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The 2022 housing market doesn’t make a whole lot of sense. At the start of the year, competition was fierce, with bidding wars on every home and lines out the door just to view an open house. Now, in quarter three of this year, interest rates have hit decade-long highs, buyers are more in control, and days on market are starting to creep back up. As a homeowner, investor, or renter, you need to know what’s on the horizon so you can build wealth while others run for the hills.

Joining us today are James Dainard, Jamil Damji, and Kathy Fettke, a gaggle of real estate veterans and the expert guests on BiggerPockets’ On the Market podcast. They’ve seen up markets, down markets, and confusing markets like today. As investors who touch almost all corners of the United States, with different areas of expertise, they bring the facts on what’s happening in today’s housing market.

We talk about interest rate updates, when the “inventory crisis” will end, why demand has taken a nosedive, and whether or not it’s still a good time to buy real estate. We also talk about the state of the economy, inflation, and how the Federal Reserve may be working to put us into another recession. This up-to-date episode will give you everything you need to make smart buying or selling decisions in today’s housing market.

Mindy:
Hello, hello, hello and welcome to the Bigger Pockets Money podcast where I sit down with James Dainard, Jamil Damji, and Kathy Fettke, three of the panelists from On the Market podcast, which is a sister podcast of this show, and we talk about this flip-flapping real estate market we find ourselves in.
I am here to make financial independence less scary, less just for somebody else to introduce you to every money story because I truly believe financial freedom is attainable for everyone no matter when or where you are starting. Whether you want to retire early and travel the world, start your own business, go on to make big time investments and assets like real estate or even just get a handle on what is going on in this market right now, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.
All right. Today, I am joined by James Dainard, Jamil Damji, and Kathy Fettke. James, welcome to the Bigger Pockets Money podcast. Please introduce yourself and tell us why you are so great.

James:
Hey, Mindy. So I’m a full-time investor. I’ve been an investor in the Pacific Northwest for the past 19 years now. I started when I was a senior in college. I’m a heavy value add investor where we do a lot of heavy lifting on properties of increasing day one margins. So whether it’s fixed and flip properties, development sites, building homes or large and small multi-family, we’re stabilizing them and increasing their value. I’m also broker up in the Pacific Northwest, where we do about 150 million a year with investors of just helping investors through the process, sourcing on and off market deals, and then handling the disposition as well, but just full-time deal junkie, Pacific Northwest. That’s where I hang.

Mindy:
Full time deal junkie, I love that. Jamil, welcome to the Bigger Pockets Money podcast. Let’s let everybody know why you’re so great.

Jamil:
Thank you, Mindy. I appreciate being here. I am Jamil Damji. I am a national wholesaler. So what I do is I wholesale properties all across the country. I founded the largest franchise for a wholesale in the United States called KeyGlee. Not only that, I also fix and flip property, and I’m on a television show on A&E, where I flip properties with my best friend and big sister, and like James, do a lot of value add, a lot of heavy construction-type projects. So this is very interesting to me. Nice to meet you.

Mindy:
Well, it’s nice to meet you too. Thank you for joining us today. Kathy, last but not least, she is alphabetically last. Kathy Fettke, welcome to the Bigger Pockets Money podcast.

Kathy:
Thank you.

Mindy:
Please let our listeners know why you are so fantastic.

Kathy:
Oh, thank you. I’m the co-founder of Real Wealth. We’ve been helping investors in high-priced markets find properties in cashflow markets, so that means understanding what it takes to own a rental property out of state. We do a ton of education at Real Wealth, and I have a broker-to-broker relationship with agents across the country who really know investment property and know what the rents are. Many of them own property management companies so that you’re not stuck with an agent that just wants the commission and is going to take you to the wrong neighborhood.
We also provide the resources that come along with that like insurance companies and the lenders that can do loans in those states. So we’ve been doing that for, oh, my gosh, almost 20 years now, and then I also started syndicating in 2010 in the downturn when we were buying land for 10 cents on the dollar. So that’s been an interesting ride as well for the past 12 years.

Mindy:
Well, I’m so excited that the three of you are here today. I’d like to say I assembled this amazing mastermind team of panelists to come in and talk about the real estate market, but I actually had some help. They are the panelists that regularly appear on our sister podcast called On the Market, where they talk about the state of the market in general, and that’s what we’re going to do today. We’re going to talk about the state of the market in general.
If you haven’t been paying attention, the fed raise interest rates, what, three times in a row, and they didn’t just give them a little bump. I believe all three times was 0.75 basis points, which is a huge amount. They haven’t done that … Well, they used to say they haven’t done that since, what was it? 2010 or something? Now, it’s like every month they’re doing this. So it’s been a lot.

Jamil:
I think I had read it was ’94 since it was-

Mindy:
’94, yes.

Jamil:
… that large of a raise.

Mindy:
Yes. They haven’t had this much of a raise since 1994. You are correct, and now they’ve done it three times in a row. Why does the fed keep raising these rates? Because inflation. They’re trying to fight inflation. Let’s talk about inflation.

