\n<\/p>\n
The 2022 housing market<\/a> doesn\u2019t make a whole lot of sense. At the start of the year, competition was fierce, with bidding wars on every home and lines out the door just to view an open house. Now, in quarter three of this year, interest rates have hit decade-long highs, buyers are more in control, and days on market are starting to creep back up. As a homeowner, investor, or renter, you need to know what\u2019s on the horizon so you can build wealth while others run for the hills.<\/p>\n Joining us today are James Dainard, Jamil Damji, and Kathy Fettke, a gaggle of real estate veterans and the expert guests on BiggerPockets\u2019 On the Market<\/em><\/a> podcast. They\u2019ve seen up markets, down markets, and confusing markets like today. As investors who touch almost all corners of the United States, with different areas of expertise, they bring the facts on what\u2019s happening in today\u2019s housing market.<\/p>\n We talk about interest rate updates, when the \u201cinventory crisis<\/a>\u201d will end, why demand has taken a nosedive, and whether or not it\u2019s still a good time to buy real estate. We also talk about the state of the economy, inflation, and how the Federal Reserve may be working to put us into another recession. This up-to-date episode will give you everything you need to make smart buying or selling decisions in today\u2019s housing market.<\/p>\n Mindy: James: Mindy: Jamil: Mindy: Kathy: Mindy: Kathy: Mindy: Jamil: Mindy: Jamil: Mindy: Kathy: Mindy: James: Jamil: Kathy: Mindy: James: Mindy: Kathy: Jamil: Kathy: James: Mindy: James: Mindy: Jamil: Kathy: James: Kathy: Jamil: Mindy: Kathy: James: Jamil: Kathy: Jamil: Mindy: James: Mindy: Jamil: Mindy: Kathy: Jamil: Kathy: James: Mindy: Kathy: Mindy: Kathy: Jamil: James: Mindy: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes<\/a>\u00a0by leaving us a rating and review! It takes just 30 seconds.\u00a0Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our\u00a0<\/i>sponsor page<\/a><\/i>!<\/i><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Hello, hello, hello and welcome to the Bigger Pockets Money podcast where I sit down with James Dainard, Jamil Damji, and Kathy Fettke, three of the panelists from On the Market podcast, which is a sister podcast of this show, and we talk about this flip-flapping real estate market we find ourselves in.
I am here to make financial independence less scary, less just for somebody else to introduce you to every money story because I truly believe financial freedom is attainable for everyone no matter when or where you are starting. Whether you want to retire early and travel the world, start your own business, go on to make big time investments and assets like real estate or even just get a handle on what is going on in this market right now, we\u2019ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.
All right. Today, I am joined by James Dainard, Jamil Damji, and Kathy Fettke. James, welcome to the Bigger Pockets Money podcast. Please introduce yourself and tell us why you are so great.<\/p>\n
Hey, Mindy. So I\u2019m a full-time investor. I\u2019ve been an investor in the Pacific Northwest for the past 19 years now. I started when I was a senior in college. I\u2019m a heavy value add investor where we do a lot of heavy lifting on properties of increasing day one margins. So whether it\u2019s fixed and flip properties, development sites, building homes or large and small multi-family, we\u2019re stabilizing them and increasing their value. I\u2019m also broker up in the Pacific Northwest, where we do about 150 million a year with investors of just helping investors through the process, sourcing on and off market deals, and then handling the disposition as well, but just full-time deal junkie, Pacific Northwest. That\u2019s where I hang.<\/p>\n
Full time deal junkie, I love that. Jamil, welcome to the Bigger Pockets Money podcast. Let\u2019s let everybody know why you\u2019re so great.<\/p>\n
Thank you, Mindy. I appreciate being here. I am Jamil Damji. I am a national wholesaler. So what I do is I wholesale properties all across the country. I founded the largest franchise for a wholesale in the United States called KeyGlee. Not only that, I also fix and flip property, and I\u2019m on a television show on A&E, where I flip properties with my best friend and big sister, and like James, do a lot of value add, a lot of heavy construction-type projects. So this is very interesting to me. Nice to meet you.<\/p>\n
Well, it\u2019s nice to meet you too. Thank you for joining us today. Kathy, last but not least, she is alphabetically last. Kathy Fettke, welcome to the Bigger Pockets Money podcast.<\/p>\n
Thank you.<\/p>\n
Please let our listeners know why you are so fantastic.<\/p>\n
Oh, thank you. I\u2019m the co-founder of Real Wealth. We\u2019ve been helping investors in high-priced markets find properties in cashflow markets, so that means understanding what it takes to own a rental property out of state. We do a ton of education at Real Wealth, and I have a broker-to-broker relationship with agents across the country who really know investment property and know what the rents are. Many of them own property management companies so that you\u2019re not stuck with an agent that just wants the commission and is going to take you to the wrong neighborhood.
We also provide the resources that come along with that like insurance companies and the lenders that can do loans in those states. So we\u2019ve been doing that for, oh, my gosh, almost 20 years now, and then I also started syndicating in 2010 in the downturn when we were buying land for 10 cents on the dollar. So that\u2019s been an interesting ride as well for the past 12 years.<\/p>\n
Well, I\u2019m so excited that the three of you are here today. I\u2019d like to say I assembled this amazing mastermind team of panelists to come in and talk about the real estate market, but I actually had some help. They are the panelists that regularly appear on our sister podcast called On the Market, where they talk about the state of the market in general, and that\u2019s what we\u2019re going to do today. We\u2019re going to talk about the state of the market in general.
