Transcription*

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Josh: All right, so we are back. I don't know if we're supposed to do this, but...

Joey: Valentine's Day.

Josh: Yes, it is. It's Valentine's Day. So, on behalf of everybody here at Josh Barker Real Estate, I just want to say happy Valentine's Day.

Joey: Yeah. Very nice. Very nice.

Josh: Hope you have something good planned for your wife tonight. That'd be wonderful. Flowers.

Joey: Yes.

Josh: The cards, all that good stuff.

Joey: Or for your husband.

Josh: Yes.

Joey: Right.

Josh: Well, I'm talking about you for your bride. That's what I'm talking about.

Joey: Okay. Well, I thought you were talking to the audience.

Josh: No, the audience.

Joey

Josh: You do the right thing. Take care of your spouse.

Joey: I've got her favorite dessert. I've got her favorite flower. So it's taken care of.

Josh: Got it down. Yes.

Joey: Of course.

Josh: My wife says that she's not actually a huge fan of Valentine's Day.

Joey: My wife isn't either.

Josh: But I told her, I said, "Well, here's a problem with that is that six months from now, you'll have a girlfriend over, and you'll say... And she'll ask me, "What did you get your wife for Valentine's Day?" And if I said nothing, then I'm that guy."

Joey: Yeah.

Josh: So, you have to get something. It's just the way it works. So, I love my wife 365 days of the year, but if we have a special day extra, sounds good to me.

Joey: There you go.

Josh: Knock it up.

Josh: Okay. So, well, we've had some changes since the last time you were here. Last month we had a guest.

Joey: I think Dan Metz, wasn't it?

Josh: That's right. Dan was here. Yep.

Joey: Dan, the man.

Josh: Dan, the man, real estate extraordinaire. So, he definitely was providing some really good information. And now, today for those listeners, and this won't be out for a few days, but the Federal Reserve just came out today, this morning, and the Federal Reserve reports on this, but it was the core inflation numbers. And I wrote a couple of them down just so I get them right. But right now, they came out at 6.4% year-over-year inflation.

Joey: Which is down?

Joey: Because they were reporting in the eights, and some sources said no.

Josh: Yeah.

Joey: 11s. We're going to say eights, but the truth is it's 11s.

Josh: Yeah.

Joey: So, that's moving in the right direction.

Josh: It is. It is. However, the stock market didn't respond all that well because the projection was that it was supposed to be around 6.2 and it came in at 6.4. So, it's like work, work, work more.

Josh: Yeah, not a huge deal. I think everybody understands inflation is coming down, but it just wasn't quite meeting the expectation. I think probably what they're concerned about is whether or not the Federal raised interest rates again. Obviously, the next meeting they have, one more number I'll get out is that month over month was half a percent, and it was projected to be 0.4. And so, month over a month, it did actually still go up as well. So, I think there's some headwind there in terms of inflation still. The Fed's response will likely be to raise the interest rates a quarter percent the next time they meet, which is what most people are projecting. And that puts a little bit of pressure on the mortgage rate too.

Joey: You know what's funny is when you're saying all that.

Josh: Yeah.

Joey: What I was hearing was that it's the Eagles by one and a half and the over-under is 50.5. Yeah. They blew both of those too.

Josh: They blew both.

Joey: From the people who brought you the recession numbers, we've got projections for the Super Bowl. Which money I lost.

Josh: Exactly.

Joey: So, these projections, you have to have to take them. This whole thing is like we were projecting 6.4, but it came in at 6.2, so the stock market tanked. Wow, that shows you what exactly the stock market's built on.

Josh: Well, it's...

Joey: Speculation.

Josh: Speculation, opinion. Well, that was surprising...

Joey: Emotion.

Josh: Yeah. I think they were hopeful because if there, obviously if inflation was going down and meeting expectations...

Joey: Which it did.

Josh: It did. You're right. You're right.

Joey: And it almost hit the number. That's what's crazy. It went down a lot.

Josh: But it wasn't enough. I'm not happy with that.

Joey: Exactly, you missed it by a 0.1.

Josh: That's a good point. All right, fine, we'll blow past that one. So, Federal Reserve, like loris, will increase their interest rate quarter percent the next time they meet. Based on that information, I still don't think is all that bad.

Joey: No.

Josh: To your point...

Joey: I think it's moving in the right direction.

Josh: Totally agree.

Josh: So, all right. Another one I'll throw at your home inventory is 540 homes for sale.

Joey: That's not a lot.

Josh: It's not a lot.

Joey: It's not a lot at all.

Josh: I know it's pretty crazy. I mean, our absorption rate was climbing. Remember, it was climbing up onto almost a neutral market. It didn't quite get there, but it was right on the edge.

Joey: But it was consistently walking the ladder. It was because it was... When you and I first started this, it was either high ones or low twos, which is insane. That's a total seller's market.

Josh: Yeah, you're right.

Joey: And it slowly walked up. It went past three, and it went into the neutral market. I'm just thinking Star Trek, the neutral zone, then the Klingons came in, and the interest, no, it walked up there, and so we're like, "Oh, it's gonna be a buyer's market." And it just turned right back around and came right back down.

Josh: It did.

Joey: Into what a seller's market is.

Josh: Yeah. It's technically inside a seller's market. If you take the market as a whole segment, of course, every price point sell produces differently, and the results will vary based on the price point, but collectively, right now, we're still in what we consider a seller's market. And that would be anything from zero to three month supply of homes. And right now, we're definitely in that range. We're in the twos right now, for those who are wondering. So, in any case, the inventory thing is interesting. It's down about 20% year over year. New listings last month that came to market. So, it's interesting because we have to watch Ford now in spring and summer. It's like, are we going to see sellers that are in a position where they really want to sell, where they need to get it sold for a number of reasons? What's going to bring that inventory to the market, I think, is a big question for a lot of people right now.

Josh: Your thoughts?

Joey: Well, we have two huge wins attacking each other. We have the tailwind that is, for Redding, lack of supply. We have a super low supply that is a major tailwind. Right. And the...

Josh: For value or for holding value, or we're keeping it from dropping too much? Yeah.

Joey: Yeah, if there's nothing for sale, I mean, this is supply and demand, right, but we have a major headwind and interest rates.

Josh: That's right.

Joey: And even though they're coming down, I mean, they shot up so crazy. We went, like, I think in a 90-day period, we went from 2.875 to almost 8% in a 90, in one quarter, a 90 day, which is crazy.

Josh: Yeah. That's going to shut the market down. I mean it definitely slows things down.

Joey: Major headwind. And so, that's come down a little bit. We're now in the, and you said mid-sixes? We're in the low sixes.

Josh: I'm sure two weeks ago we were 6.125, and right now we're just now...

Joey: And if you wanted to buy a ray gun, you probably could have gotten the fives, although I wouldn't have done that. But I mean, I still think interest rates... I think we're not supposed to get political, but I think as we get close to an election, I think the powers that be are going to do everything they can to cook the books. And so, I think that interest rates are going to get really good.

Joey: This just in...

Joey: Yep.

Joey: So I expect that. So that's why we go back to that thing we talked about you marry the house, and you date the interest.

Joey: Date the interest rate.

Joey: If you find a home you really like, what's going to happen is by the time those interest rates come down, that house will have seen its appreciation as well. It's going to hit faster than the interest rate comes down.

Josh: Interesting.

Joey: The second the interest rate starts to come down is the second the signals are there where people are like, Hey, we're not a recession anymore. Things are starting to pick up. Speculation will kick back in, and housing prices will start ramping up faster than the interest rate comes down.

Josh: Sure.

Joey: So if you can lock in your home price at the lowest point, you don't have to deal with that poor interest rate for a little bit, and then two years later, you're refinancing in the high threes or low fours. You've got the best of both worlds.

Josh: Yeah.

Joey: If you wait until the interest rates as we did before because that's what... If you think about when you saw the market drive up in '19, '20, and '21, what you're seeing is you're seeing houses go up as interest rates are coming down, and although they're directly inverse, the housing prices will go higher up faster, right?

Josh: Yeah...And it's... Well, the replenishment rate is an issue, too, right? So we have low inventory right now, and then the replenishment rate is low, and when you think about that, it's like, Okay, you and I were talking about this before we started, but it's going to take six months on the optimistic side...

Joey: Minimum.

Josh: Yeah, to produce a home to make available to the marketplace. Right now, we have one major home builder in town that still puts sticks up at a pretty meaningful number. There's a collection of smaller home builders, local people that we're obviously rooting for all the time. They're doing it and producing the product, but they need to run at the larger builder's volume. They're probably smart about it. They're just like, "We don't wanna be sitting in a situation where we're sitting on homes that we can't get sold for the prices we need to sell them at." So I hear some of that from them. Any thoughts on that?

Joey: Well, one of the things that I think about is that that big builder that we're talking about, it's a national level builder, they are not... The people that run that company have done it for quite some time, they're insanely successful, and they have looked at the market and said, "We need to build a bunch of homes." So they either need to be corrected or on a continued path of success, which is their track record...

Josh: Sure.

Joey: Of saying, "Hey look, this too shall pass, this interest rate issue will go, but what won't go away is the lack of supply."

Josh: You're right. If you look here in our marketplace, I was just pulling up these numbers. These are all the census stuff that got done in 2021. 2021, in population, they came in at 182000, of which there were 72000 units, and then 64% of those are owner occupied. So when you think about it, you're like... To your point, we have a pretty big shortage in housing, I think we're over half... Are over 5 million short now, I think through some legal or illegal, it doesn't matter, immigration that's coming in, we're at over probably two million people in the last what? A year or two years? I don't know. I mean...

Joey: It depends on which channel you watch.

Josh: Yeah, that's true. That's a good point.

Joey: It's either 2 million or 2200 billion.

Josh: But I think everybody collectively would agree that that's going to put some demand on housing.

Joey: Yes.

Josh: And so you have the... That's a tailwind in the sense that, a tailwind to value in the sense that when you have short inventory...

Joey: That's demand.

Josh: And growing demand, that's a good thing. I think still today, most markets across the country are experiencing challenges with value because of the affordability issue. Most people are using credit to purchase, and when interest rates go up, the cost for credit also goes up, and so what you qualify for a loan amount goes down, and we've talked about it before, but people go, Well, I've seen rates at 17%, and it's like, that's true. However, the price of those properties at that time was much lower, so with interest rates going up, as you said earlier in the podcast, as quickly as they have, it's still... That's a pretty challenging thing for affordability. And affordability right now is tagged at around 30% or so. There's a... Like 28-30%, let's say.

Joey: Is that what the lender uses, you mean, for what you can afford?

Josh: Yeah, I think...

Joey: 30% of your income, pre-tax?

Josh: Right. I think... Exactly, and I think those reports of your gross taxable income annually at 28-30% is what they figure makes the homes affordable. And if you looked back two years ago, it was... That was the case, and it was because the interest rates were so low, and so the affordability using credit was lining up, but today with rates being at 6.5% and values of homes haven't come down as far as they need to compensate for that, that's kind of where things are at today.

Joey: You know what, and I was thinking about it, you also have a number of what the average income is, and I think if you divide that by the 30%, you get the affordability at about 220,000, which is a quite a ways away from what the average, the medium price home, right? Well, did I do my math right?

Josh: Yeah, I did do this action again. This is everything that's coming from the census, so I'm not saying... I'm not claiming its accuracy, it is what we have, but it said that 62000 was the average household income in 2021.

Joey: Is that Shasta county, or is that...

Josh: Shasta county.

Joey: Okay, okay.

Josh: In the entire county. And I speculate that obviously, it's a little bit higher with wage inflation and things like that over the last year, but not... Let's say it's up by 10%. That would still only put it at 68000 for the... But still... Statistics are a funny thing, right? Like the median, what's the average score on that test? A 62. How many people got a 62? Nobody. What you got were 80 people that got 40 and 20 people that got a 99.

Josh: Right.

Joey: And that's what you're seeing, you have... There're the haves and the have-nots. Income-wise, there is a huge disparity, a gap.

Josh: There is.

Joey: Minimum wage, and then the people that earn dramatically more than that.

Josh: It's a great point because when you look at that number because people are purchasing a home, it's probably going to skew to the higher side of that scale obviously, and that's what...

Joey: Absolutely.

Josh: And that's kind of what we're hoping for, I mean, to have a really strong economy, you want to have people have savings, and they're taking that in savings, and they're investing, and the first place that most people start to invest is in themselves, in their home. They make that investment into buying a property that they're going to live in since they're either paying rent or you will be paying a mortgage. If they're going to be paying for living either way, you might as well be accumulating some assets along the way, right?

Joey: Yes.

Josh: But I think you're right. I think it's going to be interesting to see, but the rate right now, at 6 1/2, still puts some pressure on value. Would you agree?

Joey: Oh, absolutely.

Josh: Okay.

Josh: Be like, Oh, I could do that. So the rental market for a minute talking recently with some property managers up and down the state, and then several here locally, the number that's coming up a lot is a vacancy rate around 8%.

Joey: And what's a healthy market?

Josh: Well, last year it was probably averaging around 4%, which is white hot.

Joey: What is healthy? Just like you said?

Josh: Yeah, that's a good point. What I mean.

Josh: I bet you it's probably healthy right now.

Joey: I was going to say 8% doesn't sound unhealthy to me.

Josh: It doesn't. 8% sounds like rents are likely not increasing anymore.

Joey: And I think people got ridiculous. I heard some rents. We rented out our rental and were told we did not rent it out for enough. Right. Like.

Josh: Well, you're supposed to rent everything out for more than your mortgage. You know what I mean? So like, how much should I ask for it? Well, what's your mortgage?

Joey: Fair enough. But I would love to even go down the road on that discussion for a second. But we don't have to. I don't want to get sidetracked.

Josh: But I can agree when we get to the end of that one.

Joey: Well, because if you're buying, if Okay, we are going to go down this rabbit hole.

Josh: Yeah, go for it.

Joey: Okay. So, "Hey, look, I'm buying a rental." Why would you have a rental? Obviously, it's an investment portal. It's different from, well, my personal home because I don't want to... I want to live here. So this is different. There's emotion involved, right? But if I have a rental unit, it should be looked at like an investment vessel.

Josh: Absolutely.

Joey: So now you're comparing it to something like a retirement account. And which is usually in stocks and funds. Right. Okay. So you say, well, rent it out from more than your mortgage. Well, that's ideal.

Josh: I mean, it may not be a reality because...

Joey: Yeah, that's perfect.

Josh: It doesn't. What's your mortgage? Right?

Joey: That sounds a lot like buy low, sell high.

Josh: Sure, who can argue with that?

Joey: Yeah. Do it every day. So, if you're saying you were going to put money in retirement because it was going to appreciate over time. You didn't, unless you're like, "No, I only buy dividend-paying stocks, or I only buy municipal bonds or tax." or something like that. You were putting money into something that wasn't giving you anything back because it would grow over time. So if you did have a mortgage where you said, "Hey, my mortgage is $1,700, and my rent is $1,100, so I'm upside down $600, $7,200 a year." If you put money into the stock market, and we won't get into it like your employer does matching funds, but you put, what are you upside down? And in the stock market, we just had one of the top five worst years ever in the stock market, which it lost on average 30%. Right? How do you not look at that like that's an investment? How do you not look at that? Like, "Yes. My mortgage is locked in at, did I say $1700?"

Josh: Yeah.

JoeyJoey: Okay. Fast forward seven years from now. What is your rent now? And your mortgage should still be at $1700 unless interest rates drop dramatically and you refinance.

Josh: And you refinance all this. Yeah.

