BiggerPockets Real Estate Podcast - BiggerNews: What Happens if the Housing Market Crashes (& What Will Cause It) w/J Scott

Episode Date: August 16, 2024

Recession fears are increasing. The stock market has taken substantial hits, housing inventory is climbing, and bank account balances are starting to fall. So, with more economic turmoil, we have to ask: will the housing market crash? And if we get a housing market crash, how bad (or good) will it be for investors? Could we see a 2008-style selloff, or should we be more prepared for small dips worth taking advantage of? Today, we’re asking two top investors these questions, one of whom literally wrote the book on Recession-Proof Real Estate Investing. J Scott and James Dainard join us on today’s episode to discuss market crash predictions, scenarios, and opportunities for real estate investors. Both J and James experienced the 2008 housing market crash—an economic event almost impossible to forget. But is 2024 shaping up for a sharp decline like 2008, or will we simply see a slower real estate market like most people had expected when interest rates began to rise? If the market DOES crash, what should you look for to take advantage, and how do you ensure you don’t get caught biting off more than you can chew? J and James break down their game plans if prices fall and why buying now could set you up for wealth ten years from now, IF you can handle the “fear” of buying when others are running from real estate. In This Episode We Cover: New housing market “crash” predictions and how low prices could go Why economic “fear” is rising now, and the recession indicators that are going off Rising housing inventory and why experienced investors expected this already The difference between the 2008 housing market crash and today What could cause a housing crash and how to know it’s time to buy The immense opportunities for investors that 99% of Americans will pass up And So Much More! Links from the Show Grab Chad’s Book, “The Small and Mighty Real Estate Investor” Join BiggerPockets for FREE Let Us Know What You Thought of the Show! Grab J’s Book “Recession-Proof Real Estate Investing” Find Investor-Friendly Lenders See Dave and James at BPCON2024 in Cancun! Why Has the Housing Market Not Crashed in Over 15 Years? (00:00) Intro (04:01) New Recession Fears (14:25) Is This Like 2008? (18:06) What Will Cause a Crash (31:11) What to Do During a Crash (36:56) Opportunity for Investors Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-1005 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

You all know this, but there's so much crazy economic data right now. You have to start wondering, are we going into a recession? Is the housing market going to crash? Because there are a lot of pundits, economists, rogue YouTubers and probably your crazy uncle who tells you not to buy real estate. They're all saying that another housing market crash is coming. Maybe they cite high inflation or unstable geopolitics, the lack of affordable housing. And they say that a crash is inevitable.

And while there is some merit. to these arguments, the market, at least to date, has remained resilient. But the question of whether we'll see a crash persists, and it's an important question. So today, we're going to explore the idea of a crash in full detail. What would have to happen for a crash to actually occur? And is that likely? And what would it mean for your business if it comes to fruition? Hey, everyone, it's Dave.

Today we're talking about a potential recession in the U.S. that is starting to look more and more possible. And we're going to discuss what the market might do right now and how a recession may or not be connected to a housing market crash. We're also going to talk about what would need to happen for the housing market to actually crash. To help me do this, I'm bringing on two investors, James Dainard and Jay Scott, who had portfolios during 2008. And we're going to theorize game plan what it would take for the market to crash again and how that would impact investors, the housing market, and the economy at large. But before we do that, I wanted to tell you a little bit about what actually happened in 2008 to ground our conversation, to provide a little bit of context and help you fully understand the conversation that Jay, James, and I are going to have. In 2008, the world witnessed one of the most significant financial crises in modern history, and it all started with the housing market bubble.

Throughout the early 2000s, banks issued risky mortgages to many borrowers who couldn't afford them and maybe didn't have. have the qualifying credit. These were called subprime mortgages, and they were packaged and sold to investors in what are called mortgage-backed securities. Meanwhile, banks and financial institutions were heavily leveraging these securities and were betting on the market to remain stable. However, things changed. In 2007, when housing prices began to decline and underqualified homeowners began defaulting

on their mortgages, this created a sort of domino effect, and the value of these mortgage-back securities plummeted. This led to Lehman Brothers, which at the time was one of the largest financial institutions in the world to file for bankruptcy, which in turn sent even more shockwaves and panic throughout the entire global financial system. Eventually, the government intervened. They provided bailouts and stimulus packages to help stabilize the economy. However, many average Americans, investors, and even large financial institutions were left in dire financial situations, some losing everything. This event and its aftermath was possibly the most significant event in the housing market and the real estate investing industry in a century, or maybe in American

history. We saw the biggest decline in home prices we've ever seen, or at least as far back as we have data, and we saw a record number of foreclosures. And while this was, of course, a terrible event for Americans and the American economy. In retrospect, it also created some really unique opportunities in the housing market. And when we fast forward to today, there are a lot of widespread fears of another market crash. We have high interest rates. We have low affordability, persistent inflation, and turmoil in the commercial real estate market, which are all rightfully fueling some of these fears. So today, we're going to explore the idea of another crash. Will it happen again? What would it look like? And if it does happen,

how should you react? To discuss this, let's bring on Jay Scott. and James Dator. Jay and James, welcome to the Bigger Pockets Real Estate podcast. Thank you both for being here. Jay, I appreciate you being back on how many times you've been on this podcast? I lost count. Oh, what are the OGs? Just keep having me back and one day we can call it my 100th episode and celebrate. All right. It's probably coming up there. James, thanks for being here. I know you literally just moved your whole family across the country this weekend. So I appreciate you. Take the time to podcast with us from, what looks like a closet or some sort of weird prison cell that you're in right now.

