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Wall Street: Huge Threat or Harmless Hedge Funds?

On The Market Podcast Presented by Fundrise
33 min read
Wall Street: Huge Threat or Harmless Hedge Funds?

Home prices are a big part of the housing market. But not as big as interest rates. As the Federal Reserve sets out to “kill the economy” with rising mortgage rates, researchers like John Burns dig through the data to find out what real estate investors can do to take advantage. John isn’t a beginner in the real estate space—his consulting company has been doing this type of work for two decades, providing some of the biggest real estate investors with the most up-to-date information.

John isn’t optimistic about this housing market. The data he’s been collecting shows that home prices could see dramatic drops over the next couple of years and that the housing supply problem may only get worse. But, he also sees opportunities for investors that could take the place of the appreciation gains we got all too used to. John’s team participates in over nine hundred consulting studies a year, meaning if there’s one person who knows what’s happening in the housing market, it’s probably him.

In this episode, we talk about housing market predictions, how flippers got caught, why Ibuyers are less of a threat than most investors think, and what will happen to the housing supply as developers start selling off homes at break-even prices. Are we heading towards a 2008-sized cliff or could this be a small hiccup on the continuous road to real estate appreciation?

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Listen to the Podcast Here

Read the Transcript Here

Dave:
Hey, everyone. Welcome to On the Market. I am joined here with Jamil Damji, coming to me from Phoenix, LA? Where are you?

Jamil:
I’m in Phoenix today, enjoying life, enjoying all of the fun-ness that comes-

Dave:
What’s the fun-ness? What do you-

Jamil:
What’s the fun-ness? Well, we actually got some offers on some of our flips. That’s been really relieving to me. Beyond that, I’m almost done filming season two of our television show. So, I’m about to become a free man.

Dave:
Dude, you’ve literally been saying that since I met you which was at least six months ago. It’s so hard. I hope you’re right this time.

Jamil:
Me too, me too. But I’m super… This guest was amazing.

Dave:
Oh yeah. John is great, and honestly, a lot of people have been messaging me and asking me and saying… A lot of the people come on the show share a similar opinion. If you’re looking for a contrarian opinion, that’s not that wild, I don’t think it’s crazy, but a very informed opinion about what you think is going to happen the next couple years, listen to this interview because John has access to data none of us do. He has his own consultancy firm, and he just provides so much good context and things that I’m good to go sit in a dark room and think about for the next like three hours.

Jamil:
Really though, I think one of the most enlightening conversations I’ve had all year. So, you guys are in for it.

Dave:
With that, we’re going to bring in John Burns who’s the founder of John Burns Real Estate Consulting. But first, we’re going to take a quick break. John Burns, welcome to On the Market. Thank you so much for being here today.

John:
Oh, I’m looking forward to this. You guys are great.

Dave:
Thank you. Well, I’ve been following you and your company for quite a while and I’m a big fan of your work, but for those of our audience who aren’t familiar with you and your company, can you just give us a brief background?

John:
Sure. I started it 21 years ago to figure out what was going on the housing market for investors, mostly big companies, and there’s 115 of us now that are trying to figure that out. We have a research subscription for big companies, it’s pretty expensive, and then we also do about 900 consulting studies a year. That’s very skewed to new home development.

Dave:
Wow. So, safe to say you’ve figured out the housing market, right? You know everything that’s going to happen over the next couple of months?

John:
No, I mean, our purpose statement is to solve today to help navigate tomorrow. So, I think we’re pretty good at solving today. What’s going to happen tomorrow, your guess is as good as mine.

Dave:
Well, I was hoping, that’s why we brought you on, John. You’re going to tell everyone exactly what was going to happen. So, we’ll just end the interview here.

John:
I do have a guess. So, I can tell you our… I mean, I have to decide how aggressively we’re going to grow our business. So, this is near and dear to me, believe me.

Dave:
Well, I’m just kidding. Obviously, we would love to learn as much as we can from you. So, just tell me a little bit. Over the last 21 years, what are the key variables, what’s the data, the economic indicators that you’re looking at to help understand what’s happening in the housing market?

John:
So, when I started the business 21 years ago, it was hard to find data. So, we were getting out and finding data, and now there’s just too much data. I feel like we’re become a data filter, and we’re still looking for more data. At the end of the day, the local market from a macro standpoint is all about job growth, and that’s free data. It’s available from the Bureau of Labor Statistics, always compare July to last July because it’s seasonal. We do that for our clients. That’ll tell you whether your local economy’s growing or not. There’s two surveys. The right answer’s usually right in between both surveys. So, I advise everybody to do that.
And then on the supply side, I know you’re monitoring listings and things, and we can get into the new home market versus the resale market because I think they’re going to behave massively differently this cycle, but just monitoring listings and days On the Market, everybody can do that, but that’s a very short-term indicator that can tell you what’s going to happen. The job growth will tell you whether or not your market is adding more people who can afford to rent your house or not.