Joey: And hopefully you didn't refinance and cashed out and go buy a Corvette and pretend like somehow that's part, that No, that's just like you cashing out stock and buying Corvette. Yeah. If you did refinance, you could refinance for less. Yep. For what you owed. You didn't have to pull out every penny. Because that's now unless you're buying another and so on. So I would say that idea that, like, your rent should cover your mortgage sounds good. But in the last couple of years, I've seen a lot of people do that, and that's where I think these rents came that were like, what? You know what I mean?

Josh: Well, I kind of...

Joey: $2100 for a three bedroom, two bath in Starview Estates.

Josh: Well, because of the mortgage.

Joey: Exactly.

Josh: You know what I'm saying?

Joey: Yeah. And now they're like; I have a vacancy.

Josh: Right. Because it's a running joke with property managers that they'll know what the fair market rent is for that three bedroom, two bath, two car garage. And let's say it's hypothetically $1,800 a month, but the person has a mortgage at $2000. So the property manager says, well, the rental rate for this right now should be around $1800. Well, I need $2100 because that's my mortgage. And it's an ongoing joke. It's like, it doesn't really matter what your mortgage is. It matters what the fair market is for the rent period.

Joey: Exactly.

Josh: If you can't find a tenant, it's going to sit vacant. Right? So there's pressure. Here's the good news for those who are out there that are looking at rentals as an... What is your option at this point? The rental rates are coming down a little bit as the vacancy rate has climbed. And it's likely you won't see rental rates climbing in terms of how much it is per month. It's probably going to stay pretty much the same in the short term. Now, if you're sitting in a unit right now that's under rent, which some people are, the landlord might incrementally raise it because it's below rent now. That's possible. But as a whole, there's some pressure. VRBO is the same thing. Have you seen that with the vacation rental market? It's starting to soften. Tell us a little bit about what you see in there.

Joey: It's the same concept. People are tightening their belts, and inflation is going to hit across the board. And so the vacation, everything should see... That's the whole idea of raising the interest rate. Everything should start to see us slowing down to try to calm the economy. So it hurts when it's eggs and cheese and bread that's getting hit, but it's meant to stop brand-new truck purchases. Big TV, vacation, it's meant to slow that down. So that the spending catches up, so it's doing what it's supposed to do.

Josh: Yeah. Well, that's interesting because right now, but if you look macro and some of the policy changes, like they did some quantitative tightening for our listeners, they're like, okay, what the heck is that word? It's just essentially what the Federal Reserve will issue a lot of bonds. And when those bonds come back, they have a choice once they reach maturity. They can take the money. They receive back and go buy more bonds or more, sell more bonds again or provide liquidity to the market. Or they can just essentially destroy the cash. Federal Reserve doesn't have to hold cash. They print it. So when they collect cash, they just destroy it. And right now, they're tightening the money supply. And that's going to have an impact on people having access to credit. And so that's to your point, you're seeing these effects of a monetary policy that's tightening. You're seeing interest rates going up, and Warren Buffet said it best when he described interest rates as gravity to add the value of an asset. So as you turn up the interest rate, and it rises, it actually has a greater pull on the value of assets and really across a lot of different markets. So like you talked about the stock market. Obviously, it's going to show up there. It's showing up in the housing market now with interest rates going up, and there are a lot of other investment classes where it's doing the same thing.

Joey: You know what's funny is I'm not an economist, but I play one on TV, I'm not an economist, but I love to listen to some of this stuff. And sometimes, the logic makes sense to me and other times. I'm kind of thrown. And I was reading like when inflation rates are high and interest rates go up. It was like collectible assets. It was like collector cars, wine, and art. And I thought, "What you're really saying is wealthy."

Joey: The lower classes get hit. They have no options.

Josh: Yeah.

Joey: Right, they get hit, the stock market gets hit and so I thought about that idea of, so wherever, the interest rate really only affects the working class.

Josh: It does.

Joey: And the lower working class, it doesn't affect the hiring class.

Josh: Not at the same level.

Joey: I mean, not at the same level.

Josh: No.

Joey: And so one of the things that we talk about that I because we're talking about real estate in general. We try to get specific about the Redding market but within the market. There are if you are a renter. If you can afford to buy, you should buy. It doesn't matter. It does not matter. Housing is not going to get cheaper. When we say cheaper, I don't mean, hey, that house was listed for $365 last year, and now it's listed for $352. That effectively doesn't matter in the scheme of things that $13,000 doesn't even exist. We're talking about houses that were at $365 and now they're at $280 that's.

Josh: That's significant.

Joey: That's significant. We're not going to, in my opinion, we're not going to see that. We're not going to see that because we've taken a major hit on interest rates. The market has leveled out over a year, it might fluctuate, especially the other thing you brought it up when you were talking about you what was the rate that you gave, you gave something about the rate of homes and you kind of hinted that there are segments in the market that are getting hit much differently.

Josh: Oh, sure. Where the demand is at.

Joey: Yeah, the houses that were listed at $795 are now on their second price reduction and they're at $740, that's, you see that. For the houses that were listed at $295, I would argue I'd bet you that there are no price reductions unless they were a $210,000 house listed at $295. The lower end is the part that can't. It's not easy to replace.

Josh: It's more compact.

Joey: It is.

Josh: Yeah. So you'll see larger reductions in value as the price goes up and then as you get down into the lower price point because the demand, again, is so much higher in the lower price point because that's where a lot of people can afford them, they're coming down, they've come down some, but not nearly as much as the higher part of the market has.

Joey: So back to that, if you are in the lower end and you're renting, and you can afford a mortgage, buy the house. Marry the house, date the interest rate, and when interest rates get reduced because I haven't met anybody that doesn't think in the next two to three years, interest rates won't come down even more.

Josh: Right.

Joey: I don't know anybody that doesn't do that. So you can refinance, but like we said at the beginning of the show, the housing market will climb faster than the interest rates will come down because as soon as the signals are there. They are letting all the investors...

Josh: Everybody's back in.

Joey: They'll jump back in hard, so we, in my opinion, we've seen the correction. Have we seen the correction at the high end? Probably not. It's probably not done. The people that were, there were a lot of houses that were like $850, $795, and I looked at them, I'm like, really, really, well, that's what I want. Good luck.

Josh: You're probably a hair more optimistic on that than I am, to be very transparent with you. Because I see the interest rates having a, a pretty significant headwind to value right now, and so that's, for me, I'm looking at it going when as if interest rates drop down to like five and three quarter home values stabilize, but I think there is this disparity of about seven to 10% right now between what the median buyer can afford and what the median home is selling for. And I see that number being in existence today. Now how we bridge that gap, there are multiple ways to do it. You could have the rates going down, and then the value doesn't change. You could have values coming down, or you could have a combination of both. But once we do, I'm looking at it that way because I assume that's when volume could pick back up again. And you need volume in the marketplace. I mean, right now, the volume hit that we've had, it really only affects lenders and real estate agents. That's not a big deal. But part of the volume issue is that people need to be able to have options, and they need to be able to afford those options. I mean, if you want to get someone to move, they have to have a reason to. They need to be able to see something they would want to move to.

Joey: Yep.

Josh: And so, having the inventory grow will actually spur more transactions also, so it'll be, it's going to be an interesting year, man and probably one of the more exciting ones, because when the market shifted last time in like oh '07, '08, and, we hit the financial crisis sometime, I think in the '08. And I remember at the time when it was like, we already knew this whole thing was going in one direction. You know what I mean? It was like.

Joey: Oh yeah.

Josh: There was no question at all. It was like, this is the direction that's going.

Joey: We've been drinking all night. We're in a casino. It was 3:00 AM.

Josh: We know what the next day's going to feel is.

Joey: This is, yeah.

Josh: And it was like every day was groundhogs day every day and selling real estate in that environment and having to sell a house if you're a property owner in that environment was very stressful. Because there was a high level of emotion. A lot of people were losing money. Everything else. This one's totally different. This one's more like we know there's going to be either a slight recession, which by the way, is dropped down to a likelihood of 55% according to Kiplinger. We'll see if it happens or not. Most people are leaning towards yes. But we'll see. But, you see this now, and it's like we all feel like it's coming, but we don't nearly think, I don't know, there are very many people that think it's going to be very bad. You see the stuff on the media and stuff like that, and they're, because, they're there to sell stories and things like that. But when you look at the actual data for supply relative to demand right now, those numbers look pretty healthy.

Joey: Yeah, so the optimism comes from. When I, my optimism is based on the lower end of the local market, It's not based on the higher end of the major cities. So those I think are going to tank, I think they're going to, that's what I mean, like if you look at this like the stock market tanks, but at the same time some stocks go up, and there's a time when the stock market's total bull run and there's companies filing bankruptcy.

Josh: Sure.

Joey: So I look at the lower end, let's say, say under $360,000 in Redding, and I say, can you replenish supply?

Josh: No.

Joey: No, you can't so it'll fluctuate a little bit, even 7% if you said, Hey.

Josh: But it's all based on affordability.

Joey: Exactly.

Josh: It's not on it's supply and demand.

Joey: And that's why I said, so we're talking to renters.

Josh: I totally agree.

Joey: If you're talking about people that are thinking about flipping homes and they want, they're going to buy single-family homes.

Josh: Yeah.

Joeyjoey: As investments, that's a very different conversation.

Josh: Oh yeah.

Joey: It's very, very different. Right. So I still believe in this, this lower end, and I think it's because of supply, the lack of supply and how hard it is, how difficult it is to replenish the supply.

Josh: Oh yeah.

Joey: Interest rates can come down tomorrow as soon as the two guys run for president and they start pistol-whipping each other. Well, whoever's got the strings on the Fed will have interest rates lowered. And whoever's got the strings in the FBI will make sure what we see and read on Twitter. Right. So it's like, they will do.

Josh: We'll go way deep now.

Joey: Yeah they will do what they do. Right. So I'm optimistic and the other side of it is I say, okay, what are your... So let's talk to the hiring and go, okay, cool. I'm not a first-timer.

Josh: You got three minutes, tell me your story.

Joey: Do you want me to finish this one?

Josh: Please Go for it.

Joey: Okay, so we were off to hammer. I said I wanna tell you a little story about three little pigs, right?

Josh: Oh, the three little pigs.

Joey: Yeah that was the story.

Josh: Tell the listeners a story of three little pigs.

Joey: There were three little pigs, right? And their mom, their financial planner, the puppy society, the puppy, let's see who gets that movie reference. They said, Hey, look, you need to take this money. You need to invest in it. And the first little pig invested in crypto. Oh yeah, it was doing great. And then came along Logan Paul and his army, and they destroyed crypto. And let's see how they're doing. They've got 20 cents in the dollar. Then the second little pig put all his money in the stock market because the bull run was so great.

Josh: So good.

Joey: In the last year, as I said, the top five worst years ever for the stock market lost 30% value.

Josh: Hey, I've got friends that are brokers, man. Let's not beat them up too bad. Okay.

Joey: I'm not going to. Hey, it's not their fault. They're not the ones that said, yeah. 93 PE ratio. That sounds valuable.

Josh: I'm going to tell them to make sure they turn this off for the last four minutes.

Joey: I'd like to invest right. And the third little pig bought a house. So in the last year, the third little pig says, oh man, am I down a whole 8%?

Josh: That's an excellent point.

Joey: And the other two little pigs knifed him in an alley because they had lost everything. So that's the story of three little pigs.

Josh: That's the three little pigs.

Joey: So we're all eating ham.

Josh: So we're all eating ham.

Joey: There you go, that's my story.

Josh: Oh, what a treat, buddy. To summarize this thing right now, I would say that. Okay, relax. I think the point is it's not really all that bad.

Josh: I mean, the values have come down a little bit, and a lot of that's because of interest rates. I think everybody can respect that. We do have some headwinds with some higher interest rate environments, probably in the short term, which will have some consistent pressure on value because of the affordability. But when you look at supply and demand right now, all of those factors are very healthy. We're not oversupplied for the market. Valuations are strong because of the demand that's still there. And people, and this is one of my greatest things. One of the greatest things I like about the market right now is that people are purchasing properties with fixed mortgages for the most part. And that means that they could if they can afford the payment today, they're most likely to be able to afford to go into the future. And that's a good thing. So. All right. Well, hey, I appreciate you taking the time with us today. As always, it's always fun.

Joey: My pleasure.

Josh: I hope that the audience enjoyed the conversation with you as much as I did, and we'll catch up with you next month.

Joey: Thank you.

Josh: Thanks buddy.

Transcription*

The transcription is auto-generated by a program and may not be accurate to the conversation. In order to ensure you get all the information from the video properly, you must watch the video.

Josh: Alright, so we're here for our podcast. I was sharing with our guest here. We have Dan Metz, real estate extraordinaire, who has been here for... How long have you been selling real estate now, buddy?

Dan: 2010.

Josh: 2010. So that's been a while now.

Dan: Yeah, 12 years.

Josh: Alright, you got a little bit of what we call "salt and pepper" going on up here in the hairline.

Dan: That's right, my wife says it's definitely real estate related.

Josh: Well, I can appreciate that for sure. So, just to let you know, we're about to go on Facebook Live. I hope you're ready for that.

Dan: Oh.

Josh: Alright.

Dan: Hope not.

Dan: That's fine.

Josh: Alright. So we got a couple of topics we just discussed before jumping on for all of our listeners, but the big thing we probably wanted to catch up on was just what's happening in the housing market right now. Is that a good place to start?

Dan: Yeah, that's great. Yeah.

Josh: So I just looked it up. So the inventory is 557 homes for sale, of which 66 homes have gone pending since the beginning of the month. Right now, we're not supposed to do this, but we're at 1/16, so January 16th, and we've got 66 single-family homes that are pending 557 for sale, so what's up, huh? What's going on with that?

Dan: Yeah, we're just seeing far less buyers buying right now compared to what we've had in the past. I mean, you know, how many homes normally do we have to go pending in a month, in any given month?

Josh: Well, prior to COVID, it was probably 250 to 275. During COVID, it spiked up above that. And then, obviously, over the last 12 months, it's been trending down, right?

Dan: Right, right.

Josh So.

Dan: We've got a lot of headwinds that we can discuss.

Josh: Sure.

Dan: For starters, affordability is probably the number one issue that we're seeing right now. Buyers are just having a hard time qualifying or being able to afford these prices.

Josh: With the new interest rates.

Dan: With the new interest rates.

Josh: Yeah, you're right. I think that's been a big thing. When was it? Probably in December or January, about a year ago. For our listeners, that's when the rates started to go up.

Dan: Yep.

Josh: A corresponding effect was that we started seeing pricing coming down, right?

Dan: Right.

Josh: And so, yeah, the situation now where you have the median buyer who's qualified for less than what the median home is listed for.

Dan: Right.

Josh: Right? And that's having an impact on demand.

Dan: Yeah, yeah.

Josh: Are you seeing that out in the field too?

Dan: I am. That's one of the first things we like to talk about is the word affordability. If we focus just on interest rates, historically, an interest rate of 6 1/2 percent isn't all that high, but when you're looking at the word affordability, and you start breaking down the three components of affordability, that's when you can really start to see what's happening in the bigger picture.

Josh: Yeah, what would be some of the components of affordability?

Dan: You really have to take a look at not just the interest rate. You have to look at the average income in that area and then the price in that area.

Josh: Yup, so interest rate versus median income, and of course, the asking price is for this home.

Dan: That's right.

Josh: Yeah, it's interesting you bring that up because I've got... My parents would say to me, "Well, I went through the '70s," and it's like that's when a lot of this was happening, and the interest rates were at 16%, 17%. I've heard stories higher than that, but that's how high it was, and then they're saying the rates of today are far lower, but it's like, "Yeah, but Mom, Dad, you don't understand the cost for the homes back to him is a lot less too," right?

