Epic Real Estate Investing - Housing Bubble Prediction Was Correct in 2008, What Now? | 1226

Episode Date: August 11, 2022

There are many thoughts and articles about housing bubble prediction. But, there is one person who did predict the crash of 2000 and did predict the crash of 2008. And so what does he have to say about today? Matt will walk you through Robert Shiller’s article about predictions on the current housing market. Listen to this episode and find out what are similarities, but also what are differences between 2000, 2008, and 2022! BUT BEFORE THAT, Matt goes around what are contingencies in real estate and how you can use them. Are you ready? Let’s go! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. What are contingencies in real estate? Well, ultimately, they're what protects you from making costly decisions. And I'm going to show you how to use them so that you don't make any costly decisions. You make just good ones. You ready? Let's go. Welcome to the all-new, epic real estate investing show.

The longest running real estate investing podcast on the interwebs, your source for housing market updates, creative investing strategies, and everything. else you need to retire early. Some audio may be pulled from our weekly videos and may require visual support. To get the full premium experience, check out Epic Real Estate's YouTube channel, EpicR-EI.TV. If you want to make money in real estate, sit tight and stay tuned. If you want to go far, share this with a friend. If you want to go fast, go to rei-Aase.com. Here's Matt.

All right, so, you know, when you're working on the computer, the undo button can be an invaluable tool. So can a contingency clause when you're looking to buyer's sale real estate. You know, from a buyer's perspective, you could look at it as your escape hatch or your get out of jail free card. And there are provisions like these for sellers too. And by the time we're done here, you'll know the six most common contingencies that you're going to encounter in real estate.

And what happens if they're not met? And then I want to give you the same epic due diligence checklist that I give to my private clients so that they don't make bad decisions. They don't make bad purchases. So you can make good purchases. so you can make good purchases yourself too. And I'd give it to you because, you know, life is too short to make bad real estate deals. And if you've got something that's going to help somebody else,

it's really, it's just not cool to keep it yourself. So it's my free gift to you, and I'll give you the link in a minute. All right, so a contingency clause is a conditional clause. You know, if this happens, then this can happen. Or if this doesn't happen, then this can happen. And contingency clauses are used to provide a way for one or both parties, the buyer or the seller, to back out. of a real estate contract if certain specified conditions are not met.

There are clauses in a purchase agreement specifying an action or requirement that must be met for the contract to become legally binding. And both, the buyer and seller must agree to the terms of each contingency and sign the contract before it does become binding. It's like this. They are safeguards for buyers and sellers that give them the right to cancel a contract if the terms aren't met. And there are many types of contingency clauses that can be added to a

real estate contract. And I'm going to cover the six most common ones. The first one is the mortgage contingency. This clause, it specifies a window of time in which the buyer must obtain financing to purchase the property. If the buyer doesn't secure a loan by that deadline, they can withdraw from the deal without penalty and the seller can put their property back on the market and look for a different buyer.

Number two, the title contingency. Now, this provides the buyer the right to obtain a title search and raise any objections to the status of the title to the property, which, must be cleared by the seller in order for the buyer to close on the transfer of title. Number three, the home inspection contingency. So this clause, it involves a window of time that the buyer has to get the property professionally inspected. The home inspection, it helps ensure that there are no serious issues such as, say, a leaky roof

that you didn't know about, or a faulty electrical system or structural defects. Because if it turns out that the property has defects and the seller elects not to repair or remediate the issues which are raised by the buyer, the buyer can terminate the contract without penalty. Number four, the sale contingency. So this protects buyers who need the cash proceeds from the sale from an existing property or another property to be able to afford this new one.

Most commonly it works like this. If a buyer needs to sell their current home first, buy the deadline indicated in the contract in order to fund the new purchase, but they can't find a buyer for their existing home, they can cancel the real estate contract without penalty. Number five, the appraisal contingency. So this contingency, it safeguards the buyer by stipulating that the property must appraise

for the indicated sales price at minimum or the contract can be nullified. This is because banks don't like to loan money to borrowers for a house that costs more than it's worth. This clause, it may also indicate that the seller can opt to reduce the price to the appraised value in order to progress the sale forward. And number six, homeowners insurance contingency. Now, this clause, it stipulates that the buyer, must apply for and obtain homeowners insurance on the property. If they can't get the necessary insurance, either party can withdraw from the contract. This is often requested by either the seller or the mortgage lender.