If you haven\u2019t been paying attention, the fed raise interest rates, what, three times in a row, and they didn\u2019t just give them a little bump. I believe all three times was 0.75 basis points, which is a huge amount. They haven\u2019t done that \u2026 Well, they used to say they haven\u2019t done that since, what was it? 2010 or something? Now, it\u2019s like every month they\u2019re doing this. So it\u2019s been a lot.<\/p>\n
I think I had read it was \u201994 since it was-<\/p>\n
\u201994, yes.<\/p>\n
\u2026 that large of a raise.<\/p>\n
Yes. They haven\u2019t had this much of a raise since 1994. You are correct, and now they\u2019ve done it three times in a row. Why does the fed keep raising these rates? Because inflation. They\u2019re trying to fight inflation. Let\u2019s talk about inflation.<\/p>\n
Well, it\u2019s interesting last year that same fed said it was transitory and a lot of us were looking at each other like, \u201cAre you sure about that? Because we\u2019re seeing something different out here. We\u2019re seeing bidding wars and lines out the door and 90 people want a house paying way too much for it.\u201d So it\u2019s shocking that the federal reserve, which is really the banking system, it\u2019s not a government entity and people get confused about that, but they are tasked with controlling inflation. So they really got it wrong. They have admitted that, but to me, the bigger picture is the amount, again, well, you said, \u201cWhat is inflation?\u201d It\u2019s simply prices going up and, like you said before this show, supply and demand usually controls that, but we\u2019re in a very different world today.
The economy is not the economy of our parents. Economics is not what people learned in school. It\u2019s extremely manipulated by the fed, by the banking system. Again, not a federal, not a government agency. The banking system is what it is, and they have been able to create an enormous amount of money, which was not okay when I was young. They would print a little bit of money and it made headline news, but to just give an example of how much, I\u2019ve talked about this on our On the Market podcast, in my parents\u2019 time, it was two trillion dollars circulating or less. If they printed even a few billion dollars, it was a big no-no. Today, they\u2019ve created seven trillion dollars in the last two years. How could that not create inflation when there\u2019s that much more money circulating?<\/p>\n
What I find very interesting is that it\u2019s usually supply and demand. When supply goes up, rates fall or prices fall. When supply goes down, prices increase, and it doesn\u2019t really matter what you\u2019re doing. If there\u2019s no supply, prices are going to go up unless nobody wants it. Like typewriters, you can make those a thousand dollars a pop. Nobody\u2019s buying those. You make them a dollar a pop, nobody\u2019s buying those, but right now, we don\u2019t have supply. We have supply chain issues that stem from this little thing called COVID, and raising interest rates, in my opinion, I\u2019m not an economist, but raising interest rates when we already don\u2019t have supply doesn\u2019t seem like the right move here because, yes, you are dampening demand for housing in some markets, not in all markets, but in some markets.
I\u2019m in the Denver market and our demand with the June rate increased. Our demand was like, \u201cOh, no more. We don\u2019t want any houses at all,\u201d and that was very difficult as I got my first listing in a very long time and now it\u2019s still on the market, which is shocking to me that it\u2019s still on the market three months later, but in other markets it doesn\u2019t matter. It doesn\u2019t matter how high the rates are going to go. People are still buying, and we still have record low inventory. So how does increasing interest rates help with inflation? All I see is this hurting the people who have to move, who have to buy, who have to \u2026 and it\u2019s not just houses, it\u2019s cars and other things as well, but this just seems like the wrong direction that we\u2019re going in.<\/p>\n
What we\u2019ve seen is we\u2019ve seen inflation come down a little bit off peak of June. I think it was at 9.1 and now we\u2019re down to 8.3, but a lot of these rates, they\u2019ve been adjusted because it\u2019s not just a supply and demand thing that is part of the problem, but we are seeing the supply start to increase. Even the other day, we do a lot of construction, and we\u2019ve heard that there\u2019s actually warehousing with oversupply of flooring and different types of material because they bought up, bought up, bought up, and now they\u2019re stuck with inventory. We\u2019re actually seeing that also in the used car market. I\u2019ve been seeing that too. Lots are starting to fill up, but part of the reason they\u2019re also increasing the race is they\u2019re trying to slow the money down in our economy. It is going way too fast or it\u2019s been going way too fast and it\u2019s been consuming everything, which was a lot of the reason there was also no supply in addition to it\u2019s not just a supply and demand thing, but it\u2019s a labor issue is a lot of the inflationary cost that I\u2019m seeing is a labor issue, not just a material cost.