Dan: That's right. Well, when you start playing with these three variables, it can have a huge impact, so what did we see the last two years that maybe your parents didn't see when they had those rates? When we go back and start looking at the last two years, we can see that interest rates were very up and down dramatically. Then in addition to that, we had a lot of people moving here from out of the area working from home, and their average income could have been more than our average income here in Shasta County.

Josh: Right, because their wages would have been based on the big city or whatever, and they were getting paid that kind of money living remotely, so they're up here, they're buying into our real estate market up here at lower cost, but it added to the demand side, right?

Dan: That's right.

Josh: Yeah. What about new construction? I know new construction is still out there. We still see builders that are still building. Is it as prolific as it was before, or is it going down? What does that look like?

Dan: We definitely see a slow down in the... Well, the overall demand, if the demand is not there, it's harder for these builders here in Shasta County to continue building at the same pace that they were before, so here in Shasta county, I feel like they've always built based on the demand. They're not going to go out and build a whole lot of homes. They're going to get a home into a contract with a good deposit, and then they're going to go for building that home, and if we do not see that same demand, it makes it tougher for those builders to...

Josh: Yeah. Well, there's a builder right now over off Rancho Road. They're building quite a few homes, and they don't have any buyers for those yet.

Dan: Yeah, yeah. We see that... Yeah, they're... Yeah.

Josh: They're pushing it, right?

Dan: They are. They are.

Josh: I was driving out there a couple of weeks ago, and I was looking at the subdivision, looking at the lots that are already building out. I was like, "Wow." They've got a lot of homes actually started all at once.

Dan: Have you ever seen that here in Shasta County before?

Josh: Yeah, we did. We saw that in 2003, '04, and '05 when they had really outpaced the demand side. They were building homes left and right everywhere. A lot of the subdivisions came online, pretty much all at the same time, right around 2005, and they were speculating. They didn't even have the buyer yet, so they weren't building for a property owner yet. They were just speculating and... Not all of them, but a lot of them are doing that. In fact, those are the ones that, when the market did shift, those are the ones that sat as slabs for years because unless... If you haven't started building the stuck ship yet... So for listeners and people watching this, once you start this building framing the home, you have to follow through with it. The city is not going to let you sit there and has a half-framed house. It's too dangerous. So at that point, you're committed. But at slabs, we watched them stop at the slab level and like, "We're done. We're not going to keep going from here." Yeah, so we've seen it before. It feels different because there were a lot more homes being built in '05, and in terms of how many were being built without buyers really for them yet compared to now.

Dan: Got it, got it. Okay.

Josh: But it's... That builder we're talking about... We're starting to see some price reductions and stuff like that out there, too, right?

Dan: Yeah, they're... One is to see the inventory continue to flow, so the last thing they want to resort to is the price, but we are starting to see them reduce those prices to try and move that inventory.

Josh: So what's the deal? Why would a builder be resistant to reducing the price?

Dan: It's a really good question. At the end of the day, they've been selling these same floor plans to other buyers who have recently purchased these homes, so it impacts not only the builder's bottom line but it impacts the prior home purchasers that recently purchased.

Josh: Yeah. No, man, could you imagine if you're living in the home, you bought the house six months ago for X, and now it's being sold for $10000 below X. Yeah. That's not a great feeling. I think a lot of those builders right now, at least from our experiences, they'll do some additional credits, you know what I mean? Maybe they're going to get some more credits towards closing costs or help buy down the rate or add some appliances, maybe do a few things like that to protect that purchase price, and instead give some more concessions. I think we've seen that on the new construction side. What do you think?

Dan: Yeah, we definitely see those incentives. I mean, not even just new construction. We're seeing sellers across the board doing what they can to keep these prices elevated and offering those credits and different things like paying for an appraisal and whatnot.

Josh: Sure. Yeah, there have been some differences because when you think about the power the seller had in the negotiation, let's say 24 months ago, would you say it's greater than or less than today?

Dan: The power that the seller has is definitely less than.

Josh: Yeah, so now we're seeing more seller concessions in terms of credits and negotiating repairs at a higher frequency. There's a lot more of that happening now than it happened in the past. Will that sound about right?

Dan: Yes, definitely.

Josh: And we see that too, and I think the sellers typically are still trying to do credits, like even if in their inspections, if they find something wrong, oftentimes I'm seeing that they would rather do credit to compensate for that issue rather than actually to make their correction themselves, right?

Dan: Yeah, the credit is a lot easier. It can help keep the timelines that we're looking for for our sellers, so we're still seeing sellers' work that goes in that direction with selling a home and doing credits as opposed to doing repairs and going through the whole house.

Josh: I totally agree. So let's dive into the rental market for a second. You have rentals, right?

Dan: I do, yeah, yeah.

Josh: And my wife and I have had rentals for a while, and it's been interesting to watch the transformation in the rental market. I would say that, again, if you go back 24, 18 months ago, or even a year ago, the rental market felt pretty tight, don't you think?

Dan: Yeah, the demand was pretty high. When I added up the property available, I had no trouble. Barely, I didn't even do any advertising, word of mouth practically worked.

Josh: It worked fine to get it done.

Dan: To get a tenant in there, yeah.

Josh: At that time. And this will be, like, maybe 12 months ago. I think we were seeing vacancy rates that were maybe 1-2%, and they were probably really just the units that once the tenant moved out, you have to go on there sometimes and do a little refreshing to the unit, whatever you might have to do, and that might have been what the vacancy was because it was long enough to get the unit re-finished to the point where it's ready to be rented out to the next group.

Dan: Yeah, it could have been closer to zero.

Josh: It could have been closer to zero in reality. Talking to property managers now, the numbers. And this isn't just here in Redding, although it is here in Redding, but also up and down the state, because we try to do our best to talk to people up and down the state, because obviously, we know those folks, whatever's happening down there might come here as well. But we're talking about vacancy rates that are 8% even more.

Dan: No kidding.

Josh: Yeah.

Dan: Okay.

JB: That's been a transformation in itself. Interestingly enough, some might be because the expectations for rent prices were pretty high. Not as many people were going to be able to meet that expectation, and so the units have to sit for a period of time or even be price reduced in terms of their rental. What they're asking for is their rent to get them rented out. Have you seen some of that too?

Dan: Yeah, the same story, supply, and demand. If the supply outweighs the number of people that wanna rent, affordability has to balance back out. That's, again, just the magic word.

Josh: I'm going to put you on the spot. A couple of days ago, you and I were talking about it. Didn't you guys have a vacant unit or something?

Dan: Yeah, yeah, so we have a unit that's vacant if... Actually, if you want...

Josh: If you want...

Dan: If you're looking for a two-bed, one-bath apartment, we've got a unit available. That's right, yeah.

Josh: So, have you had to drop your rent on it yet?

Dan: Yeah, we're looking to drop the rent here just a little bit.

Josh: So that's kind of the same thing, right?

Dan: Yeah, I think the last update report was two leads generated. My property managers said they had two leads generated, so.

Josh: Do they ever give you any gauge on what that would have been like a year ago?

Dan: That's a good question. I'd have to follow up on that.

Josh: Yeah, 'cause some of the stuff, when I talk to him about it, the numbers start to really catch your eye because they're like, "Oh yeah, you know, we had seven or eight units available, and now we have 35," and you're like, "Whoa, that's a huge change in inventory." Something that, if you're not prepared for it, might catch you off guard. So I guess, on this front, to talk about the rental market, would you call it softening?

Dan: Oh yeah, I mean, I can see it.

Josh: And you're feeling it, too, right?

Dan: Yeah, feeling it personally.

Josh: So for property owners out there right now that have a rental market or have rentals in the market, I think something to be aware of is that it might be better to get the rent more competitive sooner rather than hold on to a vacancy longer, because it takes a while to make up for a unit being vacant for two or three months when you could have maybe just adjusted the rent just a little bit, right?

Dan: Right, I agree with that. That's the approach that I would take.

Josh: Yeah, that's what I've been told is a good way to go. So another one we talked about was Zillow. A couple of interesting changes there, right?

Dan: Yeah, what did you say that for the first time, Zillow has announced that we see the market depreciate?

Josh: Yeah. It's the first time I've seen Zillow come out with that kind of announcement since you came into the business in 2010.

Dan: Really? No kidding.

Josh: So we were seeing those kinds of home price expectations popping out in 2008, 2009, and '10, even maybe into '11. It would be hard to remember exactly when it stopped doing that, but that was the last time we saw Zillow come out with a lower home price expectation than it currently is, right?

Dan: Yeah. Wow.

Josh: And now we're starting to see those reports from Zillow that have these expectations for the reasons we discussed earlier. You have the median home list price that is higher than what the median buyer can afford based on the interest rate today and their wages, right?

Dan: Yep. What's their forecast?

Josh: Oh, man, I'd hate their quote because it'll probably change in an hour anyway, but in Redding, a certain one of the zip codes was like 3 1/2% over a period of time. Anderson, I saw it was high, 3% or 4%. I think Red Bluff was at 8% for certain markets, so it's not all one number because I think they do it by zip code, but it's definitely an eye-catching thing. I haven't seen that negative number in front of that number in a really long time, which I think. How are you sharing that with the property owners that you're representing? We represent a lot of sellers here in the office all the time, and when you go out and have these conversations with our clients and discuss the market, what is the advice you're giving to some of these sellers out there?

Dan: Yeah, at the end of the day, our first focus is to keep the client first. We want to help them net the highest price possible, but we want them to understand the market they're about to dive into. So we really try to find the support we're looking for, and then also try to future pace and understand where the market's going, so that our client can make the... not the right decision. There's no such thing as a right decision, but options are always available. We want to make sure our client has all their options available so they can make those decisions.

Josh: Yeah. Well, have you heard that they're... They're talking in the economic forums and chat rooms and everything else. They're talking about a recession in the future.

Dan: Yeah.

Josh: Right?

Dan: Yeah.

Josh: If that recession were to take place, do you think that would have a negative, positive, or neutral impact on asking prices?

Dan: I don't see how it can't hurt real estate prices if we're in a recession. Just the overall sentiment. You know?

Josh: Yeah, because what causes a recession ultimately will be what labor is lost, right?

Dan: Unemployment, yeah.

Josh: Yeah, unemployment is going to go up, buyer confidence will likely go down as a result of that, and it could relate to the housing market as well. It doesn't necessarily mean it will have the same level of impact, but it certainly is a headwind, as you said earlier.

Dan: Right, that's right.

Josh: Yeah, I agree with that. So if that's the case, would a seller be better off selling sooner rather than later in this market?

Dan: I would venture to say most sellers would say, "Yes, let's get the job done now," if they're looking more at the short-term. We don't really know for sure, for sure what the overall outcome is going to be over the next...

Josh: Hold on. Don't you have a crystal ball?

Dan: No, crystal ball.

Josh: Alright, let's just cut this thing off right now.

Dan: But again, we can look at the market data, we can look at what experts are saying, and then we can provide that information. Most experts are saying we're going to be in a recession this year, so if that's the case, is now the best time to maximize value as opposed to 12 months from now, or are you going to wait for this wave out? We all know real estate is very cyclical. You've seen a lot of cycles.

Josh: Oh, yeah. Yeah, it's going to be interesting to see how long it goes on this one. Most of the stuff I'm reading they don't feel like it will be all that deep. The good thing about housing that I'm really happy about in comparison to 2006 and 2007 is that the types of loans that are currently funded where the people are to live in the home and they're making a mortgage payment, most of these are fixed loan products, either a 15-year or 30-year loans, right? And many of them have pretty good interest rates too, so when you look at that, the probability of a really robust foreclosure market is pretty small.

Dan: Unlikely.

Josh: It's very unlikely, yeah. And that really was the catalyst for our inventories to jump through the roof back in the day.

Dan: We're not seeing that right now.

Josh: No, not at all. I mean, gosh, just like we said, we have 557 single-family homes for sale today.

Dan: That's right.

Josh: Now our volume is down, and so you're going to hear from the lenders out there, and you're going to hear from real estate agents that the market's really slow, and that's because, from their perspective, the market's really slow. There's not a lot of refinancing going on right now, and purchasing is down at least half, but in some cases, more than half of what it was before. And so, from a value perspective, that will impact people in that profession, but it doesn't translate into a market collapse because homes are... Because inventory is low, it's actually helping us from going down too fast in value.

Dan: I could have seen our market going much faster if we had a surplus of supply, I mean decelerating, faster impacting. I call it the golden handcuffs. Many sellers are tied right now, so making that upsize or downsize move...

JB: Giving up that 3 1/4, 3 1/2% of interest rates.

Dan: Yeah, giving up that rate makes it really challenging. It's just not as affordable as it was the last two years or even prior to the pandemic.

Josh: That's a good point. So really, the reason has to be pretty compelling.

Dan: It has to be a really high motivator. That's right.

Josh: Yeah, you're going to have... If you run out of a room and the family is overpowering you, and you need more space, that need might outweigh the cost of losing that interest rate to make that move, right?

Dan: Exactly.

Josh: Or if you're losing excitement in your property and wanting something refreshed... Now you're thinking about, "Well, do I remodel my home, or do I go out and purchase a new one that has all the things that I want in it now." Right?

Dan: That's right.

Josh: So there's a lot of different things going on there, for sure. I mean... No specific number. What are interest rates today?

Dan: I think, last I checked this morning, I believe they're sitting right around 6 1/2%.

Josh: Okay.

Dan: For a 30-year mortgage.

Josh: That sounds about right, yeah. And we just had the Fed come out and say that inflation is coming down a little bit. The supply chain is beginning to replenish itself, which is good news to hear, and so we're kinda looking at it going, "Okay, well, what's the interest rate looking like they're gonna be in the future." And so everybody's got their own opinion on that one, but collectively, there's more likelihood that the interest rates will remain similar to what they are now or slightly lower versus going up.

Dan: That's right.

Josh: Is that what you see too?

Dan: Yeah, we're certainly hoping so. If what we saw over the last two years pushed us to these elevated interest rates for affordability to balance back out, I would like to see rates come down closer to about 5 1/2, 5 1/4.

Josh: Oh, let me call the Fed for you real quick.

Dan: Let's make it happen.

Josh: Let's make that happen. We got them on speed dial. So, well, I think for them to... Obviously, the Fed doesn't necessarily set the mortgage rate. They set that discount rate, which puts some pressure on that. But I agree. I think that in order for our market to reach some meaningful volume, which gives buyers a little bit more confidence and sellers a little bit more confidence and creates some more predictability in the market, I think rates being in that 5 1/2 range would really be the catalyst for that. Right now, at 6 1/2, we don't have too far to go. But that's definitely some headwind, the fact that rates are a little higher than most people can afford.

Dan: That's right. One of the exercises we like to do with our sellers is to show them when we're choosing the price they want to list. We want to share with them what the buyer's payment will look like just to give them an idea of what's happening there.

Josh: Absolutely. So I think we have time for one more topic—vacation rentals. So I know we had a city council meeting here a few days ago. I know there were some pretty heated discussions, respectfully, not that heated like we're seeing in politics today or anything like that, but like some passionate people on both sides of the argument in terms of what to do with the vacation rentals, how to monitor it a little bit. And you have to feel for both sides, so one person, it's a business and the other person, it's my neighborhood.

Dan: That's right.

Josh: And how do we bridge the gap between those two and really solve the problem for the bigger picture for the community, but are vacation rentals going away?

Dan: Right now, we're sitting right around... From the intel that I gather, we're sitting right around 100 vacation rentals that are actually licensed to do so with a permit. And then there might be about another 300 or so plus or minus that aren't doing it with a permit.

Josh: Got it.

Dan: So it's definitely a good portion of our market and what we have here real estate-wise.