Jamil:
I love that. It’s so simple.

John:
How did I build a business just on that, I don’t know.

Jamil:
I think that’s the key though, right? The more simple that you can make what you do so that people can digest the information, the better, right? From the perspective of your average investor in real estate, for the most of us that are involved in, I guess, the information that you’re disseminating, we’re looking at it from a resale perspective, right, and there’s not a lot of people that I know that are huge new home builders. For the most part, what we do is we buy distress property, fix, and flip them. So, if you don’t mind, Dave, I just want to come out the gate swinging here. I want to understand because you said something that is all the light bulbs in my head right now are firing off. How different is the new home market and the resale market going to look coming around the corner here?

John:
Well, we’re recording this at the end of August, and the typical home builder in America has already dropped price 5%. I don’t think the resale market has done that. So, the home builders are leading indicators, and there’s actually 23 of them that are publicly traded so you can listen to their calls for free and they’ll tell you what’s going on right up to the minute. There are businesses that are going to end up with empty homes that need to be sold, and actually, they’re going to convert, they are converting quite a few of them to rentals. They hadn’t thought of that 20 years ago. So, that’s going to be an interesting play here, but that’s what you might call a desperate seller. Even though their balance sheets are really strong, I wouldn’t say they’re desperate, but they’re businesses.
The resale market, as long as the economy is growing and people are not moving or not losing their job, they’re not desperate to sell their house. In fact, if they bought their home more than a year ago, they’re sitting on a ton of equity. They can just stay put. And the mortgages this cycle, as you know, have been pristine, so I’m wondering where the supply is going to come from in the resale market, and I don’t think there’s going to be a ton of supply. I think we figured out it needed to increase 800% just to get back to normal. I mean, that’s how ridiculously low it was.

Dave:
That’s from its low point though, right, not from right now.

John:
Yeah, yeah, maybe not quite that much. Maybe that was actually, that was a new homestead, but it needed to increase significantly just to get back to a normal level, and I don’t know where that increase is going to come from unless Jay Powell is successful in engineering a really bad recession. It seems weird to say successful about a recession, but in my view, that’s the only thing he can control to get inflation down, and he’s got a long way to go because the economy’s still super strong. Unemployment’s still super low. Maybe he’ll get lucky. Something will happen and inflation will tame down, or we just end up with inflation for a very long time which will be high borrowing rates which people don’t like.

Jamil:
John, would you mind clarifying that to me because we’re obviously seeing something a little different right now in the short term, right, with respect to listings and how things have sort of shifted since we’ve seen the interest rate spikes and all the people that were thinking of selling have rushing into the market and putting their listings On the Market which has obviously swelled inventory in many markets. One of the markets that I’m in… I’m in 132 different markets just to give you backstory on me. I run a wholesale franchise operation and we’re all over the country. Primarily though, the majority of our volume is sitting in Phoenix, Arizona, and we are fixing and flipping robustly out here, and throughout the year, we started the year off with… We would finish a house, we’d put it On the Market, and it would sell immediately over list, all kinds of crazy scenarios there.
And now, since the market has started turning the corner, we’ve seen that our flips are sitting longer. We’re taking price reductions. We’re getting lowball offers, something that we hadn’t seen in quite some time. Do you think this is temporary? Because from what you just said, the resale market is not going to have enough inventory to meet demand. Is this all a temporary blip where we saw this huge rush of listings and then maybe coming around the corner that might disappear.

John:
All right. Well, you’re not going to like my answer be because you’re like a home builder. I mean, if you’ve got a house that needs to get sold and it’s empty, you’ve got to sell and you’ve got to find the market. So, that’s exactly what’s going on. The difference is hopefully for you, you’re trying to find the market where there’s not a lot of other homes for sale, and so, yeah, maybe you have to price it back where things were in January or maybe even last spring or something when you got into the deal, and nobody likes that. But if you’re out in a new home area, they tend to be 10 builders across the street from each other, and there’s a hundred empty homes for sale. That’s a much more distressful situation.
The only advice I would say is you got to find the market. You made that investment when interest rates were three and your consumer was going to be able to buy the home, or maybe somebody would buy it from you and rent it out and borrow at three. Now, they got to borrow at five. They just have to pay less, and that’s happened.

Dave:
John, you said, and I tend to agree that the new home market and the existing home market are sort of going to behave differently in this cycle. Do you have any context how big the new home market is compared to the existing home market, and is it possible that trouble with builders and new construction could start bleeding into the existing home market?

John:
Yeah, the new home market is about 11% of all the sales in the country or something like that, and historically, it’s usually around 15. So, the lack of construction everybody’s been talking about is part of the reason why it’s less. Existing home sales are coming down so quickly, maybe they’ll be at 15 pretty darn quickly, but that’s a national number. I mean if you’re in Denver, it’s out by the airport where there’s a lot of new homes and it’s not near Stapleton where there used to be a lot of new homes. It’s a very different sub-market and behavior.

