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BiggerPockets Podcast 553: BiggerNews January: Our Top 5 2022 Housing Market Predictions w/David Greene & Dave Meyer

BiggerPockets Podcast 553: BiggerNews January: Our Top 5 2022 Housing Market Predictions w/David Greene & Dave Meyer

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It’s the new year, and that means it’s time for 2022 housing market predictions! Recently, Redfin compiled a list of their ten top 2022 housing market predictions ranging from things like interest rate bumps, to rent hikes, housing price cooldowns, and more. But, are these predictions realistic, and if so, how should investors prepare for them to come true?

David Greene and Dave Meyer are back again to take a look at five of these ten predictions and give their informed, battle-tested opinions on which have the potential to come true. Dave has spent probably every day of the past year looking at housing market data and investing himself. David on the other hand has been running multiple businesses in the real estate vertical, allowing him to see directly what is happening in the market.

With the Dave-duo back in the podcasting saddle, you’ll be able to make wiser investment decisions this year while following the “pendulum swing” of wealth-building in real estate!

Have a happy, healthy, and wealthy 2022!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

David:
This is the BiggerPockets Podcast show 553. It’s going to swing back. So just be the savvy investor that pays attention, that doesn’t just follow the crowd and do what everyone else does. Find the area that’s prime for the pendulum to swing back in that direction, get in a little bit early and just weather that storm. And then you’re sitting in a great position when things turn around. You made an awesome point.
What’s going on everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast, where it’s our job to give you the tools that you need to reach financial freedom by investing in real estate. One of the ways we do that is by bringing you a monthly news episode, we call it BiggerNews. And that’s what we’re doing today, where we look at data and trends to help you make smart investing decisions. Here to help me out with this show is none other than the BiggerPockets VP of Data and Analytics, Dave Meyer himself. Dave, happy new year, first and foremost. What are we going to be talking about today?

Dave:
Well, thanks man. Happy new year to you. It is great to be back. Today, we are going to talk about our predictions for 2022. And Redfin actually came out with this really interesting article where they gave 10 predictions about 2022. They had their chief economist publish this. And we’re not going to go through all 10, but we picked four or five, I think five of them, and go through them and talk about if we agree with them, how we think it’s going to be different. And of course, we’ll relate it back to what this means to all of you real estate investors and how you should plan your strategies for the coming year accordingly. How’s that sound?

David:
I think that sounds amazing. I think that’s what everyone’s asking is what am I supposed to do? We’re in such a state of flux, maybe like I’ve never seen before. I think 2005, 2006, there was a bit of pressure on people to get in or get out, but I think at that time it was obvious to someone like me that if you looked at the fundamentals, it was an unhealthy market. It’s not as clear-cut in today’s world. So now more than ever, you have to pay attention to what’s going on with the law, with politics, with macroeconomics, with individual components of investing in real estate and all the different strategies that are available. There’s different ways to make money than what it was like 20, 30 years ago. And it was just buy a house, have a landlord form that your tenant filled out and manage it yourself. Would you agree?

Dave:
Yeah, absolutely. I think this is one of the most interesting, certainly as long as I’ve been a real estate investor the most interesting time, and I think it’s not clear-cut. And although we’re going to drill into some of the things that will happen this year, I think the main message that we talk about over and over again is how you can take this information and plan right now, but really what this means for the long term and how you really just need to keep focusing on the long term and plan your strategy accordingly, because that’s what you need to do when there’s short-term uncertainty.

David:
Beautiful. Well said. All right, before we get into today’s show, I want to take a brief moment to sort of bring a little bit of clarity into what’s going on with new year, new show. Obviously Brandon Turner, we’ve already explained he’s going to be stepping back from the podcast. So I want to let everyone understand what they can expect going into 2022 from the BiggerPockets Real Estate Podcast, the best real estate podcast on the planet.
First off, we’re obviously in a little bit of a period of transition here, but there’s a plan and it’s a great one. Many of you have said, we want to know what to expect. What days of the week can I expect what show to be airing? So I’m going to break that down here for you. On Thursday, we’re going to do the typical OG format, what people have been hearing for years. This is where we bring people on to interview investors that are doing really well. We have the Deal Deep Dive, the Fire Round, the Famous Four, that type of stuff. We’re not going to change. So at minimum, what you’re used to, you’re still going to get.
On Sunday, we’re going to be doing question and answer style episodes. So if you’ve seen Seeing Green, it’s going to be something like that. You can send your questions to biggerpockets.com/david, but I’ll also be doing Q&A shows with other investors on specific topics and some live Dave Ramsey style call-in shows. So I really enjoy when we bring people in from the BiggerPockets community and they get to ask me their questions live and I can dig in on what they are, ask some more clarifying questions, get a feel for what they want to do, and then give them advice.
I love when the listeners get to hear that, because every once in a while you come across someone and it really resonates with you that you’re doing the same thing as them and that advice is applicable. Or if you’re hearing people that are maybe a couple steps above you in their investing journey, you know what to prepare and what to expect. And at minimum you learn something. I usually try to do a good job of explaining the why behind the advice that I’m giving, the principles behind it, how the market works in general. So, that’s what you can expect on Sundays.
And then on Tuesdays is going to be our Wild Card. So every month we’re going to keep doing this state of the market show that we’re doing now, where we talk about relevant news and bring in sort of data-driven background support on what you can expect moving forward, and what’s happening in the market. We’re also going to show you some how-to style episodes on specific strategies, as well as investor coaching calls. We might even throw in a mindset episode every now and then. Eventually, we’re going to settle on one format for Tuesday and stick with it.
For now, we want to know what do you think? Can you leave us a review at Apple Podcasts or hit us up at [email protected] and tell us, what do you like the most? What shows are giving you the most value? And within those shows, what do you want to see more of? We are making huge efforts right now to listen to you and provide you the type of content you want. So please do me a favor, leave us some notes in the comments, email [email protected] and leave reviews on Apple and let us know. We would love to see more of this.
All right. And the last point, you’re probably thinking, well, what about co-hosts? Well, of course, Dave Meyer is here to join me today and Dave will continue to join me for these BiggerPockets news, but I’m also going to be joined by a few different co-hosts in the coming week. So you’ll be hearing some new voices on this show, which should be great. All right. With that, Dave, anything you want to add before we get into today’s show?

