Motley Fool Hidden Gems Investing - Housing Trends w/ David Greene (BiggerPockets Real Estate)

Episode Date: July 17, 2022

If you're interested in real estate then David Greene, host of the BiggerPockets Real Estate podcast, is probably a familiar voice. He weighs in on: - The current state of the housing market - Real estate data he considers most relevant to watch - Most common mistakes people make when listing their homes - Best neutral colors! Host: Chris Hill Guests: David Greene Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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mortgage company. Anytime there's a change in the status quo, the initial response from everyone is to freeze. You're walking through the woods, you hear a twig snap, the first thing you do is freeze. I'm Chris Hill, and that's David Green, host of the BiggerPockets Real Estate Podcast. I caught up with him last week to get his thoughts on the current state of the housing market, the numbers he thinks are most relevant to watch, and the most common mistake people make when listing their homes for sale. But I started by asking about his unusual career pivot. Before becoming a real estate broker and hosting a podcast,

David spent a decade as a police officer. And I just wanted to know, how does someone make that switch? I had no intention of becoming a real estate investor, which is funny because we typically teach people to be intentional about the life they want to live and pursuing it. But I didn't start off that way at all. I wanted to be super cop. I was going to be a police officer for my entire career. I was 100% invested in that career. And I would say it was part practical. Just if you watch the news, you see that the relationship between law enforcement and the public is not what it was when I first wanted to get into that job. And it was part, what I

would say, spiritual. I felt like there was a plan that God had in my life that it wasn't going to stay in law enforcement forever, that I had been there to learn a couple of things about myself and be developed in certain ways, but there was a next step. And so I can see that like both of those things were kind of playing out at the same time, but the reality came down to, if I want to be a full-time real estate, something investor agent, loan officer, whatever it was, you need to have some kind of stable income to replace the stable income you're leaving. And this is the dilemma that every single entrepreneur slash full-time investor has to face is, yeah, I could go do all these great things, but I still got to pay the bills in the meantime. I need, I call it

like a belay, right? I want to climb to the top of this mountain, but I need something that will catch me if I slip. So for me, it was buying single family, residential real estate and renting it out. It's not the most glamorous way to do something. It's a very blue collar way of sort of building wealth, but it's compared to other forms of real estate investment. It's very solid. It's pretty, it's reliable. It's not like a short-term rental where you never know what you're going to get. So I just grinded away, worked a lot of hours, saved up all my money. I lived in other people's houses and just rented a room from them to save and started buying rental properties that cost the country until I had enough rent coming in. That was roughly the

same as my salary as a police officer. And then I had that freedom to go take the next step. So I want to get your thoughts on the current state of the housing market. But before we do that, let's go back in time a year and a half or so. You've been involved in residential real estate for well over a decade. Had you ever seen anything like what we saw in housing that started early in the pandemic, because I don't watch it as closely as you do, but I was blown away by not just the stories I was reading, but also the anecdotes I was hearing from friends of mine in different parts of the country. I had seen it before, and I had seen it between 2000 and 2006, which was the huge bubble that burst. And B and that's what caused a lot of people to think the

same thing was going to happen in this market. Cause it looked very similar. Now, if you understand the fundamentals of what made it occur, it's not very confusing. That market at the time was driven by bad loans being given out that caused the asset values to skyrocket. Cause if you could borrow cheap money and a lot of it, you can keep paying more for a property. And that brought more demand than there was supply. Now, the thing that was different is at that time, supply was still being created at a very fast pace. They were popping houses up everywhere. There were just new home developments constantly. So when the demand dropped, there was way too much supply, not enough demand that created the bubble immediately. Everybody stops buying houses. And

then you sort of get this like residual effect that amplifies the problem where you could buy a house, but the prices are coming down. So you purposely wait. And that's where it goes all the way to the bottom this time around. The reason that we saw this crazy run in prices would be a nice way to say it was a lack of supply. Now you take a lack of supply because we didn't have enough homes because we stopped building after that traumatizing experience that the country went through with real estate in 2009, 2010, but people kept becoming of home buying age every year when we're not creating supply. And this is obviously very generalized because local markets are different, but on top of a lack of supply, now we're creating cheap money. We're keeping

interest rates artificially low for a long time. Now we're printing ridiculous amounts of that cheap money, quantitative easing hit what we had never experienced. And that doesn't get talked enough about enough in my space that for a long period of time, $80 billion a month were being introduced into the economy that did not exist before. And it's always kind of shocking to me that that doesn't get brought into the conversation about why real estate prices went so high, but prices of everything went high. And we take an asset like real estate that is very easy to highly leverage. That's like, I'm just adding all of these catalysts that you threw into that same little pressure cooker of not enough supply. When we see the market starting to cool off,

