Real Estate

New Builds, Knowing Your Niche, and the 2023 Housing Boom!?


This housing market is a tough nut to crack. One week, rates are coming back down, buyers are gearing up to re-enter the real estate market, and investors are feeling optimistic. Then, the following week, inflation spikes, mortgage rates jump, and affordability plummets back down to a depressing level. Because of this topsy-turvy economy we find ourselves in, we get a slew of questions on almost every episode asking us to predict what will happen next. And today, the entire On the Market panel has flown out to Denver to get this live debate going.

That’s right. Dave Meyer is joined by Henry Washington, James Dainard, Jamil Damji, and Kathy Fettke to pop some bottles, rock some chains (thank you, James), and give you up-to-date info on the housing market. We’ve taken a few of our favorite questions from the comment section and got the panel’s opinions on some of today’s most pressing topics. First, we’ll talk about why new homes are cheaper than existing homes in many markets and whether or not this is a red flag for the housing market.

Then, we enter lender territory and discuss which markets are seeing new down payment requirements and which allow you to still score deals at ten to fifteen percent down. We’ll also revisit the commercial real estate crash and what could happen once these massive balloon payments come due. But don’t worry, there’s still some optimism afoot, as a couple of our expert guests predict a housing market boom could be coming in only a matter of months. So, don’t get caught in the rocky waves of this real estate market; tune in to get the scoop on everything happening on the market.

Dave:
All right. Welcome everyone to this episode, very special episode of On The Market. We are back in person. I think this is only the second time we’ve ever done this, after our first episode. So we are celebrating for our Happy Hour episode where we’re going to drink fancy champagne courtesy of Jamil. Thank you.

Jamil:
You’re welcome. It would’ve been fancier but I bought it, not James.

Dave:
I don’t even know what fancier means, but James would figure it out. But thank you all. We wanted to thank you all, first of all for listening to this show. It’s been a remarkably successful 82 or 83 episodes. We have millions of downloads and hundreds of reviews, and so thank you all. So we’re going to give a toast to all of our wonderful listeners here. And I also want to point out these fancy chains that we have on.

Jamil:
Amazing.

Kathy:
Oh my god.

Henry:
It’s funny.

Dave:
Oh my God.

Henry:
So instead of hitting the equipment, you hit the guy that said you’ll have to pay me for the equipment.

Dave:
I’m sorry. I’m so sorry.

Speaker 6:
Are you all right?

Dave:
We just killed someone. This is our celebration of getting back together. While we’re pouring this champagne, I really wanted to ask everyone listening to this for a favor. If you haven’t yet left us a review, we would really appreciate it. It really helps with our rankings and everything that we do here On The Market. And in honor of that, I’m going to read a couple of these positive comments, and then a few of the mean comments just to warm it up.

Kathy:
Oh boy, I’m going to do it, fill this glass up then.

Dave:
Do you guys read the comments on your YouTube videos or anything?

Jamil:
I obsessively read them. And in fact, it’s because of the comments that I make changes to my appearance quite often.

Dave:
Well, I’m going to ask you about that in just one second. But I’ll read a positive one first. We just got one that said they’re big fans since the beginning, been listening since the first episode premiere. Oh, thank you.

Jamil:
Day one. Day one.

Dave:
… last time. And I can easily say it’s my favorite real estate investing podcast. The show always takes your reasonable and levelheaded, but optimistic view on real estate. Plus, the hosts all have real personalities, a feature that many real estate investing shows severely lack. Big thanks to all the hosts for providing useful entertainment. Awesome. I feel like that’s a good…

Henry:
That’s what we wanted.

Kathy:
Cheers to that.

Dave:
Thanks, mom.

Kathy:
Cheers.

Henry:
She typed exactly what you told her to.

Dave:
Thanks mom. It comes through in the question. Jamil, people have a problem with your beard. They really do. What is it about your Beard?

Jamil:
Well, there’s a few things. So one of the things was that my bar Barber never told me that you shouldn’t grow your beard on your neck. So I guess I had neck beard and that upset hundreds of people. So, sorry. I’ve shaved it now my… I no longer have neck beard. And hopefully that solves the problem. If you have any more issues with my beard, leave me alone.

Dave:
Yeah. We had a comment and someone said, “Jamil, please do something about your beard.” To which your friend Pace’s wife Laura, responded, “I love Jamil’s beard,” to defend you. And then other people came to your defense saying, “Never touch your face covering Jamil.” So…

Jamil:
My face covering.

Henry:
Laura will fight for you in the comments man.

Jamil:
She’ll get fisticuffs. Don’t mess with me. Listen to the people that is interested in my facial hairs. I don’t get it. Why do you care? Why do you care? Why do you care about my beard?