Now, let's look at what happens if a contingency isn't met. What are the actions, the following actions? And then we'll look at where you can download a free copy of the Epic Due Diligence checklist. Now, when a contingency condition isn't met, either party may consider the contract null and void. And this allows either party to cancel the deal. deal and pursue other prospects or other opportunities. For example, when a property under contract doesn't appraise for its expected value, the financing for the purchase is put at risk of cancellation. So here, the buyer or seller can either choose to cancel the contract, appeal the appraisal,

or mutually renegotiate the purchase price to accommodate for the lower appraised value. So either or both parties can suggest compromises and reopen negotiations in the hope that of keeping the deal from falling through. Or they can just cancel and pursue other opportunities if they think they can do better elsewhere. And if that's the case, what happens to the earnest money a buyer has deposited with the closing agent? Because this is important. The contingencies are typically tied directly to the earnest money or the good faith deposit. This is what a buyer often gives when going under contract on a property.

And if a contingency isn't met, the buyer usually gets that deposit back. The earnest money is held in escrow by a third party, it's kind of like a referee, so to speak, and if the buyer defaults on the terms of the real estate contract, if they default, the seller gets to keep their earnest money. But if the buyer put certain contingencies in the contract that allows them to terminate the contract legally, the buyer can have their earnest money refunded to them.

In this way, contingencies serve as an emergency escape hatch for buyers. And with that said, though, it is important to understand that both parties will be required to sign a release of that earnest money. Should have come to that. And if a seller drags their feet or is perhaps maybe a little disgruntled because the buyer canceled and resist signing the release in a timely manner, it could take a while before the buyer receives their earnest money, even though they are legally entitled to it.

Now, it doesn't happen often, but it does happen. Now, buyers, you should always include a financing contingency in your purchase agreement. Because with this in place, if your mortgage is denied for any reason, including a low appraisal, you have the right to get your earnest money deposit back. Now, it's good advice to have your homeowners insurance contingency in there as well, even if your lender doesn't require it. And homebuyers who need to sell their existing home first before buying a new one should also protect themselves with that sale contingency. Additionally, don't skimp on adding a title contingency. I mean, you want to make sure the property that you're buying isn't coming along with some

unwanted baggage like liens or judgments against it and it's being sold by the property's rightful owner. Without a clear title contingency, you could have issues in the future that make it challenging to resell your property. I mean, it's buyer beware out there. So be cautious, especially in a seller's market like the one that we're in right now currently. And here's why. Although these contingencies offer buyers valuable legal protection, if you clutter your contract with too many, sellers have the luxury of choosing a different buyer who may have less in their contract.

The fewer of the contingencies that you put in your offer to purchase, the more competitive your offer is, but the more risk that you take on as well. So it's a balancing act in a competitive market, and it will fluctuate with each offer that you make based on market conditions and that property. Sellers should also be careful not to negatively affect their bargaining position, which can happen if they choose to add too many contingencies to the contract, which could deter the best buyers. So if you'd like a copy of my epic due diligence checklist to make sure that you got all your

contingencies in place, to help you safely now, navigate your next purchase, you can grab it for free at epicdo diligence.com. And if you'd like some personal one-on-one help taking your real estate investing to the next level, go to R.EiA.com, answer a few questions about yourself and your goals, and then you can just pick a time for us to hop on the phone and brainstorm some ideas about what it's going to take to get you there. Because I routinely find that most people are much closer than they think, and all that's needed is just the right direction and support to make it happen. And if that's your situation, wouldn't it make sense to at least look into it? Go to

RIA8.com and we'll take a look together. Please stand by. We've got overhead to pay. We'll be right back. Boarding for flight 246 to Toronto is delayed 50 minutes. Oh, what? Sounds like Ojo time. Play Ojo, great idea. Feel the fun with all the latest slots in live casino games and with no wagering requirements. What you win is yours to keep groovy. Hey, I won. Be all the fun. Boating will begin when passenger Fisher is done celebrating. 19 plus Ontario only. Please play responsibly.

