\n<\/p>\n
Home prices<\/strong> are a big part of the housing market<\/strong><\/a>. But not as big as interest rates<\/strong>. As the Federal Reserve sets out to \u201ckill the economy\u201d<\/strong> with rising mortgage rates, researchers like John Burns<\/strong><\/a> dig through the data to find out what real estate investors can do to take advantage. John isn\u2019t a beginner in the real estate space\u2014his consulting company has been doing this type of work for two decades<\/strong>, providing some of the biggest real estate investors with the most up-to-date information<\/strong>.<\/p>\n John isn\u2019t optimistic about this housing market.<\/strong> The data he\u2019s been collecting shows that home prices could see dramatic drops<\/strong> over the next couple of years and that the housing supply problem may only get worse. But, he also sees opportunities for investors<\/strong> that could take the place of the appreciation gains we got all too used to. John\u2019s team participates in over nine hundred consulting studies a year<\/strong>, meaning if there\u2019s one person who knows what\u2019s happening in the housing market, it\u2019s probably him.<\/p>\n In this episode, we talk about housing market predictions<\/strong><\/a>, how flippers got caught, why Ibuyers<\/a> are less of a threat than most investors think, and what will happen to the housing supply<\/strong> as developers start selling off homes at break-even prices. Are we heading towards a 2008-sized cliff or could this be a small hiccup on the continuous road to real estate appreciation?<\/p>\n Dave: Jamil: Dave: Jamil: Dave: Jamil: Dave: Jamil: Dave: John: Dave: John: Dave: John: Dave: John: Dave: John: Jamil: John: Jamil: John: Dave: John: Jamil: John: Dave: John: Dave: John: Dave: John: Dave: John: Dave: John: Dave: John: Jamil: John: Dave: John: Jamil: John: Jamil: Dave: John: Dave: John: Jamil: John: Jamil: John: Dave: John: Dave: John: Jamil: John: Jamil: John: Jamil: Dave: Jamil: John: Jamil: John: Jamil: John: Jamil: John: Jamil: John: Jamil: John: Jamil: John: Jamil: John: Jamil: John: Dave: John: Dave: John: Dave: John: Dave: John: Dave: John: Dave: John: Jamil: John: Jamil: John: Jamil: Dave: Jamil: Dave: John: Dave: John: Dave: John: Jamil: John: Dave: John: Jamil: John: Dave: John: Jamil: Dave: John: Jamil: John: Jamil: John: Jamil: John: Dave: John: Dave: Jamil: Dave: John: Dave: John: Dave: John: Dave: John: Dave: Jamil: John: Dave:
Hey, everyone. Welcome to On the Market. I am joined here with Jamil Damji, coming to me from Phoenix, LA? Where are you?<\/p>\n
I\u2019m in Phoenix today, enjoying life, enjoying all of the fun-ness that comes-<\/p>\n
What\u2019s the fun-ness? What do you-<\/p>\n
What\u2019s the fun-ness? Well, we actually got some offers on some of our flips. That\u2019s been really relieving to me. Beyond that, I\u2019m almost done filming season two of our television show. So, I\u2019m about to become a free man.<\/p>\n
Dude, you\u2019ve literally been saying that since I met you which was at least six months ago. It\u2019s so hard. I hope you\u2019re right this time.<\/p>\n
Me too, me too. But I\u2019m super\u2026 This guest was amazing.<\/p>\n
Oh yeah. John is great, and honestly, a lot of people have been messaging me and asking me and saying\u2026 A lot of the people come on the show share a similar opinion. If you\u2019re looking for a contrarian opinion, that\u2019s not that wild, I don\u2019t think it\u2019s crazy, but a very informed opinion about what you think is going to happen the next couple years, listen to this interview because John has access to data none of us do. He has his own consultancy firm, and he just provides so much good context and things that I\u2019m good to go sit in a dark room and think about for the next like three hours.<\/p>\n
Really though, I think one of the most enlightening conversations I\u2019ve had all year. So, you guys are in for it.<\/p>\n
With that, we\u2019re going to bring in John Burns who\u2019s the founder of John Burns Real Estate Consulting. But first, we\u2019re going to take a quick break. John Burns, welcome to On the Market. Thank you so much for being here today.<\/p>\n
Oh, I\u2019m looking forward to this. You guys are great.<\/p>\n
Thank you. Well, I\u2019ve been following you and your company for quite a while and I\u2019m a big fan of your work, but for those of our audience who aren\u2019t familiar with you and your company, can you just give us a brief background?<\/p>\n
Sure. I started it 21 years ago to figure out what was going on the housing market for investors, mostly big companies, and there\u2019s 115 of us now that are trying to figure that out. We have a research subscription for big companies, it\u2019s pretty expensive, and then we also do about 900 consulting studies a year. That\u2019s very skewed to new home development.<\/p>\n
Wow. So, safe to say you\u2019ve figured out the housing market, right? You know everything that\u2019s going to happen over the next couple of months?<\/p>\n
No, I mean, our purpose statement is to solve today to help navigate tomorrow. So, I think we\u2019re pretty good at solving today. What\u2019s going to happen tomorrow, your guess is as good as mine.<\/p>\n
Well, I was hoping, that\u2019s why we brought you on, John. You\u2019re going to tell everyone exactly what was going to happen. So, we\u2019ll just end the interview here.<\/p>\n
I do have a guess. So, I can tell you our\u2026 I mean, I have to decide how aggressively we\u2019re going to grow our business. So, this is near and dear to me, believe me.<\/p>\n