Josh: I was having a conversation with another agent about this, and one of the thoughts that we had was around those are no longer actually long-term rentals when they're vacation rentals, which does have an impact on the availability of rentals, but like we're talking about earlier, the vacancy rate is starting to go up, so that's not really as much of an issue to solve for at the moment. You know what I'm saying? 'Cause I've always been concerned for vacation rentals like, "Gosh, if everybody... And going down that road, the long-term rental market wouldn't have as much supply, which pushes the rent prices up." You know what I mean? And some of the folks that are looking at the macro of that equation are concerned about similar things, but right now, you have vacancy rates that are starting to climb already with the vacation rental market already existing.

Dan: Yes. If you're going to change the vacation rental market, if certain laws are implemented on the vacation rental, and it slows that demand down, how will that impact our overall real estate market for homeowners in general?

Josh: Well, it's only one or two ways up the property can go if it can't be a vacation rental. It's going to be liquidated and sold, or if the person's living in it, maybe they could just do something different with that vacant space, or the other option is to turn it into a long-term rental. So it's going to do something there, but we've had some questions around it, and there were no solutions or there were no final decisions. I don't think that were made a couple of days ago in that meeting.

Dan: Just proposals.

Josh: Yeah, some proposals, some broad strokes. I think there were a couple of votes on a few things trying to get things... Get some clarity, but I don't have an actual policy that I could speak to you about right now that says, alright, this is in concrete, this is what you could expect, but if you're in the market right now thinking that you're going to be buying properties for the vacation rental market, I would say a couple of things. One, the vacancy rate for the vacation rental market is starting to soften.

Dan: That's right.

Josh: And it's not as easy as it was, and the numbers they were getting for those are starting to soften as well, would you agree?

Dan: I would. Yeah, that's what I've gathered.

Josh: Yep, and there could be some regulatory things coming down the pipe for that as well, so keep all those things in mind when you go to make that decision. We'll watch pretty closely, I think, in the short term and over the long term of what direction we are going with these.

Dan: Yeah.

Josh: So great now.

Dan: It's good.

Josh: Any other thoughts you wanted to share with the group?

Dan: Oh man, thanks for having me on and talking with me. It's always fun.

Josh: And thanks again.

Dan: Yeah, absolutely. Thank you.

Josh: Alright. Take care.

Transcription*

The transcription is auto-generated by a program and may not be accurate to the conversation. In order to ensure you get all the information from the video properly, you must watch the video.

Joey: We're rolling. We're rock and rolling. It is December. Merry Christmas.

Josh: Merry Christmas.

Joey: Josh, I hope you have awesome plans for the holidays.

Josh: We have great plans for the holidays...

Joey: Right on. We have got great weather for the holidays.

Josh: We sure do.

Joey: So you and I were talking before the camera started rolling about the same thing we always talk about, Bugattis and driving Bugattis. No, we were talking about real estate. We were talking about the shift in inventory because we've been watching it move from a buyer's market, or, excuse me, a seller's market, into a neutral market. With interest rates and everything, we know where this is going. We're getting an idea of where the winds are pushing us, but the exact numbers were it's still a neutral market.

Josh: Yeah, I mean, right now, our standing inventories are at three point six months supply, and that's factoring right now as of today. We're about 620 homes for sale. But in the last thirty days, we've had about one hundred and sixty-nine that have actually closed. This is all residential homes. So we're about a three-point three-point six months supply right now.

Joey: Which is kind of unusual because you were telling me the inventory is down for December 2022 versus December 2021.

Josh: It is, yeah. New listings to the market.

Joey: New listings to the market. Okay. So inventory, they're not coming to market as fast. Okay, that's different. But what's down even more is the number of buyers coming to market, and obviously, that's affected by...

Josh: Yeah, by interest rates.

Joey: Yeah, but the good news is...

Joey: Interest rates are actually down a little bit from the peak.

Josh: Yeah, so there's a whole lot in there. So the first thing on that is that The interest rates now have dropped. We're about 6.13% percent as the national rate, I think, as of this morning, and that's if you took all the lenders in the country, and what's the average rate that they're Pricing out a loan at it 6.13 is what it is and that this filming for everybody. It's December 15th, yeah.

Joey: The Ides of December.

Josh: Yeah, that's right. So that's what it is. Now for listeners who don't know, the Federal Reserve raised the discount rate by point five percent yesterday, so people are thinking, "Well, how come the mortgage rates didn't go up?" Because the mortgage rates are not directly tied to the discount rate. And they already anticipated that the Federal Reserve would raise that discount rate by half a point, which it did. So if anything, that were a positive thing for the market because had the Fed gone in there and raised it three-quarters of a percent, that would have been unexpected, and Wall Street doesn't like unexpected things. So it typically changes things, although the stock market dropped quite a bit today. So out of that, consumer confidence is down, and some other economic things are driving that. So right now, here's the good news, and there's something to remember, for every one percent, the interest rate goes up or down. So it either increases or decreases the buyer's purchasing power by 10%. So you remember what they rated a few months ago? Do you remember?

Joey: They got close to 8%. I think at the height. We were flirting with 8%.

Josh: I think you're right. It was 8% or close to it, which obviously had a Major diminishing impact on buyer demand because a lot of people didn't qualify. They certainly didn't qualify for the kind of home they were anticipating purchasing, and it showed up on our sales reports because we closed 162 properties on the MLS last month.

Joey: Which is pretty low.

Josh: It was down almost half compared to last year. That's how much it hit, and that was all related really to those interest rates being so darn high a couple of months ago. So now the good news for people listening and watching now is that rates are in the low sixes. Well, that's increasing purchasing power. We still have some challenges, though, because low home prices right now compared to what the average buyer qualifies for at these higher rates/ It's still putting some headwinds against the consumer right now in the market.

Joey: There's still that Delta of like... Last month we were talking about it was something. I can't remember the exact formula you used, but you mapped it out where it was like $30,000-$40,000 was the Delta between interest rates and the average cost of a home. And I can't remember exactly. You had a great formula for that. But well, if interest rates come down over a percent, that's going to cut into that Delta.

Josh: Oh, yeah. Well, if the rates went down another 1% from now. So, if it put it down at the low fives or five, that would almost all but evaporate any other pressure for For home values to come down any further.

Joey: And I was reading something the other day. I get too many emails, but one of the emails was talking about the numbers were looking good for combating inflation. So the things that had the mechanisms that had taken place, again, I wonder if these were like in Enron accountants and sending emails. It was like, "It's not a recession. No, you're totally fine. You're broke but in a good way."

Josh: In a good way.

Joey: In a good way. On the good side, it was one of those things where it said, "Hey look, all the factors are starting to show like the mechanisms they put in place are helping." Inflation is slowing down. So that means next year, if this continues to trend, the feds will bring the rates down, and then that will be other tailwinds For housing.

Josh: Yeah. Yeah. Sure. It would have definitely increased purchasing power and increased buyer demand. It can certainly level things out depending on what home inventories are sitting at that moment. I mean, right now, for people that own homes, I would just say that, yeah, there's probably going to be a headwind out there in the market still because of what the median home is selling for asking for in terms of the list price and what the median buyer qualifies for, there's a Delta there right now still. And the Delta is getting smaller, but that Delta right now, like we said last month, it was $30,000-$35,000. It might be now, because of the rates dropping a little bit more, it might be at $20,000 now is the Delta there. And I'm saying only some of what's going to be given back too in value because it's greatly dependent on the price point and everything else. But the headwind is there, and it still exists. Homes will still feel some pressure as long as rates remain pretty high.

Joey: The good news for sellers is that supply is not easily replaced. You just said that we had... How many homes came to market?

Josh: It was in the low 200s last month, and last year was, oh, yeah, I mean the...

Joey: Which is a little bit down?

Josh: Oh, yeah. It was. The year before, we were a little over 300 that came to market. So we were down by about 30%.

Joey: And then new construction, the builders are slowing down too, right?

Josh: Yeah, so obviously, home builders right now are very rate sensitive, too, because they don't want to build products that can't be sold. And so everybody's looking at the rate environment and trying to get a feel for, "Are we going to go into recession? Are we going to see buyer demand fall off?" These builders are already making modest profits, which is the best way to describe it. They're not killing it right now, profitability-wise. Still, they're making a living paying their employees and hopefully putting something away for the future, and that's becoming more challenging. So vacant land development, it's tough right now. A lot of subdivision dirt being moved around is likely unlikely at the moment. Just because a lot of lots are already sitting here existing now, there's going to... For builders, it's definitely... The next 12 months is going to be very interesting. I have a feeling they'll have a fairly conservative approach.

Joey: I Remember last year you and I were talking. I can't remember. It's been close to a year, and you were telling me about how many permitted lots there are. I think you said the City of Redding, and it was an insanely high number. I was like, "What?" And it was, do you remember that?

Josh: I don't remember what the exact number was. I'd have to go back and look at it.

Joey: You shocked me with it. I remember I was like, "What?"

Josh: Yeah, well, being there's hundreds and hundreds of vacant lots that are ready to be built on now, and there's a lot of proposed subdivision maps that are available out there too where they've got a preliminary plan done. It's probably already been run through. At least it's the first phase with the Department of Real Estate, which for larger subdivisions, you have to get approval for that. And getting through those that process and so there's something like 3000 or 4000 potential lots that are sitting out there right now than in the close proximity to the City of Redding In the county, of course too, but as part of that number But there's a lot that is sitting there that potentially could be built.

Joey: Yeah, there's no lack of land.

Josh: There's no lack of land right now.

Joey: So new construction, that's the good news. That's good news for sellers because it's competition. What you're basically saying is you have... Supply is very still very, very low. A lot of these numbers can throw you a bit, like interest rates. We talked about it being at six and eight this morning. I remember when I bought my first house, I got a great rate at seven and a quarter. So when you've come out of a market where people were getting in the high twos, low threes, which is historical, that kind of throws people off. They've got that really short-sighted memory as well as inventory. We're not in a buyer's market yet. We're not a seller's market, either.

Josh: No, supply and demand tend to tell a good story, or supply relative to demand tells a pretty good story most of the time, and right now, our supplies are still short. We're at 620, So we've trended down. We were in the mid-sevens for those who are wondering what the peak was this year. It was probably the mid-sevens or just below. And now we're at the 620 rates. So and that's normal. It's a season. We're in December. It's going to be like that normally through most of January. Then the inventory begins to climb, so sometimes we tell our sellers that if they want to enjoy a market where they're still buyers and less competition, get to the market a little sooner. Beat the spring. That'll be a good, wise decision. For buyers that are out there in the market now and might feel like they can't find that ideal home yet, don't worry. Keep good communication with your real estate agent and watch the market because that right home could pop up at any moment, and the market's leaning in your favor. There'll be more inventory next year.

Joey: And a healthy market is a neutral market.

Josh: Oh, yeah. Yeah, ideally, I mean, if you could have your market sitting around four and a half months or five months' supply of homes, that's a really good market to be in. You don't usually, or you're usually not in it very long, usually pass through it over a period of time, and it becomes A buyer's market to pass through it again as you go into a seller's market.

Joey: A pendulum?

Josh: Yeah.

Joey: Back and forth?

Josh: Yeah. But ideally, it'd be great if it slowed down a little bit in that four or five months' supply because then they have enough inventory where buyers have the feeling like they... Let's say I own a home, and I'm thinking about buying a different home. When there's inventory, it gives me more flexibility in options. But when I'm a homeowner, sitting in a home, and I look at the market what's available for sale, and nothing's getting me excited, then why would I sell my house? And that's, I think, very understandable, and that's probably a lot of what's happening right now, is that people are sitting in their home going, "Well, I don't see too much out there that's getting me excited So why should I sell my house right now?" And if that's how you feel, then I don't disagree. Good for you, but going into next year, the inventory starts to grow, whether it be new construction or The rental market potentially, bringing some more units to market that were rented out before now they decide to sell or just people that have some pent-up seller demand that wants to bring homes to market now. We're going to see that more at a higher volume next year.

Joey: Speaking of the rental market. Last time we were talking about you having friends and property management, and they were talking about there was a dramatic shift. I mean 15 applicants per home to...

Josh: Yeah, I think... I don't remember if we talked about it last month. And I got to remember which market I'm in when talking like this, so it's really challenging in the state overall. I've some friends that do some pretty large development management, and they're telling me they see some large vacancies statewide vacancies. Here locally, a couple of companies are telling us now that what used to be... Put a unit on the market on a Thursday and by Monday, you've got 15 applicants, recently, they could come in on a Monday, and there aren't any applicants. And that might be a development from last month because a month before, it was probably like one applicant, right?

Josh: And so the inventory of rentals is beginning to grow a little bit. It's not a problem, but it's certainly a reflection of tenant demand declining some. And it's hard to know exactly what that's about. It could be part of the seasonal stuff, too. It could be the fact that people are a little bit bearish about the economy and whether or not we're going to be in a recession next year or not And if you have a choice between moving out of your parent's house or not If you don't know what, if you're kind of unconfident about what might happen next you might just stay. Or you're sharing an apartment with three or four of your buddies, and you were thinking about moving out but, let's wait and see what next year brings before I do that. And so there might be a lot of different contributing factors adding up to a little bit of a softer rental Market.

Joey: There's a big potential impact on that on the horizon in that Bethel is building that very large school That's outgoing on towards Shasta College.

Josh: Yeah, they've been...

Joey: That's going to attract a lot of renters, and I wonder if they have housing. I don't know if part of it's like, "Oh, no. We're going to build dorms." I'm not super... If you're familiar with it, that's like a potentially huge project.

Josh: Yeah, it is. It's a big project. I don't know if that's a good thing. We probably need to investigate that a little bit more and find out what their provisions were. I couldn't imagine the City of Redding okaying a project out there, knowing it would impact the housing in the area Without having some sort of dormitory provisions in place.

Joey: You'd think.

Josh: I would think but I would say that for everybody listening to this that we don't know that. We probably need to go, look and see.

Joey: No, I have no clue.

Josh: I know they are right currently. Some of the students there are renting space from Simpson University out of their dormitories to help handle some of that need, which was great for Simpson to do because Simpson looked at the community and said, "Hey, We need to... Let's do our part to help serve the market and take care of people, and instead of putting so much pressure on the rental market, we have some dorms that we have available, at least at this time, and we can work something out," and that's been a nice I think a good relationship for them. So politics aside and everything else, all of us collectively solving the housing issue together is really ideally what the community needs to do.

Joey: No, the community needs to be very at each other's throats. I think we need to segment it into about 40 groups and start basically a collective war, Josh.

Josh: Scary thought.

Joey: Yeah. The community goes that we're all on the same ship, right? Are there any projects you're thinking of or anything that I mean... Because the interest rate is the thing that looms, we have no control over it. What are some other factors that you have? Anything that you can...

Josh: Well, there's a lot of... Man, there's a lot of Desire. That's the good news about it. For anybody's has listened to this or watching it, and if you've already been downtown, then you know what I'm about to say, and if you have it, you need to go see it for yourself. You've seen a lot of people pledge their time, talent, money, and wallet into downtown, trying to have an impact down there. I would say if there's anything that's had the most positive impact, I think collectively in the community. It's been the downtown. And kudos to those that have been leading the charge down there. I can't speak. I can't say that I am one of them. I haven't bought anything down there and revitalized it or anything. But I've got plenty of friends that have, and I'm certain I'm happy for them that some of that's working out, right?

Josh: We have a lot of units that are coming online downtown. We have our downtown... There's some multifamily above some storefronts, which are about spring. So a lot of that is going to come into shape, and you'll get a really good feel for that. We have some multifamily stuff that got built out there off of Lake Boulevard, and that was a big project that was pretty exciting. For those driving down Hilltop, on the North end Hilltop before it hits 299, you'll see a big development over there. People thought it's multifamily. It's not. It's actually a retirement community there.