We are in the wine room, actually. It was the only place I could get this house not to echo. So we're going from a yacht to a wine room. I don't know if that's a trade-up. And knowing you, since you don't drink, it's empty. So it's a perfect place to podcast. I'm converting. It's going to be Mike Booth.

All right. Well, let's get into what's going on in the market today because we plan this show a couple weeks ago to talk about a potential crash and what happens. And we're still going to get into that. But there's been a lot of news, economic news recently, that is going to inform this conversation. So, Jay, could you just give us a summary of what's happened in the macroeconomic climate in the last couple of weeks? And just for everyone's reference, we're recording this first week of August. Yeah. So we're on Monday, August 5th right now. And I think the big piece of news that has come out recently that's kind of driving the markets is that employment data for July was released a few

days ago. And that data indicated that unemployment had crossed this kind of scary threshold that we call the SOM rule. And the SOM rule is just a rule made up by an economist named Claudius Somm, who theorized and it's been proven true, that if the unemployment rate increases too high above the lowest point over the last 12 months, it's one of the single best predictors of a recession. And as of three days ago, as of Friday, August 2nd, unemployment data indicated that, according to her rule, we are now in a recession. Now, whether that actually plays out or not, I don't know. But what we saw was a steep stock market drop on Friday.

We're seeing a big drop in the market today, Monday the 5th. I don't know what's happened in the week and a half before this episode airs. But presumably, the market is in a much more fragile point today than it was even a few weeks ago. And so a lot of people starting to get concerned, a lot of people talking about, is this the beginning of a recession? Thanks for the summary, Jay. That is a very good and concise way to explain that the broader economic picture has darkened a little bit over the last couple of weeks. And just for everyone to know, Jay said that this is an indicator of a recession. We unfortunately don't ever know officially if we are in a recession or not until it's already started.

This is the way the government has decided that it works, is that a bunch of academics get together and retroactively tell us that a recession started a couple months ago and then they tell us that it ended a couple months after it ended. So that leaves us to sort of interpret the real-time data and try and understand if we are in a recession. So that's sort of what we're trying to get at today. James, I know you follow the market pretty closely. Did this news spook you at all or change your thinking about investing at all? No, you know, I feel like everything's on such a two-month delay when we hear reporting is because two months ago, we could start to feel this going on in the background. And one thing

I've learned over the last five, ten years is don't pay attention to the headlines all the time. It's what are you feeling? And if you're actively investing, whether it's the stock market, real estate, whatever it is, you can feel the shift. Inventory stacking. Things are slowing down. And we could kind of feel it. So I was just kind of waiting for the headlines. I actually think the headlines on real estate are coming in like 30 days.

Like inventory has exploded and all these things. But this is what the Fed has been trying to do. So I don't know why people are starting to react. We've actually been waiting for this to happen. so we can get some interest rate relief. And so it was to be expected. It just honestly came a lot later than I was thinking it was going to come. That's a really good point.

And there is a lag with all economic data. You mentioned something about inventory, though, which is going to be sort of central to the rest of our conversation about a potential crash. It is already up 23% year over year as of the last reading. James, given that you have such a good pulse on the market, and I'm not trying to joke here, but in many ways you probably feel this stuff before the headlines. Do you think inventory has gone up even more than that headline number that we've already seen?

I do. I mean, I feel like in our local markets, inventory is probably up 30 to 40 percent in the last 60 days. But that's also because we were working off no baseline. The inventory was non-existent. We were below a month's supply 90 days ago. And the thing I have learned is don't be so reactionary when things like this happen. right? Markets go up and down. And you have to, you know, when you start to feel it differently, you want to adjust your numbers differently. Like I can tell you, I bought less houses the last 60 days,

but that doesn't mean that things aren't selling. We also just sold one of our most expensive flips that was on market for 90 days. We didn't touch price, and we sold it for like 2% under list. And so I think a lot of it is inventories increasing, but you just need to be patient because we are selling everything right now, and we're still selling them for above performa. You want to be cautious, but you don't want to get cold feet. All right, so we're keeping a level head as we react to the latest unemployment news, but a recession in the overall economy is not the same thing as a real estate slump. So when we come back, we'll break down how we might see Real Estate Act in these conditions. Stick around. You just realized your business needed to hire someone