Kathy:
Well, it’s interesting last year that same fed said it was transitory and a lot of us were looking at each other like, “Are you sure about that? Because we’re seeing something different out here. We’re seeing bidding wars and lines out the door and 90 people want a house paying way too much for it.” So it’s shocking that the federal reserve, which is really the banking system, it’s not a government entity and people get confused about that, but they are tasked with controlling inflation. So they really got it wrong. They have admitted that, but to me, the bigger picture is the amount, again, well, you said, “What is inflation?” It’s simply prices going up and, like you said before this show, supply and demand usually controls that, but we’re in a very different world today.
The economy is not the economy of our parents. Economics is not what people learned in school. It’s extremely manipulated by the fed, by the banking system. Again, not a federal, not a government agency. The banking system is what it is, and they have been able to create an enormous amount of money, which was not okay when I was young. They would print a little bit of money and it made headline news, but to just give an example of how much, I’ve talked about this on our On the Market podcast, in my parents’ time, it was two trillion dollars circulating or less. If they printed even a few billion dollars, it was a big no-no. Today, they’ve created seven trillion dollars in the last two years. How could that not create inflation when there’s that much more money circulating?

Mindy:
What I find very interesting is that it’s usually supply and demand. When supply goes up, rates fall or prices fall. When supply goes down, prices increase, and it doesn’t really matter what you’re doing. If there’s no supply, prices are going to go up unless nobody wants it. Like typewriters, you can make those a thousand dollars a pop. Nobody’s buying those. You make them a dollar a pop, nobody’s buying those, but right now, we don’t have supply. We have supply chain issues that stem from this little thing called COVID, and raising interest rates, in my opinion, I’m not an economist, but raising interest rates when we already don’t have supply doesn’t seem like the right move here because, yes, you are dampening demand for housing in some markets, not in all markets, but in some markets.
I’m in the Denver market and our demand with the June rate increased. Our demand was like, “Oh, no more. We don’t want any houses at all,” and that was very difficult as I got my first listing in a very long time and now it’s still on the market, which is shocking to me that it’s still on the market three months later, but in other markets it doesn’t matter. It doesn’t matter how high the rates are going to go. People are still buying, and we still have record low inventory. So how does increasing interest rates help with inflation? All I see is this hurting the people who have to move, who have to buy, who have to … and it’s not just houses, it’s cars and other things as well, but this just seems like the wrong direction that we’re going in.

James:
What we’ve seen is we’ve seen inflation come down a little bit off peak of June. I think it was at 9.1 and now we’re down to 8.3, but a lot of these rates, they’ve been adjusted because it’s not just a supply and demand thing that is part of the problem, but we are seeing the supply start to increase. Even the other day, we do a lot of construction, and we’ve heard that there’s actually warehousing with oversupply of flooring and different types of material because they bought up, bought up, bought up, and now they’re stuck with inventory. We’re actually seeing that also in the used car market. I’ve been seeing that too. Lots are starting to fill up, but part of the reason they’re also increasing the race is they’re trying to slow the money down in our economy. It is going way too fast or it’s been going way too fast and it’s been consuming everything, which was a lot of the reason there was also no supply in addition to it’s not just a supply and demand thing, but it’s a labor issue is a lot of the inflationary cost that I’m seeing is a labor issue, not just a material cost.
That is just because unemployment is basically at zero. It is causing labor costs to skyrocket, and they’re trying to get that back down, which unfortunately means slow the money down. Slowing the money down leads to a recession, and then you have to kind of transitionally push through. I know personally as an investor who does a lot of construction, manage a lot of employees, the labor market is a mess and it does need to be fixed because it is really hard to get your job sites done, and until they make these corrections, it’s also going to push that down, which there’s going to be a lot of relief for investors on that side. You’re going to be able to get guys to show up to your work. You’re going to be able to actually pay them an affordable rate, but it has to be slowed down and that’s half the reason they’re also increasing rates. It’s not just a supply and demand thing.

Jamil:
I agree, James. I think we’ve got such a complicated situation right now that we’re dealing with, and the variables that are creating the inflation crisis I think it’s not just the simple math of, “Okay. Let’s raise rates and everything will fix itself.” I think that that is just indicative of the very surface level problem solving we have right now from the fed. I truly don’t believe that they’re looking at the problem deep enough. Again, I’m not an economist and so I don’t have better solutions to say but there was an interesting article that I read. Steve Forbes said, “We need to be looking at this situation from the level of the currency. We need to be shoring up and strengthening our currencies, not just raising rates to weaken the economy.”
In fact, all that we’re doing right now is we’re beating up the people that are the working class people, folks that are really need help in markets like this. When things get tough, we find a way to continue to beat up people who are in most need of the help. So again, I think that the way that we’re approaching this right now is totally backwards, but it’s interesting.

Kathy:
Yeah. I see it as a silent tax if politicians and their constituents want more things and want, again, student loan debt canceled. I look at Europe and they have free university and healthcare, but here in the US, if politicians want something, it is much easier to just print more money for that thing versus taxing people because at this point, you’d have to tax people 150% of their income in order to pay for all the debt. So it’s a silent tax and it does hurt the people that are already struggling because when prices go up, you’re paying more at the pump, well, I have an electric car, it doesn’t affect me or if people I know who they still bought their RVs and they’re still driving around paying all this money for gas, they’re not as affected obviously or else they wouldn’t be doing that, but it’s the people trying to just get to work that they were already struggling. So it’s an interesting time and, hopefully, more and more people will awaken to some of the manipulation of the market.