Joey: Yeah, I know what you're talking about.

Josh: Retirement home. Beautiful building from what I can see so far, and what's being done... You've got a lot of home building going on, some semi-large home builders that are local guys and gals that are aggressively trying to get things going, but as I said, I think this next 12 months, they're going to be fairly watching the rates and making sure they don't overbuild. The absorption rate is a stubborn fact. Only so many homes can be sold in a month based on buyer demand, and so if you oversupply one particular price segment. You're only hurting yourself.

Josh: So, the local builders are all too aware of that fact. DR Horton is still here in town. He bought some stuff from Palomar that the company did, and they're aggressively building out right now off of Rancho Road. So if you last got out there a while ago, you guys want to drive by and take a peek at it. That's a subdivision that's really coming together now. It's track-ish and in some form because of what DR Horton's doing with it, but it's still certainly an attractive subdivision. It's still gonna provide a lot of housing solutions. Corner of Hartnell and Shasta view, Holiday market.

Joey: Oh, yeah.

Josh: Yeah, holiday markets.

Joey: It's a big project.

Josh: Yeah, it's a big project. So they're going to be doing an entire shopping center anchored by a holiday market right there on the corner, and Axner's already broken ground out there, and it looks like it's going to be quite the project when it's done. My wife has been telling me daily that she believes there'll be a Starbucks there.

Joey: Oh, absolutely.

Josh: So I think she's pretty hopeful for that. And the girls drink Dutch Bros, for the record, and my wife drinks Starbucks, but a lot is going on. I know it's a long answer, but man, a lot is going on, and I've never seen the optimism in this community. I've been here for 40-plus years. I'm 47 now, and I've never seen this level of optimism in the community from my perspective.

Joey: I've only been here... Let me think about it for a second. I'm a little bit older than you, but I also wasn't born here. I would agree. There's a couple of just a combination of projects and things going on right now where people are really pouring money into infrastructure. Like you said, the downtown. That's been really nice the way they revitalize that and they've gone with this approach where the bottom floor is like commercial or what's the other?

Josh: Multi-use. Yeah.

Joey: Yeah, it's like a restaurant.

Josh: Retail, yeah.

Joey: And then they're putting apartments above. They've rebuilt it, just given a facelift to a lot of that stuff, and I can't remember the last time there was that much money spent. You definitely have that huge Costco project. I heard that the Old Movies Eight, and this is a rumor mill but Old Movies Eight, they were gonna Turn that into like some type of workout facility because we walk by there all the time, So it's nice to see some of these buildings. They're like, "Hey, man. Don't let that. Don't let that just go. Do something with that." That's like really nice.

Josh: Well, that was our lower expense. That was that movie theater before the big movie theater came into town. Because it was Cascade, the dollar theater, and then The Movies Eight was like the movie theater.

Joey: You remember the movie theater in the mall? UA3?

Josh: Oh, that's right.

Joey: You remember that?

Josh: Yeah.

Joey: Yeah, that's going way back.

Josh: Yeah. Well, I remember that mostly Cascade used to play movies there. They were a dollar movie night. So as kids, that's where we would go to watch the movies, but yeah, man. It's pretty cool to see all the work that's going into it. I think the downtown is definitely going to, everybody, I think every community up and down the state and across the country right now is trying to do something with their downtown and which is smart, I think they should. But it's going to be an interesting thing going forward to see these units. Once they're done, how fast can they get leased out? You know what I mean?

Joey: Yeah.

Josh: We're sitting on some vacancy in downtown right now, too. I mean that that larger K2 development down there it's a beautiful building. They got the apartments above it, but there's a lot of space down there. One tenant recently moved into one of the spaces, but there's still...

Joey: Yeah, I made a big deal of it.

Josh: Yeah, which was great and exciting, but I suspect... Sorry about that. I needed to make sure my computer was on.

Joey: No, worries.

Josh: But I think there's going to be more opportunity down there in the future.

Joey: I'll put you on the spot. What project is going on below the hospital across the street from Community Health? All of it, they bulldozed it all. It's below the Bank of America. They're tearing. I mean, they're doing Eddie... Speaking of Eddie Axner, it's Eddie Axner's trucks that are all there, but it's something big going in there. I didn't know if that was going to be medical or that was going to be housing. Do you know?

Josh: I actually don't know.

Joey: because I thought it might be medical, they tore the other building across the street and down. I think that's going to all be medical. It's just it's surrounded by medical, and that's like the highest use.

Josh: Yeah. No, I make sense. But I don't know. Yeah, I'm not sure what they're doing down there. Yeah.

Joey: So they tore down a bunch of old buildings. They consolidated several lots, and the old Owen's pharmacy was really old. All that, it's all being leveled out, and something's going on.

Josh: Another change that we see, too, is the ADUs. We've talked about it. Maybe a few months ago.

Joey: We did.

Josh: But it's I was talking with. Gosh. I think it was David down there at cousin Gary's, and they were talking about some of their units down there, but because of those manufactured homes. These aren't mobiles, I mean. These are manufactured homes and the architectural design for these things now, pitched roofs and everything else, they're pretty darn attractive, but those particular units, in an ADU kind of setting, right now might be more affordable than stick built.

Joey: Oh, absolutely.

Josh: I was looking at some of those numbers, but ADU is beginning to be more and more popular. I mean, the state obviously is trying to push it really hard because, again, collectively, they're trying to come up with as many solutions to the housing issue as possible. If you're not going to back off on any of your regulations, you've got to find a way to make it a little easier to add units. And so that's ADUs are a way to do that.

Joey: We talked about the city of Redding has come up with some designs where if you use their designs, they were going to waive some of the Fees and stuff, but I looked at the designs, and they were pretty intricate. We talked to a contractor about building one on the back of our lot, and he was like, just the cost, you're not... The cost of building to this, you've lost the savings they're giving you. It'd be better to go with a more traditional style. And you, so it's six more half dozen the other in our neighborhood. There's been a couple that popped up In the last year. One of them, t was I remember they had a sign for rent and the rent was just insane. My wife asked me, "Are they going to get that rent? I'm like, that's what they're asking. You could ask, "Hey, I want $1000,000," what you get. But we noticed the sign came down, so it's rented out. But those are starting to pop up, and I can see like more of a prefab. There's also some... You see these ads through Facebook where they're like, these modular homes. These are not Cousin Gary's, but these are like national-level ads where they've... And the whole idea is that they're very cost-effective. They look great. When you're talking about like a one-bedroom, one-bath, a two-bedroom, one-bath, definitely under a thousand square foot footprint. So you got to get creative.

Josh: So, it's interesting you say that because I've been looking at that right now for clients, and we're just trying to figure it out. Obviously, a part of our job is to forecast and try to get an idea of where the market's going and ADUs were one of the things we were collectively looking at here as a team, and we thought that like the ones that the City of Redding was proposing. And ladies and gentlemen listening or watching, this doesn't hold me to any of these numbers but I'm trying to illustrate the story here. When we looked at the numbers on it. It was like $225,000-$250 000 for the 1000 square foot unit.

Josh: The ADU or, I'm sorry, the modular numbers came in at like $215,000, $220,000, $225,000. So they were very different. Quality products probably could be built a little faster than the stick built would. Maybe, I need to find out for sure. But not enough of a price difference, and then Cousin Gary's on the one, on the same thousand square foot now as long as you're okay with the architectural design and thing like that $185,000. And so it's definitely less expensive In comparison to some of the other ones, and I'm not... I don't know. I'm not like friends with Cousin Gary's or anything. I'm just using them because they're the ones that guys are listening to.

Joey: They're local.

Josh: They're the ones that are local that provide a lot of the manufactured homes, and so that's the... That's interesting that the cost is still there. It's still expensive. You got to get pretty good rent if you want to justify spending $230,000 on a unit.

Joey: Yeah, you do. I wonder if you're doing it for rent or like someone like us, we'd be doing it just for like our eldest kid, and say, "Hey, want a place to live and want kind of to want some autonomy at the same time?" She's not going to go buy something. So it's like, well, "Maybe we build this, and."

Josh: Well, that's the good news, man. There was a time, and a lot of people would relate to this when it was difficult to put on that second dwelling there. And I mean, they had stuff like, "Well, you could you could do it if you were taking care of a relative, but if the caring relative was to pass on, then you have to remove it from your property."

Joey: Yeah, that makes sense.

Josh: I mean, yeah, okay. Who's going to spend the money if you have to throw it away?

Joey: They call that a travel trailer.

Josh: They do.

Joey: You put something that you get and just wheel it out. Yeah, that's not a house. It's a travel trailer.

Josh: Well, and if there's anything good that came out with the state's policy on that saying no, you guys, They were pushing back on counties and municipalities and saying you must provide additional adequate housing, and it opened up even where the city might have even been stuck and then so it's not even the city's fault But if the city stuck with a policy, they have in black and white, and they may have even wanted to change it. But maybe they wouldn't have had the votes, or you would have pushed back from the community now that the state comes in and says no, you must do this, and it gives them The flexibility to say, "Okay. Well, now we have to provide for that."

Joey: Yeah.

Josh: And then, of course, you try to do it in a way where it's still attractive architecturally. You don't want to diminish the property values in the area, but you do want to solve the housing stuff or the housing issue. So it's just a group effort, man. It takes a lot of work.

Joey: It takes a tribe.

Josh: It does. It takes a tribe, man. We're all in it together. I want my kids... Like I tell everybody all the time, my goal is that if my kids choose to stay in Redding, California, they can have a decent careers. And they can live in a nice, decent home and not get priced out of the market. To me, that's our responsibility, as that generation ahead of them, to try to set the playing field for that to take place.

Joey: There you go.

Josh: Yeah, so any case, man, we're almost out of time, but...

Joey: We're out of time. Well, it's Merry Christmas.

Josh: Merry Christmas.

Joey: Happy new year.

Josh: Thank you.

Joey: I'll see you in a month, and hopefully, we'll be talking about interest rates may be coming down another half percent, and we'll see.

Josh: Man, wouldn't that be great? Great for everybody.

Joey: Thank you, sir.

Josh: All right. Merry Christmas, everybody.

Transcription*

The transcription is auto-generated by a program and may not be accurate to the conversation. In order to ensure you get all the information from the video properly, you must watch the video.

Joey: Okay, welcome back, Josh.

Josh: Thank you. Glad to be here.

Joey: It's November. This blows my mind saying this out loud, November of 2022.

Josh: Time flies when you're having fun, my friend.

Joey: Yeah. And even when you're not.

Joey: It's like 2022 is almost over. And it's been quite the year for real estate.

Josh: Yeah, we had a little bit of a transformation, haven't we?

Joey: Yes, we have.

Josh: Yep.

Joey: And we were talking before the camera started. We were talking about the big news in real estate has been: interest rates. This time last year, we're talking a huge difference and a major... What you'd call a headwind, a major headwind. But there's a little bit of good news: hey, there's a rainbow behind this monsoon thunderstorm, that interest rates went down.

Josh: It went down a little bit. Yeah. So for our listeners, our lowest point was about 3 1/4%, roughly of interest rates. It was in the mid-sevens, not even a month ago. And right now, we're about 6 3/4 over the last week. So that report from the Feds basically said, hey, we got some good news on the... That looks like inflation is cooling a bit, even though they're not reporting that until next month. Some of the other lead indicators are telling them that. And so, as a response, the interest rates came down just a bit. And for everybody, too, it says for every 1%, the interest rate goes up. So it has an impact of about 10% on purchasing power. So when the rates dropped to half a percent, that increased purchasing power by 5%. And last week we saw some sales go up because of it.

Joey: And if you're talking about a $400,000 house, that's $20,000.

Josh: It is. It's significant.

Joey: Yeah, absolutely. We were also talking about... because one of the themes that have been going through this year is we've been comparing the inventory, the thing that you call the absorption rate, meaning if nobody brought a house to market, how long would it take for the current inventory...

Josh: To sell-off.

Joey: To sell-off. Because that's a big sign of whether we are in a seller's market, a neutral market, or a buyer's market, we've obviously, over the last few years, been in this like insane seller's market. At one point, it was like one point something, right?

Josh: Yeah, exactly.

Joey: And three is the magic number. Where are we? Like three months is...

Josh: Yeah. One to three months' supply is considered to be a seller's market. And then, from three to four months, supply is normally considered a neutral market. And then five months or more is considered to be more of a buyer's market. And that tends to be... At least for our marketplace, that's what it kind of tends to be. Right now, we're at the 15th of the month for this podcast. That's what the date is today for this filming of this. And we were at 98 pending for the month, and we had 715 residential properties for sale. So if you do the math on that, we'll report in our market update this next month. We'll be reporting that we're in at three months of supply, which means that we're on the tail front end of a neutral market in terms of demand relative to supply.

Joey: So, which means that you got two things going on? Number one, interest rates are heavily affecting sellers and buyers, obviously buyers. But if you don't have buyers, then sellers... Yeah. And sellers aren't bringing inventory. So it's starting to slow off a little bit, it's starting to... Because the number was creeping. It was. I remember it was in the low ones jumped up. The last time we spoke, it was like 2.9. So it's not just racing up but starting to level off a little bit.

Josh: It is. You know, and in our inventories right now, are right around 715 or so homes for sale. We saw a peak in the last few months in the 740-750 range. And part of this is seasonality, too. Fewer people want to come to the market in November or December than spring. So it's common to see our inventory decline at this time of year. And that's having an impact, obviously, on the absorption rate. But really, the quick question everybody's asking is, what's going to happen next year? Are a lot of folks going to come to market? And if they do, at what volume? What is the demand going to look like, cause that's going to tell us a lot about what to expect next year?

Joey: Yeah. And you'd have to have a crystal ball because trying to think about, well, are we going to have a big demand, are we going to have a big push of people moving to rent again next year? Or has the whole telework... Has that kind of settled out? Because during COVID, we had a massive push. And I've been like I said, I go on a radio show with a local lender a few times a year. And for the last several years, I've been bullish on people moving here. But it's leveled off. I think we need to get that.

Josh: Yeah, well, at the peak of COVID, obviously, during the pandemic, you had people that were migrating significantly for multiple reasons. And I think now obviously that big, robust migration pattern shift is obviously over. So whether or not people are going to continue to be able to work from home and have those types of jobs, people are moving up here. So I think that's still going to happen. It's just not going to have the same volume that it was before. But, you know, the median sales price in the market right now is 350,000. And if you go back one year ago, in the same month, it was 350,000. So our prices actually went up last year after October.

Josh: But at this point, we've given back a lot of the market gains from last year up to this point in terms of prices coming down a little bit softening. But if you take the median buyer and what they qualify for and compare that to the median selling price right now, it's still a delta of 40-50,000 bucks. And so, the headwinds are still there, and the only thing they can change is interest rates going down, inventory continuing to decline, or wages going up. So it's going to take something along those lines to get it done.

Joey: Do you know much about inventory besides sellers bringing it into the market? Are there a lot of projects for construction? I remembered a few months ago. We talked about how DR Horton was one of the first indicators because they're a big corporate builder. So they just came right out and said, hey, we're dropping our price. Was it 10% or 5%?

Josh: Yeah, they were like at the 470-480 range, and those same products were down, down in the 440-450 range in a short amount of time. To answer your question, we are definitely seeing builders tapping the brakes a little bit in terms of new construction. It's certainly not as robust as it was a year ago, for example. It's beginning to feel like they're being cautiously optimistic right now. I mean, it's hard. The part that's getting better for them is their access to labor is getting better. The cost of materials and supplies is going down. And so that gives some flexibility to their pricing strategy if they're trying to be more price competitive against the resale market. But there are some headwinds there right now. While we're in a higher interest rate environment, where you had the rates double in less than a year, that's what you will be up against.