Dave:
I’m impressed by your knowledge of Denver. Do you live in Denver?

John:
No, but we do 70 pages on a hundred Metro areas and I’ve traveled enough to have gone to all home games at all 30 major league baseball teams. So, I travel a fair amount.

Dave:
Wow. That’s a very cool bucket list claim to fame.

John:
Yeah, I know, I know. They keep building new stadiums, so I got to get going again.

Dave:
So, what we’re talking about so far, I presume, is mostly with single family homes. Is that right?

John:
Yeah. I mean, town homes are similar to me. Apartments are different.

Dave:
So, can you tell us a little bit about how apartment conditions are a little bit different than town homes and single families?

John:
Well, right now, it’s a completely different story. When you jack mortgage rates, you tell renters who want to be homeowners, “You got to stay renting.” So, the demand is gotten even stronger which is really the challenge for the Fed. I think the CPI measure, I think 30% of that is rent. So, when mortgage rates go up, they’re actually pushing inflation up, not down because rent’s such a big component of it. Their favorite metric is something called PC. I think it’s about 17%, but they’re doing that really in my view to kill the economy because that’s what they need to have happen so demand slows, so inflation calms back down because history has shown that sustained inflation can actually be long-term worse for the economy than just ripping off the bandaid and having a short recession, like what happened twice in the early ’80s. I hope we don’t have to go there again, but it’s starting to smell like that to me.

Dave:
We sort of talked about the long-term and short-term prospects. Given what’s happening in the new construction market and home builders are having a hard time selling, do you think we’re going to start to see, and we’ve already seen construction start to slow down, but do you think there is a risk similar to the last recession where we just saw home building fall off a cliff and it took years, almost a decade for it to come back to that level? Is there a risk that we’re going to enter another period where we already have a housing supply issue in the US and it’s maybe going to get worse?

John:
Yeah, well, it’s going down. I mean, 23 public builders have told you they’re going to start less homes next year for the most part, so I’m not forecasting other than telling you what the guys who are going to build it are saying is going to happen. So many things are different this time, and I hate that phrase, but I mean, we are building less. We’re not building 2 million homes. We’re building 1,700,00, so still pretty high. There is a big pig in the python of all these unsold homes that are under construction that are going to get finished over the next 12 months. So, I do think that’s what’s going to drive prices down.
But what is different is the builder balance sheets, public and private home builders, have never been stronger, never. In fact, we just polled them on our client webinar last week. So, sales are down dramatically. Housing market should be the poster child for the industry that’s getting destroyed. We polled 400 clients and said, “Do you have more employees than you did at the beginning of the year?” and only, I think it was 20% of them had fewer and only 30% said they were going to have fewer 12 months from now which is very consistent with what they’ve been telling me is like, “John, we made so much money and we borrowed very conservatively, and if we have a recession, I don’t like it. So be it, but I’m not letting go of my good people, and I’m not dropping land, and I won’t grow as much.”
So, that’s a different story than the last cycle where people were borrowing money like crazy, and the consumer was levered up to their eyeballs with subprime debt, but most consumers can afford the payment. They’re fixed rate payments with their current jobs and they’re getting better raises than they were anticipating due to inflation. So, I don’t think we see anything like last time, unless the Fed induces some massive recession or something I don’t see coming.

Jamil:
John, how prevalent or important do you think the institutional investor has been in leading up into our current situation and possibly leading out of it? Because it’s interesting, I read a report that one of the major institutional buyers has just raised a tremendous, I mean, a sickening amount of money to purchase new homes and resale homes in the downturn that they’re currently describing. So, almost as if they have purposely pulled back, knowing that while the rates were spiking, they pulled back purchasing and everybody in the business of buying and selling, like myself, felt that, we all felt the institutions leave momentarily so that they could create a drop in demand, and then that will automatically create a drop in pricing, but they’re positioning themselves to come in and take a massive position. How impactful do you see that being in what we’re going to experience five years from now?

John:
So, we have done so much research on this.

Dave:
Finally. Someone.

John:
We’ve gone down to mapping each house that the publicly traded institutions have done and matching it to what they’re disclosing publicly. So, we’ve got it down to the house, and the headlines are complete BS. I won’t say the whole word, but they’re complete lies. So, I’ll give you some clarity on that. So, the iBuyers are 2% of the market nationally, two. Companies that own a hundred or more homes are three. Companies that own 10 to 99, which you’re in one of those camps, is three. And then those that own less than 10 are 19. Now, that 19 does include second homes, and the way we get the data is we say, “If the property tax bill is being sent somewhere else, this is not an owner occupant.” So, that’s how we… Maybe it’s not perfect, but The New York Times hates any PE firm that starts with Black. Congress gets reelected when they’re bashing Wall Street. So, all the headlines are on that, and I’m sure, and I’ll clarify it some more.
We actually summarized it by zip codes. There are some zip codes where the percentages of buying by institutions are like five times what I just told you. So, they all have this thing they call a buy box that you’re probably familiar with the term.