Henry:
Zero impact on your life.

Dave:
My favorite one about me was that I’m a mediocre looking, middle-aged bald man. I don’t think I was balding, but now I’m looking in the mirror every day because one random person on YouTube is like-

Jamil:
Are you sure they didn’t think that you’re David Green?

Dave:
No. It was me by myself. No. It was a video of me by myself. People always make these comments. But anyway, hopefully you all enjoy this, but we really do… Just to show you, we read the reviews because we want your feedback. We really want to make the show better and better. So we would love your reviews either on YouTube, Apple, or Spotify. It means a lot to us. And guys, one more cheers. Congratulations on the show.

Henry:
Cheers.

Dave:
And then we’ll move into the content or where we’re going to answer some listener questions.

Jamil:
Cheers, guys.

Dave:
Cheers.

Henry:
Which one is which?

Jamil:
Do you see mediocrity anywhere? I see excellence.

Dave:
Look what we got. We should’ve had David on the show. We’re all here hanging out. All right. So to start our Happy Hour, we’re going to just ask a fun question to warm you guys up before you start asking the hard hitting question. So here is the first question. If you had to pick one other cast member to do a deal with, who would it be and which type of deal would you do?

Jamil:
Can I?

Dave:
Yeah.

Jamil:
I want to do deals with everybody, but I think just logically it would be James, because it would mean that I’m rich.

Dave:
It’s just rich by association. You just partner with him. You don’t even have to do a deal. You’re just rich.

Jamil:
Yeah. If I’m in a deal with James Dana, that makes me rich.

Dave:
Wow. Congratulations. Maybe we should all do it. James is going to be like, “I would choose none of you.”

Henry:
You guys are terrible. It’s funny because I would also choose James, so… Logically I would, because we do a very similar business, and I think I’ve already learned a ton from him. So being able to do a deal and learn firsthand the systems and practices that he puts into place on his deals would be super valuable to me. But also, he’s in a different niche. I don’t do luxury flips, but I want to. And so my luxury flip to him is an apartment in his market. So I would love to do a multi-million dollar flip with James Dana and just be a fly on the wall and then get 50% of lots of money at the end.

Jamil:
Let’s do it.

Dave:
I think we can make a YouTube of series out of that.

Henry:
That sounds great. I also didn’t mention that I don’t want to put any of my own money into it.

Jamil:
That’s the best kind of partner.

Henry:
Because if you don’t need me. I totally need you, but want half the profits.

Dave:
All right, Kathy.

Kathy:
Well, guys, I was going to say James too, but that was-

Dave:
I bought them all with James.

Kathy:
I want… What is it? It’s not triple digit. It would be a triple, triple, triple digit flip. That would be fun. That would be fun to do that.

Jamil:
Every time James sees the triple digit flip, he is like peasants.

Dave:
Who has the time for that? It’s not even worth it.

Jamil:
Who has the time to make a hundred grand?

Kathy:
But since you were already taken so many times, I’m going to say you, let’s do a deal in Amsterdam. Let’s go do that.

Dave:
Houseboat. We can do something fun. All right, great. I love that idea.

James:
Okay. I like it.

Dave:
But I can’t play favorites, so I would say all of you, 20 20, 20, 20, 20%. There we go.

James:
Not a good way to spread the money.

Dave:
What?

James:
Spread the money.

Dave:
Yeah, exactly. Yeah. We’d all do it together. All right. Let’s get into the actual audience questions we posted on Instagram in the bigger pockets forums to ask questions. Well, it’s just going to be a free for all. Answer these as you see fit. So our first question comes from Jack Satan, hopefully I’m pronouncing that right. He says, one thing I’m fascinated right now is by new construction being cheaper than existing homes. Is this an opportunity for deals or is it a red flag that existing home supply could come down? And what does this all mean? What do you guys think about this?

Henry:
Yeah, so my general thought would be is this a first deal for that investor? If it’s your very first deal, I don’t love the concept of new construction as a first deal. There is a lot to learn with new construction, and there’s so many avenues. Are you buying a lot that’s already zoned to do what you need to do? Have you done the due diligence on the front side before you buy that loan? Can you get the permits and the approvals to do all those things? I’m doing my first new development project right now, and there is so much that has happened between when I bought it and now, and I haven’t even broke ground yet. There was tons of hoops, tons of things that we had to get approvals for. It’s cost a lot of money. And I haven’t seen not one, two by four go up yet.
Not one piece of concrete getting poured yet. And so it can take you a lot longer to get to your payday. And there’s just… if you’ve never done it, if you don’t have the network of people who are doing that, there’s a lot that can surprise you and even kill your deal. Now, if you’re surrounded by people who all they do is new construction and they are able to guide you through that process, then yeah, it’s probably not a bad idea. But if you don’t have that infrastructure set up, if it’s not something you’ve ever done before, I think buying something existing, you can find existing houses that are going to net you a decent profit. You just have to work hard to find them.