That is just because unemployment is basically at zero. It is causing labor costs to skyrocket, and they\u2019re trying to get that back down, which unfortunately means slow the money down. Slowing the money down leads to a recession, and then you have to kind of transitionally push through. I know personally as an investor who does a lot of construction, manage a lot of employees, the labor market is a mess and it does need to be fixed because it is really hard to get your job sites done, and until they make these corrections, it\u2019s also going to push that down, which there\u2019s going to be a lot of relief for investors on that side. You\u2019re going to be able to get guys to show up to your work. You\u2019re going to be able to actually pay them an affordable rate, but it has to be slowed down and that\u2019s half the reason they\u2019re also increasing rates. It\u2019s not just a supply and demand thing.<\/p>\n
I agree, James. I think we\u2019ve got such a complicated situation right now that we\u2019re dealing with, and the variables that are creating the inflation crisis I think it\u2019s not just the simple math of, \u201cOkay. Let\u2019s raise rates and everything will fix itself.\u201d I think that that is just indicative of the very surface level problem solving we have right now from the fed. I truly don\u2019t believe that they\u2019re looking at the problem deep enough. Again, I\u2019m not an economist and so I don\u2019t have better solutions to say but there was an interesting article that I read. Steve Forbes said, \u201cWe need to be looking at this situation from the level of the currency. We need to be shoring up and strengthening our currencies, not just raising rates to weaken the economy.\u201d
In fact, all that we\u2019re doing right now is we\u2019re beating up the people that are the working class people, folks that are really need help in markets like this. When things get tough, we find a way to continue to beat up people who are in most need of the help. So again, I think that the way that we\u2019re approaching this right now is totally backwards, but it\u2019s interesting.<\/p>\n
Yeah. I see it as a silent tax if politicians and their constituents want more things and want, again, student loan debt canceled. I look at Europe and they have free university and healthcare, but here in the US, if politicians want something, it is much easier to just print more money for that thing versus taxing people because at this point, you\u2019d have to tax people 150% of their income in order to pay for all the debt. So it\u2019s a silent tax and it does hurt the people that are already struggling because when prices go up, you\u2019re paying more at the pump, well, I have an electric car, it doesn\u2019t affect me or if people I know who they still bought their RVs and they\u2019re still driving around paying all this money for gas, they\u2019re not as affected obviously or else they wouldn\u2019t be doing that, but it\u2019s the people trying to just get to work that they were already struggling. So it\u2019s an interesting time and, hopefully, more and more people will awaken to some of the manipulation of the market.<\/p>\n
Do you think that rates are going to continue to go up? I mean, the fed has indicated that they are not real concerned with keeping everybody happy. They want to keep inflation down and they\u2019re going to do it, they\u2019re the boss, but where do you think rates are going to go in 2023?<\/p>\n
Well, I think they\u2019ve said that they\u2019re going to keep increasing the rates. What\u2019s too bad is they\u2019re being so reactionary now, and so they\u2019ve had to go on this aggressive hike because they ignored the issue for nine months because at the beginning of the year, what he was saying was that the fed rate was going to land around two and a half to three points by the end of the year or up into 2023 and that should fix the issue, and then it changed from two and a half to three, to three and a half was the prediction. Now, they\u2019re saying four and a half percent from the fed rate, and typically, rates are three points higher. So it\u2019s going to be a seven and a half, eight percent loan for most investors, buyers, anybody getting any bank financing, which is a huge increase than it was 12 months ago because we were at two and a half percent and now it\u2019s going to be eight, and there\u2019s going to be shock waves by that.<\/p>\n
Do you think that\u2019s going to affect pricing? We\u2019re still really low with inventory. I mean, you look back to 2008, 2009, we stopped building, essentially, in 2008, so 2008, \u201909, \u201910, \u201911, \u201912. I don\u2019t know when they started building by you. I don\u2019t remember seeing building, big subdivisions going back up until \u201914, maybe even into \u201915. That was a long stretch of time with no building, and that wasn\u2019t just my neighborhood, that was everywhere. Builders went out of business. Trades people left the market and didn\u2019t come back, left the industry and didn\u2019t come back. So now, we\u2019re short all this housing. I hear people say, \u201cOh, this is just going to be like 2008,\u201d and I don\u2019t really feel that that\u2019s going to be that this market is the same that has different causes, but do you think prices are going to fall like they did in 2008 or anywhere closer like they did in 2008?<\/p>\n
It\u2019s already happening.<\/p>\n
We\u2019re baking in around a 10% correction for pricing moving forward in most of the markets that we\u2019re in, and we\u2019re seeing a lot of opportunity for people to actually position themselves temporarily right now to benefit from what\u2019s happening in the market, right? So you\u2019ve got cash-heavy investors who are actually pulling the trigger, but really, really, really getting significant discounts on their purchases right now, but I don\u2019t think that lasts. I think it\u2019s a temporary situation where there\u2019s going to be some \u2026 Those who have to sell will sell, right? That\u2019s the thing that we\u2019re finding is that the individual who\u2019s in the situation where they\u2019re moving, they\u2019re relocating or they\u2019ve inherited a property or a sale is a necessity, they will make the decision to sell. Are they going to absolutely get creamed because of this? Yes, they will. They\u2019re going to feel that.
I don\u2019t think that we can ignore the fact that you said, Mindy, we are at record low inventory, and because of what\u2019s happening right now, builders are pausing building, right? So were already short. We were already short on supply, on inventory, and now you\u2019ve got rates going to where they are, builders pulling back even further. What does this create? At the end of the wave, what does this create for inventory and pricing? I think what you\u2019re going to find is you\u2019re going to have a temporary, a momentary opportunity where people, investors or whoever can get in and buy.
I was on a flight yesterday, and it\u2019s really interesting when you sit with people who really aren\u2019t even in housing, they\u2019re not in real estate, they don\u2019t trade in it, but the sentiment, right? It was like when I told them that I was in real estate, immediately, they were consoling me. So the sentiment that they had about what\u2019s going on in the housing market, they were like, \u201cOh, I\u2019m so sorry.\u201d
You think, \u201cOkay. This is the sentiment out there for the average person who\u2019s not investing in real estate but just watching and reading the headlines.\u201d Then I think what ends up happening is we will absolutely get a small depression because people, they believe that the value of housing is going down, so sellers are more open to a steep discount, but I think what shakes out at the end of the wave is going to be an even bigger inventory crisis and this is going to create even more appreciation and another correction going back up with pressure moving prices up. That\u2019s what I\u2019m predicting two years down the road.<\/p>\n
I just said at the beginning of the year when I do my predictions that you got to pay attention to the fed because we\u2019re just puppets, they\u2019re the puppeteers. They control things, we need to listen and follow. Really, experienced investors do that, especially stock market investors. Early this year, Jerome Powell said, \u201cWe\u2019re going to raise rates seven times.\u201d I actually didn\u2019t believe. I was like, \u201cWhy would the fed, federal reserve \u2026\u201d When you say the fed, it sounds again like a government agency. It\u2019s the banking system. The central bank decided we\u2019re going to raise rates seven times, and I thought, \u201cWhy would they want to crush our economy? Why would they do that?\u201d
First of all, overstimulate it and then decide, \u201cNo, we overstimulate it, now we got to crush it.\u201d So I just thought, \u201cWhy would you do that if you\u2019re representing this country?\u201d but they have come out loud and clear just last week that, \u201cNo, we\u2019re going to crush it, and there\u2019s going to be job losses, and we\u2019re going to bring asset values back to where they think they should be, which is affordable.\u201d
So depending on who you are, it\u2019s either good or bad. Headline news has a different interpretation, depending on what you\u2019re doing and where you are. For a buyer, that\u2019s going to be a good thing. In the meantime, it\u2019s a terrible thing for people who own the asset class that the federal reserve\u2019s trying to kill, basically, right? So you have certain areas that went up as much as 40% just in one year.