And, you know, we just got a report from Redfin about how in the month of June, 15% of sale agreements on existing homes were canceled. Home builders are starting to see higher cancellation rates. When you hear data like that, do you think, well, this is just sort of the normal ebb and flow? Do you think it's due to rising interest rates and their impact on the housing market? or is part of this, um, maybe people getting cold feet because I don't know if you've noticed, but, uh, in 2022, the stock market hasn't done that well. Yes, that both of what you just said

are true. They're working together. So as far as people getting cold feet, I'm sure in most investment asset classes, you see the similar thing. People feel more comfortable when they're doing it as a group. I call it the flock of birds syndrome. Like when one, you know, you see a flock of birds going and they all move in one direction. Human beings feel more comfortable with that. You could refer to the whole, like, you know, a bunch of gazelles want to cross the river at the same time. So in general, when people see stock prices rising, when they see real estate prices rising, it makes it easier to get over the initial fear of what if I lose my money? What if something goes wrong? And so everybody rushes there at the same time, which is why most intelligent

investors are telling people to make your decision based off of fundamentals and numbers, not off of that emotion of safety that you get when everyone does it. However, the majority of people that are investing in stocks and real estate and crypto are not experts. They they're doing it because they heard someone else do it and they have fear of missing out. So you do see when everyone was doing it, everyone else wanted to do it. And now that there's a little bit of uncertainty, it's very easy to slam on the brakes. If you think about it, like I've seen this several times throughout my time of being investing in real estate and running real estate sales teams, as well as a mortgage company. Anytime there's a change in the status quo, the initial response

from everyone is to freeze. You're walking through the woods. You hear a twig snap. The first thing you do is freeze. Is that a tiger? What, what is that thing? And where, what am I going to do? So this isn't shocking me when you mentioned that Evan flow, it's very normal to see rates went up. That's a bit of a shock. It's not what we're used to. People stop and freeze. I saw this in 2017 when rates went up, I saw this with the very first shelter in place edict that came out during COVID, there was this several month of like, no one really knows what's going on. And they all wait to see what's going to happen when no tiger jumps out of the bush. And you realize, Oh, the market didn't crash. Home prices aren't plummeting. We're not going into a

depression. Business comes back to as usual. And it's a bit of a pet peeve of mine that every time you see this little pause, which is very normal to me, all this clickbait comes out where people say, is this the next depression? Is it all about to fall apart? And then four months later, it's to normal and no one ever talks about all the fear that got pushed into the market. Chris Hill Well, selfishly, I like that there's the housing bears, just like there are the stock market bears. There are always going to be bears out there who are just all too willing to provide the fodder for clickbait articles like that. We were talking before we started recording, I'm very much a novice when it comes to

the housing market. And I will see articles occasionally about specific cities in the United States. And a lot of times it's, insert name of city's housing market is red hot. And unless that city is New York, no disrespect to LA, Chicago, or any other city out there, but unless it's New York, I always have the same thought, which is, wait, so what am I supposed to with this information? Like, if Seattle's market is red hot, am I supposed to do something with this information? As someone who works in this field, one, how do you react to those types of headlines? And two, are there actually cities or regions of the country that you think are, maybe bellwether is too strong a word, but indicators of the overall housing market?

I would say, no, there's not cities that are indicator to the overall housing market. That's, that's not something people should worry about. And when you see an article that says Seattle real estate, red hot Austin, real estate, red hot, um, Los Angeles real estate is slowing a lot. San Francisco real estate is slowing a lot. The question shouldn't be, should I invest there or should I not invest there? The question should be what made that happen? Because if you can understand the fundamentals, they're very simple in real estate. It's one of the reasons that I really like it. It's easy to scale in this compared to other things, because you don't have to be a genius to understand how real estate works. Once you get the fundamentals,

when, if you look at the cities that have had the biggest, the most amount of articles saying this city is red hot, everything's going a hundred thousand dollars over asking price, no contingencies, blah, blah, blah. There's some patterns that you can see popping out with them. They were all very, uh, tech heavy cities. So tech companies were moving into those cities and they were becoming very successful. Money was everywhere. It was very easy for them to raise money. It's easy for them to collect it. Now they can pay more wages. The top talent is moving into the tech industry. Now you're making a ton of money because you live in Seattle or you live in Austin and there's still limited supply. So of course, prices are going to go up. You're

able to afford more. You can get approved for more and there's not enough inventory. So as supply remains constant and demand increases because you can pay more, it's not a shock that those prices went up. You did not see this happening in agricultural towns. Nobody was saying Bakersfield, California real estate is on fire. Okay. So you have this pattern of your epicenters of business, which has been tech, but it could be anything, right? Like whatever the flavor of the month is where those industries are paying more. If they have the ability to create more supply, you won't see prices expanding. If this is not happening in Kansas where there's land everywhere. Okay. These are Austin is a very specific city that only has so much square footage.

