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Josh: Alright, so I'm here with my great friend and real estate broker extraordinaire Michael Medley. Hi Mike?
Michael: Hi, Josh.
Josh: How's it going, bud?
Michael: Good to be here.
Josh: I'm glad you're here. I'm glad you're here. We're kind of shaking up the podcast this month, a little different than what we normally do, mainly because of your experience. You've been doing real estate for how many years now?
Michael: About 30.
Josh: About 30 years. And interesting for our listeners and viewers out there, Michael Medley is the person responsible for getting me into real estate.
Michael: So I'm sorry.
Josh: Apologies. Exactly. So it was... What year was that, that you and I started working in 1990. What was it?
Josh: And really, the thing that I remember most about when I first got to meet you is that you were running a company where it was pretty forward-thinking, you had an administrative team, you had a sales team, and you kind of really understood that you needed to be really proactive with your approach to real estate so, which was pretty refreshing at the time because it wasn't like that in a lot of the offices.
Michael: It was very unusual, but I had... Coming from my parents and my father, we had an idea of where it was going.
Josh: Yep. So what Mike's referring to is that Medley Realty had been here since, I think, the '70s, right?
Michael: You're correct.
Josh: And then you had taken office over in the '90s.
Michael: '94, '95.
Josh: So you've been doing this since you were born?
Michael: Don't... Don't remind me.
Josh: It's been a while so, but... And a nice shirt, by the way.
Michael: Oh, thank you.
Josh: I like that. Is that salmon?
Marcus: It has a good salmon color, yeah.
Josh: It's got some salmon going on.
Michael: Got that going for me.
Josh: Good for you. So for everybody else, let's dive right into some things. I think I wanted to do this podcast just to really lean into your market knowledge. You've been around a long time, you've seen markets that have gone up and down and sideways and everything in between, and that kind of experience, I think, would be valuable to a lot of our listeners and viewers because if you haven't lived it, it's kind of hard to really describe it, so... What year again did you jump into real estate here in Redding?
Josh: Would you mind... Just describe for our listeners what the feeling of the real estate market in the early '90s was?
Michael: Early '90s, we were going through a transition. If you guys remember that we had the Gulf War in '91, the markets and the... There were the bank issues that were going on right before 1989 and 1991...
Josh: Well, there were savings and loan issues that were happening out alright.
Michael: Yeah. And so there was a transition that was going on, there was an adjustment around '92, '93 of the price of around 20% down, there was still a lot of new construction that was going on at the same time, property on Shasta View, for example, was selling for about $119,000, 1700 square feet.
Josh: So for people listening to this, the so early '90s off of Shasta View, because there used to be a dead-end on Shasta View, people don't know about where that big circle is on the way to McConnell Foundation, that wasn't there. There was a dead-end right after Ravenwood Subdivision. You couldn't even drive past it, and what was the name of the builder in there again?
Josh: Donlin. And so those homes, the early '90s, were being built by Don, and what were they selling for?
Michael: Anywhere from $119,000 to $136,000.
Josh: $119,000 to $136,000, and that was the early '90s?
Josh: What did it look like by like... You've described to me before, and I'll let you share it, but you were saying there weren't any major swings in the '90s. What did it feel like?
Michael: Well, we probably had adjustments depending on the interest rates, probably 5% up or 5% down...
Josh: On value?
Michael: On value, for the next eight years.
Josh: So you're saying that pricing at that time was closely tied to what the interest rates were doing?
Michael: And supply.
Josh: And supply? Okay, it was the market... Were there homes selling in a high volume, or what was the volume like?
Michael: I think it was probably very much an average volume. There wasn't enough push to actually create appreciation and dwindle the supply, so we had a consistent market. It may not have been something that you could see consistent appreciation for.
Josh: Yeah, yeah. So it was just normal, a normal market. So it kind of went up and down a little bit, based on the time of the year, what the demand was versus the supply, and what the interest rates were doing?
Josh: Okay, got it. So when did that all Kinda start to change?
Michael: Probably around 2001, we started to see a movement in price point, we saw an adjustment, maybe about 15-20%, more sales that were going... Taking place, and it started synergy where we started to see the listing of the lending institutions. We started to see... Flex pays interest only, things of that negative ARM loans. That was really in 2003 and 2004 that we started seeing that. But that created our first really big boom that we saw in 12 years.
Josh: Right, so I remember that part, just coming into '99, not knowing anything, in 2000, not knowing anything anymore, really, you were like pouring into me, sharing with me everything you could, and I don't think I recognize what the market was at that time, it just kind of felt like the market, I remember seeing houses up in Country Heights for $145,000-150,000, $100 bucks a foot was kind of like the standard price per square foot at that point when I came in the market, interest rates were probably 9% on an FHA loan. Does that sound about right?