Jamil:
Dave, can I just clarify? Is the question the idea that he’s saying that new construction in a similar neighborhood is cheaper than an existing house? Is that the-

Dave:
It’s happening in some places.

Jamil:
Yeah. So he’s wondering how is this possible, right? How are we getting new construction at a lower price than existing? Well, I think that builders right now have discounted their inventory just to keep things moving, right? It’s like there could be an opportunity there for there to be a little bit of equity. But again, like Henry said, I think if you’re dealing with new construction, there’s no chance to really force appreciation, right? And if you are buying new construction in hopes that there’s some value there, it’s speculative. So my opinion is I think that… I don’t know that necessarily that there’s a deal here, but if this person is just looking at possible retail purchase and they want to move in and live in the house, I think it’s good value. I think it’s good value. And if there’s an opportunity right now and you see a builder that’s giving a discount because they’re just trying to keep cash flow and keep inventory moving…

Kathy:
I think you know what I would say. Rich and I got our start in new construction, but not… we weren’t doing the building. We were just buying a new home from a builder who already knew how to do it. We didn’t have to do anything but pick the house. And when you’re investing out of state and you’re new at it, that leaves a lot of issues that you’re not going to have to deal with, old stuff and fixing things from afar. And we were able at that time to negotiate discounts because there weren’t a lot of people yet clamoring for those homes.
So we weren’t getting a lot of built in equity, but we were getting it where it cash flowed in an area where new construction was needed because there was growth in that area. And over a few years, the property tripled in value. So if new construction is happening in the area because the need is there and the demand is there and there’s jobs coming and they can’t keep up with all of that, then absolutely go for it. It’s a long play. You’re not making money at the front. But if you’re investing for the long term and you want to have a bunch of paid off houses in the future, get a new one.

James:
And it comes down to the opportunity too, because a lot of times right now… For me, it always comes down to what is the replacement cost? And if I’m buying… Right now, building costs for 3.50 a foot in Seattle. If you’re buying something around 400 a foot, which some of the stuff has came down to that pricing, you’re paying basically what the builder cost to build it. And so it’s a lot safer thing to buy at that point or that’s how I bought in 2008, was, am I buying below replacement cost? And if I am, it’s a win, even if the metrics aren’t going together.
But the reason we’re seeing pricing come down is because these builders with heavy sites for a long time. The negative part about investing in new construction is it takes a long time. There’s a lot of hiccups, there’s a lot of hair, there’s a lot of unknowns that can get stretched out. But the reason being is their performance were still way lower when they bought these things. And now these builders were having really cheap access to money. We are paying five and a half to 6% on our development loans, now they’re 10. And so all that money has gotten really expensive. So these builders are just trying to shred down, get below the debt cost and that they still have margins, so they’re dropping them down. And also you just have unrealistic sellers in the remodel. The…

Jamil:
It’s existing house.

Kathy:
Existing house, yeah.

Jamil:
They just think… Because it’s an emotional sale versus a business sale. And that’s why we’re saying-

Dave:
You have to think about the business model, right? Let’s just say a homeowner, they’re going to hold out for the best possible price. A builder cares about liquidity, they need to get their money out, and so they’re willing to drop. And I saw that even they’re dropping prices eight, 10%, their margins are still as good as they were pre-pandemic on a national average. So it’s not like all of them are taking a bath. Some of them certainly are. But it seems like a lot of them have some margin to give back and still can turn a good profit.

Kathy:
Well, and their lender agreements require that they sell a certain amount every month. They have to sell. And I know this personally. Your loan is… you got to pay the payment. And they do expect a sale to be with that. The bank does. They want to see that you’re moving inventory. So they got to move it. This is a good time to buy new homes, in my opinion.

Dave:
All right. Great. Great conversation. All right. So speaking of lending, the next question is, I saw someone say banks are going to change lending strategy and require more money down in states with declining markets. Is this true? How do you navigate it? And I’m just going to extrapolate this question. Are you seeing different terms just generally from lenders in your businesses?