Joey: And so, when I think about this stuff, we bring the data in these podcasts. There are certain things that it's like it's just information. It's like, well, what can I do with that? It's like you can't do anything. Can't you lower the interest rate?

Josh: Right.

Joey: If you're thinking of selling and you're selling because you're moving, it almost doesn't matter what's going on. If you have to move, you have to move. If you were thinking, hey, I'm going to sell my house at retail, and then Imma go pick up a house at wholesale, that's you're watching too much AE TV. I'm just going to house flip real quick. But it's like some of this data, it's like, what can you really do about it? Be calm.

Josh: When you're saying all that, I literally I'm thinking of myself. We're like trying to be a calming force, right? People always want to jump to one extreme or the other. It's either, "Oh, my gosh, we're going to the moon." Or, "oh, no, we're gonna be the worst thing since the last recession." And it's like it doesn't have to be like that. This time around, the market cycle is a bit different than the fact pattern it was last time. And we've talked about that on previous podcasts. But I think if anything, it's to be calm about it. Say, look, here's what's going on. Yeah, we have some pressure on the housing market right now. Interest rates are high. It's having a corresponding effect on demand. You have a lot of people, though, that don't wanna sell their homes. They're happy to be in their houses at a three-and-a-quarter percent interest rate. So we don't have inventory that's shooting through the roof. That's large because we didn't have a massive amount of speculation over the last 24 months. For most of those purchases, the vast majority were owner-occupied, which means that those folks, if they were to sell, must find something.

Josh: They have to go to the rental market or whatever, which that's interesting. The rental market has been changing.

Joey: How so?

Josh: Well, I was talking to a friend of mine that has a pretty good-sized property management company, and I asked him, I said, how are things going on the property management side? So what's the vacancy rate like? And he was like, "Well, COVID was like one percent." And he's saying now that it's probably anywhere between five and seven percent.

Joey: Oh, wow.

Josh: Yeah, it's jumped a lot. He gave me an example of putting a property on the market for rent at one point and getting 15 offers on it or 15 applications for it. And now he can come into the office on a Monday and realize that there are only applications for that same product. And so the rental market is beginning to show signs it's probably reached its peak. And for some of us that have been around, we saw some of the rent prices people were asking were like, ah, this doesn't even look right.

Joey: Yeah, some of it was crazy.

Josh: It's crazy. And so I think that those folks, not the ones that are priced with the market, people that have rental properties and are pricing them fairly in the market based on comparable rents over the historical trend line, or all those are still those that are rented out. But those people that were going out there and trying to cut a fat hog, if I'm allowed to say that.

Joey: Mm-hmm. I think you're allowed.

Josh: Okay, I don't know what the rules are on that one. But that type of product is no longer really easy to rent out anymore. So it will also show up in the vacation rental market. In the vacation rental market, the vacancy is beginning to go up. But they were getting for those rentals, vacation rentals at one point, is beginning to decline a little bit. We see that, too, for different reasons, though. Some of it's associated with what I just said, but some of it's because, A lot of those vacation rentals, a lot of traveling nurses and doctors were utilizing some of those facilities instead of hotels. And that was because of some of the... I don't want to get into the politics of it, but some of the hospitals, with some of their programs and some of their rules, made it more difficult for people to work in the medical field. And so, for them to be able to facilitate the services they have to offer, they were bringing in traveling nurses and doctors. And now I think they're backing off on that a little bit, which is taking off some of the pressure on the vacation rental market.

Joey: As we sit here and talk about this, this is like just an incredible dance of variables. Just so many, the more data you take in, and it's for the people that are trying to time the market, as you said, it's a calming voice because, hey, look, if you're in a home, if you're renting, you probably want to buy if you can. If the interest rates don't make sense with the current inventory, it feels like based on... You didn't say this, but I'll go out on a limb. Here, the median price is down from its peak. Interest rates are still high. The delta is about 40 grand. So what does that tell you? Housing prices are probably going to come... That delta has to be fixed somehow. So either Feds have to lower interest rates dramatically so buyers can get that 40 grand, or sellers have to come down. That's how that delta has to be dealt with.

Josh: It does. And where people overestimate what's necessary, like based on that description, which sounds right, prices would have to come down that much. But this is what happens when the prices start to come down. The buyer demand starts to pick up.

Joey: Yeah.

Josh: And we have to compensate for that adjustment, too. If we move into a recession, which obviously it looks like that's what we're going to be in if we're not already there and everybody can...

Joey: We don't use the R-word, Josh.

Josh: Okay, fair enough.

Joey: You can say fat hog, but you can't say the R-word.

Josh: Fair enough. Okay, so since we have multiple quarters of a less gross domestic product being sold.

Joey: Okay.

Josh: We won't call it anything else but within that. During that season, normally, the Fed's, once they feel like that's the case and they see unemployment going up, they're going to start to cut the rates. And so that's what I'm saying: when things start to change, the Fed will take some action, too. So if interest rates go down, the corresponding effect is that purchasing power increases, and you see buyer demand pick up. That's just part of what happens in economics, right?

Joey: Yep.

Josh: So I'm looking at that, and I'm thinking, well, next year will be interesting. We'll probably have some tougher days ahead over the next quarter. Maybe two quarters. And then, at that point, we will have a good feel for where the bottom is. And in terms of adjusting, and letting the Fed do what they're doing right now to try to get this inflation thing under control, and then we can resume whatever that new normal is going to be. But inflation is going to be an interesting thing next year.

Joey: Yeah.

Josh: Because I think that as those numbers start to improve, the optimism of the average consumer is likely to improve, too.

Joey: And so interest rates, I mean, they've got if they come down enough to where they were last year.

Josh: I don't see that happening.

Joey: Yeah. That's going to fire it. Right, that's going to fire the kiln right back up. Do you know what I mean? Everything's going to start going crazy. But if interest rates can get down to, as you said, they're in the mid to high sixes right now.

Josh: Right now, they are.

Joey: So if they get down in the mid to high fives. You've got that delta.

Josh: Yeah.

Joey: So if they come even down a half point and then sellers reduced, maybe make a couple of reductions, you're going to meet in the middle.

Josh: You're going to meet in the middle, which might be our new normal.

Joey: And it's going to shoot. That's how it works. It always overshoots this way. Then it overshoots that way.

Josh: Sure.

Joey: So it's just going to steady out. But it was up until this year. I mean, it was just straight. It was a bull market.

Josh: Yeah. Well, COVID just, I mean, it's like riding a bike down the street. Somebody took a baseball bat and shoved it right through the spokes on your front and back tires.

Joey: You shouldn't hang out with that dude.

Josh: Yeah, I shouldn't...

Joey: And maybe there's something like that...

Josh: And we're still dealing with the aftermath because when the bike flipped, it broke the handlebar and the seat post off. Do you know what I mean?

Joey: Yeah.

Josh: You got a pedal that's off in the cutter somewhere. And now we're trying to piece this whole thing back together after you've picked it up off the ground. I mean, and so there are all kinds of leftover carnage from this massive economic catastrophe if you will. Not to mention the fact that we just threw tons of money trying to solve the problem, which created its own issues. So there's a lot of work ahead of us to get this thing back to normal. It isn't going to happen in six months.

Joey: No. And so our headwinds are interest rates. Our tailwinds are low inventory, although that's going away. The other big one is we were talking about people coming into the area that's slowed down. So all points seem to say the market will continue to come down a little bit.

Josh: A little bit. Little bit. It's going to continue to soften a little bit. It's funny because I hear this. I have lenders that will run into me like, "Oh, my gosh, we're going to see rates at 10% in the next 90 days". I'm like, calm down, calm down. It's probably not going to be like that. And then the same people, two months later or two weeks later, come to me and go, "Oh, I just read this awesome report, and rates are gonna be at 5% in the next 30 days". And I'm like, calm down. It's not going to be that good, either. It's like, just calm down. The rates are likely in the high fives, mid-sixes, and long term. That's historically been the trend, anyway. When it gets a lot higher than that, it's unusual. If it gets a lot lower than that, that's unusual. So if we were to figure that it's going to be mid-fives, mid-sixes, that's a pretty decent market.

Josh: And if we can get it done, market to stabilize where buyers and sellers in the marketplace go, "Okay, here's our fact patterns. Here's what the information is on the ground. Here's what we can expect." So now people can properly start planning, and planning is really what people need to make moves. I mean, if you're going to stay locally, move up or move down or move sideways, or if you're going to leave the state or people are going to move from out of the area, all of that takes planning, and they want a fact pattern that's a bit more consistent so that they can make plans that they can rely on. And that takes time, and that's kind of...

Joey: C'mon, good luck with that.

Josh: I know.

Joey: Good luck with stability. When was the last time we had stability being serious? When was the last time you were like, oh, it's a totally stable market? We're at equilibrium.

Josh: I'd say probably 2015 to '19 was pretty cool.

Joey: Yeah?

Josh: Yeah. Pretty stable. I mean, we were climbing. I mean, it was great because homeowners would buy and we weren't, hitting the cover off the ball. But have a home and value of five to seven percent in a year. That was pretty exciting news. They could decide to sell the home a year from then. They'd have enough equity to make some money if they wanted to and get onto the next home. And that might even be aggressive in terms of appreciation over the long haul, but it's still nice. And that's... We've had it where that's been the case. But the challenge we had back in '14 and '15 was that prices needed to be higher for builders to build at a meaningful level and compete against the existing resale market. And that was the challenge. We were watching them, waiting for home prices. We're like, okay, when the home prices get to X number. Home builders can start building again. Do you know what I mean?

Joey: Yeah.

Josh: And we were watching that pretty closely, waiting for that number to hit. And it started to hit probably at a meaningful number. And, '17, '18.

Joey: I wonder if that number is now to flip, that is, is it worth people to build now? It has to be. It has to be somebody that has a major infrastructure already taken care of. It can't be probably the individual unless they bought the lot years ago. Maybe they got that at post-car fire a lot or something. The cost to build a home right now is with that property coming back down. So they're probably back to that number again.

Josh: Yeah, they are. Again, we talked about this in our previous podcasts. The construction field is going to have some disruption coming up because you've got at least here locally what we had was, and for some of your listeners, we've had multiple fires that created this huge demand for new construction to rebuild a lot of those homes.

Josh: We've had some pretty big hailstorms, which are fairly unusual for our market, and created a huge amount of re-roofs in the county. And then if you combine those two things, and then you have the pandemic, I mean, we had just a massive amount of labor in a very short amount of time in the area. And we're beginning to see the housing market slowing down. And so you've got these crews now that are a bit more swollen compared to what they have been in the past, with all the different employees working for them. And so it'll be interesting to see what happens in the future with bid pricing and stuff like that. I could see the price per square foot going down, not just because supply and material costs go down, but also because labor potentially, or at least profit, the amount of acceptable profit will start to decrease.

Joey: When taking a kind of a step back. When we talk about year-over-year interest increase, so an appreciation of homes.

Josh: Sure.

Joey: I'm thinking, do you want it to just be a little bit higher than inflation? What is an ideal, sustainable growth number?

Josh: Well, don't go year over year. I go five years over five years kind of thing, right?

Joey: Okay, fair enough. Fair enough.

Josh: Because everything modifies.

Joey: What about weekly?

Josh: Well, what people don't probably realize is that the Federal Reserve actually has a stated... They want inflation. They absolutely want inflation.

Joey: Was it like one to three percent or something like that?

Josh: Yeah, I think it's like two-something, right? I have to double-check what the number is. So, everybody, I'm sure listening, can fact-check this. But if you were to go to the Federal Reserve.

Joey: They will.

Josh: Yeah, go to the Federal Reserve's site and look at their mandate. Their mandate will target a certain amount of inflation, which means they want inflation.

Joey: Yeah, growth.

Josh: And that's how you get that growth, right? And then the second part of that, that you're going to be looking at, is they also have a targeted number of unemployment, which means they actually want to cause some unemployment, which might sound counterproductive, but in a healthy work environment, we need people to have equal leverage. I mean, employers and employees, to have a more harmonious relationship, we need to have some unemployment in the marketplace so that you have more value as an employer to offer a job to somebody. Do you know what I mean? It allows the work and the effort of an employer. You receive from your employee to be a bit more meaningful and profitable because the person wants to keep their job. Whereas if the jobs are just too robust, it's like, "well, you have to accept my 50% effort because if I don't, I'm gonna go work for somebody else." And this is some of that disruption we're going to see, and we're hearing some pretty good-sized layoffs right now.

Joey: Amazon just reported 10,000 this week.

Josh: Yeah, these are big numbers. And they start to trickle into the economy because those people, obviously, while they're in a disruption of labor, will not be out there making some of those higher dollar purchases, and they'll probably be cutting some expenses here and there. And that starts to have a corresponding effect on those markets in which they would have been participating. So three to six months from now is when we will finally start to see where we really stand economically.

Joey: So back to that five years over five years, what kind of appreciation would you want to see on a home? In a stable...

Josh: Stable market.

Joey: Robust, but not crazy, because what goes up comes back down. So when you get these white hot... There's the other side of the mountain.

Josh: Yeah, I would say four to five percent is probably something. And, you know, Redding tends to be...

Joey: Over five years? Five percent?

Josh: Per year.

Joey: Per year. Okay.

Josh: Compound effect, yeah.

Joey: So 20 to 25%.

Josh: Yeah.

Joey: Probable it will be more than that because it compounds.

Josh: Yeah, it compounds, right? But that helps you to stay ahead of inflation. It gives you the ability to repurchase another home. But you must also realize that Redding is a lot like those flyover states. In the sense that we don't have these massive, robust swings in our home valuations, whereas you could get on the coast, you know, people think... Whenever they hear I'm from California, people say, "oh, you're from California." I'm like, yeah, but I'm not from California. You think I'm from. But we can buy a home where we live. And I'm proud to say that. Whereas if you look at the Bay Area and Southern California, it's extremely expensive.

Joey: Insane.

Josh: Yeah. And what they do in terms of appreciation has a lot to do with the economic factors on the ground at that time. When the economy is doing well, those prices down there are doing really well. When the economy goes down, they get back some value quickly. In our market, we go up and down more slowly than the Bay Area, and Southern California does. So for anybody that's thinking about moving up here, just enjoy the fact you get to buy a great home. We can't wait to welcome you here. But realize that the valuation is going to be different from what it was for you if you lived in LA. It's going to go up slower.

Joey: Well, at four to five percent, you're looking at the value of your home doubling about every what? 15 to 20 years, 15 to like 18 years.

Josh: Yeah.

Joey: So you think about you buy a home for $400,000 now, 20 years from now, it could be, on average, valued worth $800,000 at that growth rate.

Josh: Yeah. You used the rule of 72, I think, on that?

Joey: Yeah, that's what I was doing. Yeah. Kind of cheat math, cheat math. I was using poker math.

Josh: Poker math. Like, wait for a second. He's got seven outs. We'll give a training tip right now. If you guys want to know what the rule of 72 is, if you want to know how to double an investment, you'll take the rate of return. Let's say it's five percent, and you multiply it by whatever number to equal 72. And by doing that, that's how you'll get that corresponding. How many years would it take for you to double in value? So if you took five times, what, twenty-five?

Joey: No, five times 14.4.

Josh: Is that what it is?

Joey: 14.4.

Josh: Yeah, that sounds right. Yeah. Yeah. And then it puts you there.

Joey: So it sounds like 14 and a half to about 17, 18 years at that interest rate which...

Josh: Well, there you go.