And especially if you were inside of the city limits, like inside of the river, it's going to be even more expensive than this developments that go outside of it. Uh, what you notice is that once those cities become too expensive, people start naturally asking, well, I don't want to pay that much for a house or I can't afford it. Where can I afford? And then they sort of expand like concentric circles away from the epicenter as, as they're cheap. And then those areas start to go up in value. So if you can understand that's all that's happening, that's making these cities values go up. You can find another area. For instance, Miami is, I think, in my opinion, probably the hottest market that I've seen. There's, they can't build houses fast

enough. And like you mentioned, New Yorkers are leaving New York and they're going to South beach and big, big, big money is going there. Remember I said earlier that the tech was paying their, their wages very highly. Well, as wall street goes somewhere, they bring a lot of money with them. So you should expect the wages that people are earning in South Florida are going to go up a lot exponentially. So I'm now looking at cities outside of Miami, where is that demand going to push into? And I'm going to invest there where it's a solid market, not a red hot market. And as Miami overflows, those are gonna be in the next places that go up. That's what I think people just look for when they see the article, Miami real estate is ridiculous. You can't get a place if

you want it. All right. Well, if the fundamentals are strong in Miami and we think New Yorkers are going to keep moving there and bringing all their money. Where would the next place be that that overflows? And can I get in there first? Are there national numbers that you look at or are, are, are, is, are they irrelevant when it comes to investing in real estate? They're largely irrelevant. They're interesting to chew on kind of like a piece of gum, but it's not going to give you any nutrition. And so they frequently make their way into the headline, into the articles, into the thing that catches your attention and you get to listen to, but there are many cities in America, many where houses are sitting on the market for 90 days

and they're not selling over asking. Like it's funny. Cause you know, you're dealing with one of them. When someone says we got a full asking price offer, as if that's a big deal where I'm from full asking price means you screwed up really bad. You should have went way over asking price. That's very normal. And it really just comes down to understanding supply and demand. If you're investing in an area where they can build more homes and they are building more homes, prices are not going to rise incredibly quickly. And you're not going to end up in these bidding wars. The other component of real estate that probably might seem a little confusing to people that are not used to investing in it would be that the cashflow in real estate is much more important

than most stock investors would consider like a dividend payment. That's the closest equivalent to it. But from my understanding is when you're investing in a stock that pays a dividend, And then it's kind of like icing on the cake, like, Oh, that's cool. In our world, that is the cake. The appreciation of the property is much more akin to the, the icing. So when we're buying homes, what we're spending more time looking at is this individual specific house. What, how much money would it pay me every month to own it? And then if it goes up in value, that's great. And that's one of the reasons that the national data is largely irrelevant to the real estate investor who's picking an individual home.

Are there national home builders that you think are worth paying attention to, or that you and your colleagues pay attention to? Is KB Homes a better company to give you an indication of where the overall market or individual markets are going than, say, D.R. Horton? No, I don't think so. I think that the individual home builders, because if you think about what they need to be successful, a lot of it is they have to have connections with the municipality and land that they can buy at a cheap price and then get the city to agree to allow them to develop it. It's not something that can be scaled. It's very highly dependent on the relationships that you have within that specific area and where you can get

the opportunity to get undervalued land versus something like, like in the stock market, the ideas that that company has that you're investing in can take place from anywhere in the country and are not interdependent on a local area. Let me go back to the previous question I had regarding national data. What is the data that you pay attention to? You can take that in any direction, including, by the way, other writers, other podcasts, because plenty of people listen to BiggerPockets to get a sense of how to think about real estate. I'm curious what the co-host of bigger pockets is paying attention to? I keep saying it and it doesn't pick up traction to be honest with you, Chris. Like, I'm not sure what it is that I'm doing wrong that people

