BiggerPockets Real Estate Podcast - 604: BiggerNews May: What the Media Isn't Telling You About a “Housing Crash”

Episode Date: May 3, 2022

It’s a housing market crash! It’s a housing market bubble! It’s a relatively normal and stable housing market! Two of these statements might make you excited, anxious, or hopeful, while one simply makes you yawn. For years, we’ve heard numerous news outlets, forecasters, and housing authorities tell us that the next housing crash is right around the corner, only for home prices to skyrocket, interest rates to rise, and demand to stay red-hot. If you want to know if a housing market crash is coming, Rick Sharga, Executive Vice President at ATTOM, a leading provider of nationwide property data, is the person to talk to. His entire job is based on finding and figuring out the data behind housing market movements, which he then presents to field leaders who are trying to make better buying, selling, and lending decisions. Rick is an industry vet and was around during the mid-2000s housing market crash, the great recession, the foreclosure crisis, and everything that followed. Rick has seen the runup in housing prices over the past two years and has some interesting theories as to where we’re headed next. Whether you think we’re in for smooth sailing or on the cusp of another crash, Rick’s predictions may surprise you.  In This Episode We Cover: Why competition has recently fallen and whether or not this is permanent for the housing market  The difference between 2022’s housing market and the 2007/2008 housing market Whether or not raising interest rates has affected hot housing markets If we’re entering bubble territory and how to tell the real estate market is going south Which real estate markets are primed for a correction in 2023 (and beyond) How to get ahead of the foreclosure auctions in a “high equity” housing market  And So Much More! Links from the show ATTOM Data Solutions On The Market Podcast Redfin Zillow Fannie Mae  Wallstreet Journal Weatlh Track Federal Housing Administration (FHA) Blackstone RealtyTrac Youtube Tiktok   Dave Meyer's Instagram @thedatadeli BiggerPockets Youtube David Greene's Instagram @davidgreene24 David Greene Real Estate (Youtube) Rick's LinkedIn Rick's Twitter @ricksharga Click here to check the full show notes: https://www.biggerpockets.com/blog/real-estate-603 Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Podcast Podcasts Show, 604. There's really no indicator that we're sitting in a bubble, although it's understandable. People think that because we've had, I believe, 122 consecutive months now where home prices were higher than they were the prior year, which is, I believe, the longest run in history. So I do think market corrections could happen across the country in certain markets, certain price tiers. Do I think we're going to have a bubble bursting? No, but the truth of the matter is nobody really knows we're in a bubble until it burst.

What's going on, everyone? I am David Green, your host of the Bigger Pockets Real Estate Podcasts, the best real estate podcast in the world. Here at Bigger Pockets, we are committed to helping you find financial freedom through real estate. And we do that in a number of ways, one of which is on this podcast, bringing in people who have found that freedom, people who have made mistakes as well as industry experts that can help you on that journey. Today's guest is fantastic. We have Rick Sharga.

Rick is the executive vice president of market intelligence for Adam, a market leading provider of real estate and property data, including tax, mortgage, deed, foreclosure, natural hazard, environmental risk, and neighborhood data. Rick is over 20 years of experience in the real estate and mortgage industries and is one of the country's most frequently quoted sources on real estate mortgage and foreclosure trends. And he joins us today to talk about what the heck is going on in. this crazy market. I am joined today by my counterpart, the always fun, always intelligent,

and always aware, Mr. Dave Meyer. Dave, how are you today? I'm doing great. Congratulations on 600, man. It's the first time I've been here since you hit the milestone. Yeah, we stepped up production quite a bit. Like 600 happened pretty quickly after 500. Seriously, it felt like it went really quickly, but the shows have still been amazing. So even with the increased production, amazing. how you and Rob and everyone else is just bringing value to the listeners every single week or several times a week. Well, thank you.

We're trying to. Speaking of additional shows that we're making Bigger Pockets is creating a ton of new content. And that leads us to today's quick tip. Dave, what do you have for us for today's quick tip? Well, my quick tip is to check out Bigger Pocket's newest podcast called On the Market,

which is hosted by yours truly. We've been doing this show for, what is it, like six or eight months now, bigger news, trying to bring you all of the recent trends and data and news that really impacts the lives and strategies of real estate investors. And we want to scale that. So once a week now, you can find it on Spotify or Apple or we have a whole YouTube channel as well. You can get the information that helps you formulate your strategy for 2022, helps you get an

advantage in any type of market. And we keep it fun. we keep it light. It's not this dense news show. So definitely come check it out if you want to stay on top of everything that impacts the real estate investing world. I think you're really going to like it. Yeah. At Bigger Pockets, we are creating an entire family full of smart people to help you build your wealth. So do check out that show. And make sure you check out more of these shows. Every time you finish a video, hopefully you have time to watch another one because we're putting out more and more content. You just realized your business needed to hire someone yesterday. How can you find amazing

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So please, if anyone reaches out, they've copied our pictures. They've made a screen name that looks like us, but it's not us. Don't send them any money. The same goes for any of us individually at Bigger Pockets. as well as the company, bigger pockets as a whole. Before you consider sending anybody money, make sure that you've absolutely verified who you're talking to is the right person. All right, without wasting any more time,

we are going to get into today's show. It should start off a little fun, and then we'll be bringing in the guest. Dave, anything else you want to add before we get into it? No, I'm really looking forward to this show. Rick has been someone I've followed for actually quite a long time because he's a leading voice on real estate data, and I think you're going to learn a lot from the show.

All right. Let's do it. All right, David, as we just mentioned, we are going to play a quick game. It's just called Quick Takes, and I want to get your quick reactions to three different headlines. I am going to read you. Did you say quick three times in a row because I am known for being long-winded? No, but maybe I subliminally was trying to get you to go quicker because I know Eric will come on and tell us we're being too slow if we don't do this block in five to ten minutes. But quickly, give me your reaction to this. According to Redfin, the amount of market competition actually went down from February to March.