Well, I\u2019m just kidding. Obviously, we would love to learn as much as we can from you. So, just tell me a little bit. Over the last 21 years, what are the key variables, what\u2019s the data, the economic indicators that you\u2019re looking at to help understand what\u2019s happening in the housing market?<\/p>\n
So, when I started the business 21 years ago, it was hard to find data. So, we were getting out and finding data, and now there\u2019s just too much data. I feel like we\u2019re become a data filter, and we\u2019re still looking for more data. At the end of the day, the local market from a macro standpoint is all about job growth, and that\u2019s free data. It\u2019s available from the Bureau of Labor Statistics, always compare July to last July because it\u2019s seasonal. We do that for our clients. That\u2019ll tell you whether your local economy\u2019s growing or not. There\u2019s two surveys. The right answer\u2019s usually right in between both surveys. So, I advise everybody to do that.
And then on the supply side, I know you\u2019re monitoring listings and things, and we can get into the new home market versus the resale market because I think they\u2019re going to behave massively differently this cycle, but just monitoring listings and days On the Market, everybody can do that, but that\u2019s a very short-term indicator that can tell you what\u2019s going to happen. The job growth will tell you whether or not your market is adding more people who can afford to rent your house or not.<\/p>\n
I love that. It\u2019s so simple.<\/p>\n
How did I build a business just on that, I don\u2019t know.<\/p>\n
I think that\u2019s the key though, right? The more simple that you can make what you do so that people can digest the information, the better, right? From the perspective of your average investor in real estate, for the most of us that are involved in, I guess, the information that you\u2019re disseminating, we\u2019re looking at it from a resale perspective, right, and there\u2019s not a lot of people that I know that are huge new home builders. For the most part, what we do is we buy distress property, fix, and flip them. So, if you don\u2019t mind, Dave, I just want to come out the gate swinging here. I want to understand because you said something that is all the light bulbs in my head right now are firing off. How different is the new home market and the resale market going to look coming around the corner here?<\/p>\n
Well, we\u2019re recording this at the end of August, and the typical home builder in America has already dropped price 5%. I don\u2019t think the resale market has done that. So, the home builders are leading indicators, and there\u2019s actually 23 of them that are publicly traded so you can listen to their calls for free and they\u2019ll tell you what\u2019s going on right up to the minute. There are businesses that are going to end up with empty homes that need to be sold, and actually, they\u2019re going to convert, they are converting quite a few of them to rentals. They hadn\u2019t thought of that 20 years ago. So, that\u2019s going to be an interesting play here, but that\u2019s what you might call a desperate seller. Even though their balance sheets are really strong, I wouldn\u2019t say they\u2019re desperate, but they\u2019re businesses.
The resale market, as long as the economy is growing and people are not moving or not losing their job, they\u2019re not desperate to sell their house. In fact, if they bought their home more than a year ago, they\u2019re sitting on a ton of equity. They can just stay put. And the mortgages this cycle, as you know, have been pristine, so I\u2019m wondering where the supply is going to come from in the resale market, and I don\u2019t think there\u2019s going to be a ton of supply. I think we figured out it needed to increase 800% just to get back to normal. I mean, that\u2019s how ridiculously low it was.<\/p>\n
That\u2019s from its low point though, right, not from right now.<\/p>\n
Yeah, yeah, maybe not quite that much. Maybe that was actually, that was a new homestead, but it needed to increase significantly just to get back to a normal level, and I don\u2019t know where that increase is going to come from unless Jay Powell is successful in engineering a really bad recession. It seems weird to say successful about a recession, but in my view, that\u2019s the only thing he can control to get inflation down, and he\u2019s got a long way to go because the economy\u2019s still super strong. Unemployment\u2019s still super low. Maybe he\u2019ll get lucky. Something will happen and inflation will tame down, or we just end up with inflation for a very long time which will be high borrowing rates which people don\u2019t like.<\/p>\n
John, would you mind clarifying that to me because we\u2019re obviously seeing something a little different right now in the short term, right, with respect to listings and how things have sort of shifted since we\u2019ve seen the interest rate spikes and all the people that were thinking of selling have rushing into the market and putting their listings On the Market which has obviously swelled inventory in many markets. One of the markets that I\u2019m in\u2026 I\u2019m in 132 different markets just to give you backstory on me. I run a wholesale franchise operation and we\u2019re all over the country. Primarily though, the majority of our volume is sitting in Phoenix, Arizona, and we are fixing and flipping robustly out here, and throughout the year, we started the year off with\u2026 We would finish a house, we\u2019d put it On the Market, and it would sell immediately over list, all kinds of crazy scenarios there.