yesterday. How can you find amazing candidates fast? Easy. Just use Indeed. When it comes to hiring, Indeed is all you need. That means you can stop struggling to get your job notice on other job sites. Indeed, sponsored job posts help you stand out and hire the right people quickly. Your job post jumps straight to the top of the page where your ideal candidates are looking. And it works. Sponsored jobs on Indeed get 45% more applications than non-sponsored post. The best part, no monthly subscriptions or long-term contracts. You only pay for results. And speaking of results, in the minute I've been talking to you, 23 people just got hired through Indeed worldwide. There's no need to wait any longer. Speed up your hiring right now with Indeed. And listeners of the show will get a $75

sponsored job credit to get your jobs more visibility at Indeed.com slash rookie. Just go to Indeed.com slash rookie right now and support our show by saying you heard about Indeed on this podcast. That's Indeed.com slash rookie. Terms and conditions apply. Hiring, Indeed is all you need. Most investors spend more time chasing deals than reviewing their insurance. But a quick coverage check can be fast, easy, and one of these smartest ways to protect and even improve your property's cash flow. As the months get colder, frozen pipes, icy walkways, and seasonal wear and tear can increase the likelihood of claims. And traditional insurance companies aren't always built to handle these claims quickly or smoothly.

That's why more real estate investors are turning to steadily. They focus exclusively on landlords, whether it's a single-family rental, a Burr Builders Risk Policy, or midterm holiday guests. You get fast quotes, flexible coverage, and protection for property damage, liability, and even loss of rental income. Now is the perfect time to review your rates and coverage.

Get a quote in minutes at biggerpockets.com slash landlord insurance. Steadily, landlord insurance designed for the modern investor. We all joke that rentals are passive, but if you're spending nights matching receipts or guessing what a property earned last month, that's not passive at all. Baselaine fixes that part of landlording, the financial chaos. Their banking and AI bookkeeping system automatically tags every transaction, updates cash flow insights in real time, and builds the reports you need for tax season. You can even automate transfers and move money around without paying wire fees. It's just cleaner. Sign up at baselane.com slash BP and get a $100 bonus.

Baselane is a financial technology company and not a bank. Banking services provided by Threadbank. You've upgraded how to buy properties, but did your insurance get the memo? When investors start scaling, insurance can't be an afterthought. Most policies were designed for a single property, not multiple rentals, LLC ownership, short-term stays, or properties mid-rehab. That's where blind spots can creep in. NREG works exclusively with real estate investors.

They understand portfolios, how risk compounds as you grow, and why insurance should protect your upside, not just a checkbox. One uncovered claim can undo years of progress. Before your next acquisition, review your insurance. Talk to NREG and get investor-specific coverage from specialists who actually understand real estate at NREG.com slash BPPod. That's N-R-E-I-G.com slash B-PPodd. Welcome back to the Bigger Pockets podcast. Now, Jay, I'm really glad we have you here.

You've literally wrote a book about recession-proof real estate investing. So with this increased risk of recession, can you give us a little bit of a primer on how real estate, state tends to react in a recession, if there is a pattern at all. Yeah. And so luckily, we have 34, 35, 36, depending on what you think's happened in the last couple years, recessions over the last 160 years where we can look back and say what has historically occurred. And, well, obviously we can't be certain that history is going to repeat itself. I'm a big believer that the best predictor of the future is what's happened in the past. And the reality is that of those, let's call them 35 recessions that we've seen over the last 160 years,

34 of them had a negligible, if any, impact on real estate values. Obviously, there was one big recession where we saw real estate values take a huge hit, and that was back in 2008 and after 2008. And so the question is, what was different? about 2008, and are we seeing those signs today? Are we likely to see the same conditions we saw in 2008 result in a housing crash like we saw in 2008? Or are the conditions today more similar to the other 34 recessions where we didn't see a housing crash? And so if we look back at 2008, a couple of the things that drove the housing crash in 2008.

Number one, the thing that caused the recession were fundamental issues in the housing market, fundamental issues with lending, fundamental issues with these things called mortgage-backed securities. So 2008 was fundamentally a real estate-driven recession. Today, in theory, we don't have those same issues. We don't have issues with lending. We're not seeing the same banking issues. You can argue we're seeing some banking issues, but not like we saw in 2008. We're not seeing the same issues with mortgage-backed securities. So in that respect, today is very different than 2008. Now, the one way today is a very similar to 2008 was that back leading up to 2008 from 2001, 2002 through 2006, we saw real estate values move well above the long-term trend. We saw real estate values way above where we should have

expected them to be based on the trend line that we had seen for the hundred years previous. Today we're seeing the same thing. Over the last three, four, five years, real estate values have just spiked well above that trend line. And so it does lead us to ask the question, are we necessarily going to see real estate values kind of fall back to that trend line? Are we going to see a crash back to that long-term historic trend line or not? And so I think we can talk about that. But at the end of the day, I don't think that historically recessions have a big impact on real estate. I don't think that today's current environment is analogous to 2008, except in the one respect

that real estate values are exceedingly high given historic terms. Fantastic summary, Jay. Thank you. And I know that this is not always intuitive to people. It's a question, at least I get a lot, is people assume recession equals housing price decline. And I think that's particularly true of people who are maybe millennials or younger because there was this sort of defining recession in our lifetime. And it's what we all remember. At least I

could speak for myself. I certainly remember other recessions. But that was the big one. You know, and it sort of leaves the biggest imprint on people's assumptions about what's going to happen in the future. And before I jump over to you, James, I also want to add, Jay, that in addition to housing prices, rent also doesn't, from my understanding, decline during recessions necessarily. I think it declined a little bit during the Great Recession, but similar trend where recession does not necessarily mean price declines at rent. So for James, you know, you were around in 2008, you felt the run up to that. Does this, you know, Jay provided some of the data, but does this feel similar to you or different, James? I feel like this is different because we've all been waiting for it for 12 months.