Michael: I'd say 8 or 9%.
Josh: Yeah, it was right in there, I think. I remember some friends of ours, I still fuss with them today, that I think I remember they got a rate at 9% on an FHA for a $110,000 home in 2000. Like early 2000, like 2000 in January, February, or something.
Michael: It seemed to me that there was some adjustment going down to about 6 to 6 1/2 at that point, but...
Josh: Yeah, I'd have to look and see. Yeah, I don't remember for sure, but the... What I do remember, though, is that it was kind of a slow, steady growth going into 2003, it kind of felt like things were moving up, but they weren't moving up too fast. But then, like you said, something happened, the mortgage brokers and lenders started changing loan programs. They started loosening the availability of financing, right? And that's when we really saw an increase in buyer demand. That's when we saw a lot of the investors coming in, right?
Josh: Do you remember what that... When do the investors really start flooding the market?
Michael: I would start in probably 2000, late 2003, '04, '05, and probably at the end about '06.
Josh: Yep, yep. And I remember seeing that too. It was like probably around 2003-ish, I think is, when I started really realizing, wow, there are people that are like... They're buying into these subdivisions, new home subdivisions. They're buying in the 1st phase when the prices first were set for those, and then by the time they got to the 2nd phase, they're already up $50,000. And those folks that bought those were selling them, then, right? In the 2nd phase. They were selling the 1st phase homes.
Michael: There was supposedly about 40% of the purchases that were going on at the time were speculation...
Josh: Yeah, so... And what Mike's leaning to there was that 2003 and '04 and '05, we started to see an increase in investor participation. And the numbers that we remember at the time it felt like it was probably about 40% of the investment was... Or the purchases were investors or non-owner occupied or speculation.
Josh: Yeah, and it was... I mean, definitely... And builders were all online at that time, too, right. So they were all trying to supply the market.
Michael: We had three or four major builders for our area that were going gung ho, but there was also... You had the change in capital gains loss in early 2000 that took place where you had a one-time exemption before, where it was 125,000 over 55 that you could write off. When they changed the guidelines to 250 for a single...
Josh: Single person.
Michael: Or 500 for a couple. It sort of set off this motion. That basically carried us till today.
Josh: Yep, so in the late '90s, the federal government came out with the capital gains exemption. If you were single, up to 250,000 of the profit would not be taxed if you lived in the home for two years or more within the previous five years. And now, all of a sudden, they were using this as a wealth-building tool, and people were buying and flipping and doing all the stuff they could do just to bring wealth by doing that.
Michael: Every two years.
Josh: Yep, exactly so that we... I remember seeing that too. Let's talk for a minute about what the loan started doing. By 2003 and '04 we also started to notice some advertising. Remember that? There was some advertising from lenders about different types of loan programs. What did you start seeing at that point?
Michael: It was confusing. I was more of a traditional kind of agent where these types of loans really didn't make a lot of sense because the expectation was you had to have a certain amount of appreciation. In Redding, we usually had... From 1972 till today was probably about 7%, 6 1/2% over the life of that. But these types of loans, because they're using reverse amortization, flex pays interest only. You had 100% non-owner-occupied financing. You had stated income 100%, which is all... They're not Freddie Mac and Fannie Mae guidelines. Let's put it that way.
Josh: Yeah, not anymore, for sure not since the Dodd-Frank bill. So a lot of these had what we call balloon payments, right? And so what Mike's kind of talking about is that in '03, '04, we started to see lenders loosening the lending guidelines. We started to see buyers actually responding to that and wanting to use interest-only or negative amortization loans to purchase. And the big reason is that they could get a bigger house for the same monthly payment. I remember having conversations with people and saying, "Here's the 30-year mortgage, and you're going to buy a home in, let's say, Quail Ridge, right? And that would be a neighborhood that would reflect a value of, let's say at the time, maybe $200,000 for a bigger home in there. Then, if they were to use interest-only or negative amortization, instead of buying a $200,000 home same monthly payment, they're gonna buy a home for $300,000 instead. And that put them over in... Securely, it put them over in the Country Heights subdivision with average selling prices of 300,000 or something.
Michael: Or even Silver Creek or something like that.
Josh: Or even Silver Creek or Copper Creek or something like that. Yeah, so... But the point is that with 30-year fixed home mortgages, they could buy a home for 200. But if they were willing to go to an interest-only or Neg AM loan, they could buy a house at $300,000. But there was a fixed payment for only a short period, and there was going to be a sunset to that or a balloon payment at some point. And do you think that had an impact on value?
Michael: Oh, absolutely.