And now, since the market has started turning the corner, we\u2019ve seen that our flips are sitting longer. We\u2019re taking price reductions. We\u2019re getting lowball offers, something that we hadn\u2019t seen in quite some time. Do you think this is temporary? Because from what you just said, the resale market is not going to have enough inventory to meet demand. Is this all a temporary blip where we saw this huge rush of listings and then maybe coming around the corner that might disappear.<\/p>\n
All right. Well, you\u2019re not going to like my answer be because you\u2019re like a home builder. I mean, if you\u2019ve got a house that needs to get sold and it\u2019s empty, you\u2019ve got to sell and you\u2019ve got to find the market. So, that\u2019s exactly what\u2019s going on. The difference is hopefully for you, you\u2019re trying to find the market where there\u2019s not a lot of other homes for sale, and so, yeah, maybe you have to price it back where things were in January or maybe even last spring or something when you got into the deal, and nobody likes that. But if you\u2019re out in a new home area, they tend to be 10 builders across the street from each other, and there\u2019s a hundred empty homes for sale. That\u2019s a much more distressful situation.
The only advice I would say is you got to find the market. You made that investment when interest rates were three and your consumer was going to be able to buy the home, or maybe somebody would buy it from you and rent it out and borrow at three. Now, they got to borrow at five. They just have to pay less, and that\u2019s happened.<\/p>\n
John, you said, and I tend to agree that the new home market and the existing home market are sort of going to behave differently in this cycle. Do you have any context how big the new home market is compared to the existing home market, and is it possible that trouble with builders and new construction could start bleeding into the existing home market?<\/p>\n
Yeah, the new home market is about 11% of all the sales in the country or something like that, and historically, it\u2019s usually around 15. So, the lack of construction everybody\u2019s been talking about is part of the reason why it\u2019s less. Existing home sales are coming down so quickly, maybe they\u2019ll be at 15 pretty darn quickly, but that\u2019s a national number. I mean if you\u2019re in Denver, it\u2019s out by the airport where there\u2019s a lot of new homes and it\u2019s not near Stapleton where there used to be a lot of new homes. It\u2019s a very different sub-market and behavior.<\/p>\n
I\u2019m impressed by your knowledge of Denver. Do you live in Denver?<\/p>\n
No, but we do 70 pages on a hundred Metro areas and I\u2019ve traveled enough to have gone to all home games at all 30 major league baseball teams. So, I travel a fair amount.<\/p>\n
Wow. That\u2019s a very cool bucket list claim to fame.<\/p>\n
Yeah, I know, I know. They keep building new stadiums, so I got to get going again.<\/p>\n
So, what we\u2019re talking about so far, I presume, is mostly with single family homes. Is that right?<\/p>\n
Yeah. I mean, town homes are similar to me. Apartments are different.<\/p>\n
So, can you tell us a little bit about how apartment conditions are a little bit different than town homes and single families?<\/p>\n
Well, right now, it\u2019s a completely different story. When you jack mortgage rates, you tell renters who want to be homeowners, \u201cYou got to stay renting.\u201d So, the demand is gotten even stronger which is really the challenge for the Fed. I think the CPI measure, I think 30% of that is rent. So, when mortgage rates go up, they\u2019re actually pushing inflation up, not down because rent\u2019s such a big component of it. Their favorite metric is something called PC. I think it\u2019s about 17%, but they\u2019re doing that really in my view to kill the economy because that\u2019s what they need to have happen so demand slows, so inflation calms back down because history has shown that sustained inflation can actually be long-term worse for the economy than just ripping off the bandaid and having a short recession, like what happened twice in the early \u201980s. I hope we don\u2019t have to go there again, but it\u2019s starting to smell like that to me.<\/p>\n
We sort of talked about the long-term and short-term prospects. Given what\u2019s happening in the new construction market and home builders are having a hard time selling, do you think we\u2019re going to start to see, and we\u2019ve already seen construction start to slow down, but do you think there is a risk similar to the last recession where we just saw home building fall off a cliff and it took years, almost a decade for it to come back to that level? Is there a risk that we\u2019re going to enter another period where we already have a housing supply issue in the US and it\u2019s maybe going to get worse?<\/p>\n
Yeah, well, it\u2019s going down. I mean, 23 public builders have told you they\u2019re going to start less homes next year for the most part, so I\u2019m not forecasting other than telling you what the guys who are going to build it are saying is going to happen. So many things are different this time, and I hate that phrase, but I mean, we are building less. We\u2019re not building 2 million homes. We\u2019re building 1,700,00, so still pretty high. There is a big pig in the python of all these unsold homes that are under construction that are going to get finished over the next 12 months. So, I do think that\u2019s what\u2019s going to drive prices down.