And anyone who's listening to this, a lot of this market data comes a month in arrear. So we're talking about March data, even though we're just ended April. It went down from 67% of all homes facing stiff competition, multiple offers in February, dropped just slightly. to 65% in March. Do you think this is the beginning of a trend or is this something you think is just a blip or an anomaly? Not the beginning of a trend is a blip, not an anomaly. And I will quickly explain. This happens all the time. And that's because of what I call flock of bird syndrome. Most people, when they're investing in anything, when they're doing something scary, they like to move with the crowd. So what we find is the psychology of buyers in real estate. And I've often said buyers drive markets. The psychology of buyers plays a very big role in how things work out. So when

people see a lot of other people making money somewhere, they tend to think, ooh, I should go do that too. It feels safer. It's like crossing the river with all the other gazelle so the crocodile doesn't get you. The problem is often by the time you see other people making money, sometimes the money's already made. So the way it works is, well, there's been gazelles in the rivers for a long time. All the crocodiles are now there waiting for you. So that's the worst time to go in. I've seen this phenomenon. I haven't happened several times in the past. Every time there is a significant change in the norm.

So in 2017, 2018, I can't remember where it was, but we saw rates go up like three quarters of a percent, one percent, kind of out of nowhere. And Tarle Yarbrough was telling me a lot of flippers lost money during that time because buyers froze. They were just like, I don't know what's going on. I don't want to move. And then a couple months go by, everybody, oh, I guess that's the new normal. They all start buying at the same time.

the flock of birds goes that way. We saw this happen with the shelter in place. Everyone froze, not going to buy real estate. I don't know what's going to happen. At a certain point, they're like, well, I still need a house. Nothing's changing. I better jump in. This is totally expected.

I told everyone on my team, expect to slowdown for a month or two as buyers are like, wow, rates went up. This is a shock. Let's freeze and think. And when people are like, well, I guess that's where rates are, they're all going to start buying again. All right, we need some gazelles to cross the river. I don't know how I feel about this.

I'm very, I personally get it. I kind of think that it's, it is interesting to see what's going to happen with rates and what's going to see. So I'm not surprised to hear you think that people are just freezing. I have to say, man, I hope you're wrong, though. I would love to see the market get a little less competitive. I think it's really unhealthy where we're at. And so I totally respect your opinion, but I hope you are incorrect about this.

I hope I'm incorrect too. I would love to see the market slow down. When you're listening to house, the way, used to work as you look at the comparable sales, you find the highest you can possibly get and you find an average one and you would try to convince your client to sell somewhere between the maximum they could possibly receive the highest comparable and an average one. Well, now you take the highest comparable there is, you throw tens and tens of thousands of dollars on top of it. You throw another couple 10,000 as a cherry on top and that's what the seller wants for their house.

So everything getting listed is always the new neighborhood record. What I think may happen is instead of us listing for way more than what the comps show. Maybe we get back to listing at what the comps actually show and have some sort of reason to come back into the way home prices are valued. All right. Great. And we're on time. Second question for you. We all know that housing inventory is extremely low. We're going to talk about this with Rick in the next section as well. One of the main things you constantly hear about as a potential solution is upzoning, you know, allowing people to build an ADU or to build a duplex or second home on their property. And Zillow actually did a recent survey to see if home buyers were actually interested in this

because, you know, there's this whole not in my backyard, NIMBY syndrome, where people say they want it, but they don't actually want it. But a clear majority of homeowners surveyed 73% voiced support for at least one or more modest densification. options. So almost three quarters of Americans believe in this. You can't get three quarters of Americans to believe in and agree on anything. Do you think this will actually make a difference? And do you think we will start to see more upzoning in the next few years? I think, yes, if this continues, you'll start to see it happening more often. But I think

the pendulum will swing back the other way when that's over. So you'll start to see that more people do this and then more investors make money. And then the nimbies get jealous that they're not the one's making money and then some new tax will be created to the ADU tax. Or if you have something on your home and like a house hacking tax, that's what I'm afraid of that may come. But in the short term, yes, I do think more local municipalities will create zoning, less restrictions and more easing of use so that people can start putting more ways for people to live in their own property.

Excellent. That was very quick. Well done. Okay. For our last story, Fannie Mae just released a big economic survey. and there was all this information in there about mortgage rates, borrowers, appetites. You should check it out if you're interested in this kind of stuff.

But the thing that really stood out to me is that they are now forecasting a recession in 2023. You think we're heading for a recession? No, I think it's more likely that we could be in a recession and we won't feel it because prices of everything keep going up. So I kind of think the economy in general is functioning like carbon monoxide. You don't know you're getting sick until it hits very, very hard. So I've said this before.

Wages are not increasing as fast as the price of food and gasoline and things that we need to get by. So in that sense, it will function like a recession, even though the price of assets keeps going up. Even if you're getting three, four, five percent raises at work, you think you're getting a raise. You're not if inflation's at eight, nine, ten percent. Even at seven percent, you're still losing money. So I think what we have to accept with creating all the extra currency that's circulating throughout our economy is you can be in a recession and not feel it. It's much more like carbon monoxide, which is why you have to be listening to a podcast like this one where you're getting this information because it's not going to be just shoved. It's not like smoke that you can't miss when there's a fire.

It's much more silent scary. Yeah, I hope we're not heading for a recession, but I've read and talked to a few people recently that talk about the Fed's interest. in raising interest rates and they're going to do it aggressively. And two people, both the chief economics correspondent for the Wall Street Journal, who I interviewed on the market and Janet Yellen, both use the words getting lucky for the Fed being able to successfully engineer this soft landing that they're hoping to do. And so I hope we get lucky, but I, you know, the world's not feeling very lucky these days to me. So I'm not feeling optimistic. But I just want to caution people that when you do read these things as well, like when we hear recession, the most

recent real recession was like the biggest recession in U.S. history is the biggest economic downturn since the Depression, really. And so even if there is a recession just to be out there, it doesn't necessarily mean it's going to be years long. It doesn't necessarily going to have to be really bad. It could be two quarters of a, you know, half a percent GDP drop. We just don't know. But I think it's really interesting that a lot of economists are starting to see that. Those are all the questions I got it for you. I think we made it under the allotted time. Yeah.

It's a new year, new me, right? All right. Well, thank you for that, Dave. Let's grab Rick, bring him in here and see what he thinks about the real estate market and the economy as a whole. Rick Shargo, welcome to the Bigger Pockus podcast. Great to be here. Thanks for having me. Rick, thanks for joining us.

