The Science of Flipping - Is This What Could Crash The Real Estate Market?

Episode Date: July 20, 2021

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Hey, what's up, everybody? Welcome back to the Science of Flipping podcast. And on this episode, I'm going to be going over the big question. Is this the reason the real estate market is going to crash? Stay tuned. All right. So dude, when you talk about like potentially what could actually make this economy pop. And I mean, specifically when you're saying like, what in this housing market is going to be the thing that makes it pop? So here's what I would tell you is, is I actually think my crystal ball is broken. And I say that because I actually think what was supposed to make the real estate market pop was COVID, right? And so COVID came, COVID went, COVID's still here, but we're almost a year and a half, maybe a little less than that, but a year and four months into

COVID and the real estate market is doing nothing but appreciating. So the question I usually will ask myself, well, why is that still going? Because in any normal scenario, you would have thought that this was going to pop, right? I think almost anyone that has had experience in real estate and those that didn't just had some common sense would have said, this office right now, like our market over the last 12 months, and I would argue it's going to happen for another 12 months, has appreciated by 25%. That was just in 2020, right? So just in 2020, we had a 25% appreciation. I actually believe in 2021 when we're able to analyze the data, it's going to be the same. And here's two key factors of why I think that's going to be happening. First is the obvious, right? Like interest rates. Like quite literally, I just went and applied for a loan today. As a matter of fact, it's funny that we're having this discussion. And my interest

rate that I got approved for was 2.99% today. Right now, as we are having this discussion, I sent the realtor my underwriting approval and is a 2.9% 30-year fixed. So here's the deal. I have a 30-year loan at 3%, just under 3%. That's incredibly cheap money. So there's a lot of people in the market right now that are going after trying to find loans that they can afford the payment on. And so this is part of my challenge. And I would tell anyone out there that has not yet seen my YouTube channel or watched a YouTube video when I talk about this, I talk about it a lot.

Like people shouldn't necessarily be buying a home today unless they can afford the home. People buy on payments, right? So what they're doing right now is they're going out there and they're just qualifying for a loan at a low interest rate. For a home they can't really actually afford because it's a low interest rate. So they can afford the payment. Now, my opinion, don't buy a home unless you can actually afford the home

because there's a lot of maintenance costs, obviously, each and every year. I would say there's anywhere from one to 3% of the value of your home. So if I'm buying a million dollar home, I'm figuring every year, I'm going to have roughly $10,000 or so of maintenance. Now it may not be every year it's that high, but then we'll come to years where I need to do a roof. I need to redo the pool. I need to do an air conditioning, et cetera. And it really over time really rounds out statistically between one to 3% of the purchase price of your home is really what you're going to be spending on maintenance. So I would tell anybody right now, yeah, is it a good time to buy because the interest rates are low, but don't buy because you can afford the payment because you not only

have your maintenance, you also have your taxes, you have your insurance, and there's just other costs that go into a home, right? And so I would tell anyone, just make sure you can actually afford to own the home that you're buying. But here's the other thing. There's no inventory, right? It's simple economics, supply and demand. And again, I've gone over this on several of my YouTube videos, but there's still no inventory out there.

Now, this may be changing. So you're asking me specifically, is this foreclosure moratorium ending? Is that going to create this mass flood of inventory? The answer is potentially, but I would also tell you that the reality is the banks and government are not going to just go A, evict a bunch of people that have not been paying their mortgage and the banks aren't going to take back four or five million properties onto their books and become a sales person or a seller of real estate. They don't want to do that. We've already seen what happens back in the recession of 08, 09, right? So I don't believe the moratorium lift will actually help here. I actually think there's several other things that are, you know, going to be playing into this, right? I think interest rates raising will play into a slowing down of demand, right? Because someone like myself can afford to spend more than 3% interest, right? Like if it came back at three and a half,

I would still be able to buy a home. If it came back at four, I'd still be able to buy a home. But I'm not your normal person, right? There's a lot of people who are employees. They have very static income and the income may be less than 100,000 or well less than 100,000. So when interest rates start to go up,

then you start having challenges with people being able to even afford it, even though they can afford the interest rate and the payment, their DTI is going to really be affected, right? Debt to income. So they're going to still have a really high price because there's not a lot of inventory yet, but the interest rates are going up. And ultimately, I actually think this could be the number one thing that will affect the buying criteria, which will help lowering the pricing of the market. Now that helps everybody. The interesting thing right now is the Fed essentially has interest rates at