But what is different is the builder balance sheets, public and private home builders, have never been stronger, never. In fact, we just polled them on our client webinar last week. So, sales are down dramatically. Housing market should be the poster child for the industry that\u2019s getting destroyed. We polled 400 clients and said, \u201cDo you have more employees than you did at the beginning of the year?\u201d and only, I think it was 20% of them had fewer and only 30% said they were going to have fewer 12 months from now which is very consistent with what they\u2019ve been telling me is like, \u201cJohn, we made so much money and we borrowed very conservatively, and if we have a recession, I don\u2019t like it. So be it, but I\u2019m not letting go of my good people, and I\u2019m not dropping land, and I won\u2019t grow as much.\u201d
So, that\u2019s a different story than the last cycle where people were borrowing money like crazy, and the consumer was levered up to their eyeballs with subprime debt, but most consumers can afford the payment. They\u2019re fixed rate payments with their current jobs and they\u2019re getting better raises than they were anticipating due to inflation. So, I don\u2019t think we see anything like last time, unless the Fed induces some massive recession or something I don\u2019t see coming.<\/p>\n
John, how prevalent or important do you think the institutional investor has been in leading up into our current situation and possibly leading out of it? Because it\u2019s interesting, I read a report that one of the major institutional buyers has just raised a tremendous, I mean, a sickening amount of money to purchase new homes and resale homes in the downturn that they\u2019re currently describing. So, almost as if they have purposely pulled back, knowing that while the rates were spiking, they pulled back purchasing and everybody in the business of buying and selling, like myself, felt that, we all felt the institutions leave momentarily so that they could create a drop in demand, and then that will automatically create a drop in pricing, but they\u2019re positioning themselves to come in and take a massive position. How impactful do you see that being in what we\u2019re going to experience five years from now?<\/p>\n
So, we have done so much research on this.<\/p>\n
Finally. Someone.<\/p>\n
We\u2019ve gone down to mapping each house that the publicly traded institutions have done and matching it to what they\u2019re disclosing publicly. So, we\u2019ve got it down to the house, and the headlines are complete BS. I won\u2019t say the whole word, but they\u2019re complete lies. So, I\u2019ll give you some clarity on that. So, the iBuyers are 2% of the market nationally, two. Companies that own a hundred or more homes are three. Companies that own 10 to 99, which you\u2019re in one of those camps, is three. And then those that own less than 10 are 19. Now, that 19 does include second homes, and the way we get the data is we say, \u201cIf the property tax bill is being sent somewhere else, this is not an owner occupant.\u201d So, that\u2019s how we\u2026 Maybe it\u2019s not perfect, but The New York Times hates any PE firm that starts with Black. Congress gets reelected when they\u2019re bashing Wall Street. So, all the headlines are on that, and I\u2019m sure, and I\u2019ll clarify it some more.
We actually summarized it by zip codes. There are some zip codes where the percentages of buying by institutions are like five times what I just told you. So, they all have this thing they call a buy box that you\u2019re probably familiar with the term.<\/p>\n
Yes, sir.<\/p>\n
So, the buy box is not in every zip code everywhere in the country. It\u2019s in fast-growing metro areas, right around the median home price, right around a nice rent. That\u2019s where the competition is super severe, and I totally get it, but I\u2019m willing to bet that people listening to BiggerPockets is far bigger than anybody coming out of New York when you add it all up.<\/p>\n
That is incredible to me. I want to reiterate this because I just had my mind blown because you just described what I\u2026 Leading up into this, John, I\u2019ve been characterizing the private equity or the institutional buyer as the 800-pound gorilla, and you just told me that it\u2019s actually, it\u2019s an 80-pound chimpanzee.<\/p>\n
That\u2019s really interesting. But maybe, Jamil, maybe you\u2019re noticing it because they\u2019re really active in Phoenix.<\/p>\n
It\u2019s super active in Phoenix.<\/p>\n
Yes.<\/p>\n
Yeah, the percentages are bigger in\u2026 And you would really know. Are you in Charlotte?<\/p>\n
We\u2019re in Charlotte, yes.<\/p>\n
They\u2019re crazy active in Charlotte.<\/p>\n
Yes, sir.<\/p>\n
And actually, Dave, in Denver, it\u2019s one of the least markets where they do the least. So, Denver and Austin.<\/p>\n
Really? Because it maybe\u2019s just too unaffordable at that point?<\/p>\n
Well, for Austin, it\u2019s all mom and pop. It\u2019s all BRRRRs.<\/p>\n
Huh.<\/p>\n