In 2008, I was a younger investor. I was 24, 25, and we had just invested. all of our money in our business and flips. And I wasn't really paying attention to the market. There wasn't all these cool bigger pockets podcast back then. It was kind of like read the news, see what's in there. And it was almost felt like a right hook out of nowhere. It was like once they announced subprime mortgages were being eliminated and the helox and access to banking was gone, it was like the lights went out.

And it was in a free fall. I don't feel like we're in that because everyone's kind of been kind of preparing. But now I feel like because the market. didn't people got very aggressive again and they're really aggressive I feel like if you you stuck to your core underwriting it's going to be a lot different in today's age I don't see us going into a massive free fall there's still a big housing shortage people still need places to live and there's still a lot of institutional also out there buying property and there's so many different types of buyers in the market

that aren't affected by banking as much as it was back then I don't think this is going to be the same thing and that's the issue the thing I've learned from all our little dips and downturns is they're all different and they all have different reactions. And instead of trying to go, oh, I need a plan for a market crash and then I'm going to buy up all a real estate, which I wouldn't be opposed to because I kind of have prepared myself for that. If we go on a free fall, I will go on a bind spree.

But I don't think that's going to happen. And really what you have to do is just kind of make adjustments of what is the asset type that you're looking for. how do you make it safer and then stick to your core numbers of, hey, this is what I need to buy at. And don't pack the performance like people have been doing in the last four years. Performas are not supposed to be packed. They're supposed to be on the now. James, can you just explain that for a minute?

So what does that mean packing a performer and what do you recommend people do instead? Well, packing a performa is when people take the last 12 to 24 months and they see what's happened and they anticipate the same growth. and what we like to do is look at historical growth. You know, like if we're buying a flip, packing a per forma would be going, hey, this market has appreciated at 10% over the last 12 months. I'm going to forecast that end of my whole times.

Or rents have climbed at 10%. I'm going to forecast that in that they're going to continue this climb. But if you stick with historicals, it's a lot safer. The first thing is I never put appreciation in my pro forma. We are buying on the next. now. That is it. We don't anticipate that we are going to sell this property for more.

Rent growth, you have to put into your performance, but we use 20-year averages, not two-to-three-year averages because markets go up and down and you want to go, okay, what is the normal rate for rent growth or whatever the growth is going to be? And so I feel like if we do go into recession, which I'm not even sold on yet, because every time they say it's going to happen, it doesn't. And then when they say it's not going to happen, that your lights are going to get knocked out. And so, but what you can do is just be cautious and just buy on the now, buy on historicals, not the last 24. Those are not real numbers.

And then look at buying those properties. Well, it sounds like you and Jay both feel similarly that our market crash is unlikely right now. Jay, do you think the talk of market crash? is wishful thinking. I feel like I hear a lot of people say, like, oh, what goes up must come down. Or are they related to 2008 that we've sort of had this outsized growth? But there are fundamentals of supply and demand that are informing what you say. And I agree with a lot of what you're saying here. So like what would have to happen for the market to crash? What fundamentals would need to change? So before I answer that question, I do want to address one thing you just said. You said,

is a crash wishful thinking. The funny thing, the ironic thing even, is that I think a lot of people think that if there was a crash, they'd be buying tons of property and they'd be thrilled and everybody would be happy. But the reality is anybody that lived through 2008 knows that your reaction in the moment tends not to be that. You see a market crash and instead of thinking, wow, this is a great opportunity, what your brain starts to, your fight or flight in your, your brain starts to think is, oh, no, is this the end of the world? Where's the bottom? Are we ever

going to hit the bottom? Is this going to be a 20-year downturn like Japan saw back in the 90s? Is this going to be the next Great Depression? And people kind of hunker down. And instead of taking advantage of the opportunity, they sit back and they say, this is worse than I ever expected. I'm going to wait. Jay, let me just respond to that quickly because it's such a good point. We have a good example of this in the stock market all the time. Like, how many people bought stock in March of 2020 after the stock market crash? I know I didn't. I sure wish I did. And I would always tell myself, when the stock market goes down, I'll buy into it. But I was afraid. I didn't know what was going to happen with the world. It had one of the biggest crashes ever. And I missed out on it.