Jamil:
Yes, sir.

John:
So, the buy box is not in every zip code everywhere in the country. It’s in fast-growing metro areas, right around the median home price, right around a nice rent. That’s where the competition is super severe, and I totally get it, but I’m willing to bet that people listening to BiggerPockets is far bigger than anybody coming out of New York when you add it all up.

Jamil:
That is incredible to me. I want to reiterate this because I just had my mind blown because you just described what I… Leading up into this, John, I’ve been characterizing the private equity or the institutional buyer as the 800-pound gorilla, and you just told me that it’s actually, it’s an 80-pound chimpanzee.

Dave:
That’s really interesting. But maybe, Jamil, maybe you’re noticing it because they’re really active in Phoenix.

John:
It’s super active in Phoenix.

Dave:
Yes.

John:
Yeah, the percentages are bigger in… And you would really know. Are you in Charlotte?

Jamil:
We’re in Charlotte, yes.

John:
They’re crazy active in Charlotte.

Jamil:
Yes, sir.

John:
And actually, Dave, in Denver, it’s one of the least markets where they do the least. So, Denver and Austin.

Dave:
Really? Because it maybe’s just too unaffordable at that point?

John:
Well, for Austin, it’s all mom and pop. It’s all BRRRRs.

Dave:
Huh.

John:
The buy box is not working for the big institutions. Even with one of the biggest institutions in the country being headquartered in Austin, I think those hundred-plus are only buying 1% of the homes in Austin.

Jamil:
So, to just recap that, you said the iBuyer is 2% of the sales, of the purchases. The small institutional buyer is 3%.

John:
Well, yeah. Well, if they own a hundred or more nationally, they’re three.

Jamil:
Okay. So, that’s the large institution. That’s the big private equity firm.

John:
Yeah. Is that you too?

Jamil:
No sir. No, sir. That’s not us.

Dave:
Yeah, he’s just trading them.

Jamil:
I’m trading. Yeah. So, I sell to these large institutions.

John:
Yeah. So, flippers, flippers we think are about 8% of the market, but they’re coming in and out of that number, right? So, it’s hard. Some are in each of the buckets.

Jamil:
This is data that I don’t think anyone has put out there. You’ve got different data than I have seen. So, how did you track this? If you don’t mind, I know that’s proprietary probably, but how did you get so granular with it that you got it down to the house?

John:
We bought every transaction in the country. It was very expensive and we cheated a little bit. We did buy zip code because that was easier. So, if the proper tax bill’s going to a different zip code, that’s an investor. And then I just have a bunch of great people with databases that know how to run the math, and then we geo coded it too and did a lot of back checking. This took more than a year. I mean, this was not an easy assignment, but I knew it was critical to understanding the market.

Jamil:
The risk of a massive dump in inventory by a huge private equity firm isn’t as great of a risk as wall as the headlines or the media outlets are trying to make it.

John:
Well, I’ll even make you more comfortable with that statement. So, if you’re a REIT, which the bigger ones are, you pay a tax penalty as a REIT for selling houses.

Jamil:
What?

John:
Yeah.

Jamil:
I did not know that.

John:
Well, you get structured as a REIT, your income is tax free as a company and you pass it on to your shareholder. So, that’s the REIT benefit, and the flip side of that is they penalize you for becoming like a regular company where you’re selling homes, you have to pay regular taxes that way. And also, even further, they’ve borrowed money, putting all those homes up as security and a cash flow income stream, their debt covenants don’t allow them to sell a lot of homes.
The bigger risk is the guy who owns 10 homes and five homes and 20 homes times the many thousands of people that there are like that. That’s the person I think who dumps their home, and we’ve been talking to them. There’s a couple brokerage services now like Rootstock and SFRhub and others that specialize in that person. So, they’re clients of ours, and we’re asking them, “When you see a surge in selling, you be sure to let me know,” and they’ve seen a little bit of a surge, but what they’ve learned is that those sellers need to provide great information, like how have the financials been the last year and other things to sell these homes, and they don’t have it.

Jamil:
Because they’re not a sophisticated owner. They’re small ma and pa property management companies.

John:
So, they’re going to have to wait for the lease to expire and then kick somebody out and sell the house to somebody else. So, it’s not going to happen overnight. It would happen over time, if people are playing that game.

Jamil:
Wow. And primarily they’ve been purchasing with some tremendously low debt, right? And so, leading up into this, they’ve been holding a lot of inventory with some very favorable terms, and so, maybe that’s the vacuum we’re feeling right now is them leaving the space because the BRRRR’s not working as well as it was seven months ago.