Really appreciate it. Could we start by having you just explain to our listeners what your position is? it sounds really cool. I really like your job title. And what you do on a day-to-day basis. Yeah, so I'm the executive vice president of market intelligence for Adam, a data solutions company. It's the first time in my career that my name and the word intelligence have been linked together. So I'm very happy about that. But my job is mostly to be out talking about these sort of real estate market, housing market trends, leveraging our data to do that. I get to go out and speak at industry events, do these kind of podcasts, meet with the press. Also talk to some of our customers and prospects about their data needs, their use cases,

how they're leveraging this to run their businesses. So it's a little bit business development, but a whole lot of sort of applied data analytics in housing and commercial real estate trends. and it's the culmination of a 20 year accidental voyage into the real estate and mortgage industries that I never set out to do, but have been fortunate and blessed to have been able to experience. So I'm sure no one ever asks you this in all of your media appearances, but could you just tell us what is going on in the housing market and what your read is of all of the information

and data that you're privileged to take a look at every single. day? Yeah, and it's a really different conversation than we might have had a few months ago. I'm of the opinion at this point that while we still have strong demand, we are beginning to see a bit of a softening in the housing market. Prices continue to go up, but we've now had nine consecutive months of existing home sales that are lower than they were the prior year. We've had a similar number of months. We're pending home sales, another metric we track. are down on a year-over-year basis. Purchase loan applications that the Mortgage Bankers Association tracks are lagging behind both 2020 and 2021.

And we're seeing consumer confidence at the lowest level it's been in decades. And now that's been affected partly by COVID. And every time there's the rumor of a new wave, we see a hit to consumer confidence. But it's also being affected by inflation. It's being affected by the war in Ukraine. So, you know, consumers need to feel confident about entering into a long-term financial commitment like they need to to buy a house. I know, by the way, with home prices going up 17% year over year, and interest rates now being double what they were a year ago, you know, the average monthly payment for somebody buying a house is about 26, 27% more than it was for the same property a year ago. So all of that stuff is conspiring, we believe, to start slowing demand down a little bit.

Realtors I talk to joke about it somewhat. They say, now we're not getting 30 bids on a house. We're only getting 20. But you can see inventory levels starting to tick up a little bit from historic lows. You can see days on market starting to extend a little bit. So it really does look like the market is going to normalize a little bit as we move throughout the rest of 2020. 22. Yeah, I want to ask you your opinion on something. This is the stance I've always taken, because I'm a real estate broker myself and we sell houses. In certain markets, when there's not

a ton of demand, I do think rising interest rates and other economic factors could have an impact on prices as well as availability. But in others, like where I am in the California, San Francisco Bay Area, other hot markets, it's not unusual for us to see 10 to 12 offers on a on a decent house, not even the very best house, even the stuff priced at the high end. So if something happened that affected interest rates to where half of the buyers got knocked out of the market, we might see just, you know, like half of those offers, like five to six instead of 10 to 12, which is still plenty of competition to bid way over asking price and force someone to come in really heavy to get that house. And you'd have 80% of the people looking are losers

every time they write an offer. Is that the perspective that you're taking on this as well? Do people need to understand that the lack of inventory and the amount of demand is so hot that something is as small as interest rate hike isn't going to lead to the drop in prices they're expecting? Yeah, great, great point. And there's a couple things to talk about here. One is that you're absolutely right. Real estate is ultimately a local game. So what you see in the Bay Area is different than what you're going to see in Des Moines, Iowa is different than what you're going to see in Richmond, Virginia. The second thing to point out is that the market you're talking about is not the market or the tier of pricing within that market where those interest rates are going to be

particularly material. If you're looking at the Bay Area where the median price of a home is, I don't know, $1.2, $1.3 million. Excuse me, at the high end of that market, you're typically not dealing with somebody who is going to be all that worked up over a point or two on a mortgage. So local conditions will dictate this. And you're also right in that five or six people bidding instead of 10 or 12 still pretty much guarantees you a good price at the end of the day as a seller. So that's kind of the dichotomy we're seeing. We are seeing signs that demand is slowing down, but there's still enough demand that prices continue to go up. And that'll be the case, until, we start to see enough inventory coming back to the market where you don't have to be one of those

five or six or ten or twelve bidders on an individual property. So I believe we're not in a housing bubble. I believe we're not likely to see a market crash, not at all likely to see a market crash. But I wouldn't be surprised if over the course of the year we might not see some individual market corrections. And your area, particularly at the high end of the market, could be one. Pacific Northwest could be one. Markets like Austin, Boise, which had price increases that were unprecedented last year. We could see a little bit of a price correction in some of those markets.

But everybody has to look at this in terms of what's happening in their local market, as opposed to the kind of national numbers that we often talk about. Rick, I'm not much of a crap. guy either. I haven't believed that. But could you share with our audience some of the reasons and some of the fundamentals that support your opinion about the fact that you don't see a crash coming? Yeah, a lot of people really try and equate what's going on today in terms of prices and demand to what we saw in the mid-2000s, 2006-7 leading up to the crash in 2008. market conditions could not be any more different if you wrote them up on purpose.

In 2008, we had an oversupply of homes available for sale. We had a 12-month supply of homes on the market. The builders never got the memo. They just kept building after the market conditions changed. And that was followed by a flood of foreclosures entering the market, which added even more inventory. And now the builders were competing against their own properties from a year prior that were twice as big and half as expensive. and it was just, it was a nightmare.

Really hard to get a loan back then because the lenders had basically shut down. And the people who were going into foreclosure were people that were not only buying overpriced houses, but they were doing it on speculation. Very high percentage of them had adjustable rate mortgages. The only way they could afford the house was with a teaser rate. As soon as that rate adjusted, their interest payments doubled, and suddenly they couldn't afford those properties anymore. it was a real nightmare. There was a story in our local paper here in Orange County, California,

about a cleaning lady who was making about $40,000 a year and had eight properties in Santa Ana. And all eight of them, amazingly enough, were in foreclosure. And you wondered what the loan officer on the seventh or eighth loan must have been thinking before they approved that loan. Anyway, market conditions, fast forward to where we are today. We have about a one and a half to two months supply of properties available for sale. That's about a third of what we would normally have in a healthy market. The builders have not been building for a decade, so they're trying to catch up. They're having trouble building new inventory because of supply chain disruption.