James:
For sure. Yeah. The lenders are moving. If it’s a local bank or if they’re getting a buy down, if they’re in private wealth. All the terms have been changing quite a bit. I’m not really seeing people drop price on… or they’re asking for more on the down, but I can tell the appraisers are very conservative right now. I just had an appraiser come back on a property mine and they appraise that 2.9 fixed, our performance 4.5, and then the 2.9… And I called him up, I’m like, “So you think that the market’s below 2016?” And he’s like, “Well, no, absolutely not.” I go, “Well, I sold my house, which is a lesser house around the corner for 3.2 in 2016. So what are we doing here?” And it’s because they are all being very conservative. So that’s how they’re getting… It’s almost like you’re… They’re not saying you have to put more money down, but how these appraisers are coming in, you got to bridge it one way or the other. And so that’s where the more money down part is coming from.

Jamil:
I’m seeing the same thing, just higher or lower appraisals. They’re being very conservative on value. And then that just forces you to come in with more money. Either way you look at it’s a lender making sure that they’re insulating themselves from an additional five or 10% cushion, especially on investment deals, they’re… I’m going to deal right now where there’s a hard money lender who is refusing to close on the day of closed right now because there’s a real estate agent who is making more than 3% commission.

Dave:
Yeah. Those days are back.

Jamil:
It’s like, “Really? On day of close right now you’re going to pull that?” It’s happening.

Henry:
I’m not seeing much of a change.

Kathy:
Yeah. Me either.

Henry:
I’m not seeing much of a change.

Kathy:
Because you’re talking conventional, right?

Henry:
Well, I’m talking commercial or small-

Kathy:
Commercial, okay. Wow.

Henry:
… on the local banks. So again, when you talk small local banks, it can literally vary from bank to bank because they have a loan committee to answer to, not government regulations in some cases, right? And so I had one small local bank go and say, “Hey, we’re going to start needing 20% down from you.” But I literally had two conversations with two banks recently. One was willing to do 10% down, one wants 15% down. Both are willing to let me use collateral and existing properties to cover that down payment. But what they want in exchange for the lending is deposits, right? Because these small local banks, they need to loan, they need deposits in order to do that. And so they’re willing to give and take a little bit. So it’s just a matter of what lending type you use and what product it is. Now, that’s not going to work on a conventional loan obviously, but for these small local banks, it’s like what is it that they need? Can you provide them what they need? And then they can adjust the terms somewhat.

Dave:
And what do you mean by deposits? Literally just keeping your accounts there and you’re operating accounts there?

Jamil:
Bribing your banker. I’ll give you money if you give money back.

Henry:
I need deposits in my personal.

Dave:
Yeah. It’s like give me money to lend back to you at an interesting.

Jamil:
If you give me a dollar, I can loan you 10.

Dave:
Oh, wow. How wise of you.

Henry:
They want your business operating accounts, right? And they want you to keep the majority of your deposits with them, or they at least want you to have 10% in the bank based on what you have out.

Jamil:
Yeah. It’s because they’re paying their depositors less than they can get the money from the fed from. And so that’s where they get their lending power. So if you’re bringing money to a bank right now, they will do a lot of things with it.

Henry:
I had banks call me and say, “Hey, I can get you a rate in the sixes if you’re going to put deposits in.”

Dave:
Yeah, it’s really interesting, that’s why you see this difference in interest rates on savings accounts right now, all the small local banks are offering just for normal savings account, four or 5%. Whereas, Chase and Bank of America, they don’t need deposits. So they’re still offering half a percent because they have plenty flush with cash to be able to do that.

Kathy:
And that’s how we are too. We’re not seeing much change in conventional lending. And for people trying to build their portfolio in their own name with conventional loans, it’s pretty similar. The only difference we’ve been seeing is that the 30 year fixed rates are as good as the arms at this point. At least they were. Everything changes every day. But just recently it’s just been making sense to get the 30 year fixed. Again, if you’re planning on holding the property for a long time, why not?

Dave:
Yeah, that’s very good advice because it did seem like arms were ticking up a little bit in-

Kathy:
Because they were better.

Dave:
… November, December, but not so much anymore. All right. Next question from Christian Tevis is about commercial real estate. Will it be potentially harder than residential due to balloon payments and people wanting to refinance and lenders basically just saying no, or I’m going to again extrapolate. Are there any other reasons you think commercial real estate might be hit harder than the residential market?

Kathy:
Yeah.

Henry:
Can we all just say yes?

Dave:
Moving on the next question.

Kathy:
It’s going to be an interesting year to see how that goes. There’s two sides to it. There’s definitely loans that need to be refinanced this year, a lot coming due. And they’re refinancing into a much, much higher rate. They may have to put more money into the deal, they might have to have capital calls or they just might not be able to refinance. So the question is, how’s that going to affect values? And are we going to see a bunch of foreclosures? On the flip side, there’s still a ton of money on the sidelines waiting for that. So they’re going to get scooped up pretty quickly. Everybody’s just wondering, where are these deals? We want them. So the values may hold up simply because there’s just so much money waiting for this to happen.