Concerned by your gambling or that if someone close, you call 18665331-260 or visit Comexonterio.ca. Remember that person that gave up on their real estate investing dreams? Neither do I. Let's keep going. Back to the show. I want to talk today. Let's see about the pending housing bubble.

So more and more people are on the doom and gloom side of things. And they seem to rear their heads every single day and share their new predictions. But there's one particular person that did predict the crash of 2000, did predict the crash of 2008. And so what does he have to say about today? What does he have to say about now? So I want to go ahead and show you an article that was just released and what he is predicting. So you can plan accordingly or you can take it with a grant of. fault and stay the path of what you were doing.

Okay. So we're talking about Mr. Let's see, Robert Schiller. So he predicted the 2008 bubble. And so his call for 2022, everyone is kind of like all ears because he also predicted the 2000. com bubble as well. And so he released a book about it in 2000,

and called it. And read the least other book, Is There a Bubble in the Housing Market, late 2004 and by 2007. we know what happened, right? So the article goes, as the pandemic here has the pandemic housing boom, which has pushed up U.S. home prices by 42% over the past two years, as it starts to fizzle out, it raises the question does Schiller think we're in another housing bubble? So on Sunday, he spoke to Yahoo Finance, and he told the outlet that he once again thinks the U.S. housing market is headed for travel. And his reasoning is home prices have haven't fallen since the 2007.

2009 recession. And right now, things look almost as bad. Existing home sales are down, permits are down, a lot of signs that we'll see something. And it may not be catastrophic, but it's time to consider that. A drop in home prices, he says, looks very possible. I don't think anyone is really dealing whether or not we're going to have a drop in home prices. We're all thinking there's going to be a little bit of correction. There's certainly some slowing down.

But at the moment, we are still appreciating. So the U.S. home price, there was a one stat in here that I haven't seen before and I didn't realize. So it shows the new home builds, right? So we've always been talking about how the demand or the two to the supply is so low and new home builders haven't been building at the rate that they need to. And we've seen a rapid decline here just last four or five months where the building permits is dropped, dropped, dropped, dropped and dropped. And so the builders almost stopped. But what I wasn't aware of was how much building had already started. So there was quite a bit of building that had started.

And the last stat that I saw was that there is nine months inventory of new houses. And that sounds scary. Like, oh my God, that takes us right into a buyer's market. And that is the recipe for a bubble. But in that, with that said, of those, that nine months of inventory, a lot of those houses haven't even been started yet that the permits were pulled. So technically the inventory is there, but with the cost of labor, the cost of supplies,

the whole supply chain thing, they actually haven't been started. Although they are there and they've, yeah, they have been started, but they're not continuing to build them right now. So they've totally stocked. So when you see like this, this whole article right here, he's talking about how the home builders might be getting hurt because they have all these projects going on that they can't finish. So they're going to get hurt.

But is it really going to impact the housing market? Is it going to impact you? What does this mean for investors? So he goes on to say that every bubble has a few things in common. And the first thing he's talking about is, and we know in 2008, that was a big deal. The builders were building like crazy and people were buying houses like crazy. And what happened was we had too many houses and we just didn't have enough people to fill them. So you can see this part right here of U.S. home flips.

And we had a bunch of new stuff hit. Okay, right here got started here in the first quarter of 2022. And that has come to a drastic slowdown, almost a dead stop. So he thinks there's a lot of speculation here. I don't think there is a lot of speculation because in 2008, we had more houses than people. And right now we have more people than we've got houses available to live it, even though the new.

home builds are in the new housing starts and all the new home builders are getting stuck with all this inventory, they're not ready to move in yet. They're not ready to move into and they've stopped building because they can't see a way out of how they're going to make a profit. So they've kind of stopped everything. So that's the first thing. The second ingredient that he's talking about and this is a little bit misleading as well, I think. The second element is over evaluation. So a housing bubble sees home prices go far beyond what incomes historically with support. And we're seeing that.