Mindy:
Do you think that rates are going to continue to go up? I mean, the fed has indicated that they are not real concerned with keeping everybody happy. They want to keep inflation down and they’re going to do it, they’re the boss, but where do you think rates are going to go in 2023?

James:
Well, I think they’ve said that they’re going to keep increasing the rates. What’s too bad is they’re being so reactionary now, and so they’ve had to go on this aggressive hike because they ignored the issue for nine months because at the beginning of the year, what he was saying was that the fed rate was going to land around two and a half to three points by the end of the year or up into 2023 and that should fix the issue, and then it changed from two and a half to three, to three and a half was the prediction. Now, they’re saying four and a half percent from the fed rate, and typically, rates are three points higher. So it’s going to be a seven and a half, eight percent loan for most investors, buyers, anybody getting any bank financing, which is a huge increase than it was 12 months ago because we were at two and a half percent and now it’s going to be eight, and there’s going to be shock waves by that.

Mindy:
Do you think that’s going to affect pricing? We’re still really low with inventory. I mean, you look back to 2008, 2009, we stopped building, essentially, in 2008, so 2008, ’09, ’10, ’11, ’12. I don’t know when they started building by you. I don’t remember seeing building, big subdivisions going back up until ’14, maybe even into ’15. That was a long stretch of time with no building, and that wasn’t just my neighborhood, that was everywhere. Builders went out of business. Trades people left the market and didn’t come back, left the industry and didn’t come back. So now, we’re short all this housing. I hear people say, “Oh, this is just going to be like 2008,” and I don’t really feel that that’s going to be that this market is the same that has different causes, but do you think prices are going to fall like they did in 2008 or anywhere closer like they did in 2008?

Kathy:
It’s already happening.

Jamil:
We’re baking in around a 10% correction for pricing moving forward in most of the markets that we’re in, and we’re seeing a lot of opportunity for people to actually position themselves temporarily right now to benefit from what’s happening in the market, right? So you’ve got cash-heavy investors who are actually pulling the trigger, but really, really, really getting significant discounts on their purchases right now, but I don’t think that lasts. I think it’s a temporary situation where there’s going to be some … Those who have to sell will sell, right? That’s the thing that we’re finding is that the individual who’s in the situation where they’re moving, they’re relocating or they’ve inherited a property or a sale is a necessity, they will make the decision to sell. Are they going to absolutely get creamed because of this? Yes, they will. They’re going to feel that.
I don’t think that we can ignore the fact that you said, Mindy, we are at record low inventory, and because of what’s happening right now, builders are pausing building, right? So were already short. We were already short on supply, on inventory, and now you’ve got rates going to where they are, builders pulling back even further. What does this create? At the end of the wave, what does this create for inventory and pricing? I think what you’re going to find is you’re going to have a temporary, a momentary opportunity where people, investors or whoever can get in and buy.
I was on a flight yesterday, and it’s really interesting when you sit with people who really aren’t even in housing, they’re not in real estate, they don’t trade in it, but the sentiment, right? It was like when I told them that I was in real estate, immediately, they were consoling me. So the sentiment that they had about what’s going on in the housing market, they were like, “Oh, I’m so sorry.”
You think, “Okay. This is the sentiment out there for the average person who’s not investing in real estate but just watching and reading the headlines.” Then I think what ends up happening is we will absolutely get a small depression because people, they believe that the value of housing is going down, so sellers are more open to a steep discount, but I think what shakes out at the end of the wave is going to be an even bigger inventory crisis and this is going to create even more appreciation and another correction going back up with pressure moving prices up. That’s what I’m predicting two years down the road.