aren't understanding how important it is. I think probably the people that enjoy investing in real estate, there's like a dopamine hit that they get from the actual seeing the house, making it pretty looking at the numbers on a spreadsheet. The individual home is what's fun as opposed to the overall numbers, but in our world that the numbers that you should be paying attention to are macroeconomic indicators of the government as a whole. I include myself in this group. There are a lot of real estate investors that have done very well over the last six or seven years. And many of my colleagues are giving themselves their credit for why they've done so well. Oh, I invested my money in the best thing. I'm up this much. This house has this much equity cash

flow so high. It's we've been running with the wind at our backs and it's a heavy wind for a long time. They have literally printed. We're not printed. Isn't the right way to say, especially if I said literally, but money has been created through very clever means so much that anything that you buy, any asset with any form of scarcity was going to go up. People are trading baseball cards. Bitcoin had a huge run because people were so concerned about the fact that inflation is eating up the value of a dollar. So I spend a lot of time looking at what is the federal government doing? Are they going to be printing more money? So this is one of the reasons that I did well after COVID when the shelter in place hit conventional wisdom was cash is King,

pull your money out, keep your powder dry. We're going into depression. There's tons of opportunity. You're going to jump in. You're going to buy houses for pennies on the dollar because someone lost it. And I would say all things being equal, that is what should have happened in a purely capitalistic society, that advice makes a lot of sense. I just bet on the fact that the president that was sitting in place and Congress, all of them were not going to let the market die. Just that the too big to fail thing is now like a, is a acceptable answer in a lot of ways. And I said, no, they'll print more money. They started this with president Obama with quantitative easing. There was no big pushback. There's a handful of people that are

kind of salty, you know, the angry conservative guy banging on the table and everyone kind of shoes him away. So I could see that because there wasn't a big backlash to this, they're going to do it again. And that's why I kept buying and I advised our clients, you should get, and sure enough, we had a three, four month window where everyone was scared and the market was soft for a little bit. And then boom, it took off and it hasn't stopped. So to sum this up, if you want to look at national data that would make sense for the type of asset class like housing, look at how much money is in circulation and look at the tax code. Are you rewarded for owning this asset or are you punished for it? Are they making a lot of money? Cause that money needs a place to go.

And real estate is one of the easiest places to park a lot of money compared to starting a company and trying to run it yourself. All right. Before I let you go, let me just ask a couple of very specific questions relative to the home buying and selling process. And you don't have to name names because I don't want to get you in trouble with your clients. But what is the most common mistake people make when they are listing their homes for sale? Oh, that's a really good one. And we're dealing with this right now. Greed. So sellers hear about everybody else's house was selling for such a certain amount, and then they assume their house should as well. And they don't take into account what it is that made the other houses sell for

more and then emotions get involved. So the house down the street sold for this much. You think yours should too. Theirs is way nicer than yours or a much bigger lot. And you are stuck in this, but this is my home. And I think that this is just as pretty. So is the mistake that they're working with a professional like yourself and you're like, I think we're listing this a little high. And they're like, nope, this is what I want to go with. No, it's more that the real estate agent, if they tell them what they need to hear, they'll sell with someone else. So then real estate agents want to tell you what you want to hear and hope eventually that you figure out that you went too high and it damages the relationship. So the problem is, frankly, is that if you tell

someone what they want to hear, you'll get the listing. And if you shoot straight with them, they'll go with someone else. But that's literally the opposite of what would be in your best interest. Some friends of mine recently sold their house and they went through the process of staging it. They got rid of a lot of their stuff and worked with a company that essentially staged their home. It wasn't until after they had sold it and they had moved out of town that I thought of this question, and I can't ask them, so I'm going to ask you. Do you have a favorite neutral color? It just seems like when you're looking at neutral colors, all is like 50 shades of white, 50 shades of cream. Uh, do you have a go-to neutral color?

Grays were very popular for a while. I noticed that, which was weird. I think that's something people are going to look back on and our kids are going to say, why were you so depressed? Why does every house look like Eeyore? The way we look at the green shag carpet, like what were you guys thinking? So no, I don't know that I have, I prefer like the sand tones. I like Browns and like beiges and like, and lighter, uh, shades of Brown, but it doesn't mix well with gray. So you typically go grays and whites or, or Browns and lighter ones. Uh, I think a lot of it has to do though, with the area that you're in.

So what you tend to see is, is every local area has, has a taste or a trend that everyone likes. And it's tapping into that because this is what they're used to seeing. It goes back to what you were saying earlier about sort of the herd mentality. It's like, well, everyone's doing this, so let's go with this. That's way too much of that goes on in real estate, but you're exactly right. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against,

so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.