Joey: There you go. Yeah. So that sounds reasonable. It sounds kind of crazy, too, at the same time, because you think like 4 years later, you know, a 400,000 house is 1.6 million.

Josh: I know.

Joey: And then, I think I just described the East Bay, you know? Maybe they were getting a bit better than that because I remember being a kid, a teenager, and going down and visiting my aunt and uncle and then buying a brand new house in Dublin at the time. And it was, I think, just these numbers, you think of something, and a number pops in your head, and you say, "I think that's the number because it popped in my head." But I remember them buying it for like $100000. It was a total track home, cul de sac, four-floor plans, and hundreds of homes. But there were fields everywhere.

Josh: Oh, yeah.

Joey: You know? I remember walking down, and now you look at it, and I'm sure that house has to be... I don't know. It's way over a million dollars.

Josh: Oh, yeah.

Joey: Way over a million dollars. And that was about... Oh, wow. I'm much older than I anticipated. Thirty-five years ago. But that sounds about right.

Josh: Yeah. I mean, if you were to look at... Same thing. I have a family in Santa Clara who purchased a property for like four hundred thousand bucks. The last time I saw it sell, they didn't own it anymore. They'd moved on to another property, but it was like 2 million. It's probably over the same period, like over 30 years, that it did that. And it's interesting to see what real estate does over time. I'm obviously a huge advocate, and full disclosure, I'm heavily invested in the real estate market. And so, for me, I like and enjoy the benefits of appreciation, but I equally enjoy the benefits of cash flow. And if you want to find an investment that has proven itself over an extremely long period of time to perform well, it's not the magic answer. I invest in stuff like the stock market as well. I try to be somewhat diversified, but I... More heavy in real estate because that's what I do. It's what I know.

Joey: It's what you know.

Josh: Yeah. And I've got friends that are stockbrokers, and obviously, they do some real estate, but they're way more invested in the stock market because that's what they know. But it's wise to invest in something because dollars, no matter what, return to zero if they don't get invested into some asset.

Joey: Especially with the inflation. We've seen this year that if you've got cash sitting in the bank, you're losing money.

Josh: You're losing money.

Joey: You're losing money at eight to 10%, depending on...

Josh: You are.

Joey: Yeah. So you want to purchase assets that you will appreciate. And yeah, that's a whole...

Josh: Well, even purchasing something that holds its value is going to be, you know, protecting you, right?

Joey: You're going to beat cash.

Josh: Yeah, exactly. I mean, investments are not a liquid position, or at least not very often. So you'll have to commit to being in that investment for a time. Real estate is a challenging investment to diversify out of quickly. It takes a period of time to market a property and sell a property.

Joey: One of the least liquid, if not the least liquid.

Josh: Yeah. Well, you could get a refinance or pull cash out. So, if you are in a position where you could do that...

Joey: But you can't just run down to Goldmark and sell your necklace.

Josh: No, you sure cannot.

Joey: And you can't get on E-Trade and sell, sell, wait, everyone's selling? Buy buy.

Josh: That's right. Yeah. No, with real estate, you will want to be a bit more strategic in how you approach things. But I can access cash out of all of our properties at any given time if I want to. I don't choose to because if I don't need it, why would you pay interest on stuff you don't need? But setting yourself up for that, investment in real estate still as a long-term prospect is a great investment.

Joey: I've got a question for you that's going to be... You're not going to be prep for this.

Josh: We've got two minutes, by the way.

Joey: Oh, okay. Are you familiar with what commercial rates are doing? Because normally, when residential rates were at three and a quarter, the commercial was at like five and a half, it's always a little bit higher. It just is. But I'm wondering now, where are commercial rates? So I put you on the spot if you don't know it's cool, 'cause I'm wondering, "Hey, I want to buy a templex," you know...

Josh: Yeah. Well, I've got some commercial lines right now. I mean, most of my building stuff is obviously fixed-rate stuff. But we have our instant offer program. And what we use that for is we have a huge line with the commercial line. And I just got my notification of what the rates are right now. And they just sent me the rates at eight and a half percent.

Joey: So the same thing, they're a couple of points higher than residential.

Josh: They are.

Joey: So they just track. I think there was a time there, a few months ago, when you could have snuck in. And so we'll see the commercial because the last few commercial buildings, apartment complexes, I keep my eyes open for that stuff. The prices had yet to come down.

Josh: Well, we don't have time... Well, they can't because they have a cap compression issue. And that's going to be an interesting story going forward. A lot of folks had some very short maturity on some of the notes they had on their investments on the multifamily side. Many people were really getting aggressive into the multifamily space, with cap rates that were already compressed, and now rents are likely going to compress. And now they're going to be paying more for that mortgage than last year. We don't even have time to talk about the rental market today because we need more time. But I would say if you were to look at what's the next thing we're going to see, we have some serious challenges. I mean, we already have the stock market and the real estate class. Where would we get hit first? I would say it's going to be in the multifamily space.

Joey: So we have topics for next month. But just to leave everybody on a good note, we're talking about total pandemonium, cats and dogs sleeping together. I mean, real wrath of God-type stuff.

Josh: Real end-of-the-world stuff.

Joey: Oh, yeah, total. Wrath of God.

Josh: Send the nukes. We're done.

Joey: Yeah. Clickbait. So well, awesome. Thank you, Josh, for this month's report. And next month, I'll make a point of us definitely doing some homework to talk about commercials and rentals and stuff.

Josh: That's a great idea. Let's do that.

Joey: Okay, thank you, Josh, have a good one.

Josh: Thank you. Appreciate it.

Transcription*

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Joey: Okay. We're back.

Josh: Hey, we're back. Alright.

Joey: We're back again. It's October.

Josh: It is.

Joey: Although the weather tells you it's July, [chuckle] but the calendar tells me it's October.

Josh: Oh, man. It's a good place to live.

Joey: So last few months, we've been talking about how the absorption rate, which is how quickly if no homes came to market, how fast the current purchase rate would inventory be gone, and you've always said that if it's three months or less, that's considered a seller's market, 4-5 months is neutral. Anything more than five months is considered a buyer's market.

Josh: That's right.

Joey: We've been watching it creep because I remember... I don't know if it was last year, but it was like 1.2, and it slowly started to creep up. I think the last time we spoke, I think you said it was 2.75. Do you know where it sits right now?

Josh: The absorption rate right now is about 2.96.

Joey: So we're still in a seller's market?

Josh: Yeah, we call it the tail end of a seller's market, but with the angle of that trajectory, though, by next month, I would imagine we're going to be in a neutral market.

Joey: So what does that mean for... I mean, is it... When you talk to sellers and you talk about pricing, that affects pricing, right? Because it's pricing before when the market is so... The inventory is so low, you're always trying to price for what's about to hit.

Josh: That's right.

Joey: If the market's going up?

Josh: Yeah. Yeah.

Joey: So what are you guys doing now when you have conversations?

Josh: Yeah, how we're changing that?

Joey: Yeah.

Josh: Well, first, I would say it's a lot different between... There's a difference between what a real estate and does for pricing strategies and what an appraiser does. So real estate agents are typically trying to project what might be happening in the future, whereas appraisers are typically requested to provide evidence of what's already happened in the past. And so that's where there's always this little conflict that pops up from time to time between what a realtor might be able to generate for an offer on a home and whether the appraiser can justify the value. Those things pop up. But to answer your question, when you're moving into a neutral market, the advantage begins to slip to more of a neutral position and pricing more accurately from the start instead of testing the market is typically how the more successful sellers approach it. So if they have the option of pricing at the high end of the range or pricing at value, most sellers, if they want to get moved, are pricing at value right now and not risking that they overprice and perhaps even chase the market down if it declines a little bit in this season.

Joey: And you're always trying to balance that idea like, "Look, we wanna get you the most for your home, obviously."

Josh: Yeah, absolutely.

Joey: But at the same time, people don't want their homes to sit on the market for a long period of time. It's considered like a negative thing, right? So you have to price... It's probably a little bit easier now, I would think, than it was five months ago when interest rates first... Five or six months ago, when interest rates were first... Because they jumped very quickly.

Josh: They did, yeah. They've doubled now in the last eight months.

Joey: And at that point, people were like, "But my friend just sold their house four months ago for X." That was a 2.9% interest rate.

Josh: Yeah and the media was a little bit behind that, too. It's always tough for a real stage, and when you come out and you can... You know the facts on the ground that day. You know how much the rates have moved up. You know exactly where... What's selling and what's not, but the property owner that you're going to meet with may not be up to speed with the same situation. They may not see the same fact pattern that you see, and so when you show up, it's like this... You're trying to educate them on where the markets are before you dive into valuation and things like that because you're trying to make sure that they understand what's going on. And sometimes in competing situations, where an agent's... When a seller is interviewing multiple agents, maybe some of those agents are up-to-date on the market, and maybe some of them are not. That's challenging too. Because if they heard a conflicting story of the market compared to what you were saying, naturally, the seller would want to be focused on the more optimistic person. That certainly sounds appealing. Of course, it doesn't necessarily translate into your home sold.

Josh: So my point is that recently the media has caught up, so you see all the news reports and all the headlines, and I think unless you were hiding under a rock or something, most people know the market has now shifted. There are still some local radio stations with some fear-mongering going on with some advertisers or whatever, but the reality of it is, is that we've had a long period of market expansion, and it's natural that we would cycle into a little bit of a retraction period. And that's kind of where we're at right now.

Joey: And there's a bunch of factors that... Because for the last few years, I have been going on a radio show talking about, hey, the renting market's going to climb, right?

Josh: Yeah.

Joey: And we would talk, and people would say, "Yeah, but it's gonna be a bubble, and it's gonna come back down." And they always refer to 2007, 2008, because that is historically the single greatest housing bubble that we... You know what I mean? I'll always refer to the absolute best or the absolute worst. It's like, "Yeah, but the factors that drove that, the easy loans, the people purchasing a second, third, and fourth home without renters, that's not there."

Josh: No, no, and what we really don't... What's not there now is inventory.

Joey: That's the other piece.

Josh: Yeah. That's a huge difference this time around the last time. Last time we had a massive amount of speculation going on. We've seen numbers as high as 45%. 50% of all purchases in 2005 and '06 at the beginning of '06 were speculation.

Joey: Which is crazy.

Josh: Crazy. And so you had massive amounts of new construction taking place, a lot of vacant properties all over the place.

Joey: This means was super low rent.

Josh: Super low rent.

Joey: This is not what's going on now.

Josh: No, not at all. Well, because, again, inventory, right? So back then was a different fact pattern. You had negative amortization, interest-only loans, and variable interest rate stuff that was floating around out there and just primed for a market correction. But I just pulled this up. I'm looking right now at our MLS. This is for... That's 2021. Let me get to... I had 2008. Here we go. September of 2008, listen to this. So for those listeners who are listening to this right now, 2005 and '06, arguably that was the market's peak by '07, people were like, "Uh-oh, we're in trouble. Something's going on." By '08, everyone recognized the market had shifted. Prices have changed a lot. So listen to these numbers. The median sales price in 2008 was $274,000. Okay, now this is like the all-time worst market, 2008. If you guys paid intention, that's right around the financial melt-down crisis, and everybody's... Banks are closing down. I mean, things that you never thought about. Hallmark companies in the country are collapsing. There were 179 properties that closed escrow in September of 2008.

Joey: Wow.

Josh: 179.

Joey: Even in the...

Josh: Even in the worst of the worst, 179. This is why I try to push back against people that go super negative. I'm like, "Look, at the end of the day, people need a place to live. No matter what, they need to do it." And they have the option of owning a home or renting a home. Those are the only options those people have unless you're going to live with a family relative or something like that, and for your parents out there with kids in the house still that want them to move on hostile, I get it. But that's really the option, 179. And so right now, last month, we had 238 here in our market. We're still selling a lot of properties locally.

Joey: Yeah, it's just the prices have shifted a little bit because now the cost of money is so much higher.

Josh: Absolutely.

Joey: And anything that goes up that high, it was... I think about 10 years straight of just a quarter after quarter after quarter, and it got super hot during COVID. Really, the market started going crazy, and year over year, people are seeing like 20% to 30% increase in prices at some of the lower segments. The $220,000 house, a year later, was like $265,000. It's just crazy.

Josh: Well, and this is the argument I have with my parents and stuff like that about the higher interest rates, 'cause everybody says, "Well, you know what, we had rates at 16% in the '70s." I'm like, "I get it. I understand."

Joey: You also bought a house for $58,000.

Josh: Thank you very much.

Joey: Yeah.

Josh: That's exactly right. And what we had during COVID was insanely low-interest rates. It absolutely triggered a robust buyer's market with a market that was already really slim on inventory for obvious reasons, driving the valuations high. If anything, what we're giving back right now is very similar to what the stock market's giving back. We're giving back the value that was created during COVID.

Joey: Basically, yes.

Josh: Basically, that's what we're doing, right? And the stock market right now, for apparent reasons, it looks like it's making those adjustments to it. It'll find its new equilibrium if you will, and it'll continue to grow, I'm sure, over time. I'm not the stock guy, but I would assume it is. I hope so. I'm still giving money to them every year. So I would assume that the real estate market will be the same. We're going through a correction there because we had really low-interest rates that pushed prices up. We're going to have this correction that, obviously, we're seeing right now. We'll find a new equilibrium, and then we'll continue to grow out of that.

Joey: Maybe not for this month, but next month or the month after that. What I think would be good for us to just to carry on with this conversation, is to say, look at the median price and let's look at the median price one year ago and two years ago, and what you might find is it only slips down a little bit. Yes, it came down, but it only came down a little bit. It's still much higher than it was two or three years ago. People still see appreciation in the market, and a lot of appreciation too.

Josh: Well, the median sales price right now last month was $424,000. That was the median... Sorry, the median list price. Median sales price.

Joey: That sounds high.

Josh: Let me rephrase that. The median sales price was $361,000. The median list price was $424,000.

Joey: Wow, what a difference.

Josh: Oh yeah, between the two, yeah.

Joey: Little bit of disparity there. Oh, yeah, and it goes back to what you said about the realtors that come in and interview and they're, "Well, I can get you a... Whatever. Retail plus 20%. Sure." Like, there you go.

Josh: Well, there's the market, right? And right now, what we have is a situation where the median price of a home is higher than the median qualified buyer, and that's because of interest rates going up. And it's going to take some time because the median sales price either has to continue to come down or the median buyer somehow has to be able to qualify for more, which could be either through wage growth or through interest rates going down, but we're going to continue to see pressure until those two things are closer together. Right now, there's a pretty big spread between the two, the median sales price and the median buyer that qualifies. But as those two numbers come closer together, the frequency in the volume of home sales starts to go up more, and you start to see the market begin to find itself again, and that's really the transition that we're in right now. We're not done. We still have a transition to get through, but as I said, everybody's still faced with the same decision: Rent or purchase. And right now, it's not the peak anymore, so would you rather buy at a peak or closer to the bottom? And in this cycle, we're moving that way.

Joey: Well, as we've said, somebody else coined it, but "You marry the house, and you date the interest rate." So purchasing at the lowest point and then refinancing a couple of years later when the interest rate... Something's going to have to give. Something will give.

Josh: And another one I like to hear too, we're all hearing these little phrases popping around. The other one that I really have taken a liking to is that "If you rent, you're paying 100% interest."

Joey: Yup.

Josh: because you're not gaining any equity.

Joey: None.

Josh: Whereas if you own, currently, right now, you're probably paying an interest rate at 7% or somewhere in that range anyway.

Joey: Is it up to 7%?

Josh: Oh yeah.

Joey: Oh wow.

Josh: Yeah, in fact, for some, it's higher.