Dave:
Well, that’s all really interesting. I think there’s an awesome lineup for the show in the coming years and there’s just going to be so many interesting hosts and stories coming up. So I think you have an awesome plan for the show. I particularly like that. I think I qualify for the Tuesdays, right? Am I the Wild Card?

David:
You’ve always been a wild… I mean, you live in Amsterdam. What’s more wild than that?

Dave:
Well, I agree, but I just like the idea. Like, of course, normally you and I talk about data, the housing market, but does that mean we could just do whatever we want? Like one day we could be freestyling or having like a chicken wing eating contest or something. People have no idea what’s going to come on a Tuesday.

David:
Maybe we see like how many donuts we can eat in an hour or something like that. No, it won’t be that wild. We’re still going to have different show formats that we’re introducing. But Tuesdays will be the day that we kind of plug in different styles to give the BiggerPockets community, a chance to tell us which of those styles they like and which ones we should focus more on.

Dave:
All right. Great. Well, that’s great to hear. I love this new format and I’m happy to be a part of it whenever you invite me back, David. You say jump, I’ll say how high.

David:
Yeah, I think David and Dave, I think we make a pretty good duo. Do you think the same?

Dave:
I do, man. This is a lot of fun. I always look forward. This is a lot of dos. I really do like doing this show. It’s a lot of fun. I think they keep getting better. This show today is going to be awesome. We really go into some interesting stuff for 2022. So, if you are one of those many, many people out there who are thinking, what am I doing this year? Is it a good time to invest? What is going to happen? Make sure to stick this one out, because David and I have got you covered and look forward to spending more time with you guys over the coming year.

David:
All right. Without any further delay, let’s get down to it.

Dave:
All right. So for our first prediction brought by Redfin, we have mortgage interest rates will rise to 3.6%, bringing price growth down to earth. David, what’s your opinion on this prediction?

David:
First off, I’ll say, I think that that should happen. I would like to see that happen just for the health of our economy as a whole. I think when you hold interest rates low, that makes sense for short, temporary periods of time where you need a boost, but we’ve sort of become addicted to that boost. And so now the boost has become what we consider normal. And we often have applicants that are coming to my mortgage team to say, “It’s 3%. Why can’t I get 2.8 or 2.9?” And when that becomes normal, then it becomes why not 1.9 and it never stops.
So I will say, I think they should go up, but I don’t believe they will. I disagree with this prediction, although I hope I’m wrong. Basically mortgage rates are tied to the 10-year Treasury note and the 10-year Treasury note is affected by the decision to buy stocks or bonds. When the stock market is doing well, it’s harder to get people to invest in bonds. So they have to offer a higher interest rate to get people into that. And that higher interest rate drags up what mortgage lenders can charge on theirs because they compete with the bond market in the secondary market. I realized I just got kind of complicated with describing this whole… If you watched the movie The Big Short, it’ll make more sense. But as long as the stock market’s doing well, it sort of pulls everything else up with it. And so unless we see a significant impact in stock prices and the health of that aspect of our economic economy, I think interest rates are going to stay low.

Dave:
That’s an interesting perspective. I think the stock market point is interesting because obviously if people are putting most of their money into the stock market, bond yields are going to stay where they are or close to where they are now, which is low. But I do think that in recent weeks the Fed has signaled that they’re more likely to raise their target rate, which does have an impact on mortgage rates, but also has an impact on the 10-year note, which you were just talking about.
So I think that it could start to rise up. I think that 3.6, 3.5 is about right. I don’t think we’re going to get my much higher than that. And honestly, at that rate, I don’t think we’re going to see a huge decrease in demand. If mortgage rates stay in that three and a half-ish range, I don’t think people are all of a sudden going to start leaving the housing market. I think we’re going to still see pretty strong demand. But at the same time, I think housing price appreciation does have to start coming back down to earth because affordability is starting to decline. We’re not at some area where we were like before the Great Recession, but it is starting to come down. So I think it’s close. What do you think about the appreciation rates? Regardless of interest rates, honestly, do you think appreciation is going to stay where it at, double digits, or are we going to come back down to a more balanced market?

David:
I think your point compared to my point was the more important point is that irregardless of what interest rates do… Why do we say irregardless and regardless? I think they mean the same thing.

Dave:
I thought for most of my life that irregardless wasn’t a word. And I would argue with people all the time. I was like, “That’s not a word. You’re wrong.” And then I looked it up and it is a word and they mean the same thing. I’m pretty sure.

David:
And it means the same thing.

Dave:
I think they’re the exact same thing.