Dave:
That’s a really interesting take, and if anyone listening to this wants to learn more about this topic before everyone else jumps in, we had two really good episodes about this. James and I talked to Ben Miller about this, and then Kathy and I talked to Brian Burke, who both had really good thoughts about the commercial market, but anyone else have any-

James:
The turtle on top of a turtle.

Dave:
Yeah, yeah, exactly. The de-leveraging situation.

James:
Yeah, on that episode, it was enlightening to me because they were talking about that there could just be no, even if you can bring in and raise that money to pay down your loan balance, the banks still might not issue the loans. And based on what he was talking about, there could be a massive opportunity but just with the opportunity, there’s going to be struggle because you’re going to have to figure out how to pay for it. It’s either going to have to be all cash or very, very low leverage. But yeah, it could be the next thing that goes.

Henry:
And even if they do finance it, the interest rates are killing the cash flow. I analyzed the multi-family deal last week before I got here and it was… six months ago it made great money and now it’s not. So even if the bank says yes, you still can’t perform. How do you… You may cover the note, but then you’re sitting on a break even or you’re losing 10 grand a month and hoping you bank the equity in the next two, three years.

James:
As for the pricing has to come down.

Dave:
Yeah, it has to.

James:
Yeah. That’s will work.

Dave:
In the residential market there’s enough home buyers that are not making their decisions purely financially that it does help prop up the market. But when you talk about commercial real estate, it tends to be a very efficient market. It’s sophisticated investors who are not going to buy things when they don’t cash flow or they know that there’s going to be a better deal six months from now. And I was saying to someone yesterday, it’s like when it comes to commercial, I’m going to do what I always advise people against and try and time the market and be a complete hypocrite.

Kathy:
But you said sophisticated investors and over the past few years, there’s been unsophisticated investors in the commercial space and the underwriting’s been… they’ve just been pushing the numbers and pushing the numbers and it was obvious that wasn’t going to work even if interest rates weren’t going to go up. Some of those people just weren’t underwriting well. And a lot of us were on the sidelines just like, “Wow, how are you going to squeeze this much money out of something that… where the rents have already been raised and the rehabs already been done. You think you can go in and renovate it again and push the rents, just because you put in new counters doesn’t work that way.”

Dave:
Shine them up. Put some LAC on the bad boys.

James:
Get them shiny.

Dave:
That’s why everyone wants to do deals with James. He’s got beautiful advice-

Kathy:
Shine them up.

Henry:
Shine up something to put on the market.

Dave:
All right. What do you all think about the confusing economic data that’s been coming out just in the first few months of 2023? Some things seem to be really good, some things seem to be really bad. What does that mean for the housing market over the rest of the year? Big question. Who wants to predict what’s going to happen?

James:
Based on the data and facts that they keep throwing out, they change every other day.

Jamil:
It’s like a fish out of water. It’s flopping all over the place, really. And I think that… because of that, you’ve got one week, you’ve got indicators that show us that we’ve got a strong economy and then the next week there’s different news and then there’s layoffs and you really can’t get a reading that will give you an honest answer except to look at the market itself. And that’s what I’m doing. I’m looking at the market, I’m looking at activity. I’m looking at how long are listings lasting. We have an uptick in, at least in Phoenix, in the markets that I’m in, the uptick and pendings that have been post holiday have been insane, right? We’ve seen so much more activity just in the last month and a half than I was expecting to see. And so for me that that’s at least an indication that we… And then again, this could just be seasonal, but I feel like people are coming to terms with what we’re dealing with now.
People are coming to terms with lending being where it is. People are making decisions. Again, they’re entering back into the housing market. So for me, I feel like yes we will still feel some pain but activities going on. Our wholesale activity is very strong. Our fixed and flippers are back in the market. They’re buying robustly right now. They’re buying deep, deep deals and they’re able to come out and actually put these houses back on the market fast enough and they’re actually closing. And so I’m optimistic. I’m optimistic about where things are headed.

Kathy:
It feels like a train that was just lost… breaks. It’s just been screeching or zooming and now it’s just trying to break and having a really hard time slowing down this train. And we know that, again, I’ve said it on every single show, you can’t print 6 trillion and think that you can just all of a sudden reverse that. In fact, I don’t know if you guys know or you’ve heard this from your CPAs, but we actually had our CPA call and say “You know there’s still stimulus out there for businesses. You can still apply.” What? Covid is not a thing right now, but there’s still money out there being handed out. That’s going to really upset some of the listeners, but it’s a fact. So with that much money that people either banked on or they spent money over the last two or three years, and it’s hard to turn your lifestyle around. It’s hard to say, “You know what? I’m not going to eat as good a stake this week. I’m going to buy something cheaper.”

