’s going to be a lot of fun, and we’ll get to share some thoughts and comments from all of you on one of our next shows.

Dave:
Thank you all so much, James, Kathy, Henry. It is always a pleasure to have you on the show. Can’t wait to have you back sometime real soon. Thank you, everyone, for listening. We’ll see you next week. For another episode of On The Market.

Dave:
On the market is created by Dave Meyer and Kalin Bennett. Produced by Kalin Bennett, edited by Joel Esparza, copywriting by Nate Weintraub. Special thanks to Lisa Sawyer, Eric Knutson, Danielle Daley and Nathan Winston. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.