Kathy:
I just said at the beginning of the year when I do my predictions that you got to pay attention to the fed because we’re just puppets, they’re the puppeteers. They control things, we need to listen and follow. Really, experienced investors do that, especially stock market investors. Early this year, Jerome Powell said, “We’re going to raise rates seven times.” I actually didn’t believe. I was like, “Why would the fed, federal reserve …” When you say the fed, it sounds again like a government agency. It’s the banking system. The central bank decided we’re going to raise rates seven times, and I thought, “Why would they want to crush our economy? Why would they do that?”
First of all, overstimulate it and then decide, “No, we overstimulate it, now we got to crush it.” So I just thought, “Why would you do that if you’re representing this country?” but they have come out loud and clear just last week that, “No, we’re going to crush it, and there’s going to be job losses, and we’re going to bring asset values back to where they think they should be, which is affordable.”
So depending on who you are, it’s either good or bad. Headline news has a different interpretation, depending on what you’re doing and where you are. For a buyer, that’s going to be a good thing. In the meantime, it’s a terrible thing for people who own the asset class that the federal reserve’s trying to kill, basically, right? So you have certain areas that went up as much as 40% just in one year.
So there’s a good chance that those areas are going to correct, and that’s the way Jerome Powell said it, “We’re going to correct the housing market,” and I only see that as one thing. They’re the ones who blew it up. One of the ways they blew up this bubble is buying mortgage-backed securities to keep interest rates low. When you have the central banks buying these mortgage-backed securities and then you pull back, which is what they’re doing, they’re tapering, now you don’t have a buyer for those. So then rates have to go up.
So again, why would they have done that all the way up until March of this year when prices already gone so high? They were still stimulating in overly stimulated market. Now, they’re like, “Oops, okay. We’re going to pull all that back and stop buying or, at least, again, taper the buying.” So I listen. Really, a month ago, I would’ve said something different, but based on what Powell said last week, he’s like, “No, we’re we’re going to destroy it.” So you got to pay attention.
Now, that doesn’t mean some of the things that we’re doing I would change because we’re still buying homes in the 150, even $80,000 range in parts of Texas where there’s job growth. So there’s always ways to work through an economy like this, but at the end of the day, people who are in short-term loans pay attention. People who have overpaid for properties hopefully are locked into a rate that will still make it okay over time, but the value might go down. That doesn’t mean your cashflow will go down. So maybe just if you’re locked into a low rate for 30 years, don’t worry so much even when you see you might have lost some money. Just keep holding because eventually it comes back, but there’s going to be some bubbles that get popped.

James:
Yeah. I think you can’t increase the cost of money by 40 to 50 percent and not expect for things to deflate down. Stock market, crypto, housing is also coming down and deflating down. It’s just too expensive on the monthly payment. The quicker they get down to a more stable market, I’m a pro rip the rates up. Let’s get to where we need to get to to start working off like even what Jamil just said was 100% right. There’s an overreaction right now and there’s more deals in the market, and then once they get to where they need to get to, we can actually level the plane field back out and just buy like we normally buy, which is, “Here’s the math on the deal, execute the right plan, stabilize it out whether you keep it or dispo it out.”
Everyone should expect, or at least I’m expecting a retraction and values because you just cannot increase the money by that much in a short amount of time and not have an overreaction. With every action is a reaction. We pumped in too much money, it went flying through the roof, now we’re pulling the money back the other way, it’s going to come down the other way, and that is okay. It’s just leveling it out.

Mindy:
What retraction do you foresee in prices?

James:
We’ve seen about in the Pacific Northwest, we’ve seen about a 25 to 28 percent drop off peak pricing. What we saw in February, March and April is we saw an appreciation rate that was absurd. It was hitting 19 to 24 percent, which is just nuts. So we’re seeing it back down this other way, but we’re still sitting four to five percent over the median home price growth from last year. It’s just off that peak, peak number. If you bought a short-term deal doing February, March, April, May, it’s going to hurt a little bit and sting because those are the fly that have just been deflated down. I don’t really see this as a crash, I just see that we’re deflating things.
So it’s totally different than 2008, which was like a brick wall market free fall down. This is like a slow, we’re just letting the air out, and as the air gets loosened up, everything will level out, but we’ve seen about 25 to 30 percent off peak pretty quickly.

Mindy:
Okay. That’s interesting, and that aligns with something that I was speaking to a local agent in the front range area in Colorado and she said, “Yes, we are seeing prices going down, but if you look at the trajectory from 2021 up in December, if you drew a straight line and skip the huge bump from the spring, you’d see the same steady growth up into the right, but if you look at with the spring, you’ve got this huge hump here and then it’s continuing to go.”
So it’s like you said, it’s off the top of the peak, but it isn’t prices falling. It definitely is not 2008 level crisis thing. I’m wondering, Jamil and Kathy, if that’s the same price decrease, I’m doing that in air quotes, that you’re seeing, a deflation as opposed to a free for all drop.

Jamil:
Absolutely. From what we’re seeing, especially from our investor activity because I primarily wholesale, and that means that I’m betting on people, betting on the market, right? The people that I’m transacting with on a day to day basis, these folks are looking at making projections as to what they’re value or what the property that they’re buying right now after they fix it is going to be worth in three or four months. So we’re all putting on our little fortune teller hat when we’re trying to make these decisions.
What I’ve been seeing right now in our primary markets, so we’re talking Phoenix, Tampa, Orlando, these are spots where we heavily transact, we’re seeing about a 10 to 15% drop right now, but again, I don’t feel like it’s bottomed yet. So that’s what we’re experiencing right now, some markets fairing better than others, but I’ve also heard in some markets as well that the 25, 30 percent drops have been seen.