David:
That’s funny. All right. So I think regardless of what… And there it is. I just used them both synonymously. But there’s probably some grammar specialist that’s going to-

Dave:
We’re going to get corrected about this, for sure.

David:
Yes. [crosstalk 00:11:14].

Dave:
Tell us in the YouTube comments.

David:
Yeah.

Dave:
Oh, they will. We don’t need to invite them.

David:
I don’t think the interest rates are going to affect affordability. And this is one of the things that is worth noting because it often gets presented to our listeners, to real estate investors that interest rates and value are tied so closely that as rates go up, values go down, as rates go down, values go up. There is a relationship between the two, but it’s not interest rates. It’s just overall affordability. As homes become less affordable, ideally their price would come down. The problem is if rates go up, like they’re talking about in this article, they’re expecting $100 more per month in mortgage payments for the median home. It’s not like that’s nothing, but when you consider how much inflation is sort of tearing through our economy and the fact that wages should be growing at the same time, it doesn’t actually make it less affordable if it goes up by 100 bucks. If you make 100 bucks a month more at your job, that’s the first thing to look at.
The second is the supply side at this stage in the cycle is so constrained, there’s just not enough supply. Let’s say interest rates went up to 6%, that would make them much less affordable. I don’t think it would drop the price because guys like me would still buy them, because I’m not looking at, is it less or more affordable to making my decision should I buy real estate? I’m looking at, is real estate the best option compared to stocks and crypto and other asset classes? And as long as real estate is, wealthier people can still buy the assets.
So what happens when rates go up is it actually just hurts the person on the bottom of the totem pole, the one who doesn’t make as much wealth. So if I’m still willing to buy it, the price isn’t going to go down. When you work in the industry like I do and you’re constantly representing clients, I know if every house is getting 12 offers and we cut that in half and it only gets six offers, it’s still selling above asking price. It’s not going to drop the price. There’s such a limited amount of supply. So if you actually want affordability to go down, you have to make more houses. There’s no other way around it.

Dave:
Absolutely. And I think for the long term, the reason we talk about this stuff is because people want to know like, is now a good time to invest? And honestly, what you’re talking about bodes extremely well for the next five or even 10 years for the housing market because even if we increase our pace of construction, it’s going to take eight to 10 years to build out of this. And we all know that that pace of construction is volatile and might not continue on an upward trajectory. So, who really knows?
But I do want to just get back to something you said, that there is a relationship between interest rates and home prices, but it is not a perfect correlation. And if you look back in the seventies or eighties, when inflation was super high, interest rates were super high, home prices still went up during that time. And I think more relevant to investors right now is between 2011 and about 2018, interest rates were mostly rising and home prices went up. It’s really a question of, like you said, affordability. And if the Fed or the 10-year Treasury note went up so quickly, if it went up really fast that it was going to cause a shock to the entire system, then I think it could really hurt housing prices. But I think that’s extremely unlikely. If you look at what happened after the Great Recession, the Fed raised rates extremely slowly, they told you they were going to do it like six to 12 months ahead of time. So no one freaked out about it. And so I think that’s probably what’s going to happen again here.
So to me, when it comes down to next year is like, there’s all these variables in the housing market. A lot of things, like demand and, like you said, supply and inflation are all sort of pushing prices upward, right? That’s like upward pressure on pricing. Affordability, I think is the one thing that could impact it negatively, but I don’t think that means housing prices are going to go down. I think it’s instead of seeing 10, 15, even 22% year over year growth, like we saw last year, we’re probably going to get, I think somewhere into the five to 8% year-over-year growth next year. Redfin here seems to think it’s about three by the end of the year, but I think that’s actually a little low personally.

David:
Yeah, I would agree with you. And I don’t think that’s bad. I would like to see less growth in real estate, as crazy as that sounds as a person that owns it. Just because if I’m looking at the economy as a whole, it is not healthy how fast these assets are increasing in price, because it makes it very hard for the person listening who’s trying to figure out, should I buy a house or not, to make that decision when it’s ridiculous when prices are going up that much. I’ll cap off this point with this fact that you mentioned. In 1981, the interest rate was about 18.5%, 18.45% and prices were still going up. So for those that are like, I can’t pay over 3% interest, they were paying 18 and a half and people were still buying homes and the value of those assets were still going up, but not as quickly as they would have been. That’s why the Fed did that is they’re trying to slow down how fast these assets were appreciating.

Dave:
Yeah, absolutely. That’s a great point. So with that, because you wrapped that up so nicely, let’s move on to the second prediction. Number two, new listings will hit a 10-year high, which will hardly make a dent in the ongoing supply shortage. I’m really curious about, you must know a lot about this with just running your business, curious what you think about new listings hitting a 10-year high.