The buy box is not working for the big institutions. Even with one of the biggest institutions in the country being headquartered in Austin, I think those hundred-plus are only buying 1% of the homes in Austin.<\/p>\n
So, to just recap that, you said the iBuyer is 2% of the sales, of the purchases. The small institutional buyer is 3%.<\/p>\n
Well, yeah. Well, if they own a hundred or more nationally, they\u2019re three.<\/p>\n
Okay. So, that\u2019s the large institution. That\u2019s the big private equity firm.<\/p>\n
Yeah. Is that you too?<\/p>\n
No sir. No, sir. That\u2019s not us.<\/p>\n
Yeah, he\u2019s just trading them.<\/p>\n
I\u2019m trading. Yeah. So, I sell to these large institutions.<\/p>\n
Yeah. So, flippers, flippers we think are about 8% of the market, but they\u2019re coming in and out of that number, right? So, it\u2019s hard. Some are in each of the buckets.<\/p>\n
This is data that I don\u2019t think anyone has put out there. You\u2019ve got different data than I have seen. So, how did you track this? If you don\u2019t mind, I know that\u2019s proprietary probably, but how did you get so granular with it that you got it down to the house?<\/p>\n
We bought every transaction in the country. It was very expensive and we cheated a little bit. We did buy zip code because that was easier. So, if the proper tax bill\u2019s going to a different zip code, that\u2019s an investor. And then I just have a bunch of great people with databases that know how to run the math, and then we geo coded it too and did a lot of back checking. This took more than a year. I mean, this was not an easy assignment, but I knew it was critical to understanding the market.<\/p>\n
The risk of a massive dump in inventory by a huge private equity firm isn\u2019t as great of a risk as wall as the headlines or the media outlets are trying to make it.<\/p>\n
Well, I\u2019ll even make you more comfortable with that statement. So, if you\u2019re a REIT, which the bigger ones are, you pay a tax penalty as a REIT for selling houses.<\/p>\n
What?<\/p>\n
Yeah.<\/p>\n
I did not know that.<\/p>\n
Well, you get structured as a REIT, your income is tax free as a company and you pass it on to your shareholder. So, that\u2019s the REIT benefit, and the flip side of that is they penalize you for becoming like a regular company where you\u2019re selling homes, you have to pay regular taxes that way. And also, even further, they\u2019ve borrowed money, putting all those homes up as security and a cash flow income stream, their debt covenants don\u2019t allow them to sell a lot of homes.
The bigger risk is the guy who owns 10 homes and five homes and 20 homes times the many thousands of people that there are like that. That\u2019s the person I think who dumps their home, and we\u2019ve been talking to them. There\u2019s a couple brokerage services now like Rootstock and SFRhub and others that specialize in that person. So, they\u2019re clients of ours, and we\u2019re asking them, \u201cWhen you see a surge in selling, you be sure to let me know,\u201d and they\u2019ve seen a little bit of a surge, but what they\u2019ve learned is that those sellers need to provide great information, like how have the financials been the last year and other things to sell these homes, and they don\u2019t have it.<\/p>\n
Because they\u2019re not a sophisticated owner. They\u2019re small ma and pa property management companies.<\/p>\n
So, they\u2019re going to have to wait for the lease to expire and then kick somebody out and sell the house to somebody else. So, it\u2019s not going to happen overnight. It would happen over time, if people are playing that game.<\/p>\n
Wow. And primarily they\u2019ve been purchasing with some tremendously low debt, right? And so, leading up into this, they\u2019ve been holding a lot of inventory with some very favorable terms, and so, maybe that\u2019s the vacuum we\u2019re feeling right now is them leaving the space because the BRRRR\u2019s not working as well as it was seven months ago.<\/p>\n
So, we have this fix and flip survey which by the way, if any of your BRRRR clients want to participate in that, just send it to me at [email\u00a0protected]<\/a>, and I\u2019ll get you in on the survey because we\u2019re trying to stay on top of what people are doing. People are exiting and then not reinvesting the proceeds yet. I know that there\u2019s 1031s and other things associated with that, but they\u2019re not finding deals that are as underwriteable right now. In fact, I don\u2019t have the exact stats. I\u2019ve got it in the survey, but the percentage of ARV that they\u2019re willing to pay now versus three months ago has gone down dramatically.<\/p>\n
Do you have an average of what that has gone down?<\/p>\n
We have it by distribution, but it\u2019s gone down maybe 10%.<\/p>\n
Yeah.<\/p>\n
So, maybe if I was going to do a 75, I\u2019d do a 65 something, but that means I\u2019m going to pay less for your house or I\u2019m going to borrow less money.<\/p>\n