John:
So, we have this fix and flip survey which by the way, if any of your BRRRR clients want to participate in that, just send it to me at [email protected], and I’ll get you in on the survey because we’re trying to stay on top of what people are doing. People are exiting and then not reinvesting the proceeds yet. I know that there’s 1031s and other things associated with that, but they’re not finding deals that are as underwriteable right now. In fact, I don’t have the exact stats. I’ve got it in the survey, but the percentage of ARV that they’re willing to pay now versus three months ago has gone down dramatically.

Jamil:
Do you have an average of what that has gone down?

John:
We have it by distribution, but it’s gone down maybe 10%.

Jamil:
Yeah.

John:
So, maybe if I was going to do a 75, I’d do a 65 something, but that means I’m going to pay less for your house or I’m going to borrow less money.

Dave:
Can you tell us a little bit more about that survey, John?

John:
Yeah. So, it’s just, it’s a survey. We partnered with a couple companies, Flatiron and Sundae and some others that are involved in this business. We’ve got a couple clients that fund fix and flip, and yeah, it’s just about 10 questions, but there’s a lot of participants, and you’re asking me these questions I don’t know the answer to, but if I ask a thousand people and poll them, we’re hoping to get those answers and find these things out. I want to ask, are you going to sell?

Dave:
Oh cool.

John:
Or are you going to reinvest?

Dave:
So, our listeners, if they want to participate and contribute data to this survey, they can, that’s what you were saying, email you or go to your website.

John:
Yeah. We’ll get you in. We do it once a quarter. We’ll get you on the next survey and then you’ll get all the results in return. That’s our give back.

Dave:
Cool. That’s awesome. I mean, if you’re a flipper, that’s a no-brainer. Go fill out 10 questions in exchange for a lot of information about your market. So, we’ve talked a little bit about what’s going on and what’s happening here, and I do want to get your opinion, I know that’s not data supported always and no one can predict the future, but what do you see happening over the next couple of months, and how do you feel about the long term prospect of housing valuations in the US?

John:
I mean, we think they’re coming down. I’m not going to quote the percentage, but it’s substantial, but I’ll say it another way. So, we just went through say two to three years of really substantial price appreciation. What if you had to give a year of that back? Would that sound unreasonable? No. Do the math on that percentage in your market. It’s a lot.

Dave:
Yeah, it is. And do you think that’s going to happen universally across markets?

John:
No. Every market is completely different.

Dave:
And so, you’re saying on a national level sort of-

John:
Yeah, right. And then those stats I quoted you, they’re so different in Charlotte than they are in Phoenix than they are in Denver, though that was all national. This is very local, and even I remember I have the Charlotte map kind of memorized in my head. It’s like all the east and west side of Charlotte where all this activity’s going on and nothing in the north and the south. So, it’s very zip code specific.

Jamil:
John, you’re saying that you’re seeing that housing values are going to come down based off of the research that you’ve done and some markets more than others, and I’m not quoting you, but possibly erasing an entire year’s worth of appreciation from our balance sheets. What’s the timeframe?

John:
I think it’s quicker where there’s a lot of desperate sellers like home builders, and it’s really slow on the resale side where people are not desperate.

Jamil:
So, emotions again, just like how we saw the massive appreciation happen based off of emotions because there’s a term that I love using, I call it emotional equity. That’s where we had people coming in and overpaying by 100,000, $200,000 more than a property was listed, and this isn’t lender-backed value. This is stuff, they were waving appraisal contingencies and just coming in and slapping down cold, hard cash to close this deal, and so, that equity, that appreciation that happened will disappear, and you’re saying it’s going to disappear as fast as it came here because it’s an emotional-based situation.

John:
Yeah. So, actually, a guy named Robert Shiller who won the Nobel Prize not that long ago for economics primarily won it for what you just said was his analysis on psychology and it feeding on itself. When things go up, it forces things to go up even more, and I think we’re going through a psychology shift the other way where if now’s not a good time to buy, I should wait three months or I should wait three… And I think that’s the most likely scenario until some new information comes along and changes everything I just said. But the other part of this question that I do find flippers don’t talk enough about is the mortgage rate and the borrowing rate. When you see 40% home price appreciation and rates go from 3% to 5.5%, who thinks that doesn’t matter? I mean, but that’s what you’re saying. If you don’t think prices are going to fall, you’re basically saying that doesn’t matter.

Jamil:
It has to matter.

Dave:
Of course, yeah.

Jamil:
It has to matter.