Joey: Wow.

Josh: So, right now, the interest rates are...

Joey: I was still thinking we were in the sixes.

Josh: No, no, man, that was so last week.

Joey: That was so last week.

Josh: No, rates right now, guys, if you don't know that, the rates right now, they're balancing somewhere between 7% and then 7.5%. You can get it down in that 6.5% range, but you'll pay some points to do it. And that's kind of what's going on right now.

Joey: There's a lesson in there because I remember when the rates were 5% just a few months ago. People were like, "Well, I'll just wait till it comes back down," and look what happens.

Josh: Yeah, it didn't change, and people are still faced with the earlier part of this conversation of whether you're either renting or you're buying. So it's a tough situation to be in, but I'm very optimistic in the long term. We had what, two million people migrate into the company, and obviously, that's... Whether it was illegal or legal, it doesn't matter. You got two million people here that need to be housed.

Joey: Oh, you said in the company. I was like, what?

Josh: No, not in the company. In the country, I'm sorry. So I look at the demands on housing, and I say because of the demands on housing that we can visually see, that's why I'm optimistic about the real estate market going forward. We don't have enough housing units to provide adequately for those who are going to need them, and that's the pressure that, over the long term, I could see the housing market continue to strengthen over time, and that's the reason why is because the demand's not going away.

Joey: Now, when a market shifts like it is now, this is usually that time when people are like, "Oh, I'm gonna hold on to my cash because there's gonna be foreclosures, there's gonna be short sales," but that's probably not what's happening. That's probably not going to happen because of that whole inventory issue, right?

Josh: It's tough to know for sure what the shadow inventory really is. Last year, we purchased some data that gave us insight into the moratorium market in terms of how many people were in some sort of forbearance program. We have researched that as heavily as we could to get a feel for it. I'm not going to quote numbers in this podcast because I'm not confident that everything was accurate.

Joey: Oh, okay.

Josh: What I will say is that it was a lot of people were there. However, like six months later, that number had diminished a lot because a lot of those people had transitioned away from the forbearance program. So they'd either refinanced their home or brought their mortgage current or they sold the property. And all three of those resolved the forbearance issue. So now you go into where we're at today, and I would say maybe about a third of who was experiencing that during COVID is probably what's still left to be what we consider to be distressed. And they're probably in a position where they have to decide, do we sit on our homes longer or sell them if we have some equity? And so we're not quite there yet. I think it'll probably take another six months before we know what that market looks like. I can tell you right now we don't have a lot of for closure showing up, and we see occasional short sales, but they're very occasional, and for most of them, those are people that have purchased over the last 24 months because anybody that's owned their home longer than that, usually has plenty of equity just to sell the property, if that's what they want to do.

Joey: And hopefully, took advantage of refinancing in those high twos, low threes.

Josh: Yeah. Yeah.

Joey: So we're not going to see that. So what is it? We see inventory climb, very... But for the small amount, you just went from 2.75 to 2.9 in a month. It's still not going crazy. We are going into a neutral market. Interest rates continue to rise. Is there any news coming out that's like, "Hey, over the next few months, this is what... The feds are going to do this or nothing. Is it just cloudy?"

Josh: Well, it's... They've been pretty clear, actually, right now with this most recent inflation report, I think it was like at 8.2 or 8.3, I think that gave the Federal Reserve, that's the entity that sets short-term interest rates. I feel like it gave them some runway to raise that rate, so I'm no expert, but the experts that I'm listening to are saying that it's likely going to be a three-quarter of a percent increase in their next meeting or when they make their next announcement for raising the rate. And that's what they're saying. My personal opinion is it's probably anywhere between half a percent and three-quarters of a percent, so I'm somewhat agreed that it's probably somewhere in there. That will translate into some upward pressure on the long-term mortgage rates, but they've not tied lockstep, you know what I mean? So, just because the Fed raises the rate doesn't mean the mortgage rate goes up overnight just like that. The mortgage rates are set a lot more by the demand for mortgage-backed securities.

Josh: And actually, the biggest pressure, I think, on the mortgage market is that they think that long-term interest rates are going to be lower, and so they're kind of pricing into mortgages, they're doing now...

Joey: That means they want to buy the mortgages now at 7%.

Josh: But they know that they're going to refinance out of them, though.

Joey: Oh. Okay.

Josh: You get what I'm saying? So the mortgage companies recognize that "Hey, you know what, I'm going to go and give this loan to somebody at 7% today, but in two years, the rates are probably going to be 5%. I don't have a crystal ball, but if that's what they're thinking, then they're thinking, "Well, I'm only gonna have this loan for a couple of years, so I've gotta charge some points upfront." Do you know what I mean?

Joey: Yes.

Josh: Or do I have to charge a little bit of a higher rate? I have to get a bit of a better return because the chances are they're going to refinance out of this loan over the next 24 months, and that's actually what's creating some of that challenge right now in the mortgage market. So I'm pretty optimistic again about interest rates too. I think that it's highly likely that once we get inflation numbers to come down, you will also see mortgage interest rates going down. And I'll tell you right now, listeners, the moment that mortgage interest rates consistently go down, you will see buyer demand or affordability correct. Because we had talked about it in a previous podcast, and I'm serious about this, we do not have a demand problem. We always talk to buyers who want to purchase, but we have an affordability issue, and a little higher interest rates have created that affordability issue.

Joey: And there's... I'm very conflicted because I try not to listen to any news, but unfortunately, I'm able to pull some pieces of data in. There are a few things that have popped up recently like. I was reading how the British pound has never been lower against the dollar for some long period of time, and that the European Union and some other Countries were applying pressure on the United States to say, "Hey look, you need to stop raising interest rates because it affects the dollar" because the dollar is basically still the currency of the world. So it didn't get too far, and it just said that there was pressure. They're trying... Outside forces are trying to stop us from raising interest rates. And then, on top of that, I was reading about how there are some proposals in California around trying to slow down the... I think it was the effects of that capital gains every two years, you know how it... Which just kind of escalated people flipping homes. So there are a lot of forces at work trying to slow this down... Do you know what I mean?

Josh: Yeah.

Joey: I don't know what they're going to... I don't know if that's what's going to happen from that.

Josh: Yeah, I don't either. I don't think the Fed is probably too concerned about what Europe's doing right now. I think the Fed is probably pretty focused on just handling the inflation issues in the country. They probably have more of an egocentric opinion of "if we can keep our inflation in check... " They've already solved the problem for the rest of the world, [chuckle] And I don't mean that to be egotistical or anything, but I do think the Fed...

Joey: Mocker...

Josh: Yeah, right.

Joey: Mocker.

Josh: I think the Fed is more focused on controlling the US issue.

Joey: Well, we also talked about how at some point, supply chains are going to catch up. And then... And that's going to cause... Inflation is going to come down.

Josh: Well, it's happening now.

Joey: It is... And then, once you have inventory, inflation will come back down.

Josh: Absolutely, no, we got inventory, and supply chains are being re-established. I think, for most intentional purposes, the shipping lines are now open. What we hear now is that... I'm reading this... I read this from Economist. There's a great article out there, I won't quote magazines or anything like that, but there's some, there's some good reporting out there right now that's suggesting that shipping, for one, for example, the demand has fallen. And so now, they're not backed up as much as they were anymore. The bigger issues apparently currently are around the trailers of trucks. Getting enough truck trailers available to move the stuff out of the ports is where the next issue is now. And it's kind of like a traffic jam. How many times have you guys driven down the freeway and then suddenly stopped, and then you start moving again, and you're like, "What the heck, why did everybody stop right here for?" Do you know what I mean? It's just like...

Joey: The accordion effect.

Josh: The accordion effect.

Joey: When you have a big group that just does that.

Josh: Right now, the accordion effect has moved all the way out now to trucks driving down the road. Fortunately, that's where the choke point is, where all of us were hearing about the ports before being the issue, right?

Joey: Mm-hmm.

Josh: The issue now has moved to the trucks and the trailers for those trucks, so we're kind of working our way out of it. You can just see it one step at a time, resolving the supply chain issue, and as you said, it's going to bring down inflation long-term.

Joey: So once they reduce those interest rates, housing prices will probably start climbing again.

Josh: That's my opinion.

Joey: Very quickly too.

Josh: I am so, I am so bearish on, or bullish on that, yeah.

Joey: Because the demand's there.

Josh: What's that?

Joey: Because the demand's there. So that demand is like an immediate pressure, like the minute the valve is released with interest rates going down...

Josh: Yes.

Joey: You're going to immediately feel like, "Okay, it's gonna drive... "

Josh: Yes.

Joey: People are going back to, like, "Hey, I've got six offers for you."

Josh: And the people that are in the market right now, I mean, that have the option of purchasing right now, don't forget, and maybe you didn't know, but don't forget that 18 months ago, it didn't matter if you found an amazing home that you were excited about purchasing. You were one of probably 15 other people trying to buy it, so 14 people who wanted to buy it were excited but didn't get to buy it. Today, you can shop, and today, you can make decisions, and today you don't have to be one of 15 offers, but when rates start coming down, watch out because you're right, it's going to be like a pressure cooker, all that pressure is going to get released.

Joey: About 18 months ago, my brother-in-law put in an all-cash offer for the asking price the second day the property was listed. They didn't even get countered.

Josh: No.

Joey: And I contacted the agent, and I said... And I won't throw them under the bus, but I said, "Hey, why didn't you counter? Like all cash, full price?" And he's like, "Oh well, I didn't think it would appraise." I thought to myself, "That's why it's all cash, buddy. It's... Did you not catch the first part of that?" But it was just, he took an offer for 10 grand more, and it just, it was the beginning of, the market just getting crazy, and people just getting multiple offers same day over, and it just became a bidding war. That wasn't that long ago.

Josh: No, it's not. And I don't want to put roses over everything. We are definitely still in a market correction, and we've got months to go before we can resolve that. We'll likely be in a real recession, fully documented, by the end of the year, beginning next year, for sure. And that's, that's probably a good thing. For those who don't like recessions, losing a job is no fun, and that's the sucky part about recessions, which is that typically it reflects a bad job market, right?

Joey: But that's not what we have.

Josh: That's not what we have.

Joey: At all.

Josh: No, we just have a reduction in GDP, largely created because of the inflationary numbers we're seeing. So I think that we're going to see this recession come in and we're going to have to cycle through that issue. Higher interest rates are definitely going to be a drag on the housing market, and then as we work through this and get to the other side of it, it's going to be pretty optimistic. But if you're selling in the next 12 months, today is probably your day. Do you know what I mean? And if you're buying right now, don't buy and only plan to stay there for a year. Plan on staying there for three, or five years, and if you do, you're going to be great. As I said, you still have to make a decision today, "Do I wanna rent or do I wanna own?"

Joey: Which is part of that pressure, because as soon as those interest rates turn, all those renters that are paying $1800 a month for a small three, two, or higher... Do you know what I mean? They're chomping at the bit.

Josh: Oh yeah.

Joey: Because, as you said, they're paying 100% interest.

Josh: Yeah.

Joey: They're paying someone else's mortgage. There was a TV show when we were growing up, I don't know if it still exists, but it was... I think it was called Point Counterpoint, where someone would make something and I feel like I have to be negative to your positivity. But the problem is that NASA could deflect an asteroid, and so I was going to bring that in, like interest rates, we've got asteroids headed to Earth.

Josh: Well, I didn't even know why they thought that was a big deal. If you want to go back in history, I was alternating. I was alternating... Is that the word?

Joey: It depends on... Finish the sentence, and I'll tell you.

Josh: Yeah, I was moving the course of an asteroid years ago on Atari because I was playing the game asteroid, remember? And you'd shoot it and the asteroid would literally move its trajectory in another direction, so this NASA stuff, not even a big deal. I've been doing it since I was like seven years old.

Joey: I was going to say, I think they, I think they brought in Activision just to help them with this one. Which...

Josh: Yeah, it makes total sense to me.

Joey: Yeah, so I'm not negative about it either. I think a lot of people like you said, I think when the market is so hot, and it's been so easy to just to buy, "Hey, got you in at 2.9 percent. Hey, we listed your house today, and we got 12 offers." It's just, it gets this weird, rather silly euphoric feeling like you're in a casino, and just the dealer just keeps busting type stuff. For any type of correction, people are hyper-sensitive, and they always want to go back to the worst market ever, and none of those variables are in play. We don't have the huge speculation, we don't have inventory, so the one headwind that we have is interest rates, and it's just trying to counter inflation, and I think that the factors pushing inflation are going to catch up. We are. I mean, that and they printed a ton of money, man, that's another big one.

Josh: Yeah, these podcasts are not designed necessarily to get into those things, but yeah, it's not... That definitely creates a burden for our kids. The more debt that the country assumes, the larger liability for our kids to have to deal with when they're our age, right?

Joey: Our country has debt?

Josh: Just a little bit.

Joey: Just a little bit, little bit, a little bit. Little bit.

Josh: Just a little bit. But I think the last thing to talk about is if we want to have a more sober-minded conversation, less optimistic, I would just say that right now, as we're going through this transition. And I said it a minute ago, is that seller... It's probably more important right now than ever before to make sure that you are educated on the market before you make a decision on what you're going to do. Some agents have been on the market for just a little bit of time. Some have been here a long time. In reality, that doesn't necessarily mean that one's more educated than the other. Make sure you're talking to an agent that is up-to-date on the market, understands what's happening today, is assessing that seller's unique situation and what they're trying to accomplish, and then make sure you design a plan that complements that.

Josh: Right now, more than ever, you've gotta slow down and really look at the big picture before you make a big decision like that because people are stuck, they're trying to figure out, is it a good idea to move? Is it a good idea to move up or move down? So there are a lot of questions in the market right now, and I think it takes a lot more discussion upfront before making a decision.

Joey: Yes, one of the things that I think... When a hot market, you just... Anybody could have sold a house because the second you put the sign out front, the neighbor is like, "What? Your house for sale!" People are flocking, and that's not... And so you need to make sure you find somebody that can say, "Look, this is what we think your house is worth." Well, yeah, but I wanted... It's like, "Okay, then let's go with... " 'Cause I've heard these conversations in here where they've said, "Hey look, this is what your home is worth." Well, I was hoping to get this. "Okay, if we go to market with this and we don't see certain signs, is that gonna tell you, like, Look, this was the price."

Josh: Right.

Joey: Because when someone works on commission, of course, they want the highest... I was hoping to sell your house for a billion, you know what I mean? But the market... What determines the price? The marketplace. And just having those kinds of conversations and having people that can even have those conversations, realtors that can sit down and say, "Look, I can tell you why I came up with this number." I didn't pull it out of a hat."

Josh: That's right.

Joey: And these are all the variables, and it wasn't one var... Well, your neighbor sold last year for 369, so I have to think 372, right? No, the more variables you take in, the more accurate your assessment will be.

Josh: I 100% agree. And buyers are now shopping active inventory, not homes that sold in the past. So a really healthy dose of reality is to look at what's active for sale also and try to determine where you would position yourself on a scale of one to 10, 10 being most likely that you'd be picked... How do you position yourself at that price point where you'd stand out as a value because not everybody will sell right now? We're about to move into that neutral market.

Joey: Well, awesome, Josh. Thank you. I think... You were pretty optimistic, you know what I mean, but we need some optimism because, as you said, there are a lot of people that are being a little too Chicken Little right now. The sky is not falling.

Josh: A little bit. Yeah, it's never going to be as bad as everybody thinks it will be, and it's not going to be as rosy as everybody talks about. Let's just be rational. It's somewhere in the middle, right? Awesome, let's stay rational.

Joey: Thanks, Josh. I appreciate you—next month. Have a good one.

Josh: Thanks, everyone.