Henry:
Go to the Sizzler.

Kathy:
So people are still spending money. When you look at the M2 money supply, and I’m not an economist, I just look at that and I see a ton of money created over the last few years and not that much out of the system yet. It’s only come down a little, which tells me there’s still an enormous amount of money circulating, which is what makes things confusing and why we saw retail sales up in January.

Dave:
Yeah. I wonder… There’s about 12, 15 questions on this list and nine of them are asking us to predict what’s going to happen in the market. Do you guys think about it? Honestly, do you think that much about it or are you looking past what’s going on? Do you actually think what’s going to happen in six months? Or are you comfortable with the idea that it’s very uncertain?

Kathy:
I’m obsessed with it.

Dave:
Yeah,

James:
I’m a warrior. After 2008, you just worry all the time. And you have to when you’re looking at these deals, because you have to think about when you’re dispelling them. We just bought a raw lot and it was cheap and we didn’t really want to buy raw lots right now because we wanted to get everything permitted so we can have it built and stabilized and sold off in nine months. But then again, now we’re actually looking at buying more raw lots because the pricing that we can get is so cheap, and we know our dispo is going to be in 18 to 24 months. And I really do think in 18, 24 months that rates are going to be the high fives, so the market should be better. So if they’re not looking down the road, I think it’s a huge mistake because you can buy the right stuff right now and time it well, now the timing is never going to be perfect.
When we were buying deals at the beginning of the year, we did not think we were going to get smacked in July. We thought rates were going to stay up a little bit. But if you start forecasting that out a little bit, you can really do well, or when you’re buying these rental properties, and if you’re buying them and they’re barely breaking even, or you’re getting mediocre cash flow, look at it in two years down the road, how long are you going to keep that for? If you’re going to keep it for one year, don’t buy that deal.
But if you’re going to keep it for two to five years and restabilize it, put new debt on, the math changes dramatically. And so I’m always looking down the road, looking at what’s going on in the market. We had this little flurry, Jamil was just talking about. We sold a ton of properties in the last two weeks. And now I’m like, all right, the cool thing about what we get to see right now is rates have crapped back up and is it going to keep going? And if it keeps going, I’m jumping on the gas because it’s more of a psychological thing than a financing thing. And so I think it’s really important to be looking down the road.

Dave:
Well, I want to follow up on that because I think that’s true. The whole premise of the show is that you should be an informed investor. But when you see this contradictory information back and forth, how do you navigate that? Do you form a hypothesis in your head and just go forward, or are you constantly changing it? Or how do you that?

Henry:
I try not to focus on… too much on the macro, and I look more at the micro, right? Because I am investing in one, maybe call it two markets, right? And so I can’t control all of what I’m seeing on the macro level. But if I’m going to make money on the micro level in my market, then I need to understand what the KPIs are doing within my individual markets. And so for me it’s all about underwriting, right? I insulate myself from risk by buying deep, and I can only buy deep if I understand what deep truly means in my market, right? And so I’ve talked about it on another show. I’m just super strict with my comping right now because even… whatever I’m buying, if comps are older than 60 days, then I’m subtracting the ARV. I’m subtracting a percentage. And that percentage I’m going to subtract is what’s the list price, the sale price ratio been over the last 60 days?
So when a property gets listed, what does it actually end up selling for? And then I average that out. So if on average properties are selling for 20% less than what they get listed for, and I don’t have up to date comps in the last 30 days. I’m saying, “Great. My realtor says ARV is 300, I’m subtracting 20% off that.” That’s my ARV. That’s what I’m using to base all of my analysis on, and then I’m making my offers based on. Now that means that I may buy less deals because sellers don’t want that type of offer. And that’s okay. You have to be more strict. But all of those are microlevel numbers in my specific market because that’s all the data I have to go off of, right? And so I’m not stopping my investing. I’m just trying to make sure that what I do buy, I’m buying with the understanding of, the ARV today may not be the ARV tomorrow, and the only data I have is going to tell me what percentage to drop that, and then we do those things, right?
And again, I have a more… I don’t want to say… It’s not a risk free investment strategy, but I buy singles and small multis, right? So I’m not buying deals where I’m millions of dollars out of pocket. I’m not buying deals, large scale multi-family commercial buildings that are costing millions and millions of dollars, right? and so at the end of the day, I’m buying a product in a market where I know we have tons of jobs, and so there’s going to be a demand for rent. At the end of the day everything that I buy, if I have to just turn it into a rental, I can, and I’ll probably make money, worst case scenarios, I’ll break even. And so the risk isn’t that massive for me. Do I not want to turn a profit on those ones that I want to sell and make a flip? No, I absolutely want to flip them. But if I have to pivot, I can, right? And so my investing strategy just allows for me to be able to be a little more risky, but I’m still very, very strict on the underwriting.