Like these housing prices in middle America are so high that, but the average income for those areas, they don't have the income or the job opportunity to support those housing prices. But what has happened is so many people have moved from the West Coast and from the East Coast and they've all moved inward and they've got a bunch of money. They're working remotely. So it looks like they are overvalued. Technically, the people there are making the money to satisfy themselves or excuse me,

to live in those properties. with no problem. So I don't know. I still, the other thing that he doesn't have here that he's not listing is what really caused the housing bubble of 2008 was the bad lending practices, the bad credit, right?

And right now, that is not the case. And that was the big domino right here. So why do some industry insiders think home prices, declines are unlikely? For starters, the country outlawed the subprime mortgages that sank the market a decade ago, Not to mention homeowners are less debt burdened this time around.

So back in 2007, mortgage debt service payments accounted for 7.2% of U.S. disposable income. Now it's just 3.8%. Like almost there's just a little more than half, right? So people've got a lot more money right now than they had back then. So it would suggest that people aren't nearly as fragile and the market would be nearly vulnerable. So I don't think the price, he thinks that we're coming into an adjustment. adjustment. What was the other thing he said here? Possibly at 10% deep client is what he's expecting, but not maybe just certain markets.

So what does that mean as investors? Really the big thing that we're looking at right now are the mortgage rates, right? It's becoming more and more difficult for people to buy a house, particularly first-time home buyers and particularly middle-class America. They can't afford the house they could have afforded just three months ago, four months ago. So they're slowing down in their buying activity. What are they doing? Well, a lot of them are moving over to rent. And here's the article that just was released today as well. This was actually just yesterday.

Inflation hit rental market as higher mortgage rates. Limited supply pushes up prices that is what they're saying. I've been saying this all along. So your position really well as a real estate investor by being a buy and whole investor because if the people there, the first time home buyers, the middle class America, they can't afford to buy a house, they still need shelter, they still got to live somewhere. So they're going to go and they are going to rent. And that's exactly what this is saying.

So the demand was competing for houses. And when we had, you know, a house would hit the market and you had 15, 20 people all coming in and writing operas and bidding that up. Well, they've left the buying market and they've moved over to the rental market. So it's really good time. If you've got some income property right now, it's a really good time to be a landlord. It's probably a really good time to go out and start looking into how to acquire.

And us as real estate investors, if you don't have the finances or you don't have the mortgage rates because that's making the cash a little bit more difficult, this is a time to really sharpen up on your creative financing skills. I'm talking about subject to talking about seller financing or a combination of the two and doing the wraps and what another good strategy is your exit strategy would be the lease option, right? and finding yourself tenant buyers.

And that's a lot of what we're going to be talking about on Saturday. So if you'd like to join us, please do. Beth's go over at Flip the Script Workshop.com. The other part that's right here is on Friday. It was revealed that the U.S. job growth unexpectedly accelerated in July. Define the fears of a slowdown and hiring, even as the labor market confronts the twin threats of scorching hot inflation and rising interest rates.

So there's something really interesting going on, and I'm going to point two things out to, actually three things really quickly, and then it will be, but employers added 528,000 jobs in July. The Labor Department said its monthly payroll report release Friday, blowing past the 250,000 jobs forecast that the economists were forecasting. So the unemployment rate, meanwhile, edged down 3.5%.