So there\u2019s a good chance that those areas are going to correct, and that\u2019s the way Jerome Powell said it, \u201cWe\u2019re going to correct the housing market,\u201d and I only see that as one thing. They\u2019re the ones who blew it up. One of the ways they blew up this bubble is buying mortgage-backed securities to keep interest rates low. When you have the central banks buying these mortgage-backed securities and then you pull back, which is what they\u2019re doing, they\u2019re tapering, now you don\u2019t have a buyer for those. So then rates have to go up.
So again, why would they have done that all the way up until March of this year when prices already gone so high? They were still stimulating in overly stimulated market. Now, they\u2019re like, \u201cOops, okay. We\u2019re going to pull all that back and stop buying or, at least, again, taper the buying.\u201d So I listen. Really, a month ago, I would\u2019ve said something different, but based on what Powell said last week, he\u2019s like, \u201cNo, we\u2019re we\u2019re going to destroy it.\u201d So you got to pay attention.
Now, that doesn\u2019t mean some of the things that we\u2019re doing I would change because we\u2019re still buying homes in the 150, even $80,000 range in parts of Texas where there\u2019s job growth. So there\u2019s always ways to work through an economy like this, but at the end of the day, people who are in short-term loans pay attention. People who have overpaid for properties hopefully are locked into a rate that will still make it okay over time, but the value might go down. That doesn\u2019t mean your cashflow will go down. So maybe just if you\u2019re locked into a low rate for 30 years, don\u2019t worry so much even when you see you might have lost some money. Just keep holding because eventually it comes back, but there\u2019s going to be some bubbles that get popped.<\/p>\n
Yeah. I think you can\u2019t increase the cost of money by 40 to 50 percent and not expect for things to deflate down. Stock market, crypto, housing is also coming down and deflating down. It\u2019s just too expensive on the monthly payment. The quicker they get down to a more stable market, I\u2019m a pro rip the rates up. Let\u2019s get to where we need to get to to start working off like even what Jamil just said was 100% right. There\u2019s an overreaction right now and there\u2019s more deals in the market, and then once they get to where they need to get to, we can actually level the plane field back out and just buy like we normally buy, which is, \u201cHere\u2019s the math on the deal, execute the right plan, stabilize it out whether you keep it or dispo it out.\u201d
Everyone should expect, or at least I\u2019m expecting a retraction and values because you just cannot increase the money by that much in a short amount of time and not have an overreaction. With every action is a reaction. We pumped in too much money, it went flying through the roof, now we\u2019re pulling the money back the other way, it\u2019s going to come down the other way, and that is okay. It\u2019s just leveling it out.<\/p>\n
What retraction do you foresee in prices?<\/p>\n
We\u2019ve seen about in the Pacific Northwest, we\u2019ve seen about a 25 to 28 percent drop off peak pricing. What we saw in February, March and April is we saw an appreciation rate that was absurd. It was hitting 19 to 24 percent, which is just nuts. So we\u2019re seeing it back down this other way, but we\u2019re still sitting four to five percent over the median home price growth from last year. It\u2019s just off that peak, peak number. If you bought a short-term deal doing February, March, April, May, it\u2019s going to hurt a little bit and sting because those are the fly that have just been deflated down. I don\u2019t really see this as a crash, I just see that we\u2019re deflating things.
So it\u2019s totally different than 2008, which was like a brick wall market free fall down. This is like a slow, we\u2019re just letting the air out, and as the air gets loosened up, everything will level out, but we\u2019ve seen about 25 to 30 percent off peak pretty quickly.<\/p>\n
Okay. That\u2019s interesting, and that aligns with something that I was speaking to a local agent in the front range area in Colorado and she said, \u201cYes, we are seeing prices going down, but if you look at the trajectory from 2021 up in December, if you drew a straight line and skip the huge bump from the spring, you\u2019d see the same steady growth up into the right, but if you look at with the spring, you\u2019ve got this huge hump here and then it\u2019s continuing to go.\u201d
So it\u2019s like you said, it\u2019s off the top of the peak, but it isn\u2019t prices falling. It definitely is not 2008 level crisis thing. I\u2019m wondering, Jamil and Kathy, if that\u2019s the same price decrease, I\u2019m doing that in air quotes, that you\u2019re seeing, a deflation as opposed to a free for all drop.<\/p>\n
Absolutely. From what we\u2019re seeing, especially from our investor activity because I primarily wholesale, and that means that I\u2019m betting on people, betting on the market, right? The people that I\u2019m transacting with on a day to day basis, these folks are looking at making projections as to what they\u2019re value or what the property that they\u2019re buying right now after they fix it is going to be worth in three or four months. So we\u2019re all putting on our little fortune teller hat when we\u2019re trying to make these decisions.