But if I had just kept dollar cost averaging, I would have enjoyed the recovery from that. And I just want to clarify that when I say wishful thinking, obviously people who hold a lot of real estate may not be wishing for that. But I do think we hear a lot of particularly newer investors or people who want to get into the first time looking at affordability, which is at 40-year lows and saying, man, I need some relief to get into this market. That's not, you know, that's another topic for another show. But that's sort of what I mean by wishful thinking is that some people think that they can get in based on that. So anyway, back to my other question is like, what, you know, let's just talk fundamentals for a second here. What would have a

have to happen and what would need to change for the market to actually crash. And we should probably define crash. Let's call it 10% declines nationwide in home values. Yes. So I'm going to, I'm going to kind of not answer that question. Well, I'll answer the question, but I think my answer is going to be a little bit different than most people expect because there's one really important lesson that I learned in 2008. And that's that the data is necessarily driving the market. So everybody says, well, if unemployment goes to this number, what's going to happen? And if inflation goes to this number, what's going to happen? And if interest rates drop to this amount, what's going to happen? At the end of the day, all of those

things are important, but they're less important than one other much less quantifiable metric. And that's how much fear is there in the market? Because at the end of the day, the fundamentals, the data, the numbers are absolutely mean. meaningless relative to how much fear there is in the market. If there's a lot of fear, it doesn't matter how good the numbers are. And if there's no fear, it doesn't matter how bad the numbers are. Fear is what's going to drive people's decision making. And at the end of the day, how much fear is what's going to determine what happens in the stock market, the real estate market, and every other asset market there is out there. You know, Jay, I'm surprised to hear you say that, because I

agree with the stock market side of things. That is sort of, it has this intrinsic volatility where people can sell and take money out. But at least to me, what creates stability in the housing market, I agree it's not data. Most people other than maybe the three of us don't look at real estate data all that much. But because house it, you know, because real estate is an asset class is mostly people's housing, I don't really feel like because they're afraid they're all of a sudden going to sell their house for less money than they need to. To me, what it comes down to is like this idea of forced selling? You know, like, is there such a bad recession or are there macroeconomic conditions that mean they can no longer afford their payments? Like, do you agree with

that or disagree? So again, let me reframe this before I answer that question. And I want to go back to this fear. You should have been a politician, man. You're just dodging these questions. Jay's asking his own questions. He's interviewing himself right now. So I guess the key here is I want to rebut your idea that the data is more important than fear. So think of it this way. Imagine a graph. And I like to call this a fear graph. And so imagine a graph where on the horizontal axis is fear from one to 10. Well, let's look at inventory based on a fear graph, on a level of fear. Today I would, argue, or let's say two weeks ago, I would argue that fear was down near one. Nobody was scared about a market crash. Nobody was really too worried about the economy. So we were probably at a one or a two on the fear. Where was inventory? Where has inventory been? It's been historically very low. And why is that? Because when there's no fear in the market, sellers aren't going to sell. Sellers don't have a reason to give up their 3% mortgages, their 4% mortgages. They don't

have a reason to sell when when prices are through the roof and they'd have to go buy something else that is a ridiculous price at a 7% mortgage. So when when fear is very low, transaction volume is going to be very low in today's environment. Now think of it the other extreme. Imagine fear going all the way to eight or nine or ten. At that point, sellers are going to be desperate to sell. They're going to want to lock in their equity. They're going to want to get out of their houses before the market crashes. They're going to want to, they're basically, they're going to be losing their jobs, so they're going to need to sell. But what's going to be happening on the buyer side? On the buyer side, we're going to see the same thing we saw in 2008 when

fear was at eight, nine or ten. And that's that nobody wants to buy. Anybody that was flipping houses, I was flipping houses in 2008. Let me tell you something. The hardest thing to do in 2008 was to sell that house because there were no buyers. And the buyers that were there, they didn't qualify. And so as you get to fear at 8, 9, 10, transaction volume dries up as well. Where do you see the most transaction volume? When fear is somewhere around four, five, or six, because that's where you have a good amount of sellers that are really interested in selling. They may need to sell. They may want to lock in their gains. And that's where you have the most buyers that aren't too scared to stop buying at that point. And so if you look at the fear graph for

transaction volume, you kind of have this hump. So it starts low, goes to a peak, and then ends up low. And I think it's a lot less important what happens with interest rates. I think it's a lot less important what happens with unemployment. Obviously, all those things contribute, but all those things also contribute to the amount of fear we have. And at the end of the day, I think that is the data point that's most important. That is very well said, Jay. And I actually agree with you most of it. I wanted to say, I'm not saying data is more important. I agree, the average American doesn't look at data. I think that's a very good premise and I'm very, I'm envisioning this graph now and it makes a lot of sense to me. But the one thing I question is, what happens to a regular

homeowner when fear hits 10? Because I see your point that they might say, hey, I want to sell and take my equity out. If it were me, I'd be like, no, I'm going to hunker down. You know, like, I'm just not going to do anything right now. And so I'm curious what happens there. But I think that's a very, very interesting data point that if we could quantify that really well, I guess you can in the stock market at least. But that would be super cool. Keep in mind that fear is correlated to what's going on in the real world. So fear at 10 means that unemployment is probably spiking. People are losing their jobs. People are unable to pay their mortgages. People are unable to put food on their family's plates. And so fear at 10 isn't just people making the decision, do I want to sell or not sell.