Can you tell us a little bit more about that survey, John?<\/p>\n
Yeah. So, it\u2019s just, it\u2019s a survey. We partnered with a couple companies, Flatiron and Sundae and some others that are involved in this business. We\u2019ve got a couple clients that fund fix and flip, and yeah, it\u2019s just about 10 questions, but there\u2019s a lot of participants, and you\u2019re asking me these questions I don\u2019t know the answer to, but if I ask a thousand people and poll them, we\u2019re hoping to get those answers and find these things out. I want to ask, are you going to sell?<\/p>\n
Oh cool.<\/p>\n
Or are you going to reinvest?<\/p>\n
So, our listeners, if they want to participate and contribute data to this survey, they can, that\u2019s what you were saying, email you or go to your website.<\/p>\n
Yeah. We\u2019ll get you in. We do it once a quarter. We\u2019ll get you on the next survey and then you\u2019ll get all the results in return. That\u2019s our give back.<\/p>\n
Cool. That\u2019s awesome. I mean, if you\u2019re a flipper, that\u2019s a no-brainer. Go fill out 10 questions in exchange for a lot of information about your market. So, we\u2019ve talked a little bit about what\u2019s going on and what\u2019s happening here, and I do want to get your opinion, I know that\u2019s not data supported always and no one can predict the future, but what do you see happening over the next couple of months, and how do you feel about the long term prospect of housing valuations in the US?<\/p>\n
I mean, we think they\u2019re coming down. I\u2019m not going to quote the percentage, but it\u2019s substantial, but I\u2019ll say it another way. So, we just went through say two to three years of really substantial price appreciation. What if you had to give a year of that back? Would that sound unreasonable? No. Do the math on that percentage in your market. It\u2019s a lot.<\/p>\n
Yeah, it is. And do you think that\u2019s going to happen universally across markets?<\/p>\n
No. Every market is completely different.<\/p>\n
And so, you\u2019re saying on a national level sort of-<\/p>\n
Yeah, right. And then those stats I quoted you, they\u2019re so different in Charlotte than they are in Phoenix than they are in Denver, though that was all national. This is very local, and even I remember I have the Charlotte map kind of memorized in my head. It\u2019s like all the east and west side of Charlotte where all this activity\u2019s going on and nothing in the north and the south. So, it\u2019s very zip code specific.<\/p>\n
John, you\u2019re saying that you\u2019re seeing that housing values are going to come down based off of the research that you\u2019ve done and some markets more than others, and I\u2019m not quoting you, but possibly erasing an entire year\u2019s worth of appreciation from our balance sheets. What\u2019s the timeframe?<\/p>\n
I think it\u2019s quicker where there\u2019s a lot of desperate sellers like home builders, and it\u2019s really slow on the resale side where people are not desperate.<\/p>\n
So, emotions again, just like how we saw the massive appreciation happen based off of emotions because there\u2019s a term that I love using, I call it emotional equity. That\u2019s where we had people coming in and overpaying by 100,000, $200,000 more than a property was listed, and this isn\u2019t lender-backed value. This is stuff, they were waving appraisal contingencies and just coming in and slapping down cold, hard cash to close this deal, and so, that equity, that appreciation that happened will disappear, and you\u2019re saying it\u2019s going to disappear as fast as it came here because it\u2019s an emotional-based situation.<\/p>\n
Yeah. So, actually, a guy named Robert Shiller who won the Nobel Prize not that long ago for economics primarily won it for what you just said was his analysis on psychology and it feeding on itself. When things go up, it forces things to go up even more, and I think we\u2019re going through a psychology shift the other way where if now\u2019s not a good time to buy, I should wait three months or I should wait three\u2026 And I think that\u2019s the most likely scenario until some new information comes along and changes everything I just said. But the other part of this question that I do find flippers don\u2019t talk enough about is the mortgage rate and the borrowing rate. When you see 40% home price appreciation and rates go from 3% to 5.5%, who thinks that doesn\u2019t matter? I mean, but that\u2019s what you\u2019re saying. If you don\u2019t think prices are going to fall, you\u2019re basically saying that doesn\u2019t matter.<\/p>\n
It has to matter.<\/p>\n
Of course, yeah.<\/p>\n
It has to matter.<\/p>\n