What I\u2019ve been seeing right now in our primary markets, so we\u2019re talking Phoenix, Tampa, Orlando, these are spots where we heavily transact, we\u2019re seeing about a 10 to 15% drop right now, but again, I don\u2019t feel like it\u2019s bottomed yet. So that\u2019s what we\u2019re experiencing right now, some markets fairing better than others, but I\u2019ve also heard in some markets as well that the 25, 30 percent drops have been seen.<\/p>\n
Yeah, and there is no, as you know, housing market. Every single market is behaving differently, and some markets were just really popular. There was job growth or there was big money moving to those areas, so they saw gains that they hadn\u2019t ever seen, again, Boise, Austin, Nashville. Nashville was not, when I started investing, was never a growth market. Austin was once the tech industry moved there. Seattle, of course, same thing, when the tech industry blossomed there became a growth market, but these are areas where there has been tremendous job growth, tremendous migration, and the people there were priced out, for sure.
People moving in, it\u2019s still cheap, it still is. For people moving into those areas, it\u2019s a deal, it\u2019s a bargain, but how much longer is that going to be the case? So definitely, the markets that went up unsustainable are going to feel it the most because no market, no matter how much growth you have, can sustain a 40% growth in rents or in home prices.
One of the things that is concerning is that shelter inflation is one of the big metrics that the fed or that the government looks at when looking at inflation numbers, energy and food, certainly in housing, and it\u2019s a lot, the rental costs. Will those rents drop? That is a bigger issue, right? We\u2019re seeing home prices drop, which is, again, good for buyers, not so good for people who own that asset, but in rents, will we see that same correction? If we don\u2019t, then the fed is just going to keep going at it because if rents are staying high and that keeps inflation high and they think the only way to solve that is to kill landlords, you know what I mean, what are they going to do to get where they want?
At this point, it looks like Jerome Powell is in battle, a battle against inflation that, again, happened because of too much stimulus of the economy. The way you undo that mistake is you pull that money back out, and the way you pull money back out of an economy is through bankruptcy, it\u2019s through job losses, it\u2019s through stock market crashes. That\u2019s how you get it back out, and that\u2019s just a horrible way to run an economy, but it\u2019s what they\u2019re doing and it\u2019s what they plan to do and he\u2019s making no qualms about it like, \u201cThis is where we\u2019re going.\u201d<\/p>\n
He referenced that at the end of his speech. He said, \u201cThe inflation around housing would take some time to work its way through but it will get there.\u201d When you hear that line, that means, yes, I think Kathy\u2019s 100% right, they\u2019re going to try to deflate rents, deflate values, and create affordable housing. That is something all investors should be paying attention to right now as you\u2019re doing your projections.<\/p>\n
On top of that, make it an opportunity. The world doesn\u2019t really know this yet. So if you\u2019re in a property that it\u2019s not your best property, maybe just put it on the market. You might take a loss, but maybe it\u2019s less of a loss than later.<\/p>\n
I just don\u2019t see how we\u2019re going to get to a spot where rents come down because even if, just say for instance, you\u2019re sitting on the sidelines right now and you\u2019re like, \u201cWell, the rates are too high. I don\u2019t want to buy,\u201d so you rent, there\u2019s a lot of pressure right now for the rental market. I don\u2019t know if it\u2019s the same everywhere, but just what you can see here in Phoenix where you put a house up for rent and there\u2019s multiple people trying to get that property and the rents are stupid high. So I still don\u2019t understand where that money is coming from. It\u2019s all of the pressure, all of the things that are happening, but there are lineups right now for people to rent houses because they don\u2019t want to make the decision to buy.<\/p>\n
Yeah. Buyers have to go somewhere. I\u2019ve got several questions. Is now a good time to buy real estate? Jamil said a few minutes ago there\u2019s a small window to come where rate prices are going to drop even though rates are high. Cash investors, investors are heavy with cash, they\u2019re coming in to snap up these properties at lower prices. Do you see rates coming back down in the future so that buyers who don\u2019t have cash can eventually refinance out of these crazy high rates? I say crazy high rates, I think we should acknowledge that 7%, traditionally, historically is not a crazy high rate. That\u2019s a historical average for a mortgage. The problem is prices have gone up so much that now 7% makes that mortgage payment just 99% of your income.<\/p>\n
Yeah, I mean, it just comes down to what your intention is. If you are on the hunt for cashflow, there\u2019s opportunity out there even though rates are still high. It\u2019s interesting because the non-conventional loans are actually lower than conventional right now. You can go to a private lender, it\u2019s amazing how things have flip-flopped, but if you\u2019re able to find a property right now that cashflows, so you\u2019re able to get a good price at it and you\u2019re paying maybe a little bit more for that debt but it still cashflows, great. Granted, some areas might possibly see rent go down, but that\u2019s questionable. It depends on supply. That is definitely a supply issue. If there\u2019s lots of jobs and people need a place to live, they might not buy but they\u2019re going to rent.
So if you\u2019re buying your own primary residence and it\u2019s cheaper than rent or there\u2019s not a lot of other options, you\u2019re still getting all the benefits of real estate. You\u2019re locked in to a payment, you\u2019re paying down your loan, over time you\u2019re getting tax benefits. So there\u2019s always good reasons to buy real estate. Same with investing. If you\u2019re buying for cashflow and you\u2019re able to lock in a rate, and you have somebody else paying that loan down for you, and you\u2019re getting tax benefits and asset protection, and over time, generally, if inflation is an issue, then debt is a good thing. Debt becomes less big in an inflationary economy.
So all of the fundamentals are still there. If your strategy from five years ago or 10 years ago is a strategy that\u2019s worked for you, keep using it, but just know that some of the things have changed where you\u2019re maybe buying it cheaper, but in trade you\u2019re getting a higher interest rate, but maybe the cash flow is the same.<\/p>\n
I\u2019d say it\u2019s a different type of BRRRR property now or process. 24 months ago, how you buy a BRRRR property is you\u2019re buying something with a heavy value at. You\u2019re buying it at a discount. You\u2019re putting in a rehab. Sometimes you\u2019re stabilizing that, at least in our expensive market, for 12 to 18 months. We\u2019re not getting any cashflow at that point and we\u2019re having to do all this work. The reason we\u2019re doing that is to get an equity position and a high cashflow position at the end of the day because we bought it cheaper.