David:
A bit of wisdom I want to offer to the listener. Whenever you’re told something like, well, there’s a foreclosure crisis coming because of all the forbearance that happened during COVID-19, it’s typically presented in a clickbait style that is oversimplifying the truth. So what a lot of people were hearing for a long time is, I’m going to wait because foreclosures are coming. We’re going to have a crash and I’m going to have dry powder. And I was one of the few people that was saying, yeah, I don’t think that’s going to happen, buddy. I think that by the time that those loans are in default, that the price of the asset will have increased so much that they’ll just sell it. They’re not going to go into foreclosure. And the demand is so strong that a lot of those people could put their house on the market. It’s not going to even make a dent because there’s such a shortage in supply. And we still haven’t seen this foreclosure crisis, that many people were ringing the bell saying, hang on.
The only point I’m wanting to make is that when you hear information like this, you got to dig deeper. You cannot just look at the headline and say, oh, that’s the case. Yahoo Finance told me to wait. So I’m going to wait. And this is another example. The point I made earlier about when there’s 12 offers and half of the buyers leave the market or get priced out, there’s still six offers for every property. The impact that has on the overall price an asset sells for, it’s not a big difference if I can get six offers for my seller versus 12. I might be able to get a little bit more money if I have 12 buyers, as far as how much they’ll pay over the asking price, but it’s not like I can get twice as much money. There’s a lot of diminishing returns when it comes to these facts.
And so what people need to understand is though there is more inventory coming, which I do agree is happening, it does not mean that there is enough of it to make up for the shortage in supply. If you pour a cup of water on the beach in Hawaii, when you’re hanging out with Brandon Turner, the sand sucks that water up really quick. That’s what we should expect to see with the new housing supply coming in. Now, there could be a few specific one-offs where they built too many houses in one specific area. That could lead to that area’s prices dropping. Or a certain type of asset like, maybe they build too much A-class commercial multifamily real estate. And so there’s not enough demand for that. So prices drop as they have to, then go compete with B-class places to fill vacancy. The savvy investor will look for those types of opportunities, but over all, they can’t build houses fast enough for the amount that we need to sort of bring equilibrium into this dance.

Dave:
Yeah, that’s a really good point. I think, disclaimer to everyone listening to this, when we’re talking about this stuff, we are talking about national level. So if you’re thinking, oh, that’s different in my neighborhood, that could be true. What we’re talking about in these predictions today, we’re talking about on a national macro scale. And I think that’s a really good point. There are areas where people are overbuilding and there are also areas where maybe there will be a foreclosure problem or a specific asset class will hurt. But demand just is so strong right now.
Usually this time of year home sales start to go down, listings start to go down, but that’s not happening right now. And I think people are saying like, oh, it’s a bubble, but people know what the prices are right now and demand is remaining high. And so I think a lot more people are going to start becoming comfortable selling into this market. And I think a lot of the reason that we’ve seen low inventory so far is all the things that you just said, but also, if you were going to sell a house, there’s all this fear that you’re going to not be able to buy something to move, you might not have somewhere to go.
And so I think if what we were talking about earlier happens, and we start to see the appreciation rates come down to three, five, 7%, something like that, and the housing market becomes even a little bit less competitive, yes, we are still going to have a super competitive market. I’m talking about marginally less competitive, but then I think we will start to see people listing their homes more. But when they list a home, they also become a buyer. So it’s not like they’re just going to suck up demand and there’s going to be no demand. But I do think generally with this prediction, listings, I don’t know if it’s going to be a 10-year high, but I think listing will increase next year, but not to the point where all of a sudden it becomes a buyer’s market. I think we are in a seller’s market for at least the next year or so. I don’t know what happens past 2022, but I don’t see an end to the seller’s market next year.

David:
It’s a really good point. I think when we talk about interest rates possibly going up, they’re not going to affect home affordability as much as they’re going to affect the amount of homes that are available to buy. So let me break that down. If you own a house, Dave, and your interest rate is, let’s say, you refinance into a 3.1% interest rate and you bought your house for 500, it’s gone up to 800. So you’ve got, say, a quarter million in equity and you’re thinking about selling. Well, what you’re really looking at is, can I get a house or a property or an area that I like more than the one I have without it breaking the budget? I don’t want to have to become house poor in order to upgrade. And interest rates do affect how much you’re paying for the new property.
So you may move your equity of 250,000 into the new property. Your property taxes will probably go up a little bit, because if you’re selling your house for 800 and you’re buying one for 800 or 900, your previous tax base was at 500 K. So that’s going up, so you’re losing a little bit there. But imagine the interest rates have increased to 5% or even 4.5% from the time you refied. Now you’re getting out of a loan at 3.1% and you’re getting into one at four, four and a half, 5%. Even though overall affordability hasn’t changed compared to what you are currently paying, it’s not as attractive. And so there’s more people that will say, you know what? I don’t want to sell my house because then I just got to buy a new one. My taxes go up, my interest rate’s going to go up. It’s less affordable than what I have.
So when we tend to look at buying a house, we’re always looking at just should you get in or not, renting versus buying. And it makes way more sense to buy in most cases. But when it’s selling and then rebuying, interest rates do affect that a lot. So as rates go up or if they go up, I think you’ll see less people moving. There will be less people putting their house on the market to go buy new houses. Which means there will be less to pick from, which might actually make the prices go up even more, because inventory’s coming out. So, that’s what I look at when I’m looking at interest rates. When they go lower, people make the decision to move or to refinance. Business gets done more often. Just like with the 1031 exchange, if you have that option, you’re more likely to sell and buy something else. If they get rid of the 1031 exchange, it doesn’t mean they’re going to collect more in taxes. It means there’s going to be less transactions happening and overall less people making money in those transactions to pay as income.

Dave:
All right. Well said. So basically I think we’re both feeling like listings will probably go up next year. I don’t know if it’s going to hit new highs, but I do generally agree that even if they go up, it’s probably not going to really change the supply and demand dynamics.