They can't get appliances, roofing materials, windows. And so it's taking them longer to bring properties to market. we have demand that's demographically based. So this is not false demand. The biggest cohort of millennials, who are the biggest generation in U.S. history, are between the ages of 29 and 32. The average age of a first-time home buyer is 33. And even with interest rates being at 5%, they're still lower than the 6, 7, and 8% loans that we saw back in 2008. The other thing to keep in mind is that first-time homebuyer percentage is actually fairly low this time. And that's your riskiest loan. During the build-up to the Great Recession, first-time homebuyer rates were in the

high 40s, 45, 46, 47%. The most recent numbers I've seen on first-time homebuyers in today's market is about 26%. That means most of the sales are in the move-up market. And people are tapping into the huge amount of equity they've built up to make fairly low. large down payments on their next property, which is keeping their monthly mortgage payments lower. So that's one of the metrics you look at to determine bubble, is what's going on with mortgage payments as people are buying new homes. Another is the spread between rental prices and mortgage payments, and rental prices have been going up as fast as home prices have. So again, none of the predictors that we would have looked at leading up to 2008 seem to be in place.

market dynamics are all different. The quality of the borrowers is extraordinary. In fact, the delinquency rates are the lowest they've been since the mortgage bankers started tracking those numbers in the 1970s. And the economy is supporting it too. We're creating jobs. Unemployment rates are very low. And usually that's what I would look at as a trigger. If we see unemployment rates go up, typically your delinquency rates go up. If your delinquency rates go up, your foreclosure rates go up, we're still dealing with historically low rates of foreclosure. So there's really no indicator that we're sitting in a bubble, although it's understandable people think that because we've had, I believe, 122 consecutive months now where home prices

were higher than they were the prior year, which is, I believe, the longest run in history. So I do think market corrections could happen across the country in certain markets, certain price tiers. Do I think we're going to have a bubble bursting? No, but that's the market. the truth of the matter is nobody really knows we're in a bubble until it bursts. Yeah, I think it's, I love the point you made that this looks like how it looked in 2009, 2010, or maybe I actually say the run up to that, so 2000 through 2005 or six.

But the fundamentals are vastly different. And for those on the outside looking in who just sort of see the symptoms, you're like, oh, that looks like the same symptoms as when I had a cold. But for those of us that live in this world where we're doctors, we're like, This is not the same virus. This is not the same kind of cold, even though the symptoms are the same. And I get a lot of almost anger when we say, yeah, the market is still fundamentally strong. People are getting 30-year fixed rate loans that they can afford.

Their job is very secure. Rents are going up. There's a lot of money flowing into real estate that makes it a desirable asset. And they just don't want to hear that. What they want to hear is there's a crash. And so I'm always trying to figure out how do you connect with those people who want to believe we're going to have a crash. Well, at the same time recognizing, who knows, it could be. One thing that I've not heard spoken, I'm wanting, oh, go ahead, I'll let you say that.

I'll ask you my question. No, just I couldn't agree with you more. And I actually get really frustrated. And my encouragement to anybody who's watching or listening to this conversation is anybody who's selling you a guarantee of a crash is doing that because they're trying to sell you something. I just, I spent 24 minutes of my. life that I will never get back watching a video that a colleague sent me as proof that there was a crash coming. And I wanted to reach into the computer and ring the guy's neck because he was misrepresenting the data. He was coming to false conclusions. Every, every, you know, forecast he was making, I could have refuted very, very easily. But there's a lot of this misinformation out there.

And people really have to be careful what they sign up for. There was a guy who was predicting millions and millions of foreclosures a year ago. And I had people sending me that because since the beginning of the pandemic, I've been out saying we're not going to see another tsunami of foreclosures. And people just knit together really loose math. And it ought to be criminal because they're charging thousands of dollars for courseware and training programs that are really going to just suck people dry of their money without returning any. any potential benefits. So it's a it's a pet peeve of mine and the press gets caught up in it too

predicting millions of foreclosures, tens of millions of evictions and now we're going to have a housing crash. And I guess you never go broke with a negative headline, but it's, I'm sorry, it's a pet peep. That's my point. That's what I want everyone listening to this to understand. Think about the last time you got angry at someone that said, don't buy a crash is coming. The people that said that four years ago, five years ago. Are you mad at them now that you lost out on five years of, no, it never happens. But if one person says you should buy and the market drops, you hate them with the fury of a thousand sons. There's something, it's always the safe bet to go for the person who says there's a crash that's coming. You should wait. And so that's why so many of them do that.

And they play into the fear. And you said the media, every article, interest rates rise is a recession looming, tons of inventory will be flooding the market. Everyone likes to see that. And so that's why media prints it. They're not printing it because they believe it. They're printing it because you will click on that because that's what people want to hear. So we have to think about where we're getting our information from. And like Rick, what I love is you're giving data to support your opinion. It's not, well, I'm just angry. The housing prices are go up. So I'm going to find some way to vent that anger and say that they're going to be going down. And you, your theory on foreclosures is the same thing that I've been telling people for so long.

And to be honest with you, when we're going to, I'm going to let you share it. But when I would share it with someone and they would act surprised, I often thought like, how did you not see this? It's not, it's not hidden, right? It's that they wanted to believe foreclosures were coming. So the obvious answer that's right in front of them, that no one's going into foreclosure that's got tons of equity in their home. And at this, when markets this hot, you're getting equity while you're in escrow.

Right. Like, even if you couldn't make your payment, you're going to make a whole bunch of money selling your house because how fast it's rising. Like, how did you not recognize that? But it's this like blinders that we put on where we want to believe there's a crash coming because it is hard to get a deal. It is frustrating. There is a ton of competition in the real estate space right now. Before we get into the foreclosure thing, I wanted to get your opinion on a question. I haven't heard asked very often.