Now, it\u2019s actually a different type of BRRRR is how I\u2019m looking at everything. I\u2019m running my metrics on a deal and looking at their current rate, if it\u2019s at 8%, and if I\u2019m getting a four to five percent cash-on-cash return right now, I do am projecting that rates will be around 5% in about 24 months. So now, I\u2019m actually just looking at a deals, \u201cWhat is this going to look like in 24 months? In 24 months, my 4% return. I can buy something that\u2019s actually in a lot better condition. Now, I don\u2019t have to do all the hard work, I just have to hang onto it at a 4% return. Once the rates fall down to five, it actually goes to a 12 to 14 percent cash-on=cash return, and in addition to, because everyone\u2019s a little bit nervous right now, I can get that massive equity position right now.\u201d
So it\u2019s a different BRRRR process. It\u2019s the same type of process. You\u2019re buying something, you\u2019re waiting on the cashflow to get the big upside at the end. It\u2019s actually an easier way to do it now. I don\u2019t have to go tear a building to shreds to get the margin. I just have to hang in there and stomach some okay cashflow for two years. So as long as you look at things and just run the math, you can position, change your process, and it\u2019s the same end result.<\/p>\n
I just want to point out because, James, the thing I was saying is happening, these cash investors coming in, just literally coming in and taking huge, huge discounts on properties. It\u2019s exactly what he just said he\u2019s doing. Guys, if you\u2019re sitting there listening right now and you\u2019re like, \u201cI don\u2019t know if now\u2019s the time,\u201d follow the leader of the pack. Follow the people who are making the market. Exactly. He has the market timed out for the next 24 months. He knows how this plays out.
So you should not be sitting on the sidelines and letting yourself miss a massive opportunity to come in and get a property at a significant discount. Look, I\u2019m not a fan of an adjustable rate mortgage, and please don\u2019t make this sound like I\u2019m saying that, but if there was ever a moment that I thought that it would be less of a risky situation to get into an adjustable rate mortgage, it would be right now. Go in. Get a property significantly discounted. Get an adjustable rate mortgage. Lock in at a lower rate for the next five years if they give them to you that way, and then refi out of that thing in five years when the rates come back down, but you will get a huge benefit by taking advantage of the market situation right now. Do you like froth? I like froth in my coffee. Go get the froth. Now\u2019s the time.<\/p>\n
Yeah. People shouldn\u2019t be so afraid of ARMs today because the lenders have learned there\u2019s much tighter regulation, and you actually have to qualify for that adjustment if rates go up. So they\u2019re really qualifying ARM borrowers. So they want to make sure you can handle an increase in payment in five years. That was not the case 10 years ago. In fact, they were giving out ARMs. We were. I was in the mortgage industry at that time, and we were literally, not my idea, someone else\u2019s in the big offices in New York was saying, \u201cNah, let\u2019s just qualify people on a teaser rate, so just a fourth of what their actual payment will be and see how that works out,\u201d which didn\u2019t work out.
Today, it\u2019s the opposite, \u201cNo, we\u2019re going to qualify you on the adjustable rate of what it could be.\u201d So I\u2019m not worried about ARMs. I think they\u2019re a wonderful, wonderful solution for today, and that is exactly why we\u2019re doing a single-family rental fund right now, which some people might think is crazy, but it\u2019s like people can put in a $50,000 investment in that and we\u2019re going in and paying cash. Again, that\u2019s why I said we\u2019re buying stuff in one of the fastest growing parts of Dallas where all these chip manufacturers are moving because the Biden administration is subsidizing that, 52 billion dollars, and they\u2019re moving to this North Texas area. Yet, we\u2019re able to negotiate with all cash offers at, like I said, $60,000, $80,000 for a property. Put about 50, 60 thousand into it to make it really nice for those tech employees, I don\u2019t see how a huge recession would affect that. So there\u2019s still opportunity. There\u2019s tons of opportunity out there.<\/p>\n
Take notes, guys.<\/p>\n
I\u2019m really glad you mentioned ARMs because that\u2019s one of my questions up here. Traditionally, the ARM is not a \u201cgood product\u201d in air quotes because it\u2019s going to go up. It always goes up. In the past few years, nobody was getting an ARM because rates were so ridiculously low and now, even now, ARMs are higher than regular rates were, but they\u2019re still lower than the fixed rate loan.
I just want to point out that if you\u2019re considering getting a loan at all, talk to your lender. Ask questions. Your lender cannot read your mind. They don\u2019t know what you\u2019re thinking. Talk to them about ARMs. ARMs are not just three year loans. The ARM, the adjustable rate, it\u2019s a fixed rate for a certain period of time and then it can adjust. It can adjust, what, once every year, once every two years? It can start adjusting, but there\u2019s a fixed period of time. So a three-year ARM means for the first three years it can\u2019t go up. There\u2019s five-year ARMs, seven-year ARMs, 10-year ARMs.
Do you think rates are going to stay like this for the next 10 years? I don\u2019t. I don\u2019t have a crystal ball. Past performance is not indicative of future gains, but I think a 10-year ARM is still better than a 30-year mortgage, and people move on average every five to seven years. So if you\u2019re going to be buying your primary residence and your options are, and I don\u2019t have quotes on ARM rates, but I think a 30-year fixed right now is 6.5% for an owner occupant. So let\u2019s go with a 10-year ARM is 5.75 or even 6%. That\u2019s less. So that means you\u2019re paying less, so that\u2019s better.<\/p>\n
The thing is capital is just a cost of the deal, and I think investors fall into this, and I can do it too. You fall into this rate trap where you\u2019re like, \u201cWell, the deal doesn\u2019t make sense with this rate,\u201d but each capital has a purpose. When I\u2019m borrowing money at 10 to 12 percent on hard money for a one to two-year period, I\u2019m not just fixated on this. That\u2019s just the product that I had to factor as a cost of the deal. Right now, when you\u2019re looking at buying a rental and you\u2019re using an ARM product, that\u2019s what you\u2019re doing to get you by if you do think that rates will fall in two years. I do believe that rates will be back in the fives in about 24 months.