David:
No. And the last piece I’ll add before we move on, is that typically when you’re in an environment with not much supply available, new home construction is an attractive option because you can sort of avoid the multi offer, crazy bidding frenzy. But with the price of materials going up as much as they have, our supply chain issue is becoming a bigger deal and the shortage in labor with less people wanting to work, new homes are becoming much more expensive than they were compared to resale. So just temper your expectations now that you’re probably not going to get a bargain on a new home like you might have, if you avoided the bidding war. They’re going to be even more expensive than existing inventory.

Dave:
Yeah. That’s a really good point. Okay. Prediction number three. Rents will increase by 7%. What do you think about this one?

David:
Yeah, I think that’s a pretty healthy expectation to have. I see this in my own portfolio as 7% or more. Obviously this depends on market by market. So if you’re in an area with more rental options, they don’t go up as much as if there’s less. But you made a very good point before we started talking here that inflation may be at 7%. And so it could be a net zero, even though you think you’re making more money.

Dave:
At the time of this recording, the most recent CPI data shows that inflation’s at 6.8 or something like that. It’s nearly 7%. And so I honestly think that that could be a low prediction. I don’t think it’s going to be much higher than that, but if everything’s going up 7% at a time where, I don’t have the data in front of me, but I know that vacancy is at an all-time low right now in the US. So at a time where inflation’s going up and vacancy’s at an all-time low, that is probably driven by the fact that people aren’t in the housing market and don’t want it. There are people who don’t want to get into this housing market. And so there’s demand for rent and all of a sudden I could see rents going up another seven to 10%.

David:
Yeah. One thing that I would add on to this point that is good for homeowners and landlords at this state of the market is that as inflation goes up, even if inflation just keeps pace with rent growth, so both go up by the same amount, seven, eight, 9%, the one thing that benefits us is that our mortgage rate stays the same. If you have one of those fixed rate loans, you’re benefiting, even if inflation and rent are staying the same because your mortgage payment is low. And that’s one of the reasons why you want to buy real estate and wait, because time is the most important ingredient in this cake we’re trying to bake.

Dave:
Absolutely. That’s a really good point. One last thing I’ll say is that we’re talking a lot about housing prices and I think that even if housing prices do come down again, it doesn’t sound like either of us think that’s going to happen, I think rent could still go up. All these things are not necessarily tied together. Like things don’t all go up or all go down.

David:
Yes. Great point.

Dave:
And I think that the environment for rent to grow is pretty strong regardless of what happens with housing prices. So I think 7% is a good guess. And I think it might even be a little bit higher.

David:
That’s such a great point about the don’t oversimplify, right? Because like, as groceries go up, that doesn’t mean that bacon goes up the same amount as Top Ramen. They’re different depending on how they’re made and rent is independent of all these other things because the housing supply is different in different parts of the country.

Dave:
Has Top Ramen ever gotten more expensive in the history of Top Ramen? I think it’s like always a dollar, right?

David:
Yes.

Dave:
It’s just, it’s reliably the cheapest food you could possibly buy.

David:
It’s the one win we can count on. I love it.

Dave:
Yeah. Inflation can’t touch Top Ramen. It’s got nothing on Top Ramen. All right. Prediction number four. Home buyers will relocate to affordable cities like Columbus, Ohio, Indianapolis, and Harrisburg, Pennsylvania over the Sunbelt. And I’ll just say that Redfin does provide some data that shows that not necessarily demand is going down in the Sunbelt, but that it is his peak. Like the craziness peaked and people still are moving there like crazy, but not peak craziness is behind it. So what do you think about this?

David:
Okay. I don’t think the average American is willing to move from Miami to North Dakota to save on rent. That’s the first thing that I would say. So I think that we may see some of this in the future. In my humble opinion, it will be more tied to the metaverse than it will be to anything else. If your job requires you to be in an office somewhere, that’s where you’re going to live. It doesn’t matter what rents are. However, if you can make your money coding software and it doesn’t matter where you live, some people may move into these cheaper areas. And if you’re somebody who’s just, it’s like WALL-E and you’re just jacked into the metaverse like it’s the matrix all day long, maybe you move to an area like that because you’re not spending as much time in the real world, but I don’t anticipate that happening anytime soon.

Dave:
Yeah. I tend to agree. I do think that there is this longstanding trend towards smaller cities, but I don’t think small cities. We used to say that Denver and Austin were like the small secondary cities, because they weren’t Chicago or New York or LA, but those are big cities. At least in my mind, those are big cities. Are there going to be new up and coming smaller markets? Yeah, definitely. I don’t personally know enough about any of these three cities. I don’t know Harrisburg. I’ve been to Columbus. Columbus is cool, but I think some of them will emerge. But ultimately people live where there are good jobs. And so yes, like you said, there are people who can work anywhere now and they might choose smaller cities, but I think really what it comes down to is not necessarily small or big. A lot of this comes down to quality of life. And I think you see people move to Boise because it is a good climate generally.

David:
Yes.

Dave:
And people like living there. It’s not because they’re affordable. It’s because it’s a great place to live. And if that happens, they’re affordable now and then they’ll get more expensive. You see this… I invest in Colorado, you see this all over Colorado. Even these small places, they have high quality of life and they go up. So if I were trying to look for the next place, I’d look for places that have really high quality of life, a good economic growth. It’s pretty simple.

David:
And marry that with affordability.

Dave:
Yeah. Right. Yeah.

David:
Don’t just look at affordability and say, oh they’re cheap. That’s where I’m going to go buy.