roughly zero, right? And so banks are able to lend out at under 3%, as I was just telling you. And so the combination of that, I actually think interest rates raising will help out the real estate economy more than anything. Obviously, it's going to create somewhat of a balancing act because literally, I'm in the process of trying to buy homes. I'm getting beaten out on almost all my offers. And by the way, I'm paying their asking price. That's the craziest part. I'm actually giving them the price they're asking for, and I get beat out. And someone like myself, being as experienced as I am, I'm actually giving them the price they're asking for and I get beat out. And someone like myself being as experienced as I am, I'm not willing to be stupid. And just because there's competition, I'm more apt to be patient and really find the home in the situation that best fits me

than just rushing in way over pay because the price that they are actually listing at is inflated anyways. Sometimes north of like 25% inflated based around the comps, right? All the comps that we teach as real estate investors, like that is not a thing because people are saying, well, there's nothing to buy, so they have to buy this. Well, then comes appraisals. Is the home going to appraise? And one of the things that I'm going through right now with these agents is, listen, I'm happy to make this, but I'm not going to pay a dollar above appraised price. And it's actually making me not the highest qualified buyer towards the agent because I'm smart enough to know that even though I'm going to pay a number that's not reasonable,

let's just say based around comps, I'm also smart enough to know I'm also not going to pay a dollar above appraisal. And if they're inflated by 10, 15, 20, 25%, and it comes back, you know, let's just say I offer a million three and it comes back at a million one, because that's really what the market value is. I'm not paying a dollar above a million one. And agents don't like that, right? Because they think there's just dumb money out there. And there is, there's a lot of people with a lot of cash and they're just dumping it in. So I actually think, you know, interest rates could be the biggest precipice

to where it could correct the market to some extent. I don't think it will crumble it. Now, listen, if the interest rates go up to, you know, 6%, that was the interest rate I bought at when I bought my very first loan, 6% my first home I bought. If it went up to that, I think it would be, I think the market would have a pretty large substantial correction. I don't think they would do that. I actually think there is no discussion about what's going to make the market crash. I actually will tell you right now,

I don't think in 2021, the market is going to crash at all. Could there be some small slowdowns here or there? We saw that a little bit back in May, I believe it was when they raised the interest rates a little bit, there was some slowdown, but I think 2021 is going to continue to appreciate in terms of values. And I think the interest rates are going to stay incredibly low. But again, to be aware of interest rates, DTI debt to income ratio appraisals that are going to be coming in, right. There still has to be an actual appraisal and all these homes. So it doesn't matter if they want to sell it at 1.3, if the comp says 1.1, the appraisal is not going to give them 1.3. Um, all that will get incorrect some. And then when people are getting corrections

on their price, they are likely now thinking, you know, should we be selling now? Is it that time to sell? And my answer would be yes. Everyone should be putting their home on the market. That also would give some level of correction is if the people that wanted to sell, start selling. But listen, at the end of the day, you know, there's also this idea that everyone has so much equity, they're doing refis, right? They may have a 4% loan or a 3.5% loan. They get a refi for under three, then they get to cash out and then they get to remodel their home. That is keeping people in their homes longer because there's such cheap money out there. Now, again, if the interest rates do go up, are people going

to refi out and do a cash out refi? Probably not. right? So my own opinion on this, and I'm glad you asked, is just I genuinely think the interest rate raising will be a bigger impact than actually the moratorium foreclosure. However, listen, at the end of the day, who knows anymore? That's kind of my ultimate answer. I think we need to be careful of it. I think if you're trying to buy a home right now, be patient, don't overpay, right? Even like someone like myself, I got a 2.99 interest rate, but I'm still not gonna overpay

just because I can afford to, right? I just wanna be patient and that's the best case scenario because at some level, somewhere down the road, and I believe it'll be somewhere in 2022, there will be a correction, there'll be more opportunity and I'll get to be able to buy a better deal, if you will, rather than paying top dollar. So that's my answer there.

All right, that's it. We did the outro and intro. That was 10 minutes. Felt like it was 20. I really liked that. I really liked that perspective. Like the perspective or our perspective? Your perspective, our perspective.

So let's just do more of it. Yeah. All right, so I'll stop this so we can stop recording. Hell yeah. All right, guys, so that is today's episode. This is my feeling specifically on what is happening with the real estate market and what potentially could happen. If you are not yet subscribed to my YouTube video, make sure to go to youtube.com forward slash Justin Colby. Make sure to subscribe. That word

is subscribe because I drop three videos a week, all things business, real estate, and entrepreneurship. Go to youtube.com forward slash Justin Colby. Make sure you're subscribed and I will see you guys or talk to you guys on the next podcast. Peace.