Kathy:
Yeah, and there is no, as you know, housing market. Every single market is behaving differently, and some markets were just really popular. There was job growth or there was big money moving to those areas, so they saw gains that they hadn’t ever seen, again, Boise, Austin, Nashville. Nashville was not, when I started investing, was never a growth market. Austin was once the tech industry moved there. Seattle, of course, same thing, when the tech industry blossomed there became a growth market, but these are areas where there has been tremendous job growth, tremendous migration, and the people there were priced out, for sure.
People moving in, it’s still cheap, it still is. For people moving into those areas, it’s a deal, it’s a bargain, but how much longer is that going to be the case? So definitely, the markets that went up unsustainable are going to feel it the most because no market, no matter how much growth you have, can sustain a 40% growth in rents or in home prices.
One of the things that is concerning is that shelter inflation is one of the big metrics that the fed or that the government looks at when looking at inflation numbers, energy and food, certainly in housing, and it’s a lot, the rental costs. Will those rents drop? That is a bigger issue, right? We’re seeing home prices drop, which is, again, good for buyers, not so good for people who own that asset, but in rents, will we see that same correction? If we don’t, then the fed is just going to keep going at it because if rents are staying high and that keeps inflation high and they think the only way to solve that is to kill landlords, you know what I mean, what are they going to do to get where they want?
At this point, it looks like Jerome Powell is in battle, a battle against inflation that, again, happened because of too much stimulus of the economy. The way you undo that mistake is you pull that money back out, and the way you pull money back out of an economy is through bankruptcy, it’s through job losses, it’s through stock market crashes. That’s how you get it back out, and that’s just a horrible way to run an economy, but it’s what they’re doing and it’s what they plan to do and he’s making no qualms about it like, “This is where we’re going.”

James:
He referenced that at the end of his speech. He said, “The inflation around housing would take some time to work its way through but it will get there.” When you hear that line, that means, yes, I think Kathy’s 100% right, they’re going to try to deflate rents, deflate values, and create affordable housing. That is something all investors should be paying attention to right now as you’re doing your projections.

Kathy:
On top of that, make it an opportunity. The world doesn’t really know this yet. So if you’re in a property that it’s not your best property, maybe just put it on the market. You might take a loss, but maybe it’s less of a loss than later.

Jamil:
I just don’t see how we’re going to get to a spot where rents come down because even if, just say for instance, you’re sitting on the sidelines right now and you’re like, “Well, the rates are too high. I don’t want to buy,” so you rent, there’s a lot of pressure right now for the rental market. I don’t know if it’s the same everywhere, but just what you can see here in Phoenix where you put a house up for rent and there’s multiple people trying to get that property and the rents are stupid high. So I still don’t understand where that money is coming from. It’s all of the pressure, all of the things that are happening, but there are lineups right now for people to rent houses because they don’t want to make the decision to buy.

Mindy:
Yeah. Buyers have to go somewhere. I’ve got several questions. Is now a good time to buy real estate? Jamil said a few minutes ago there’s a small window to come where rate prices are going to drop even though rates are high. Cash investors, investors are heavy with cash, they’re coming in to snap up these properties at lower prices. Do you see rates coming back down in the future so that buyers who don’t have cash can eventually refinance out of these crazy high rates? I say crazy high rates, I think we should acknowledge that 7%, traditionally, historically is not a crazy high rate. That’s a historical average for a mortgage. The problem is prices have gone up so much that now 7% makes that mortgage payment just 99% of your income.

Kathy:
Yeah, I mean, it just comes down to what your intention is. If you are on the hunt for cashflow, there’s opportunity out there even though rates are still high. It’s interesting because the non-conventional loans are actually lower than conventional right now. You can go to a private lender, it’s amazing how things have flip-flopped, but if you’re able to find a property right now that cashflows, so you’re able to get a good price at it and you’re paying maybe a little bit more for that debt but it still cashflows, great. Granted, some areas might possibly see rent go down, but that’s questionable. It depends on supply. That is definitely a supply issue. If there’s lots of jobs and people need a place to live, they might not buy but they’re going to rent.
So if you’re buying your own primary residence and it’s cheaper than rent or there’s not a lot of other options, you’re still getting all the benefits of real estate. You’re locked in to a payment, you’re paying down your loan, over time you’re getting tax benefits. So there’s always good reasons to buy real estate. Same with investing. If you’re buying for cashflow and you’re able to lock in a rate, and you have somebody else paying that loan down for you, and you’re getting tax benefits and asset protection, and over time, generally, if inflation is an issue, then debt is a good thing. Debt becomes less big in an inflationary economy.
So all of the fundamentals are still there. If your strategy from five years ago or 10 years ago is a strategy that’s worked for you, keep using it, but just know that some of the things have changed where you’re maybe buying it cheaper, but in trade you’re getting a higher interest rate, but maybe the cash flow is the same.

James:
I’d say it’s a different type of BRRRR property now or process. 24 months ago, how you buy a BRRRR property is you’re buying something with a heavy value at. You’re buying it at a discount. You’re putting in a rehab. Sometimes you’re stabilizing that, at least in our expensive market, for 12 to 18 months. We’re not getting any cashflow at that point and we’re having to do all this work. The reason we’re doing that is to get an equity position and a high cashflow position at the end of the day because we bought it cheaper.
Now, it’s actually a different type of BRRRR is how I’m looking at everything. I’m running my metrics on a deal and looking at their current rate, if it’s at 8%, and if I’m getting a four to five percent cash-on-cash return right now, I do am projecting that rates will be around 5% in about 24 months. So now, I’m actually just looking at a deals, “What is this going to look like in 24 months? In 24 months, my 4% return. I can buy something that’s actually in a lot better condition. Now, I don’t have to do all the hard work, I just have to hang onto it at a 4% return. Once the rates fall down to five, it actually goes to a 12 to 14 percent cash-on=cash return, and in addition to, because everyone’s a little bit nervous right now, I can get that massive equity position right now.”
So it’s a different BRRRR process. It’s the same type of process. You’re buying something, you’re waiting on the cashflow to get the big upside at the end. It’s actually an easier way to do it now. I don’t have to go tear a building to shreds to get the margin. I just have to hang in there and stomach some okay cashflow for two years. So as long as you look at things and just run the math, you can position, change your process, and it’s the same end result.