So it's really difficult to have a recession when unemployment, employment is so darn low. And right now we're at 3.5%. And so what I want to kind of point out to you is we just got this report that jobs are up, like almost doubled what we were predicting. But then you come over here and you look at the U.S. jobless claims, they hit an eight-month high. So the number of Americans filing new claims for unemployment benefits jumped by 9,000 to

251,000, the week that ended July 16th, the highest since November. 2021 and well above a market expectations of $240,000 pointing up to a cooler labor market. So on one hand, we have we have we've added all these jobs and on the other hand, we've hit an eight month high and jobless claims. So, you know, which one is accurate? And then we have this also. It's tough to see how we have both things going on right now. So a way of the layoffs is sweeping the US here and here are the firms that have

announced cut so far from Shopify to Tesla. So corporations are laying off people like crazy. So Shopify, about 1,000 workers. 7-11, 880 jobs. Vimeo, 6% of its workforce was laid off. Tesla turned 29 employees. Let's see. Rivian potentially about 5% in its workforce.

Gopuf, I don't know what that is, but 10% of its staff. It must be a big company. Remax 17% of its workforce. Microsoft, less than 1%. So it looks like they've got some security over there. JP Morgan, over 1,000 workers. But you're seeing this in the news every day. Compass 450 employees.

The whole tech industry is laying off. Redfin about 6% of its total employees. Coinbase about 18% of its workforce. So we're having these massive layoffs. The unemployment claims are up, but we're adding massive jobs. So it makes it really difficult to kind of, to predict as to what is actually going on, right? But what I see it as for real estate investors,

the simple concept of supply and demand, and I talk about this all the time. And if you've been here before, maybe I'm something like a broken record. But we just have too many people. 2008, we had more houses and not enough people. And now those things have switched where we've got too many people because the millennials have grown up.

Now they're buying houses. It's the biggest portion of our population right now, the peak age of the millennial is 32 years old, and the average age of the first time homebuyer is 34 years old. So that means right then that's just 24 months and probably about two years after that. So we got 48 months of the most demand for housing that we've ever seen in the history of this country. And so if we see the prices go up and down, just understand it's being manipulated. It's being manipulated by the monetary policy.

We can't suppress that we've got too many people. So we're not necessarily in a housing bubble. I see it. I see we're in a population bubble. And we've got to do something about it. So I see one of three things happening. Either one, the government is going to get involved in their gut building housing. I don't think that's going to happen.

But that's one option. The second option is the government is going to start subsidizing builders to build more housing. Now, I see that as a possibility, but by all accounts of what's going on right now, they're not taking any action at this moment to make that happen. And then the third thing is, we're going to have multiple families living under one roof. That's how the population is growing right now, and that's what the availability of the housing is. So that could lead to absolute chaos. And that could be, I don't know, chaos and unrest in the streets, or it could be something much more subdued, but we see chaos at the voting boots. So we will see which way it goes.

But we cannot ignore that we've got more people than we've got housing. And for me, from my perspective, you know, they got to live somewhere. And so if they can't afford to buy, I prefer that they live in my rental properties. They live in my income properties. And I would prefer that you out there and make those same types of investments. And they live in your income properties as well because that giant competition that just left the sales market is now entered the rental market. All righty. So that's what I got for you today.

If you'd like to join us this Saturday, go to flip the scriptworkshop.com. We're going to talk about me and a number of my expert guests of what type of strategies and what types of things and tools and resources and where you need to have your focus in this new economy that we're entering into. A lot of uncertainty and a lot of conflicting information, which makes me think that, you know, there's some chicanery going on. But what we do know is everybody needs food. food, water, air, and shelter.

And shelter is the one that we all have access to to make art to invest in. And so what the average person has at their disposal to create their wealth. And it's created more wealth for more people than anything else. And I think the next 48 months is the time to do it. Now, there might be some turbulence here over the next six months, 12 months, 18 months. Who knows? But I think two years, three years, five years, 10 years, looking back, you'll wish you got started right now.

I mean, just think if you bought 20 houses 20 years ago, what would you be today? Well, the big question when you ask yourself is, what would you be saying 20 years from now? And that wraps up the epic show. If you found this episode valuable, who else do you know that might too? There's a really good chance you know someone else who would. And when their name comes to mind, please share it with them and ask them to click the subscribe button when they get here and I'll take great care of them. God loves you, and so do I. Health, peace, blessings, and success to you, a metario.

Living the Dream. Yeah, yeah, we got the cash flow. You didn't know home for us, we got the cash flow. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio.com.