Dave:
Yeah, I mean, affordability is I think I saw some stat recently that said is near a 40-year low in terms of what people can afford, and of course that matters because it dries up demand and just less people are willing to get into the market. Do you think, John, this bodes… So, that’s sort of your short-term view. What do you think about sort of the long-term prospects of the housing market? Because we’ve done some analysis at BiggerPockets just about previous recessions, previous housing cycles, and to us it looks like the outlier is 2008 in terms of how deep housing price declines were and how long it took to come back to pre-crash levels. Do you see something like that as feasible? I know you can’t assign a probability or anything like that, but is it even feasible?

John:
So, that is the data and that’s exactly what it says when you chart it nationally. If you chart it locally, you’ll see that there are other precedents where things have taken just as long. So, like the S&L crisis happened in the mid-eighties in Houston, it fell for four or five years and took another nine years to come back.

Dave:
Wow.

John:
It happened in California in 1990. I mean, my wife and I bought our first home in ’91 20% off the initial asking price and sold it five years later for a loss.

Dave:
Whoa.

John:
And then seven, eight years later, it came back. Yeah, so this has happened. Yeah, look at the construction starts in the local markets. Now, I’m not saying that’s going to happen again. Those were all financial crisis. You know what happened last time before than that, it was the collapse of the S&L industry. There’s certainly no financial crisis that I’m aware of happening in real estate. If they were lending on Bitcoin or lending against hedge fund portfolios or something, then there could be one, but I don’t think it should play out like that, and we are undersupplied, our view is by about 1,700,000 houses right now. That’s a lot of undersupply. As we mentioned earlier, the apartment market is completely full. Until we finish all those apartments under construction, that’s going to stay the case. Yeah, it shouldn’t be something like you just outlined.

Jamil:
So, do you think the… Because we were sort of playing with this number of 10%, right, a 10% reduction in value, and do you think the 1.7 million houses that we’re short, do you think that’s what backstops that from a crash?

John:
Well, a simple demand supply chart, I think demands and rents have already corrected for that supply. So, probably priced out of those 1,700,000 people. So, as you drop rents or as you drop home prices, you allow those 1,700,000 to split up with their roommate or whatever they’re going to do and get their own place. So, I do think there’s an affordability component to that, but yes, the fact that we’re entering this undersupplied rather than oversupplied, which is the case in 2006 is a far better situation to be in.

Dave:
So, I’ll ask you the question probably on the mind of all of our audiences. Are better buying opportunities sometime in the near future rather than today because in your mind prices, values are going to fall?

John:
Well, the flippers have told us that. So, your listeners have already said, “My borrowing costs are up. I’m not going to take a bet on home price appreciation like I used to so I’m going to buy at a lower percentage of ARV,” and this woman, Kyla Scanlon has coined this term calling it a vibecession. We’re not in a recession, but it feels like it, the vibe is like we’re in a recession.

Jamil:
I like that.

John:
It’s exactly what you were just talking about. People are hitting pause, and when people hit pause, demand slows. What’s different this time is I don’t think supply is really going to skyrocket. So, that’s good, and people aren’t going to have to go through foreclosure and things like that in a big way. That actually argues for it taking longer to get back to where prices and rents need to be.

Dave:
That’s really interesting. Yeah, I love that, the vibecession. That’s a good point. We did a whole show on this, but basically we’re not technically in a recession, but who really cares because all of the underlying economics have been… The trends are what they are and people are feeling like it’s a recession which is pretty much what matters.

John:
Exactly.

Jamil:
Yeah, I mean, a hangover is a headache, but you can call them both the same thing, right? Either way, it doesn’t feel good.

Dave:
Yeah, exactly, yeah.

John:
Yeah. At least you know that’ll go away.

Jamil:
So, is there a way for a fix and flipper to bake in their forecasting? Because the bottom line is is that when we do this full-time for a business, right, it’s very difficult to just pause and wait and say, “Okay, look, I’m not going to purchase right now. I’m not going to…” Because you’ve got crews that you need to be responsible for. You have wages to pay. There’s things that need to keep the machine moving because if you don’t keep the ball moving, the entire thing falls apart, and then reassembling that later on is next to impossible, or it looks really different from what it looked like right now.
And so, I’ve seen a lot of rehabbers that I work with at least, they’re saying, “Look, Jamil, we can’t pause. It’s impossible for us to pause. We’ve got way too many people that we’re responsible for. We have a lot of inventory that we’re holding. We’re going to continue pressing forward, but we’re going to bake in some understanding. We’re going to bake in value, or we’re going to bake in a deceleration in pricing,” whatever you want to call it. What would you say to a fix and flipper that is trying to orchestrate a business plan for the next 12 months? How would you advise them?

John:
So, I mean, this has been really interesting for me because everything you just said, you sounded exactly like a home builder. Exactly. “I’ve got all these homes, I’ve got all these people.” What you didn’t say, but is underlying in all this is, “I’ve got a lot of debt that needs to get repaid,” and that is the answer to your question. So, if your debt is low or you’re able to restructure your debt and you can be patient, you’re going to be patient. If you have no choice, you got to go as fast as you can to make sure you pay back your debt, and Dave asked about the builders in the last cycle going under, they had a lot of debt. This cycle, they’ve been able to borrow like 4% fixed rate and it doesn’t mature for six years. So, they’re like, “I can be patient.” Their borrowing literally is like 30% against the asset value or less. If you’re at 70, 80% leverage, you’re in trouble.