I remember in the last bubble, much of the wealth being. created that was flooding into the real estate market was from the real estate market. It was home flippers. It was real estate agents that were crushing it. It was loan officers that were making ridiculous amounts of money giving away all these loans. It was people that worked in the real estate space making a ton of money and then they would invest it back into real estate or they would go buy a boat, an RV. There were all these helocks where you could pull money out of stuff, right? So it was sort of this house of cards that the minute you couldn't make money like when homes lost their value, the people making money by selling homes lost their money

and the whole thing imploded on itself. But now what I see is more money coming out of tech, more money coming out of sort of entrepreneur ventures like crypto investing and the NFT craze that we're seeing. There's people that are literally being millionaires because they bought the right cryptocurrency. And it's kind of a silly way to be making money. It's not sustainable, but it is happening. And then you see money flowing from the overall wealth of the economy, the stimulus that we've created where it's just made so many people wealthy without them having to earn it the old-fashioned way is now you got to find a place to park that money that feels safe and smart people recognize real estate is a longer is a better long-term bet than buying some

nfti that you're hoping goes somewhere or investing in a cryptocurrency that you hope become something better so what i'm getting at is it seems like where the money is coming from that's going into real estate is coming from more sustainable places you've got institutional capital. You've got hedge funds. You've got smart people parking their money into these areas where people are migrating to. Do you think that is another sign that the fundamentals are stronger? Do you think there's something I'm missing there? No, I think that's very well said. There was a lot of internal momentum, if you will, during that buildup to the housing bust. And the flippers then were not the flippers today.

And actually, it was more similar. Those flippers were more similar to what we saw with Zillow offers in the last year, where it was sort of an arbitrage model. I'm going to pay full value or even too much for a property and count on increasing market prices to be able to make my margins. Our data shows that the, the average gross margin on a flip was right around $60,000 nationally. Obviously, it's going to vary market to market.

And we saw a heightened amount of flipping activity. But these flippers are making their money by going in and repairing a property and then being able to sell at a higher price because they've added value. If you're flipping in an arbitrage model, your risk is much, much higher. Zillow lost $300 million in a quarter. by mispricing houses and having to sell them for less than they paid. And that was kind of what we saw in the 2005 to 2008 flipping model. So when those profits started to derive,

you saw the whole house of cards start to crumble. You're absolutely right. A lot more institutional money coming in today. A lot more, I would say, cautious and thoughtful money coming in from individual investors. A lot more focus on longer-term investments from people buying these properties. We surveyed, we published the Realty Track website, which has foreclosure data on it. Mostly individual investors use it.

And we surveyed them. Over the last year, we've seen the percentage of people doing single-family rental investments continue to grow and actually begin to outpace the fix and flip percentages. So something like 60% of the investors we surveyed last time were claiming to be rental property owners as opposed to flippers. To me, that's a more long-term conservative approach to investing, and I think we're seeing a little bit more of that. So, again, very different model. And there's a lot more capital being generated in other parts of the economy beyond real estate that have been supporting the real estate growth that we've seen. The last point I want to make before I turn it over to Dave is I think in that 2000 through 2006, crazy, ridiculous rush we had,

what people were banking on was speculation. They were speculating that the home would continue to increase in price. They had one extra strategy, which was, I will buy low and sell high. They did not understand cash flow. They did not understand the fundamentals of owning, managing, investing in real estate. Like you said, they weren't improving the property. It was buy a brand new home from a home builder, wait six months and sell it to make $100,000. And that word, that concept of speculation.

got somehow married synonymously to appreciation. So now when people hear the word appreciation, they assume that means speculation, right? Like one exit strategy, all your eggs in one basket. If one thing goes wrong, you lose the whole deal. But I've never seen it like that. I think appreciation applies to both rents and the value of the home. And you make money in real estate from an appreciating, but that doesn't mean you do it foolishly. It still needs to cash flow.

You still have to have enough money to hold it long term. and I just noticed that there are a lot of the same people they get angry about. There is a crash coming. They get angry at the word appreciation. It's the same. The minute they hear it, it clicks like, oh, that's speculation. That's bad. I got warned about that a long time ago.

Have you seen that as well where, like at one point, helix were synonymous with bad investment decision. Like a helock means you're losing your house, right? And we've finally gotten far enough away from it that people don't automatically think Keylock means a death sentence to your family's finances. But it feels like that same idea of buying a house and waiting long term for it to go up in value is getting labeled the same way that speculation was when people were trying to like day trade real estate. Well, actually, the last thing you said is probably the most accurate metaphor for what we saw. These were people

that were literally trying to day trade real estate. And that's the wrong asset class that you're day trading on. You're just not going to see your values appreciate. And again, a company as big as Zillow, a multi-billion dollar, a company with multi-billion dollar valuation that's been in the real estate market that made its bones with a product called the Zestimate that's supposed to give you at least an approximation of home value. And they managed to lose $300 million in a quarter by doing that kind of, you know, arbitrage. So it's just, it's not a good play. I know a lot of flippers. They're still very successful at what they do.

We've seen actually an uptake and flipping activity in our data, but it's people that know what they're doing. It's people that know how to price a property. They're going in and they are buying low and they're fixing things up and they're selling high. But again, a lot of the value that they generate is because they're going in and making huge physical improvements in a property. They can just do it cost effectively and in a way the pencil is out at the end of the day.

But it's again, I think the investors in today's market are a lot more thoughtful. They're a lot more educated, I hope. And we're not seeing lenders take on the kind of reckless risk that we saw lenders take on 10, 15 years ago. That's been the other big part of the difference is lenders have always been expected to provide kind of the adult supervision at the party. And during that housing boom, you know, it was kind of like they went up, they went away and left the kids home for the weekend and tossed them the keys to the liquor cabinet right before they left. And then we were all surprised at the outcome. So very different lending market. The CFPBs had a lot to do with that, putting restrictions in place. But even the commercial lenders, the people who specialize in bridge loans and investor loans have really tightened things up. And so a lot of the risk that was inherent in those old models just doesn't exist in today's lending market.

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Tax season reminder for all the real estate investors listening. If you own rental properties, short-term rentals, commercial buildings, basically anything that's not your primary residence, you need to know about cost segregation. It's an IRS compliance strategy that lets you accelerate depreciation on your properties, which means you're paying less in taxes this year and keeping more cash in your pocket for your next deal. Cost Segregation Guys is the go-to firm, having done over 12,000 of these studies with $500 million in total depreciation identified. Head to Costsegregationguise.com slash BP to get a free proposal and see your potential tax savings. Rick, I want to get back to something you mentioned earlier. We've talked a lot about why the fundamentals are very different from the 2000s and why you don't believe that there is a crash. You have said, though, that you think there could be market correct.

in individual markets. And just for the record, based on our diatribe about people calling crashes, a correction and a crash are not the same thing. A correction is a modest decline in prices that is usually part of a normal economic cycle. So can you just tell us a little bit about why you think, counter to what you just said, that you don't think there's going to be a crash? What are you seeing that suggests that there could be some market corrections out there? And if you're an investor, like, what to look out for in those markets you think there might be corrections in?