Having an ARM product can be risky, but not if I\u2019m getting it for the intention of bridging me to where I can get my high cashflow. So whatever the loan product is, talk to your lenders, like you said, and then just factor it into how you structure your deal and the cost of the deal, and then at that point, it\u2019s just absorbed in the math.<\/p>\n
I do want to point out that Kathy, James and Jamil are more investment-minded than owner\/occupant-minded, and they\u2019re in it for the long haul. They\u2019re holding period is forever to quote Warren Buffett, my favorite. So if you are thinking about buying a house that you\u2019re going to live in for a couple of years, this is going to be advice that may not apply to you. If the rates are still going to be really high in two years and you\u2019re not going to have an opportunity to pull your money out or to refinance and then you\u2019re going to sell and maybe it\u2019s still a down market in two years, maybe it\u2019s not, this is going to be different advice. This is more for people who are investing.
A few minutes ago, James said, \u201cRun the math.\u201d I think that now even more than ever before when it was already really important, knowing how to run your numbers is so important and really running them carefully is key, but we\u2019re still, like James said, in historically low inventory market, and that is not going to change anytime soon. You can\u2019t just build four million houses overnight. You can\u2019t just get \u2026 I mean, have you ever tried to get anything approved to the permit office? Even the most generous of permit offices take forever. What does it take? I\u2019ve never built a whole neighborhood from scratch, but it\u2019s a three or four-year process. It\u2019s not just like, \u201cHey, I want to build houses in that vacant land over there,\u201d and then tomorrow you\u2019re pouring cement. It\u2019s a really long process.
So we are going to have historically low inventory probably for a decade to come. So when this little blip that we\u2019re going through right now changes, if you\u2019re looking to buy a house that you\u2019re going to hold onto for a really long time, we could be in a situation where now is an awesome time to buy, and if you want to buy a long one, I have a house for sale.<\/p>\n
Well, what happens in 24 months, guys, when we\u2019ve got depressed building now, we\u2019re already short four million houses? What happens when rates stabilize? Where does the market go then when so many builders are pausing right now and inventory is already short? What\u2019s the effect<\/p>\n
The building fairy is going to wave her magic wand and say, \u201cPoof! There\u2019s four million houses.\u201d<\/p>\n
I think I actually have changed my mind about this. I have changed my mind about inventory just recently because at a time when the government is, basically, or the fed is pulling the plug on economy and people are losing money in the stock market, they don\u2019t have that extra money, when you have extra money, you buy things you don\u2019t need, right? When you don\u2019t have it, you don\u2019t. So there are people who got short-term rentals that maybe they\u2019re like, \u201cOh, this isn\u2019t going to work,\u201d or they got rental properties and it\u2019s not working out the way they thought.
You also have baby boomers getting a lot older and dying, the oldest ones, and then you\u2019ve also got the millennial population that over the next three years or so is a really large generation, but then after them, it starts to wane. So I don\u2019t know that I\u2019m in the camp anymore that this inventory problem\u2019s going to last forever. I actually think it\u2019s going to normalize in a year or two, if not sooner. So that\u2019s something to pay attention to as the population, as the demographic shift a little bit.<\/p>\n
Interesting. I\u2019d like to talk to you about that further and expand on that a little bit because it\u2019s a very contrarian perspective, and at the same time, I\u2019m curious as to what data, and I know you make decisions very thoughtfully, so I\u2019m interested as to what made you make the shift.<\/p>\n
Oh, I just interviewed John Burns on the Real Wealth Show and he sent me all his slides and he studies demographics, and he\u2019s just got an enormous amount of data. We\u2019ve known for a long time that the largest part of the millennial generation is now. From 2020 to 2024, this was going to be the biggest buying pool and we weren\u2019t prepared for them, but after that, the Gen Z population is smaller. So when you look at the population growth, you\u2019ll see this bump, but then it\u2019s a bump. So what\u2019s behind them is less people, less buyers at a time when you\u2019ve got baby boomers aging.
So it is a blip in time, for sure, where we weren\u2019t prepared and we didn\u2019t have the inventory. We shut down the economy. We stopped producing, and yet we had all these families forming. So if we had just planned things a little better and not stimulated the economy at a time when there wasn\u2019t enough supply and huge demand, then we wouldn\u2019t be in the situation. When I say we, I\u2019m not talking about me, I\u2019m talking about the fed. I know that\u2019s depressing, you guys, but I\u2019m a firm believer that no matter where, there\u2019s always opportunity in any city.<\/p>\n
I think inventory is honestly going to go into overcorrection mode for a minute because that\u2019s \u2026 Real estate, when it goes up, it comes down, and then it levels out. The thing about the American public, the American consumers is they\u2019re very reactionary. We\u2019re seeing it now. We are getting really good buys right now because people dump and they\u2019re just reactionary in general. So as you see those things, people get FOMO, they want to maximize their equity, they\u2019re seeing other things like their stock accounts getting shrunk down to. People feel like they\u2019re losing wealth right now, and when they feel like they\u2019re losing wealth, they make very bad decisions and very quick decisions.