Jamil:
You just described how rich they all are right now because they made so much money leading into this. So, when you’ve insulated yourself with all of this, all these years of really, really great returns, you position well to be able to come out of this at least intact.

John:
So, if your listeners have sold some house and stuck some cash in the bank and paid down their debt, they’re fine, but if everybody rolled it back to just keep buying more homes, which I know there’s a tax incentive to do that, you’re taking a lot of risk in a cyclical industry, and everybody knows housing is cyclical.

Jamil:
So, the depreciation buyer might not appreciate what you just said.

John:
Well, but they can hold on and enjoy the depreciation for a very long time. I mean, if you’re in a shape where you can just rent this out and refinance with some long-term debt, you’re fine. I know people that did that in the last cycle too. Some builders actually did that. There’s a famous one in Houston, did that with 4,000 homes that were intended to be for sale and they ended up renting them all out. It was awesome. It’s a different lender on a perm financing on something like that so you can get a fixed-rate debt too. I mean, maybe not from everybody, but that’s how you get through. You rent it out.

Dave:
John, this has been super helpful. I’m curious if you have any other things you think our audience of aspiring and active real estate investors should know about this about the housing market or where you think things are going.

John:
I’ll end on a positive because I felt like a little bit of a Debbie Downer today. I think this is not discussed enough. The housing boom of the early 2000s was 18 to 20 years ago and homes need a remodel on average, we’ve got the census data, 20 to 25 years after they’re built. So, the number of old, tired homes that need a refresh is massive. We have a lot of clients who are building products, clients who sell to the remodelers. We’re very bullish on remodeling and the need for rehabbing homes, purely due to the number of homes that was built 20 years ago.

Dave:
Oh, that’s fascinating. I didn’t ever think about that.

Jamil:
To my taste, Dave, I can’t live in a house that hasn’t been remodeled five years ago.

Dave:
Oh, I know, I know you buy a new house every year, Jamil. But do you think it’s possible, John, just curious if builders have all these people they’re trying to employ and they don’t want to build, would they reallocate resources towards remodeling? Is that possible?

John:
To some extent, but they’re also entering this with a labor shortage. So, it’s not like they have too many people they’re trying to… And actually, home builders are different because their trades are on somebody else’s payroll, but there’s been such a trade shortage here, I think some of those trades will flip to remodeling. In fact, I’m sure of that.

Dave:
Yeah, that’ll be interesting to see. John, I have one last question and it’s entirely selfish. I feel like the housing market is very confusing and so is the economy right now. In your 21-year history of looking at housing market data, how does this stack up in terms of complexity and normality, I guess?

John:
This is about as complicated as I can remember, but I think I would’ve answered that question the same over the last 20 years. It just seems to get more complicated.

Dave:
Yeah.

John:
There’s more things going on, and as I mentioned, there’s more data to analyze, like, “Oh my god, I hadn’t thought of that.” This flipper stuff, iBuyers, who was talking about iBuyers before? Yeah, it’s super complicated which actually is kind of good for our business.

Dave:
Yeah, it’s good for our podcast. That’s why we created it. But yeah. I mean, I think it’s reassuring to know for people who are new to this industry that this is complicated, that if you’re listening and feel a little bit confused about the economy, you’re not the only one.

John:
I think the guys in charge of the economy are confused about the economy.

Dave:
That is a painful truth.

Jamil:
Oh boy.

John:
When the Fed chair is apologizing for getting it wrong, don’t feel bad that you got it wrong.

Dave:
All right, John. Well, we’re very grateful. As investors and just people interested in the economy, we’re very grateful to have some time with someone like you with such great experience and access to so much unique information. So, thank you so much, and for anyone listening, if you want to connect with John, it sounds like the best place to do that is on your website or is there anywhere else they should do that, John?

John:
There’s a form on our website that would be awesome. Just fill out the form and say, “I want to be in the fix and flip survey,” or you can email it, [email protected] Someone will get back to you.

Dave:
All right. Great. John, thanks so much for joining us.

John:
All right. Take care.

Dave:
Dude, I feel like we need Kathy here to calm me down. We need to call her so we could have her soothsay to us for a while and make me feel better.

Jamil:
Right? That was sobering and depressing, but at the same time really interesting, right? I mean, I would have never guessed that 19% of the properties owned are just mom and pop investors. My eyes have been on these institutional investors in Wall Street, and it’s like one of those moments where you realize that you’ve been diverted, your attention’s been diverted to the wrong thing, and meanwhile, the actual situation is happening behind the scenes, and it was incredible to hear John describe that.