Jamil:
I just want to point out because, James, the thing I was saying is happening, these cash investors coming in, just literally coming in and taking huge, huge discounts on properties. It’s exactly what he just said he’s doing. Guys, if you’re sitting there listening right now and you’re like, “I don’t know if now’s the time,” follow the leader of the pack. Follow the people who are making the market. Exactly. He has the market timed out for the next 24 months. He knows how this plays out.
So you should not be sitting on the sidelines and letting yourself miss a massive opportunity to come in and get a property at a significant discount. Look, I’m not a fan of an adjustable rate mortgage, and please don’t make this sound like I’m saying that, but if there was ever a moment that I thought that it would be less of a risky situation to get into an adjustable rate mortgage, it would be right now. Go in. Get a property significantly discounted. Get an adjustable rate mortgage. Lock in at a lower rate for the next five years if they give them to you that way, and then refi out of that thing in five years when the rates come back down, but you will get a huge benefit by taking advantage of the market situation right now. Do you like froth? I like froth in my coffee. Go get the froth. Now’s the time.

Kathy:
Yeah. People shouldn’t be so afraid of ARMs today because the lenders have learned there’s much tighter regulation, and you actually have to qualify for that adjustment if rates go up. So they’re really qualifying ARM borrowers. So they want to make sure you can handle an increase in payment in five years. That was not the case 10 years ago. In fact, they were giving out ARMs. We were. I was in the mortgage industry at that time, and we were literally, not my idea, someone else’s in the big offices in New York was saying, “Nah, let’s just qualify people on a teaser rate, so just a fourth of what their actual payment will be and see how that works out,” which didn’t work out.
Today, it’s the opposite, “No, we’re going to qualify you on the adjustable rate of what it could be.” So I’m not worried about ARMs. I think they’re a wonderful, wonderful solution for today, and that is exactly why we’re doing a single-family rental fund right now, which some people might think is crazy, but it’s like people can put in a $50,000 investment in that and we’re going in and paying cash. Again, that’s why I said we’re buying stuff in one of the fastest growing parts of Dallas where all these chip manufacturers are moving because the Biden administration is subsidizing that, 52 billion dollars, and they’re moving to this North Texas area. Yet, we’re able to negotiate with all cash offers at, like I said, $60,000, $80,000 for a property. Put about 50, 60 thousand into it to make it really nice for those tech employees, I don’t see how a huge recession would affect that. So there’s still opportunity. There’s tons of opportunity out there.

Jamil:
Take notes, guys.

Mindy:
I’m really glad you mentioned ARMs because that’s one of my questions up here. Traditionally, the ARM is not a “good product” in air quotes because it’s going to go up. It always goes up. In the past few years, nobody was getting an ARM because rates were so ridiculously low and now, even now, ARMs are higher than regular rates were, but they’re still lower than the fixed rate loan.
I just want to point out that if you’re considering getting a loan at all, talk to your lender. Ask questions. Your lender cannot read your mind. They don’t know what you’re thinking. Talk to them about ARMs. ARMs are not just three year loans. The ARM, the adjustable rate, it’s a fixed rate for a certain period of time and then it can adjust. It can adjust, what, once every year, once every two years? It can start adjusting, but there’s a fixed period of time. So a three-year ARM means for the first three years it can’t go up. There’s five-year ARMs, seven-year ARMs, 10-year ARMs.
Do you think rates are going to stay like this for the next 10 years? I don’t. I don’t have a crystal ball. Past performance is not indicative of future gains, but I think a 10-year ARM is still better than a 30-year mortgage, and people move on average every five to seven years. So if you’re going to be buying your primary residence and your options are, and I don’t have quotes on ARM rates, but I think a 30-year fixed right now is 6.5% for an owner occupant. So let’s go with a 10-year ARM is 5.75 or even 6%. That’s less. So that means you’re paying less, so that’s better.

James:
The thing is capital is just a cost of the deal, and I think investors fall into this, and I can do it too. You fall into this rate trap where you’re like, “Well, the deal doesn’t make sense with this rate,” but each capital has a purpose. When I’m borrowing money at 10 to 12 percent on hard money for a one to two-year period, I’m not just fixated on this. That’s just the product that I had to factor as a cost of the deal. Right now, when you’re looking at buying a rental and you’re using an ARM product, that’s what you’re doing to get you by if you do think that rates will fall in two years. I do believe that rates will be back in the fives in about 24 months.
Having an ARM product can be risky, but not if I’m getting it for the intention of bridging me to where I can get my high cashflow. So whatever the loan product is, talk to your lenders, like you said, and then just factor it into how you structure your deal and the cost of the deal, and then at that point, it’s just absorbed in the math.