Jamil:
I’m a wholesaler, so I get to live in the present.

Dave:
That’s true. That’s very true.

Jamil:
It’s very true. It’s the most zen way to be.

Dave:
Yeah, that makes a lot of sense. Just being able to not worry about James talking about, you don’t have to worry about what’s going to happen in 18, 24 months from now.

Henry:
So you’re selling the deal now. So now’s what matters.

Jamil:
Exactly. And I’m paying attention to the temperature right now. I get to hear specifically where buyers are, and a deal either sells or it doesn’t sell. If a deal doesn’t sell, we can renegotiate. And it’s just what it is. The seller really needs to get out of the deal or needs to sell a house. And we can’t make the numbers work. We can’t make the numbers work. It’s just… But we’re very open, we’re transparent with the people that we’re talking to and we’re working with. We’re not pretending we can make things work that we can’t make work. We’re just being completely open and saying, “Look, the market’s going to dictate and it’s going to tell us where this thing needs to be in order for it to trade.” And we either trade or we don’t.

Kathy:
Yeah. For me, I’m obsessed with it because partly because I have a lot of people who listen to me on my podcast and also in our business that I feel like I need to know because we are in so many markets, and we help people buy in those markets and every market is different, but the markets we focus on seem to be less affected by any of it. And that’s why we’re in those markets. But I live in a volatile market, so for my own personal reasons, I want to know what’s going on. But also just again, to be able to answer questions like that, what in the world is going on? And so for me, I feel extremely positive that over this coming year we’re going to see rates come down simply because the year over year inflation data it’s got to look better. When we get to the summer and we had the highest inflation, we were at what? 9% and we’re going to be doing year over year.
I can’t imagine that it wouldn’t be better. And if it’s better, rates follow inflation. If inflation’s coming down, we should see rates come down. Now within the housing market, in the residential housing market that I’m mostly focused on, there is still… I want to see where that inventory levels are. If inventory levels are going up, that’s going to be concerning. They’re not. They’re coming down. And that’s equally concerning. Inventory levels continuing to come down because of that lock in effect, people in those low interest rates not wanting to leave. So in my opinion, when we see potentially rates come down this summer in this housing inventory under a million, it’s my opinion that we’re going to see another boom. And if you’re operating thinking that it’s going to be a housing crash, you’re going to miss the boat. So to me it’s again, very, very important to stay on top of the fundamentals that might flip that switch.

James:
But then there’s also the fundamentals of how are people going to afford it? You play with a mortgage cow sometimes, and I’m like, “Okay, yeah.” And then I’m like, “Yeah, who’s going to pay $10,000 a month to live right here?”

Kathy:
Well, not everybody.

Jamil:
… in Seattle.

Henry:
It’s crazy. Somebody-

Kathy:
But that National Association of Home Builders report came out saying that when rates get down to 5.5, it will be another 5 million people who can afford. So if you only have less than a million in inventory, not everybody has to be able to afford it. You need some people to. So it’s just… For the amount of people that will be back in the market this summer, because prices have either come down or are flat, so you have potentially lower home prices, lower interest rates, it could be 10 million people that can afford.

Dave:
And people are being more creative with how they’re qualifying and how they’re purchasing homes too. You’ve got folks that are jumping in on houses together. You’ve got people that… Normally you’d have a family that would be two incomes qualifying. But now you’ve got friends going in and buying homes together so that they can afford a place to live. We are definitely changing the way that we’re navigating this whole affordability situation, especially right now. And what Kathy is saying, I think is absolutely true. When rates come back down, I believe… just looking at where inventory is right now, how could another boom not happen?

James:
No. Yeah, there is nothing for sale. But then you look at it and I’m like, I know… If you look at the core demographics of who’s buying in a neighborhood. You take a step back and you go, okay. In North Seattle for us, it’s tech workers. We know that they’re tech buyers. We know they make 140 to 175 grand a year. And then I’m looking at the housing cost and I’m looking at the rates and I’m going, “How are these…” But then they’re still there. We had 20, 30 showings last weekend on a couple properties. Well, I didn’t see that many bodies come through just with the rates coming down a half point. And so-

Dave:
We need to post up at James’s open houses and be like, “Excuse me, how are you going to afford this?”