Yeah, I mean, affordability is I think I saw some stat recently that said is near a 40-year low in terms of what people can afford, and of course that matters because it dries up demand and just less people are willing to get into the market. Do you think, John, this bodes\u2026 So, that\u2019s sort of your short-term view. What do you think about sort of the long-term prospects of the housing market? Because we\u2019ve done some analysis at BiggerPockets just about previous recessions, previous housing cycles, and to us it looks like the outlier is 2008 in terms of how deep housing price declines were and how long it took to come back to pre-crash levels. Do you see something like that as feasible? I know you can\u2019t assign a probability or anything like that, but is it even feasible?<\/p>\n
So, that is the data and that\u2019s exactly what it says when you chart it nationally. If you chart it locally, you\u2019ll see that there are other precedents where things have taken just as long. So, like the S&L crisis happened in the mid-eighties in Houston, it fell for four or five years and took another nine years to come back.<\/p>\n
Wow.<\/p>\n
It happened in California in 1990. I mean, my wife and I bought our first home in \u201991 20% off the initial asking price and sold it five years later for a loss.<\/p>\n
Whoa.<\/p>\n
And then seven, eight years later, it came back. Yeah, so this has happened. Yeah, look at the construction starts in the local markets. Now, I\u2019m not saying that\u2019s going to happen again. Those were all financial crisis. You know what happened last time before than that, it was the collapse of the S&L industry. There\u2019s certainly no financial crisis that I\u2019m aware of happening in real estate. If they were lending on Bitcoin or lending against hedge fund portfolios or something, then there could be one, but I don\u2019t think it should play out like that, and we are undersupplied, our view is by about 1,700,000 houses right now. That\u2019s a lot of undersupply. As we mentioned earlier, the apartment market is completely full. Until we finish all those apartments under construction, that\u2019s going to stay the case. Yeah, it shouldn\u2019t be something like you just outlined.<\/p>\n
So, do you think the\u2026 Because we were sort of playing with this number of 10%, right, a 10% reduction in value, and do you think the 1.7 million houses that we\u2019re short, do you think that\u2019s what backstops that from a crash?<\/p>\n
Well, a simple demand supply chart, I think demands and rents have already corrected for that supply. So, probably priced out of those 1,700,000 people. So, as you drop rents or as you drop home prices, you allow those 1,700,000 to split up with their roommate or whatever they\u2019re going to do and get their own place. So, I do think there\u2019s an affordability component to that, but yes, the fact that we\u2019re entering this undersupplied rather than oversupplied, which is the case in 2006 is a far better situation to be in.<\/p>\n
So, I\u2019ll ask you the question probably on the mind of all of our audiences. Are better buying opportunities sometime in the near future rather than today because in your mind prices, values are going to fall?<\/p>\n
Well, the flippers have told us that. So, your listeners have already said, \u201cMy borrowing costs are up. I\u2019m not going to take a bet on home price appreciation like I used to so I\u2019m going to buy at a lower percentage of ARV,\u201d and this woman, Kyla Scanlon has coined this term calling it a vibecession. We\u2019re not in a recession, but it feels like it, the vibe is like we\u2019re in a recession.<\/p>\n
I like that.<\/p>\n
It\u2019s exactly what you were just talking about. People are hitting pause, and when people hit pause, demand slows. What\u2019s different this time is I don\u2019t think supply is really going to skyrocket. So, that\u2019s good, and people aren\u2019t going to have to go through foreclosure and things like that in a big way. That actually argues for it taking longer to get back to where prices and rents need to be.<\/p>\n
That\u2019s really interesting. Yeah, I love that, the vibecession. That\u2019s a good point. We did a whole show on this, but basically we\u2019re not technically in a recession, but who really cares because all of the underlying economics have been\u2026 The trends are what they are and people are feeling like it\u2019s a recession which is pretty much what matters.<\/p>\n
Exactly.<\/p>\n
Yeah, I mean, a hangover is a headache, but you can call them both the same thing, right? Either way, it doesn\u2019t feel good.<\/p>\n
Yeah, exactly, yeah.<\/p>\n
Yeah. At least you know that\u2019ll go away.<\/p>\n
So, is there a way for a fix and flipper to bake in their forecasting? Because the bottom line is is that when we do this full-time for a business, right, it\u2019s very difficult to just pause and wait and say, \u201cOkay, look, I\u2019m not going to purchase right now. I\u2019m not going to\u2026\u201d Because you\u2019ve got crews that you need to be responsible for. You have wages to pay. There\u2019s things that need to keep the machine moving because if you don\u2019t keep the ball moving, the entire thing falls apart, and then reassembling that later on is next to impossible, or it looks really different from what it looked like right now.