Dave:
Yeah, exactly. Yeah. A lot of times they’re cheap for a reason. So just think about that. Some of them are diamonds in the rough for sure. But some are going to be cheap for a reason. All right. So, that was number four. So I think generally we think affordable cities are probably going to see some growth, like everywhere else, but I don’t think the total dynamics of where people are going to live have changed and high quality of life, affordability are definitely going to play a role here.
All right. So this is the last one. And I find this one pretty interesting, because I have a strong opinion about this. So I’m curious to what you think. Condo demand will take off. And I think the reason they’re saying this is because over the last year we’ve seen that suburbs have grown faster than they have since the Great Recession, big cities, metro areas are growing a little bit slower than they have relatively compared to the suburbs. So what do you think, do you think condos are going to take off?

David:
Yes, but I think that’s healthy. So like you said, before COVID-19 hit, condos were all the rage. If you were in a big city, if you were in Austin, Denver or San Francisco, Seattle, if you were driving around, all you saw were cranes everywhere, building up. They were all building condos. And it was very trendy because, especially millennials, they like to be within walking distance or biking distance. And so people would buy condos and not have to have a car. They wouldn’t have to cook. And what really stopped that was two things. When COVID-19 hit, people were afraid to be in close proximity to each other. And the whole benefit of living in a condo is you got a great location. Well, they weren’t great locations because entire cities were shutting down.
So we saw an exodus of people out of San Francisco condos into where I am, the East Bay, like suburb type areas where people would have space. It became incredibly hard to sell a condo and incredibly hard to buy like an estate or in the suburbs. Well, as that changes and things open up, people are going to flock back into condos because that’s the only thing that’s going to be affordable. It’s getting very hard to buy single-family homes, because there’s so much demand. And so if you want to buy anything, the new starter home is probably going to become the condo.

Dave:
That’s a really good point. I agree with this prediction that we’re going to see prices sky rock, because they’re cheaper. But I’m going to just alter this prediction because I really wanted to just ask you, would you invest in a condo?

David:
Yeah, I do invest in condos occasionally.

Dave:
You do? Okay.

David:
Like the two I bought in Hawaii where both condos and I’ve seen a couple town homes that I went after in the San Jose area. I wasn’t the winning bidder, but I was looking at a 1,600 square foot condo in San Jose for like $800,000 where a house of that same would be somewhere between 1.4 and 1.6 in a lot of those similar neighborhoods. And they were house hackable as well. Like you could rent the rooms out to different people. Now you have to look for things like, is there enough parking that you can put everyone in? Do the regulations allow more than one person to be living there if they’re not in the same family? But I think condos are a smart, if you’re in the right area, appreciation play. And especially if you’re a person who’s renting instead of buying, that’s almost a no-brainer, is you can get in a condo and lock your payment in place. And so it doesn’t go up like increasing rents are going to be driving your payments up.

Dave:
That’s a good point. Yeah. I think especially if it’s your first, if you’re investing, you pick a place that you think is going to appreciate and you want to live in it, a condo could be a great way to do it. I just have this irrational fear of HOAs. I just hear these stories about what happens with HOAs. And for some reason I’ve always been hesitant to even look at condos.

David:
It’s very tricky. I look at analyzing an HOA the same as I look at analyzing an area. So if I’m going to go buy somewhere, I’m going to look and see, what is this city like? What’s their employment like? What is the quality of life like? How well is their government managed? Are they growing? Are they thriving? Are they redeveloping? Or is everyone that lives there upset because all the money went to like one county hospital and their roads haven’t been fixed in 40 years or something like that? You kind of got to look at an HOA the same way. Do they have healthy money in reserves? Are they managed by a board of people that want to keep costs low? Or is it opposite of that? I mean, frankly, I think HOAs are one of the biggest rackets that’s out there. I’ve often said like, when I retire from investing in real estate, I’m just going to manage HOAs because it seems like the easiest way. And it’s so easy to win compared to everyone else because the effort that they put into running them is so low.

Dave:
Totally. I just feel like, this is just totally biased, but like my mom lives in a condo and she tells me these stories about these special assessments where she has to come out of pocket for all this money, and it just sounds like people who don’t know anything about real estate making decisions about your investment, which worries me. But you’re right. That’s a broad generalization based on very limited information on my part. So I was just curious what your thoughts are, because I’ve honestly just irrationally steered clear of them in my investing career.

David:
Yeah. I always thought like you too. I did not like… In fact, when you had the option of condo versus non-condo, I always steered people away from HOAs. It’s just, you’re not really having that option anymore. So now here’s the way that I tend to look at it. The people who are running the HOA are voted in by the members of the people that own the real estate. In general, if it’s a community of people that are, I don’t want to say ignorant in a negative way, but just without knowledge of how home values work and real estate works, maybe they’re not business mind, they tend to fall for the popularity contest and they vote for the nicest, cutest, friendliest person and say, I want them to be in there. And that person’s usually incompetent and that’s why prices go up.
If you’re in a more wealthy area where people earn more money and they have more business savvy and they all own those condos, they’re much more careful about who they vote into place, as well as the accountability that they put on the people running the HOA. And so they tend to be run much more efficient. I think the danger is you can’t lump it all together and say HOA or non. You have to analyze the individual HOA, just like we have to analyze every other aspect of owning real estate.

Dave:
That’s a great point. So anyone listening to this, if you’re thinking about a condo, you have one more step in the analysis.

David:
Yes.