Mindy:
I do want to point out that Kathy, James and Jamil are more investment-minded than owner/occupant-minded, and they’re in it for the long haul. They’re holding period is forever to quote Warren Buffett, my favorite. So if you are thinking about buying a house that you’re going to live in for a couple of years, this is going to be advice that may not apply to you. If the rates are still going to be really high in two years and you’re not going to have an opportunity to pull your money out or to refinance and then you’re going to sell and maybe it’s still a down market in two years, maybe it’s not, this is going to be different advice. This is more for people who are investing.
A few minutes ago, James said, “Run the math.” I think that now even more than ever before when it was already really important, knowing how to run your numbers is so important and really running them carefully is key, but we’re still, like James said, in historically low inventory market, and that is not going to change anytime soon. You can’t just build four million houses overnight. You can’t just get … I mean, have you ever tried to get anything approved to the permit office? Even the most generous of permit offices take forever. What does it take? I’ve never built a whole neighborhood from scratch, but it’s a three or four-year process. It’s not just like, “Hey, I want to build houses in that vacant land over there,” and then tomorrow you’re pouring cement. It’s a really long process.
So we are going to have historically low inventory probably for a decade to come. So when this little blip that we’re going through right now changes, if you’re looking to buy a house that you’re going to hold onto for a really long time, we could be in a situation where now is an awesome time to buy, and if you want to buy a long one, I have a house for sale.

Jamil:
Well, what happens in 24 months, guys, when we’ve got depressed building now, we’re already short four million houses? What happens when rates stabilize? Where does the market go then when so many builders are pausing right now and inventory is already short? What’s the effect

Mindy:
The building fairy is going to wave her magic wand and say, “Poof! There’s four million houses.”

Kathy:
I think I actually have changed my mind about this. I have changed my mind about inventory just recently because at a time when the government is, basically, or the fed is pulling the plug on economy and people are losing money in the stock market, they don’t have that extra money, when you have extra money, you buy things you don’t need, right? When you don’t have it, you don’t. So there are people who got short-term rentals that maybe they’re like, “Oh, this isn’t going to work,” or they got rental properties and it’s not working out the way they thought.
You also have baby boomers getting a lot older and dying, the oldest ones, and then you’ve also got the millennial population that over the next three years or so is a really large generation, but then after them, it starts to wane. So I don’t know that I’m in the camp anymore that this inventory problem’s going to last forever. I actually think it’s going to normalize in a year or two, if not sooner. So that’s something to pay attention to as the population, as the demographic shift a little bit.

Jamil:
Interesting. I’d like to talk to you about that further and expand on that a little bit because it’s a very contrarian perspective, and at the same time, I’m curious as to what data, and I know you make decisions very thoughtfully, so I’m interested as to what made you make the shift.

Kathy:
Oh, I just interviewed John Burns on the Real Wealth Show and he sent me all his slides and he studies demographics, and he’s just got an enormous amount of data. We’ve known for a long time that the largest part of the millennial generation is now. From 2020 to 2024, this was going to be the biggest buying pool and we weren’t prepared for them, but after that, the Gen Z population is smaller. So when you look at the population growth, you’ll see this bump, but then it’s a bump. So what’s behind them is less people, less buyers at a time when you’ve got baby boomers aging.
So it is a blip in time, for sure, where we weren’t prepared and we didn’t have the inventory. We shut down the economy. We stopped producing, and yet we had all these families forming. So if we had just planned things a little better and not stimulated the economy at a time when there wasn’t enough supply and huge demand, then we wouldn’t be in the situation. When I say we, I’m not talking about me, I’m talking about the fed. I know that’s depressing, you guys, but I’m a firm believer that no matter where, there’s always opportunity in any city.

James:
I think inventory is honestly going to go into overcorrection mode for a minute because that’s … Real estate, when it goes up, it comes down, and then it levels out. The thing about the American public, the American consumers is they’re very reactionary. We’re seeing it now. We are getting really good buys right now because people dump and they’re just reactionary in general. So as you see those things, people get FOMO, they want to maximize their equity, they’re seeing other things like their stock accounts getting shrunk down to. People feel like they’re losing wealth right now, and when they feel like they’re losing wealth, they make very bad decisions and very quick decisions.
So we may see this surge of housing come to market, but then it will work its way through and it’s all okay. You just don’t want to be the reactionary person giving away your asset or selling off your asset too quick or just trying to buy too quick as well, but it’s to be expected, when rates increase, when we go into recession, things will slow down, inventory will increase and will work its way through the system.