Fear at 10 is probably due to the fact people are that fearful because they're in a situation where they're desperate. We have to take a final break to hear a word from our sponsors. But while we're away, if you do want to learn more about real estate investing or get more timely information about the housing market, make sure to visit our website, biggerpockets.com. If you want a short-term rental, here's something worth knowing. Not all landlord policies are built for your type of property. And with holiday bookings, chilly weather, and higher guest turnover, having the right coverage is more important than ever. Steadily offers insurance designed specifically for short-term rentals, covering property damage, liability, lost rental income, and even unexpected issues like bedbugs.

Steadily works exclusively with real estate investors. So they understand the details that make short-term rentals unique and they build coverage to match it. A quick review of your rates and coverage every year can help you protect your property and your cash flow. Get a quote in minutes at biggerpockets.com slash landlord insurance. Steadily, rental property insurance for the modern investor. When I bought my first rental, I thought collecting rent would be the hard part. Nope. The admin crushed me.

Every night was receipts, tax forms, and checking who was late on rent. I kept thinking, if this is one unit, how do people run 10? Base lane changed that. It's Bigger Pockets official banking platform that handles expense tracking, financial reporting, rent collection, and even tenant screening, all in one place. It's the system I wish I had from day one. Sign up today at baseline.com slash bigger pockets and get a $100 bonus. Baseline is a financial technology company and is not an FDIC insured bank.

Banking services provided by Threadbank, member FDIC. There are two kinds of real estate investors, those who have reviewed their insurance and those who think that they have. Most don't realize their coverage wasn't built for how they actually invest. Vacancy periods, rehabs, short-term rentals, or LLC held properties. These gaps surface only when filing claims. That's why investors work with NREG. They specialize exclusively in real estate investors, understanding portfolios, risk at scale, and cash flow protection.

One claim can erase years of returns. If you own a rental property, don't assume you're covered. Have NREG review your insurance with someone who gets investing at NRE.com slash BP pod. That's N-R-E-I-G.com slash B-P pod. Managing properties can feel like a full-on circus. You're juggling vendors, tracking payments, chasing approvals across multiple properties, and maybe a few HOAs, all while trying to keep tenants happy and owners confident. One delay can throw everything off, and suddenly your day is all clean up, no progress. That's why hundreds of property managers rely on bill to streamline their finances.

Bill for property management lets you add all your properties, assign permissions, pay bills, and receive payments quickly and efficiently, without the usual bottlenecks. It syncs with platforms like QuickBooks, Zero, NetSuite, and Sage Intact, so your accounting stays aligned. You can automate bulk payments across properties and HOAs. Choose flexible payment methods like same-day ACH, international wires, card or check, and set custom roles in approval policies.

There's even a dedicated bill inbox for each property to keep everything organized. Ready to simplify your workflow, book your free demo at bill.com slash bigger pockets and get a $100 Amazon gift card. That's bill.com slash bigger pockets. 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 stuff. with 500 million in total depreciation identified. Hit to Costsegregationguise.com slash BP to get a free proposal and see your potential tax savings. Welcome back to the show. Let's jump back in with James and Jay. I do feel like in 2008, though, the sellers were in a different mindset than they are today.

And so I feel like people are looking for this housing crash. Do I think transactions will slow down? Yes. But I don't know if there's going to be this massive. massive decline. And I'm also calling a massive decline. Like we saw pricing get cut in half in 2008. You know, is there going to be a pullback of 10%? There should be. I don't understand how the markets kept going up the last 12 months. But it's just a different, I think it's going to be a different seller, different game. And no matter what, there will be some sort of pain in there.

It really just comes down to that fear. And it's almost not even just fear. It's FOMO. Fear of missing out on your equity. Like they feel rich because they have all this equity. And if it starts declining and they're going, I'm not rich anymore. And it will be more fomo than anything else. Like, I need to get this equity before it's gone. And that's where there's opportunities. So, James, if you think there might be a pullback, like what drives that pullback of your mind? Jay has told us he thinks it's fear. Is there something else you think that could cause the market to retract? Yeah, I think it's just running out of gas. Like, I mean, people's, they made so much money the last two to three years, right? Like, you could buy anything and it was going to be worth more.

I even sold my boat for more money than I had bought it for three years. You're the first person to ever make money on a boat. Well, it will catch up to me when I sell this next boat for sure. It all comes around. And so it's just a lack of liquidity and a lack of payments, right? And so what we did see, and I think this is why we're seeing the results now. I think in April, it was the first time we saw people's savings accounts dip below pre-pandemic. I think it was the end of April that came out.

And people had a lot of money in the bank. They were kind of living off of it. And that's where we're seeing the tightening. You are not seeing cars, boats, your luxury goods have slowed down. And I think it comes down to liquidity and affordability. And people don't want to lock into a heavy payment when they're uncertain about the market. And that's what I think is going to cause the delays in sales and bring pricing down. It's going to come down to are you a seller with a level head?