Dave:
Doesn’t mean you can’t do it. It just means you got a little more due diligence to do when you’re going into it. That’s great advice. Actually, my short-term rental has an HOA, but it’s an optional HOA, which is just amazing, because it’s not a condo, it’s a homeowner’s association for a subdivision. And it’s just like, if you don’t want to be a part of it, you could just bow out and then you have to pay for your own trash somehow.

David:
That’s cool.

Dave:
But I did look at it because short-term rentals and HOAs don’t always mesh really well together. And so this HOA has a policy that they allow short-term rentals, but I don’t know if someone could come in and change that, and so I can just dip out of the HOA if I want to and then do my own thing basically.

David:
That’s a great example of looking into it deeper. My primary residence is in an HOA. It’s about $176 a month, which in California’s almost nothing. It’s a very big community. So there’s so many properties that are in there that they don’t need to raise the amounts on us every single year. There’s an attendant that has to check in anyone that wants to come in or go out. So it cuts down on security risks. They have people that drive around all night long. A lot of people in my community, as crazy as it sounds, leave their doors unlocked because the only people that can get in the community live in the community.
And then they are very strict about the condition that the properties are in. So if you’re worried about the neighbors that bring the value down, the HOA sort of plays the police for you and they enforce that. So I’m happy with the HOA service I get where I live, but there’s other ones that are nightmares, just $900 a month and they’re constantly bringing special assessments. It’s horrible. So I wouldn’t say, to recap that, don’t write it off, but also don’t assume that it’s good if it’s an HOA.

Dave:
Yeah. All right, cool. So sounds like we agree condo prices are probably going to come back. I think generally just to round this thing out, these trends of people moving to the suburbs, I think they’re going to keep going. We’re not going to see flight from the suburbs. Not everyone’s going to move back to the city, but I think the old ways are going to start coming back. People always bet against San Francisco or New York and it never happens. We’re going to start seeing the cities that have carried American real estate and the economy for decades, continue to do that, Houston, Boston. All these cities, they’re going to continue to keep growing.

David:
Yes. You have to look at the pendulum swinging, right? At one point New York, it was a terrible place to live in, it had tons of crime. And then the pendulum swung really far. And then the values of real estate went up as crime dropped and the amenities that were available increased the desirability. And then the pendulum swung back the other way. And now everyone’s complaining about New York and they don’t like the measures that happened when COVID hit. It’s going to swing back. Right? So just be the savvy investor that pays attention, that doesn’t just follow the crowd and do what everyone else does. Find the area that’s prime for the pendulum to swing back in that direction, get in a little bit early and just weather that storm. And then you’re sitting in a great position when things turn around. You made an awesome point, Dave.

Dave:
Awesome. Well, well said. Okay. So that’s the end of my Redfin predictions that I wanted to go over, but I thought it would be fun to end with some, I don’t know if they’re predictions, they’re just like sort of questions going into 2022. So I have one for you and if you have one for me, please feel free. And I honestly think we should probably do a whole show about this, maybe in the new year we will. But my question is, what do you think will happen with real estate in the metaverse in 2022? And I’m teeing you up here. So let’s keep this to five to 10 minutes because I think we should do a whole show about it, but just what are your high-level thoughts on this?

David:
I have an agent on my team that’s a specialist in this. He owns real estate in the metaverse, Decentraland and a couple others. We’re actually helping some people that come to us that want to learn more about it, teach them about this and then represent them buying real estate in the metaverse just like it would be elsewhere. Man, there’s a lot you could get into about it. Overall, I think if you look at buying real estate in the metaverse using the same principles that we do real estate in the real world, you’re okay. So the reason real estate’s valuable in the world we live in now is because it gives people a place to go in an area that they want to go to. So you want to live in a certain area, well, you need a place to sleep and to keep all your stuff, or you want to visit a certain area, you need a place to take a shower, park your car, sleep. It’s very practical.
So if you get into the metaverse, the first thing you have to know is you’re speculating on which area will be the one that everyone wants to go to. And that can change, just like there’s a super hot club in town that everyone goes to and a year later they’re going to a different club, or you’ll see this with restaurants over time. When you buy this type of real estate, it’s not the same as just buying a single-family home that’s likely going to be, unless you bought it in Detroit, it’s going to have consistent demand. It shifts a lot.
So it’s much more speculative than the real estate that we’re used to, where we encourage people just get in and buy it, and you’re more than likely going to be fine. The principles are different if you’re in a place like the metaverse. So I would say, I wouldn’t encourage people to get into that until they’re already sort of financially stable with normal real estate investing or how they’re running their finances. But I do think it will work very similar to how we see real estate working in the world we live in now.

Dave:
Totally. I think someone is going to make a ton of money on the metaverse. How they do it and where they do it, I’m not a hundred percent sure. I mean, I think this idea that there is going to be a metaverse, like basically this social network… And for those people who don’t know, basically the metaverse is like a virtual world where people can create avatars and they have their own economies where you can buy things and you can showcase your NFTs and you can even attend a concert. Actually, Justin Bieber just hosted a concert in the metaverse the other week.
So I think that this idea, if you are familiar with games like Minecraft or people, our age are probably familiar with Second Life, stuff like that, then I think it’s a natural extension that something like this is going to succeed. Is it Decentraland or the Sandbox, I’m not a hundred percent sure. Like you said, there’s a lot of different platforms. It’s kind of like crypto, where there’s a lot of money flowing into it. Which one is going to win out in the end, still unclear. Crypto has a much longer track record. This, I think is really the wild west.
And it’s really, like you said, if you have money to spare and you are willing to, if you want to take a shot where you can basically say like, this might 100 X and I might lose it all, go for it. But recognize that it is not based on any fundamentals, it’s a hundred percent speculative. And if you go into it knowing that, that’s okay, but don’t go into it thinking it has the same fundamentals as the housing market, because people need houses. You don’t need to live in the metaverse. You don’t need to do anything in the metaverse. It is something that could be cool in the future, but right now that’s all it is, is something that might be interesting in the future, in my opinion.