The latter question is harder to answer than the former. And I'll be honest with you, this is an arbitrary definition on my part. But I look at a correction as something in the neighborhood of a 5 to 10 percent price drop. And it will then recover. You mentioned normal economic cycles. There's a lot of people involved, or wanting to get involved in real estate today, who candidly haven't been around long enough to see what looks like a normal housing cycle. And those cycles follow a predictable pattern. You see demand increase.

As demand increases, you see more sales, a sales increase, you see prices go up. And then at some point, prices get to a certain level where people kind of look at it and go, no, that's too much money. And then demand slows down and prices kind of come back down with it. And you have those normal cycles. And I believe we're starting to see a little bit of that in certain markets across the country as we hit what I call an affordability wall. You know, the combination of home prices going up, of interest rates going up, there's a certain borrower who's going to look up and say either I no longer qualify, I can't afford that property, or, you know, that's just too much for me to be comfortable with right now. I'm going to take a step back and see what happens.

Or I'm going to look farther away from that property. I'm going to look at a smaller property and scale back. Ultimately, that has an impact on demand. Lower demand ultimately has an impact on pricing. If you look back at, and I did this, I don't know why I was doing this, but about a week ago, I happened to be looking back at 100 years of home prices.

And it's funny, when the 30-year fixed rate loan became popular, or became legal in 1954 for existing homes. Most people probably don't know that before that you couldn't get a 30-year fixed rate loan is when we started to see prices take off because now you could amortize your costs over a much longer period of time. But if you look at that, we've only ever had one cycle where prices fell significantly in 100 years. And that was during the crash leading up to the Great Recession.

And if you remove the drop and the, the significant increase we had during that period of time, we're right about where the historic trends say we should be in terms of home prices. But that doesn't, even though prices historically have always gone up, it doesn't mean they go up consistently. There are going to be times in markets where prices do dip for a while, and then market conditions change and they come back up. So would I be surprised to see parts of the Bay Area where home prices have been off the charts or parts of the Pacific Northwest where we've had, you know, incredible competition for housing over the last few years or markets like Austin or some markets in Florida,

see a little bit of a price decline, particularly at the higher ends where there's not as much competition. No, I wouldn't be at all surprised to see that. Do I think it's the, you know, foreboding of a huge crash to follow? Not at all, really. But local investors need to become experts on their local markets. And you want to look for things like population growth or decline. You want to look for things like job growth or decline. You want to look for things like wage increases. Are they keeping pace with local prices with inflation? And inflation is the wildcard, by the way. That's really the X factor here. I believe that persistently high rates of inflation will hit people harder on the margins. So your low end of the market, particularly your FHA borrower,

is going to have a hard time affording to buy a house because they're having a hard time affording to buy gas and food. And that will have an impact going up the food chain to a certain extent where people are going to have to take a step back and see when they can get their finances in order because everything is costing them 8, 10, 20 percent more than it did a year ago. So again, normal cycles don't see a crash, but local conditions will vary, but you really have to become the local market expert, much more than I can be a local market expert on 3,140 counties across the country all at once. I'm so glad you mentioned what you just did, because rates going up will affect the FHA

buyer significantly. Like they probably were barely able to afford houses in their area. Rates jump a point or two. They can't buy a house at all. Rates do not affect a person in my position. Right. Right. So the house becomes a little less.

affordable, the cash flow is a little bit less, maybe I have to put more money down, it is still vastly superior to anything else that I can invest in. So I'm going to keep buying. And that's what I want to come across is that while this may make it harder for the average blue collar mom and pop investor trying to claw their way out of their W2 position, which is kind of our audience. That's who we're trying to help. This does not make things harder for Blackstone that can go borrow money at 1 and a half percent, right? And has a 10, 20, 30 year horizon. Like, it doesn't matter to them if they make a little bit less money in years one or two. And that's who your competition is now. These I buyer programs with tons of money flooding into them. It's, I wish that this rate hike

would cause a decrease in prices. As an investor, I would welcome that. It's really hard to find property, but it's not going to. They can go up a lot. And for people that have money or like, for someone doing a 1031 exchange who's got, they made $800,000 and they got to put it somewhere. Okay. So they make less of a return than they, is that you, Dave? You got $800,000 who's trying to figure out where to park. Yeah, I am trying to park some $1031 money right now. That's been fueling a lot of the run-up in prices.

It's this self-sustaining ecosystem where like we have a city in where I live called Modesto, California. And it's not the nicest area. It's like maybe an hour and a half away from the Bay Area. but if someone sold their house in San Jose for $800,000 and they got to park that money and if they can't, they're going to pay $300,000 in taxes, they will gladly pay $50,000 to $100,000 more than market value for that Foreplex and Modesto. And you have all these Modesto investors that are like, man, I can't get a return.

What kind of an idiot's paying that much money? They don't see the big picture. They don't see that idiot is saving $300,000 by buying that property or buying in the nicer areas because they know in five years it's going to get ahead. And that's, I like that you're mentioning sort of this macroeconomic understanding and inflation. Yeah. And that like it's, go ahead. And cash is king.

So I think for investors who do have cash, market conditions are absolutely tilting in your favor right now. And we know that somewhere between 60 and 70 percent of investor purchases are funded with cash. Because you don't really care if mortgage rates go up a point or two because you're not financing. Even if you're doing a bridge loan and rates are ticking up a little bit on those, it's a very short-term phenomenon. You can usually build that into your prices and pencil it out. But what you're also talking about is interesting to me because it's one of the reasons home prices have risen as rapidly as they have. Because we are seeing people not just invest in properties in Modesto, but we're seeing people move from high-price markets to low-price markets. I call it the Boise Factor.

Boise, Idaho had property values on sales go up 45% last year. Now, I will guarantee you there's nothing happening in the Boise economy to organically drive prices up 45%. But somebody sold- Unless you call Californians moving there organic. And that's exactly what's happening. Driving the locals crazy because they can't afford to buy a house now. And I'm scared to death what's going to happen when the tax assessor gets around to adjusting prices. Oh, man. You don't even think about that.