So we may see this surge of housing come to market, but then it will work its way through and it\u2019s all okay. You just don\u2019t want to be the reactionary person giving away your asset or selling off your asset too quick or just trying to buy too quick as well, but it\u2019s to be expected, when rates increase, when we go into recession, things will slow down, inventory will increase and will work its way through the system.<\/p>\n
I think that\u2019s interesting your comment about the surge of inventory. During the spring, I\u2019m a real estate agent who primarily represents buyers, and I would look in my MLS, my local MLS, and houses came on the market on Thursday, showings were Friday, Saturday, Sunday, offers were due Sunday or Monday, and they were under contract on Tuesday. So on Wednesday, there was nothing on the market. I\u2019m talking maybe 10 properties. In my city of 90,000 people, there were 10 houses available up to $700,000, and this was every single week for about three or four months.
Now, I can go in and search, and there\u2019s 75 or 80 houses, which is a whole lot more, but still historically low. There should be 100 or 200 houses on the market to give you a really good mix of houses to buy and to look at, and there\u2019s still low inventory. I think there\u2019s so many people who are not in real estate who don\u2019t pay attention to this. Not everybody is as big a geek as we are about real estate, guys. So they don\u2019t know that 70 houses is low. They think, \u201cWow, there\u2019s seven times more houses now than there were in the spring, so we are back to normal.\u201d We\u2019re not even close.
So I just think that this is very interesting that we\u2019re having this inventory conversation. I think that Kathy\u2019s incredibly intelligent and she just spoke with somebody who is far smarter than I am, but I just hate to argue with you. I don\u2019t see a change in the inventory and I hope I\u2019m wrong.<\/p>\n
I think the boom is going to go for a while. Like I said, it was 2020 to 2024, before all of this. I mean, that was predicted that this millennial population would be at home buying age and household formation age. So I don\u2019t think it\u2019s going to change today, but just the 10-year outline in the future, maybe we\u2019ll see some shifting then. Unless, again, we depend on government policy, unless there\u2019s a change to immigration because the birth rate is slowing down too, so if we become more open to immigration, that could change it.<\/p>\n
Okay. I think this has been a fantastic discussion. I really thank you all so much for your time today. Let\u2019s remind everybody where you guys are normally found every single week.<\/p>\n
I\u2019m at realwealth.com and I\u2019ve got the Real Wealth Show, and then my syndication company is growdevelopments.com.<\/p>\n
You can find me on my YouTube, @JamilDamji, also on Instagram, @JDamji. Check me out Saturdays at 10:00 AM on A&E and watch us flip houses, make mistakes, and try to make some money.<\/p>\n
First and foremost, check us out on the On the Market podcast. This is where we all get a hangout. It\u2019s by far one of the highlights of my week. I mean, just amazing people on the show. Then for more construction tips, investor tips, check me out on Instagram, JDainFlips, and on YouTube, @ProjectRE.<\/p>\n
Okay. James, Jamil, Kathy, thank you so much for your time today. This has been a lot of fun. Don\u2019t miss checking out James, Kathy, and Jamil, along with Henry Washington and Dave Meyer on the On the Market podcast, which is available every place you get your podcast.
Holy cats! That was one of my favorite episodes. I love talking about real estate, and Kathy, Jamil, and James are so informed and so smart. Some of my key takeaways from this episode are, number one, investing can be scary and there is always risk involved in investing, and the best way to mitigate that risk is to be informed. So look at what\u2019s going on in the market. Interest rates are the big story. Listen to what the fed is saying. Like Kathy said, she listens to what the fed is saying. She listens, she watches the videos, she reads the articles.
All three of our guests today listen to the videos and read the articles and they\u2019re really doing their research. It isn\u2019t just, \u201cHey, I bought a house. Now I\u2019m an investor.\u201d You really need to stay informed if you want to continue to grow as an investor, but there is, like James said, there is success down the horizon. There is a light at the end of the tunnel, and he\u2019s predicting about 24 months we\u2019re going to see a difference in rates, we\u2019re going to see prices starting to go up again. So now is a really great time to be buying a house, so long as you can afford the payments currently.
Like Jamil said, the market, he\u2019s seeing price corrections in his market. I\u2019m seeing price corrections in my market, and that\u2019s not super awesome when you\u2019re the seller. It\u2019s a good time to be a buyer right now. It might become an even better time to be a buyer in the next few months. The market is going to be down for a short period of time. So there is opportunity to buy even with these current higher interest rates.
Inventory is going to continue to be down for years. We are not going to be able to correct our low inventory, historically low inventory situation in just a few months, in just a few years. I don\u2019t see us getting back to correct inventory levels for a decade, and even with Kathy\u2019s very well-reasoned comments about the baby boomers was the largest generation that we\u2019ve had and they are getting older, they are starting to pass on. Even with them passing on, we\u2019re still four million housing units short.
That\u2019s the number that I keep hearing from all of my people in the data analysis department of Bigger Pockets, Dave Meyer, who happens to be the host of On the Market, which is where all of my panelists came from today. I keep hearing that we\u2019re four million housing unit short, and even if we\u2019re three million housing unit shorts or five million housing unit short, that\u2019s not overcomable in just a few months. That is years, even decades down the road that we will finally be able to figure that out if we start taking steps now, but like they said, builders are even starting to pull back. So I really do think that inventory is going to be a factor for a while, and there are outside factors affecting our current inflationary period that are outside of our housing market control that I think will come into line very shortly. I think we\u2019re looking at an interesting window right now of opportunity for those who can afford to buy.
One last takeaway, my biggest takeaway, if you are at all interested in investing in real estate, you need to add On the Market to your podcast rotation. It\u2019s hosted every week by Dave Meyer, who I think walks on water. He is incredibly smart data analyst guy who\u2019s been with Bigger Pockets for I think six years. He has this amazing ability, just like Kathy, Jamil, and James, he has this amazing ability to take complex real estate and economic ideas and theories and translate them into understandable English. So that is an excellent podcast to check out every week wherever you your podcasts.
From the Bigger Pockets Money podcast, this is Mindy Jensen signing off.<\/p>\n