David:
Such a great point. And we’re highlighting this because we call both of them real estate. So we don’t want to confuse people that they’re the same thing. I think from an example of what the real estate looks like in the real world, investing in the metaverse now is much more like having a development of new condo construction going into South Florida, and this is 2005 and you don’t know which one of those developments are going to make it and which ones are going to fail. It is like you said, highly speculative.
We do help people with buying real estate in the metaverse. And I’m happy to talk with more people about that and get them connected. But I’m very, very clear, this is not the same as what we’re talking about on BiggerPockets. BiggerPockets, what we portray here with how to achieve financial freedom is a much more steady, reliable, consistent, and you are much more likely to win using this scenario than what we’re talking about with the metaverse, which is very speculative. And like you said, you might hit a home run, you might strike out, but it’s very tough to make it anything in between.

Dave:
Yeah, exactly. I think it would be cool if we brought on an expert, maybe sometime in the new year to learn more about it, because it is something I am personally going to keep an eye on. I’m very curious about it. I think there is going to be money to be made there. It’s going to be a brand new frontier in technology, but it’s so early that you just don’t know exactly. I don’t know if you remember this, you remember laser discs back in the day?

David:
No.

Dave:
It was like a predecessor to DVDs.

David:
Okay.

Dave:
There was like DVD and then there was Blu-ray and then there was HD DVR, and all these things were competing. And people would buy the laser disc player for thousands of dollars and hundreds of movies. And then all of a sudden DVDs came out and it was completely obsolete and people were left with nothing. Like that’s what I think could happen here. You could invest in a platform and then Facebook might come up with a brand new platform that’s way cooler. And then all the users leave the previous metaverse and you’re left with nothing or may be the one you invest and catch on and you were an early adopter. So we’ll keep an eye on it and keep y’all posted as we go into 2022 with that.

David:
Very well said, my man.

Dave:
You have anything else you’re thinking about for 2022?

David:
Yeah. I don’t think we’re going to see it much different in 2022 than what we saw in 2021, other than the inflation that I’ve been talking about for probably two, three years now is just going to ramp up. It’s weird. I would just telling someone, this is the opposite of the advice I always gave for so long, which was don’t take out debt, pay for everything with cash, save your money, avoid buying things. And if this continues, like buying a car now makes more sense than buying a car in a year or two if the price of cars has gone up 80%.
So if you can come by a purchase you know is coming and you’re able to actually borrow the money to buy it, it may be cheaper to be spending money. Now this is the problem with having inflation is that it constantly encourages you to spend your money and you don’t save. So now the game became more complicated. We have to be thinking about that and at the same time, making sure that we don’t overextend ourselves. You also have to make sure that you’re keeping money in reserves so that you’re playing more aggressive, but you have defensive options that you’re sitting back on and waiting.
I wish it was as simple as telling people, just buy a house and wait. Now there’s just more pressure. You have to figure out, am I going to get into the condo market or am I going to wait for the single-family home? And what are the laws going to be like regarding what I’m allowed to do with this property and how I’m taxed? Are some of the ways that real estate investors save in taxes going to be taken away in three, four or five years, or are they going to get better? There’s more uncertainty going on. So I think that now more than ever, people should be educating themselves on what’s happening in the market right now, shows like this one, reading the news, paying attention, because you might be out of the game for six months and come back and it’s a completely different game.

Dave:
That’s really well said. I think part of the reason we’re doing this show is exactly because of that. Things are changing. And as an investor, you need to be constantly adapting your strategy. And I don’t mean like your longterm strategy. You don’t need to be switching from rentals to flipping or totally changing markets all the time, but you need to think about those things. Whether you buy now or maybe you do look for a new market are things that you should be thinking about in these uncertain times. And so what David and I are going to try and do is keep you informed on everything that’s going on. And hopefully you guys like shows like this. And as always, if you have ideas or there’s anything in the news or economics that you’d like us to cover, you can always hit us up either on Instagram or on BiggerPockets because we’d love to know what’s on the top of all your minds.

David:
Very well said. All right, Dave, I will get us out of here. Great job today. Thank you for joining me. I like when we get to tag team these issues. Where can people follow you? Is it The Data Deli?

Dave:
That’s right. It is The Data Deli at Instagram. Or you could find me on BiggerPockets.

David:
Wonderful. I’m David Greene 24. Follow me. Follow David, The Data Deli, because he loves sandwiches, which I think is hilarious that he made his social media handle off of that. And has always, follow BiggerPockets to stay in the loop. This is David Greene for Dave “the man from Amsterdam” Meyer signing off.

 

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In This Episode We Cover:

  • What happens when interest rates start to rise in 2022?
  • Will new listings hit a 10-year high as housing demand stays steady?
  • What will rent hikes look like as inflation roars onward?
  • Whether or not investing in condos could be the underrated real estate play of the decade
  • Investing in the metaverse and buying virtual real estate
  • Hedging inflation by making smart, informed real estate purchases
  • And So Much More!

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