It's funny. But that's driven partly by this work from home phenomena that COVID led to. So sorry, David. Go ahead. No, I was going to say, actually, on our other show on the market, we were just talking about this, that Idaho just became the least affordable state in the entire country, surpassing Washington and California for this exact phenomenon. People are going there.

It's not actually leading to an improvement in the local economy to the point where, wages are going up for people, but the cost of living is absolutely exploding there. And you sold a house in Silicon Valley. You walked away with $800,000, and you bought a house twice as big in Boise for $400,000. And you really don't care that you paid 40% over a list because you have the money, right? So it's a phenomenon that doesn't have a long life expectancy. And I do think in some of those markets, that's one, St. George's, Utah, of all places, Phoenix. We saw similar patterns in markets like that. And they're due to settle down.

We probably could see some price adjustments in those kind of markets. But people ask me, what are the next hot markets? And I always ask for a show of hands. Who had Boise and St. George's, Utah, on your bingo cards last year? Because you're the person I want to ask about what the next hot market is. I had neither of them. Well, this is why this is a good conversation to have, because it's not, if you're buying a property that will support itself through cash flow, it's not risky speculation to try to

determine where do I think demand is going to go. And so I do think about this, we just bought a property, my co-hosts of the regular podcast, Rob and I in Scottsdale, Arizona. And I was very big on that because so many people in California are constantly talking about not liking it here, wanting to go to a place with different, demographics, different political bend, and different home prices. So like Scott, if you're wealthy in California, that's where you want to go. You want to go to Scottsdale. So I can see how if you, like, when Boise is too much, well, you're in the desert. So you have to understand that's a completely

different scenario. But in general, the people like New Yorkers, they don't want to be in New York right now. They're all going to South Beach, right? There's probably going to be a trend to people in New York moving into Florida. That will be their version of Boise because the taxes are better and they can still work from wherever they are. So if you're trying to figure out, like, where's the market I can get to before everyone else does, I do think that's kind of the game you got to play. Because if you just want to say, oh, let me just go to a city and find a house on Zillow and buy it, good luck. It's very, very difficult. So you sort of have to understand the psychology of the people that are moving, figure out where they would want to be and then get there before everyone else does and then get a

very strong, fundamentally sound deal that you can afford to keep for the long term. And it's definitely made investing a lot more complicated than it was in the good old days. We were like, send out some letters. Someone will reply, offered to buy their house. And we were all getting hung up on, oh, but the roof needs $4,000 of repairs. I don't want to have to deal with that. And now we're looking at like, man, why are we stuck on those details when we see what it's turned into now? You're happy to find a house you can buy. Yeah, that's right. There's 12 other people that want it. It's the hunger games. You've got to hope you're the one left at the end. Rick, before we go, I want to come back to something we, you, David and I were actually chatting about before the show, but you had some really interesting insights into the foreclosure market and how investors should navigate that. Could you tell us a bit about that?

Yeah. Unfortunately, my foreclosure background goes all the way to my beginnings of my career in the real estate and mortgage industries. I spent 10 years with a realty track during the foreclosure crisis. and we were publishing the largest database of foreclosure information at the time. And I can tell you that during that cycle, there were a couple very unique things going on. One was that 33% of all homeowners across the country had negative equity in their properties, not just foreclosure borrowers, all homeowners. So that's how far home prices had fallen. Virtually everybody in foreclosure was upside down. And because of that, they couldn't sell their home unless they got a short sale approved.

which was, you know, an incredible hassle for people, although we did see short sales go up a bit during that cycle. Very little was selling at the auctions because the lenders were trying to get the full amount of debt back on a purchase, and investors simply weren't biting because prices were too high. So a huge percentage, much, much higher percentage than normal of properties going into foreclosure ultimately went back to the banks or went back to the lenders and they became REO assets. And so people that were successful. successfully buying and flipping or buying and renting foreclosure properties during that cycle, waited for the repossession.

They knew the bank was going to be hanging on to these properties for a while. Little known fact is a lender doesn't have to take the loss on a property they foreclosed on until they resell it. So in a lot of cases, the banks were simply hanging on to these properties to defer their losses because they were under such incredible financial duress during that period. and the best deals were typically found in those REO assets. This market, again, could not possibly be any more different than that market. There's a record amount of homeowner equity across the country, $27 trillion of homeowner equity. Just a ridiculously high number.

To David's earlier point, I think we're going to start to see a return of cash out refis and even some helox as people start to tap into that equity, largely for home improvement because they're not going to move because they don't want to buy a more expensive house with a more expensive mortgage. Anyway, this cycle, according to our numbers at Adam, about 90% of borrowers in foreclosure have positive equity in their homes. There is no reason for those borrowers to lose a home and lose more of that money to a foreclosure auction when they can sell it in a huge, huge seller's market.

So for any investor who's looking to participate in the foreclosure market this time, you need to find those borrowers, those homeowners, in the earliest stage of foreclosure possible and reach out directly to them or work with a realtor who specializes in working with distressed homeowners and have the realtor reach out to that homeowner and try and execute a deal before that foreclosure auction. The other thing I will tell you, and I spent five years working for auction.com back in the day, is that the auction companies are reporting record sell-through rates at the foreclosure auctions. Normally 30 to 35% of properties sell at an auction.

Today, that number is between 65 and 70%. So if you think about the fact that most homeowners in distress should be able to sell a house before the auction, 70% of the properties getting to auction or selling at the auction, that doesn't leave very many properties going back to the lenders. So your strategy as an investor this cycle has to be to strike way, way earlier in the food chain before that REO takes place, before that repossession takes place. And there will still be deals out there, but you're going to have to get to them much, much earlier. That's a great point.

I'm glad that you've shared it. It's very easy to look at it at a shallow level and say, oh, foreclosures are coming. I'm just going to wait. but in a market like this, it doesn't go to foreclosure. They sell it unless they just are ignorant and they don't understand. And then it goes to the courthouse steps and then a non-ignorant person buys it. You're not seeing inventory sneak all the way to the very end like before. It was sort of, I looked at it like back then the market was saturated with homes.