And so, I\u2019ve seen a lot of rehabbers that I work with at least, they\u2019re saying, \u201cLook, Jamil, we can\u2019t pause. It\u2019s impossible for us to pause. We\u2019ve got way too many people that we\u2019re responsible for. We have a lot of inventory that we\u2019re holding. We\u2019re going to continue pressing forward, but we\u2019re going to bake in some understanding. We\u2019re going to bake in value, or we\u2019re going to bake in a deceleration in pricing,\u201d whatever you want to call it. What would you say to a fix and flipper that is trying to orchestrate a business plan for the next 12 months? How would you advise them?<\/p>\n
So, I mean, this has been really interesting for me because everything you just said, you sounded exactly like a home builder. Exactly. \u201cI\u2019ve got all these homes, I\u2019ve got all these people.\u201d What you didn\u2019t say, but is underlying in all this is, \u201cI\u2019ve got a lot of debt that needs to get repaid,\u201d and that is the answer to your question. So, if your debt is low or you\u2019re able to restructure your debt and you can be patient, you\u2019re going to be patient. If you have no choice, you got to go as fast as you can to make sure you pay back your debt, and Dave asked about the builders in the last cycle going under, they had a lot of debt. This cycle, they\u2019ve been able to borrow like 4% fixed rate and it doesn\u2019t mature for six years. So, they\u2019re like, \u201cI can be patient.\u201d Their borrowing literally is like 30% against the asset value or less. If you\u2019re at 70, 80% leverage, you\u2019re in trouble.<\/p>\n
You just described how rich they all are right now because they made so much money leading into this. So, when you\u2019ve insulated yourself with all of this, all these years of really, really great returns, you position well to be able to come out of this at least intact.<\/p>\n
So, if your listeners have sold some house and stuck some cash in the bank and paid down their debt, they\u2019re fine, but if everybody rolled it back to just keep buying more homes, which I know there\u2019s a tax incentive to do that, you\u2019re taking a lot of risk in a cyclical industry, and everybody knows housing is cyclical.<\/p>\n
So, the depreciation buyer might not appreciate what you just said.<\/p>\n
Well, but they can hold on and enjoy the depreciation for a very long time. I mean, if you\u2019re in a shape where you can just rent this out and refinance with some long-term debt, you\u2019re fine. I know people that did that in the last cycle too. Some builders actually did that. There\u2019s a famous one in Houston, did that with 4,000 homes that were intended to be for sale and they ended up renting them all out. It was awesome. It\u2019s a different lender on a perm financing on something like that so you can get a fixed-rate debt too. I mean, maybe not from everybody, but that\u2019s how you get through. You rent it out.<\/p>\n
John, this has been super helpful. I\u2019m curious if you have any other things you think our audience of aspiring and active real estate investors should know about this about the housing market or where you think things are going.<\/p>\n
I\u2019ll end on a positive because I felt like a little bit of a Debbie Downer today. I think this is not discussed enough. The housing boom of the early 2000s was 18 to 20 years ago and homes need a remodel on average, we\u2019ve got the census data, 20 to 25 years after they\u2019re built. So, the number of old, tired homes that need a refresh is massive. We have a lot of clients who are building products, clients who sell to the remodelers. We\u2019re very bullish on remodeling and the need for rehabbing homes, purely due to the number of homes that was built 20 years ago.<\/p>\n
Oh, that\u2019s fascinating. I didn\u2019t ever think about that.<\/p>\n
To my taste, Dave, I can\u2019t live in a house that hasn\u2019t been remodeled five years ago.<\/p>\n
Oh, I know, I know you buy a new house every year, Jamil. But do you think it\u2019s possible, John, just curious if builders have all these people they\u2019re trying to employ and they don\u2019t want to build, would they reallocate resources towards remodeling? Is that possible?<\/p>\n
To some extent, but they\u2019re also entering this with a labor shortage. So, it\u2019s not like they have too many people they\u2019re trying to\u2026 And actually, home builders are different because their trades are on somebody else\u2019s payroll, but there\u2019s been such a trade shortage here, I think some of those trades will flip to remodeling. In fact, I\u2019m sure of that.<\/p>\n
Yeah, that\u2019ll be interesting to see. John, I have one last question and it\u2019s entirely selfish. I feel like the housing market is very confusing and so is the economy right now. In your 21-year history of looking at housing market data, how does this stack up in terms of complexity and normality, I guess?<\/p>\n
This is about as complicated as I can remember, but I think I would\u2019ve answered that question the same over the last 20 years. It just seems to get more complicated.<\/p>\n
Yeah.<\/p>\n
There\u2019s more things going on, and as I mentioned, there\u2019s more data to analyze, like, \u201cOh my god, I hadn\u2019t thought of that.\u201d This flipper stuff, iBuyers, who was talking about iBuyers before? Yeah, it\u2019s super complicated which actually is kind of good for our business.<\/p>\n
Yeah, it\u2019s good for our podcast. That\u2019s why we created it. But yeah. I mean, I think it\u2019s reassuring to know for people who are new to this industry that this is complicated, that if you\u2019re listening and feel a little bit confused about the economy, you\u2019re not the only one.<\/p>\n
I think the guys in charge of the economy are confused about the economy.<\/p>\n
That is a painful truth.<\/p>\n
Oh boy.<\/p>\n
When the Fed chair is apologizing for getting it wrong, don\u2019t feel bad that you got it wrong.<\/p>\n
All right, John. Well, we\u2019re very grateful. As investors and just people interested in the economy, we\u2019re very grateful to have some time with someone like you with such great experience and access to so much unique information. So, thank you so much, and for anyone listening, if you want to connect with John, it sounds like the best place to do that is on your website or is there anywhere else they should do that, John?<\/p>\n