Dave:
Totally. Yeah, I think it’s one of these things that you look at data, read about data where it’s like is institutional investors going up, probably, but just with inventory and other stuff in the housing market right now. Is it going up from 1% to 1.5%? Will that impact a market? Sure. Is it going to impact the national housing market? Nah, probably not that much. So, it’s really important to get those sobering facts from someone like John who obviously knows. I guess, what I feel like if the housing market goes down, that obviously is bad for homeowners, for a lot of investors. That sucks. I think what’s making me just feel sad right now is just the lack of consensus. It’s like every person you talk to, it’s completely different, and the only truth is that no one knows right now, and it’s honestly great. It’s so good to have an alternative perspective. It’s so, so important because we’ve had other really prestigious analysts like Logan Mohtashami and Rick Sharga on the show, super experienced, saying something pretty different from that.

Jamil:
Totally different.

Dave:
I think the theme though that we’ve seen through the last couple shows is every market is going to be really different from here on out, and you really just got to understand your niche.

Jamil:
I think that’s really important, Dave, and I think that a reason why the BiggerPockets audience really needs to pay attention to this is because no one is going to give you the silver lining or that one-stop-shop answer. You’ve got to get into your local RIAs. You’ve got to get into your local marketplace. You’ve got to talk to the buyers out there. You’ve got to talk to the rehabbers out there. You’ve got to talk to the lenders out there, the hard money lenders. You’ve got to really do research for yourself to understand am I in a market right now that has the fundamentals that are going to remain strong so that I can make a decision. I mean, guys, he did not say that it was bad everywhere. In fact, there was a lot of positivity in those markets where that had strong job growth, right? If you’ve got strong job growth in your market, you really do have some insulation. So, paying attention to these key market indicators are super important in making a decision on how you’re going to progress your real estate investing business.

Dave:
Honestly, something about this makes me a little bit excited and feel like I have a bit of an advantage because the last two years it’s like you just throw a dart at a dartboard and you’re going to make some money. Now, it’s kind of like a researcher’s market. If you’re someone who likes to understand what’s really going on in your market, you’re going to have a huge advantage, and listen, there’s flip sides to both of these things. I feel like people I talk to, half the people are like, “Oh no, I’m so fearful of housing markets going down,” and the other half are like, “Can’t wait, can’t wait till the housing market goes down.”
And just the truth is that every market, like he said, even in Charlotte, new construction is different from existing homes. The north side is different from the east and west side. Single family assets are different from multi-family assets. There are going to be opportunities, but you’re going to have to try harder, and honestly, that’s a good thing. When it was easy the last few years, look how much competition you were facing. Everyone was out there trying to buy stuff because it was so easy. When it gets harder, the people who are committed to it and the people who really understand it have an advantage. And so, not wishing for anyone to lose money, but I’m just saying it means there will be opportunity, if John’s right. Who knows?

Jamil:
Yeah. Well, I think that’s great. You are right, and the good news, guys, is that you’re tuning into a podcast that’s going to keep you abreast of all of the information that we can find out there, right? We’re going to hear from all of the point of views, whether it be from somebody with a really optimistic, robust point of view of where things are going to somebody who’s looking at it from a different perspective. Always know that if you’re making decisions based on data that you’re doing a much better job than people that are just throwing darts at a dartboard.

Dave:
Totally dude. I mean, I think the thing I love about this show and everyone who’s on this show, I’m going to toot our own horn a little bit, is everyone just seems so willing to learn. We’re just taking information and changing your opinion, and I think that’s so important. So many people you see have said, “The market’s going to crash,” and they’ve been saying it for seven years. They won’t admit that they were wrong seven years ago, and we don’t know what’s going to happen. I don’t know if John’s right or if Logan’s right or whoever, but what we can commit to you is that we’re going to keep just bringing on people who are smart and who understand the industry and give you as much information possible, and hopefully, you can make good investing decisions with that. All right, man. Well, it was great having you on, really appreciate it, and hopefully we’ll have you again soon.

Jamil:
Always good to see you, brother.

Dave:
Well, thank you everyone for listening. We will see you all again next week. On the Market is created by me, Dave Meyer, and Kaylin Bennett, produced by Kaylin Bennett, editing by Joel Ascarza and Onyx Media, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show, On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

Watch the Podcast Here

In This Episode We Cover

  • The new development vs. resale housing market and what they say about the economy
  • An unbelievable opportunity for apartment investors as homebuying dries up
  • Housing supply and why builders may not be in the same predicament as in 2008
  • Ibuyers/institutional investors and why they’re a much smaller threat than most people think
  • The home price “wipeout” that is coming down the pipeline for sellers
  • Why refreshing/remodeling homes could make a profitable comeback this decade 
  • And So Much More!

Links from the Show

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.