You said it perfectly. There was too much supply. It was like imagine soil that is just completely saturated with water. You pour a bucket of water on that and there's nowhere for it to go. It just floods over and there's too much of it, right? Well, now it's like pouring a bucket of water onto the sand at the beach. It doesn't matter what type of water it is. It's so thirsty.

We have such a demand for inventory. It just sucks up right off the bat. And so waiting for that overflow to run to you to get a great deal isn't the same strategy. What really the only answer I can see is we need to build more houses. We need to make it easier for builders and developers to create more inventory in the places that people are moving to. Outside of that, it's difficult to see how. real estate is going to stumble for a very, very long time. So we just have to be more creative.

It's people listening to shows like this that are getting the inside scoop on what they can do to be successful. Rick, I really appreciate you being here to share some of this information with us because it's the facts that matter. It doesn't matter how angry you are or you want to believe there's a recession coming or somebody on YouTube was ranting about the next time. And if you don't know what you're listening to, you hear that. And you're like, yeah, I'm going to wait.

And four years go by. and prices are twice what they are right now. It just seems incredible, and you've lost a lot of money. And like we said, nobody gets angry at that person. And that's the person they should be the angriest at. But now the, you know, the numbers are the numbers. And there's an old plushie in real estate, which you've probably heard before, which is that the best time to buy a house was 15 years ago.

And the second best time is today. And it's, you know, if you have a long enough, outlook on this or if you're not if you're not looking to do that arbitrage model and buy today and sell tomorrow and hope for the best. You know, it typically, you know, for most people, real estate's a pretty good investment if you know what you're doing. There you go. Dave, any last words? No, thank you so much, Rick. We're definitely going to have to have you back, either on bigger news once a month or on our other show on the market. You're a wealth of knowledge and appreciate your really analytical and data-focused approach to helping everyone understand the

housing market. I appreciate it. I enjoyed the conversation. And yeah, let's do it again soon. Thank you very much, Rick. This was awesome. All right. And that was our show with Rick.

Man, that guy is just a gem. What a wealth of knowledge and insight. What did you think, Dave? I loved it. I think he provides a really well-reasoned, sober analysis. of the housing market because there's so much going on. And it's understandable, really, to be confused about what's going on. But that's why we do these shows, right, to bring on people who are experts and who have the data and the experience to help us interpret it. And I just,

I learned a lot from Rick. I think he has a very good read, similar to how I see the housing market personally. And I hope everyone got a lot out of it. What do you think? Yeah, I feel like it's so hard to know who to believe, especially, so you've got the increase in social media, the increasing content being made on platforms like YouTube and TikTok. You've got a lot of thirsty gurus that are out there trying to get attention and they'll say whatever it is, it grabs your attention. And it is very common to hear some people say, buy other else that you can and others to say, don't touch it, you're headed to a crash. It's in absolute polar opposites and you don't know what to believe. So in an environment where you have all of this confusion, my advice is you ground yourself in facts.

find like numbers can't lie to you. Numbers are not sensational. They don't scream and say, watch me, click me, follow me. They don't ask for your money. And so that's what I trust. And when you find a person like Rick who based their information off of numbers, I feel much more comfortable. And that's why we wanted to bring them in front of the audience today.

Absolutely. And that is exactly what on the market our new podcast is all about. It's about presenting you this information in an unbiased, logical way. So you can help, so you can understand what is going on without, all of the sensationalism out there. And I like that you called them thirsty gurus. I think that is a very funny way to refer to gurus because they're a thirsty bunch. I just made it up right now, actually.

So sometimes my own genius only comes out in a spontaneous creative moment. This happens when they make sure the green M&Ms are not in my bowl. This is why, the green Eminem slow you down? Well, there's an old theory about, it was a group like Van Halen or something where they were considered divas because they didn't want. green M&Ms in their bowl. I was sort of pretending like I was a diva there. Oh, no, not a diva. Very, you're a man of the people. Thank you for that. So are you. And if the people want to follow more of you, the man, where can they find you? I am most active on Instagram where I am at

the Data Deli. I know it's an absurd handle, but I really like data and I like sandwiches, so I'm sticking with it. You've married two beautiful things together and you threw alliteration in there. It's incredibly profound how you're able to do that. Yeah. Well, do you know Kaylee who works on the publishing team at Bigger Pockets? Mm-hmm. She came up with it. She was like, she came up within like two seconds.

She's like, you love data and you love sandwiches, Data Deli, obviously. Man, at Bigger Pockets, we got a bench deeper than the Golden State Warriors. Talent just oozes from everywhere. If anybody wants to follow me here more about what I'm thinking, maybe you're like, man, I really wish David Green could have talked more. but Dave Meyer forced him to give very short answers, and I wish he could expand. Well, one.

Yeah, blame it on me. It is always my fault. You know, it's our producer trying to make sure you guys have a good show because you complain when we go too long. So it makes sense. But if you wanted to hear more, go to the comments on YouTube and say, I wish you guys would have expanded on this point,

or I wish I could have heard more of this. I wish you to ask this question, and I will do my very best to get you the information that you're looking for. You can follow me online everywhere on social media at David Green 24. There's an E at the, end of green. You can also message me on Bigger Pockets or you can find me on YouTube at David Green Real Estate. The point is we want to give you all the information we possibly can at Bigger Pockets. We want to flood you with value. And if we can't do it on this hour to hour

and a half podcast, there's other mediums where we can still get you what you need. So give us a follow. Let us know what you thought and make sure you're also following Bigger Pockets. Please share this podcast with anybody that you love. Subscribe to it when you hear when a new episode comes out and keep following us because we just get better with age. I'll get us out of here. This is David Green for Dave, not the thirsty guru Meyer, signing off.

I need to, I need to, like, get something that attaches to my chest. So when I move, like the mic moves with me. Oh, yeah, like a gimbal for yourself. Yeah,

I definitely, I move around a lot. You're like Axel Rose from Guns and Rose is doing the snake when you're recording. Yeah. She's got a smile

and it seems to me. Yeah, that's really good, actually. Thank you all for listening to the Bigger Pocket Real Estate Podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday.

On the host, an executive producer of the show, Dave Meyer, the show is produced by Ian K, copywriting is by Calico content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. Bigger Pocket's LLC disclaims all liability for direct, indirect, consequential, or other damages arising

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