Like when I didn't sell this house for 90 days at $4.5 million bucks and I'm paying $0.5 million, in bucks and I'm paying $25,000 a month of payments, you have to be level-headed. And I was level-headed because that's what the home was worth. Now, some people would go the opposite direction. If they're running on fumes, right, that lack liquidity and that lack of reserves is why people make bad decisions. Then they'll start cutting price. That starts crashing the market down.

And then buyers start to see that and they will resurface too. So it's, you know, when the buyers think there's an opportunity, they hear a hint of good news, they rush back into the market. And so, I mean, the major issues are going to be lack of affordability, lack of liquidity, but also, guess what? When we go into a recession, rate should fall, too, which is going to make things more affordable. And so there is going to be a balance in that in that mixture. And I think that's the main difference between 2008 and today. Well said. I do think you see that in the data, too, right? Like savings accounts, they are declining. People are using up a lot of the money that they have. And that can definitely contribute to a decline. I also want to just

just call out the fact that there's just a huge amount of geopolitical instability right now. And it's, I don't know if you call it a Black Swan event because they're inherently unknowable. But like, I just think the risk of something crazy happening on a global scale is probably higher than it's been at most points in my lifetime. And you never know what's going to happen there. So like that could certainly impact housing, although it's almost impossible to forecast what, that would be and what it would mean for investors. But I think it's just the uncertainty is higher than it normally is, at least in my opinion. So given these things, you know, the potential of fear or running out of gas or some black swanophant, I guess the question is we talk a lot about what to do

in today's environment, but I'm curious to get both of your advice on what to do if there is a retraction, if there is a crash. And this may not even be on a national level. Like this may be localized in your specific market that there may be a crash. Jay, what would you do if you saw, let's say, a 10% decline in the market? So one thing that has been true in every market over, again, the last 150, 160 years is that real estate goes up in value. And there's been no 10-year period in the last 100, however many years where we've seen real estate not go up in value. nationwide on a national level. And so again, from my perspective, the best predictor of the future is the past.

And if you assume that that is a good metric, then over any given 10-year period, you're going to be happy that you bought real estate. So if there's a 10% decline, I think that gives us the opportunity. If you can find deals that are cash flowing with conservative underwriting, I think anybody that heard what James was saying about packing a pro forma, needs to go back and listen to that because that is super important. It's really important that we'd be conservative and we use historic data, even conservative historic data, as opposed to assuming that what's happened over the last two or three years or even the last 10 years is going to happen again because

it's unlikely to happen again. But use historic data and model out your deals. And if you find deals that will cash flow, that you're not at risk of running into issues over the next five or 10 years, you can be pretty certain that 10 years from now, those properties, you're going to be glad you bought them. And so, yeah, I see every percentage point drop in values, every percentage point drop in mortgage rates as being additional opportunity. And I think real estate investors should, instead of being fearful, because again, I remember back in 2008 and the number of people I talked to today that say, wow, I wish I would have

just pulled the trigger in 2010, 11, 12, but I was too scared to do so. We'll be looking back in 10 years and unfortunately there'll be people saying the same thing. Don't be one of those people. Well, because there's always the overcorrection. When there's any shift, like Jay was talking about, the fear ramps up and there's the over dip. And one thing I've learned is when I get cold feet, I'm like, oh, this is going to suck because it will. No matter what, as an investor, If you go through a market cycle, which you will, and if you don't think you will, you should not be doing this. But what I've learned is when I get cold feet and I stop for a second going, oh, man, this is going to hurt for a second, you have to keep buying because you buy through that over dip, you through the correction when rates shot up. And almost drastically, we took a major hit.

I mean, I'm talking six figure loss over 350 grand in a six month period. That sucks. That is not great for anybody. But the thing that we did right is I was looking at value. I'm going, wow, there's good pricing on things right now. And we kept buying. We were able to make up that loss in six months by buying those deals. Now, I would not be able to make up those loss if I was buying right now because the deals aren't as good as they were when it overcorrected.

And so those are things that you always want to do is going, what my core business, what is value? I don't want to get trapped on the numbers. Michael, am I buying good value? Am I buying below replacement costs? Am I buying below pricing that I saw three years ago? And that's the thing I learned most of 2008 for all the investors out there is keep a reserve bank. You have to have liquidity to grind through these events. And if you have liquidity to grind through the events, it also allows you to keep buying to make up those losses in a very short amount of time. And here's another thing to think about. Anybody that was investing three, four years ago, I wrote a Facebook post three years ago where interest rates were down around, well, interest rates

were at zero percent, mortgage rates were like at three, three and a quarter percent. And I wrote a Facebook post that basically said, buying real estate today, the asset isn't the real estate. Real estate was already a little bit overpriced at that point. The real asset is the loan. Getting a loan at three, four, even five percent is a tremendous asset in and of itself. even if the underlying real estate kind of stays flat for a period of time. And the reason for that is because having debt in an inflationary environment, when we have

high inflation, having debt is a tremendous benefit to the person that has that debt. Because you're paying off that debt in inflated dollars. You're paying off that debt in dollars that are worth less money in the future. And I suspect that over the next six months, there's a reasonable chance that the Fed, overcorrects with their cutting of rates. I think rates are going to be lower than the historic average within six to 12 months. And I think there's going to be another great opportunity for real estate investors to leverage relatively cheap debt. And within a likely inflationary environment over the next five to 10 years, that debt's going to be even more valuable.