Mindy:
I think that’s interesting your comment about the surge of inventory. During the spring, I’m a real estate agent who primarily represents buyers, and I would look in my MLS, my local MLS, and houses came on the market on Thursday, showings were Friday, Saturday, Sunday, offers were due Sunday or Monday, and they were under contract on Tuesday. So on Wednesday, there was nothing on the market. I’m talking maybe 10 properties. In my city of 90,000 people, there were 10 houses available up to $700,000, and this was every single week for about three or four months.
Now, I can go in and search, and there’s 75 or 80 houses, which is a whole lot more, but still historically low. There should be 100 or 200 houses on the market to give you a really good mix of houses to buy and to look at, and there’s still low inventory. I think there’s so many people who are not in real estate who don’t pay attention to this. Not everybody is as big a geek as we are about real estate, guys. So they don’t know that 70 houses is low. They think, “Wow, there’s seven times more houses now than there were in the spring, so we are back to normal.” We’re not even close.
So I just think that this is very interesting that we’re having this inventory conversation. I think that Kathy’s incredibly intelligent and she just spoke with somebody who is far smarter than I am, but I just hate to argue with you. I don’t see a change in the inventory and I hope I’m wrong.

Kathy:
I think the boom is going to go for a while. Like I said, it was 2020 to 2024, before all of this. I mean, that was predicted that this millennial population would be at home buying age and household formation age. So I don’t think it’s going to change today, but just the 10-year outline in the future, maybe we’ll see some shifting then. Unless, again, we depend on government policy, unless there’s a change to immigration because the birth rate is slowing down too, so if we become more open to immigration, that could change it.

Mindy:
Okay. I think this has been a fantastic discussion. I really thank you all so much for your time today. Let’s remind everybody where you guys are normally found every single week.

Kathy:
I’m at realwealth.com and I’ve got the Real Wealth Show, and then my syndication company is growdevelopments.com.

Jamil:
You can find me on my YouTube, @JamilDamji, also on Instagram, @JDamji. Check me out Saturdays at 10:00 AM on A&E and watch us flip houses, make mistakes, and try to make some money.

James:
First and foremost, check us out on the On the Market podcast. This is where we all get a hangout. It’s by far one of the highlights of my week. I mean, just amazing people on the show. Then for more construction tips, investor tips, check me out on Instagram, JDainFlips, and on YouTube, @ProjectRE.

Mindy:
Okay. James, Jamil, Kathy, thank you so much for your time today. This has been a lot of fun. Don’t miss checking out James, Kathy, and Jamil, along with Henry Washington and Dave Meyer on the On the Market podcast, which is available every place you get your podcast.
Holy cats! That was one of my favorite episodes. I love talking about real estate, and Kathy, Jamil, and James are so informed and so smart. Some of my key takeaways from this episode are, number one, investing can be scary and there is always risk involved in investing, and the best way to mitigate that risk is to be informed. So look at what’s going on in the market. Interest rates are the big story. Listen to what the fed is saying. Like Kathy said, she listens to what the fed is saying. She listens, she watches the videos, she reads the articles.
All three of our guests today listen to the videos and read the articles and they’re really doing their research. It isn’t just, “Hey, I bought a house. Now I’m an investor.” You really need to stay informed if you want to continue to grow as an investor, but there is, like James said, there is success down the horizon. There is a light at the end of the tunnel, and he’s predicting about 24 months we’re going to see a difference in rates, we’re going to see prices starting to go up again. So now is a really great time to be buying a house, so long as you can afford the payments currently.
Like Jamil said, the market, he’s seeing price corrections in his market. I’m seeing price corrections in my market, and that’s not super awesome when you’re the seller. It’s a good time to be a buyer right now. It might become an even better time to be a buyer in the next few months. The market is going to be down for a short period of time. So there is opportunity to buy even with these current higher interest rates.
Inventory is going to continue to be down for years. We are not going to be able to correct our low inventory, historically low inventory situation in just a few months, in just a few years. I don’t see us getting back to correct inventory levels for a decade, and even with Kathy’s very well-reasoned comments about the baby boomers was the largest generation that we’ve had and they are getting older, they are starting to pass on. Even with them passing on, we’re still four million housing units short.
That’s the number that I keep hearing from all of my people in the data analysis department of Bigger Pockets, Dave Meyer, who happens to be the host of On the Market, which is where all of my panelists came from today. I keep hearing that we’re four million housing unit short, and even if we’re three million housing unit shorts or five million housing unit short, that’s not overcomable in just a few months. That is years, even decades down the road that we will finally be able to figure that out if we start taking steps now, but like they said, builders are even starting to pull back. So I really do think that inventory is going to be a factor for a while, and there are outside factors affecting our current inflationary period that are outside of our housing market control that I think will come into line very shortly. I think we’re looking at an interesting window right now of opportunity for those who can afford to buy.
One last takeaway, my biggest takeaway, if you are at all interested in investing in real estate, you need to add On the Market to your podcast rotation. It’s hosted every week by Dave Meyer, who I think walks on water. He is incredibly smart data analyst guy who’s been with Bigger Pockets for I think six years. He has this amazing ability, just like Kathy, Jamil, and James, he has this amazing ability to take complex real estate and economic ideas and theories and translate them into understandable English. So that is an excellent podcast to check out every week wherever you your podcasts.
From the Bigger Pockets Money podcast, this is Mindy Jensen signing off.

 

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




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