Jamil:
Well, a lot of it’s banking app.

Henry:
Well, it’s two income households too a lot of the time. Might as well-

James:
But even at that, I look at the math and I’m like, “Their DTI is 55%. This doesn’t make sense.”

Dave:
But yeah, I totally agree. I think Kathy and Jamil, what you’re saying though is you should have banking on rates going down, right? That’s what would potentially bring another boom. But there is a chance that they don’t come back down.

Kathy:
Yeah. Certainly.

Jamil:
Eventually they will. Every, everything’s a cycle, right?

Dave:
Yes, of course. But I just think… I was feeling pretty confident that rates were going to go back below 6% up until three weeks ago. And now with the jobs report and the not so great inflation data, it seems like the Fed might go even higher and higher than they were originally saying just a month or two ago. So I think it’s really… Personally, I believe it’s pretty 50, 50 about where mortgage rates will end this year.

James:
I think that’s everybody’s call right now.

Henry:
It could go up, it could go down.

Dave:
It’s very profound.

Kathy:
It’s what you call the fish flopping in the air.

Dave:
Yeah, fish under water. It’s a flip flopping-

James:
It’s exactly what’s going on.

Dave:
I know, but I do feel like in January it was feeling like there was a little bit of direction and momentum, right? Interest rates had peaked back in November, they’re at 7.4, they are coming down to six. And then we have this crazy job report, which just so you understand, the Fed has these two jobs. It’s to control inflation and to maximize employment. And so when they see maximum employment, they’re like, “We’re going to go hard after inflation,” because that gives them the green light to do that. And so that on top of the inflation report, which was pretty blur, might… now they’re saying instead of the Fed pausing at 5%, it might be five and a half percent, it might be five and three quarters. So now it just feels like we were so close to getting a little bit of momentum and direction, and now it’s just all back up in the air again.

Kathy:
Wait till May. I think it’s going to be up and down. I think we will really get a better idea next month because we just came out of the holidays. But again, this summer when rates really hit a peak, I mean when inflation peaked and rates did too. Again, mortgage rates follow inflation. And just looking year over year, we’d have to have massive inflation for it to be higher this summer. Yeah.

Dave:
All right. Well, hopefully you all enjoyed listening for an hour for us to say we don’t know what’s going happen. Rates might go up, they might go down. But I think all the advice here in all honesty is really helpful. It helps you mitigate the market. I think everyone here is a testament to the fact that you can’t just sit on the sideline and be afraid. You have to try and form your own opinions and get the information that you need to be able to make decisions and actually act and move forward in a market like this.

Kathy:
Coming back to what Henry said, he knows his market so well. He knows a good deal. Regardless of what’s happening anywhere else, he knows what’s going to pencil and what’s going to work, and he’s got a backup plan if that plan doesn’t work. Same with you, Jamil you know your market, and you don’t take as much risk with the wholesaling. You obviously know your market.

Jamil:
Sometimes.

Kathy:
Sometimes.

Jamil:
But James likes risk.

Kathy:
And it’s a higher price point, so there is more risk there. But if you take a loss, no one’s going to cry for you.

James:
I cry for me. I cry for me, Kathy.

Henry:
How many plane tickets did you buy to get here, James?

Dave:
He didn’t buy a ticket, he-

James:
It’s actually two.

Dave:
Oh, you didn’t take the jet?

James:
No, I bought coach, man.

Jamil:
Unless you-

Dave:
He just buys three tickets.

Henry:
He just buys three tickets to make sure one of them sticks.

James:
Well, you got to have multiple exit strategies. I was like… And that worked. My flight got canceled. Luckily, I had a backup slit right in, and I made it here.

Kathy:
You made it.

Jamil:
It worked really well for you.

Dave:
Did you really have multiple-

James:
I bought in LAX and in [inaudible 00:40:28].

Jamil:
And you got here. And it got-

Henry:
I say at least once a month, everybody needs James standard process.

James:
Oh, man. Oh, man. Oh, man.

Dave:
Yeah. All right. Well, we hope you enjoyed this episode. We’re calling it Happy Hour. We’re going to get out of here. Go to real happy hour, hopefully. If you guys haven’t yet, please give us a review. We really appreciate them. We did get a couple more recently, and those were awesome. They’re really, really valuable to us. So if you like this kind of show, let us know. Thanks for listening.
On The Market is created by me, Dave Meyer and Caitlin Bennett. Produced by Caitlin Bennett, editing by Joel Esparza and Onyx Media, researched by Puja Gin Doll. And a big thanks to the entire Bigger Pockets team. The content on the show On The market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

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