That's a great point. And one of the most valuable parts of owning real estate is just locking in that lower debt and paying it down over time. It is, as safe of a return as you can get, I think, out there. Jay, what are the interesting dynamics in the 2008 market that I'm curious, your opinion on, is that credit got a lot harder. So we had this situation where prices went down, but it wasn't as easy for someone who might have said, hey, this is a buying opportunity to jump back in because there's really tough to get a loan. As James said, there's always an overcorrection. Loans were super easy to get, and then they were super hard to get. Do you think this, if the market goes down now, we might see a situation where

prices go down and credit actually gets easier to get if rates are coming down. What do you make of that? I'm not sure I agree. I mean, I've been through a couple of these cycles and we always seem to think that when lending is good and the markets are wide open, it feels like it's going to stay that way forever and we always make excuses for why we're never going to get in a situation where lending gets really tight. But historically, when there's a lot of fear in the market, again, let's go back to a fear graph. When fear is around a one or two or three, lending is wide open. It's up high. And as you move across that fear graph, you basically see a linear line down in terms of lender willingness and ability to lend. And so as you get towards

eight, nine, ten, and fear, lending basically dries up. I'm hopeful, and I'm relatively confident at this point, that we're not going to see a 2008 type event, that we could get to a typical recession where we see fear kind of in that, to make up numbers, four, five, six range. And I think the four, five, six range on fear is an amazing. opportunity for investors because typically you're going to see a lot of transactions in that range. You're going to see lending still relatively loose in that range. You're going to see values still relatively strong in that range. There's enough demand out there that I don't think that even with transaction volume doubling or tripling that we're going to see values drop. I think that this is going to

end up being a good recession if there is one of those things for us as real estate investors because I think it's going to give us a lot of benefits without the, without all the drawbacks of something as bad as 2008. Well, and I think the thing to for everyone to keep in mind, rates will come down, but that doesn't mean banks want to lend it to you. And when you go through transitionary markets, you know, I don't even call them recessions. I call them transitionary markets. We're just going into something different. And you just want to build the right toolkit for yourself. What is the toolkit? It's resources. When money is hard to get, you want to go meet with every type. of bank, hard money, soft money, local business banks, big banks. Because as fear, like Jay keeps

mentioning, creeps up, it hits your suppliers, it hits your contractors, it hits your lending and your banking, and you have to have access to liquidity. And that is what we've been working on for the last 12 to 24 months because we have to stay ahead of it. And if you want to maximize a transitionary market, you have to have financing. And it doesn't mean the financing won't be there, but you've got to pick up the rocks and find out who will lend it to you. And if you have that in your corner, you are golden during these ages. That's such good advice. Are there other parts of this toolkit that you think investors should be building out right now? Yeah, I mean, the things that you want, like, what are we looking for during a recession market? Well, we need financing, so the banking,

like I just talked about. We need access to quick liquidity. Outside regular banks, we want to make sure that our hard money lenders or private lenders are still there. If my private lenders are getting nervous, then we're going to sit down and talk about why they're nervous, where they're going to put their money, and should they be putting it elsewhere, or should they keep it with us? We'll have those conversations,

and we have those conversations today. And I think that's important because we're having them today because they know what our mindset is going forward, not that we're being irrational with the purchasing. Then other things that you want to build up is you've got to have your deal flow. I've spent a lot of time on the phone with these young guys, you know, because I'm now became the old guy in my market, the young guys that are out finding the deals. And we're not even buying from them now, but I know I'll be buying from them in six months. And they will be selling me everything at that point because the buyers go away.

You want to make sure that your contractors and your resources are not just available because when going to recession, they will be available. I promise you that. But you need the right guys. because if you hire that wrong contractor and a time when things are going down and then they walk away with your money, you're getting double popped. And so it's all about building those core resources that you need, right? If you have a property manager right now that's not quite hitting your quotas and not meeting your expectations, swap them out now. You don't want to be doing that when the market cools down, right? You want to be proactive right now, not reactive.

Great advice from both of you, James and Jay. Thank you so much for joining the podcast. If any of your listeners want to connect with these veterans, excellent investors, we will make sure to put their contact information in the show notes. You can, of course, connect with them on BiggerPockets.com and see what they're up to over there. Jan James, thank you so much. Appreciate you being here. Thanks, Dave.

Thanks, guys. Attention, passive real estate investors. Make sure you have the Passive Pocket Summit on your calendar. Better yet, plan on attending it in Denver, Colorado. from April 30th to May 2nd. This conference is built exclusively for the LP or Limited Partner. It's a great place to network and talk current deals and current strategies for accredited investors investing in real estate deals right now.

Go to passivepockets.com forward slash summit for all the details and use a coupon code podcast to save you $50. Hope to see you in Denver.