Josh: What did it do?
Michael: Well, you had people who would normally not be able to afford a certain price structure, pushing that up exponentially. And a lot of those people were using these flex pay. And the flex pays, you could say, "Okay, I have got a house in Silver Creek, it's Oatreal and Shiham it's 2400 square feet, I can make a $1000 a month payment, or I can do interest only at $2200 a month."
Josh: They could just choose?
Michael: Yeah, sort of either or you can go principal and interest, so their normal payment would have been about 24 to 26.
Josh: Alright, so help me understand this. So they're buying a really nice home in Silver Creek, and for $400,000. If they had the option of making the regular principal and interest payment, or they could make an interest-only payment, or they can make a negative amortization where they're just... Are they just tucking that onto the back of the loan?
Michael: Yes, they are. And so, each month, there was an increase in principle.
Josh: Every month, that house had a larger debt on it.
Michael: And so the only way that made sense is that we saw a certain amount of appreciation in the market. So if we had 7, or 8, or 9% appreciation...
Josh: Then, they could still sell the house.
Michael: Sell the house and get out.
Josh: But if it doesn't go up...
Michael: That's the problem.
Josh: That's the problem. So let's look at 2005 and 2006. I think that most people if you look back now, I think the technical month was like the fourth quarter of 2006 is when they started to see things start to really, really peak up. Would you agree with that?
Michael: I would say that. You could see that it was more coasting probably that last quarter.
Josh: Okay. What happened? In your opinion, what ultimately happened that caused the market to shift?
Michael: Well, you can only push up for a certain point, and then if there's not that normal appreciation, these people who were buying were buying with no money or limited money down, so there was no investment into it. And so it was very easy for them to step away if this investor if 40% of our investments. If they had zero money in the game, well, then they just walk away from it. And so that started to cascade and started to... Yeah.
Josh: And start to happen. So I've heard people say that too, that essentially, value got pushed up as high as it could go on the flex pay. [chuckle] One of the interest-only in Neg AM, like the values, went as high as they could go, and it started running up against affordability, but this time it's running against affordability on bad loans, not on a regular 30-year fixed loan.
Michael: Absolutely, which...
Josh: And that's where things started to slow down. Right?
Josh: So let's speak to them for a minute for our listeners about what did the inventory look like? Did we have more homes available than there were buyers to purchase them?
Josh: A lot more?
Josh: Were we oversupplied? Do you believe in how many houses we had as a community and country?
Josh: Versus how much was actually buying, is that different than today?
Michael: Absolutely 100%. I believe we were sitting around 1700, 1800, and 1900 homes on the market at one point. And we had, let's say we had 200 transactions at that point.
Josh: Yeah. Mike's talking about something. We as a company reviewed this earlier this week, and we were looking at 2006, and then we looked again, I think at 2008 or something or 2007, and there was a huge jump where we had like maybe 500 or 600 homes for sale, and a large sales volume of 300 and 350 homes a month or whatever it was. But a year later, a year and a half later, it was at 1700 homes for sale and sales volume down to about 200. Does that sound right to you?
Michael: Yeah, it's what I remember.
Josh: The big change that happened was is that when the investors pulled out, right? I mean, when the investors stopped buying, which was 40% of the transactions or purchases were investors, so if the market is no longer going up, I would imagine the investors all stopped purchasing.
Josh: So overnight, 40% of transactions went away?
Josh: Yeah. And then when they went away, the inventory spiked because nobody was buying those homes anymore?
Michael: And the programs... There were subdivisions that were coming online at that point.
Josh: Oh, that's a great point. So they had... We had builders that were still aggressively bringing up housing units, and the market was beginning to shift.
Michael: I love contractors because they're always the optimists.
Josh: Optimists. Yeah, they're optimists. You gotta love them.
Josh: Yeah, without them, we wouldn't have them. So thank you. With that, they are they're kind of stuck. They have to finish a house they think probably won't likely sell for what they're going to have into it because of the changing market. And some of them might have been at a point where they may be stopped, which is why we saw some subdivisions where there were just slabs. Remember that?
Josh: I mean slabs in the neighborhood, no sticks, no framing nothing. They just stopped right there in the slab.
Michael: And just the cost, there was no way to sell and make a profit at that point. A lot of those subdivisions turned over.
Josh: Yes. So let's talk about that then. So investors pulled out what we think was about 40% of purchases. Interest loans and Neg AM loans became a thing of the past because lenders immediately took those loans off the table.
Michael: Frank Dodd.
Josh: Right, yeah, they're the Dodd-Frank bill. So now it's tightened the money supply. Right. And you got fewer buyer participation, and it sounds like a recipe for a market correction like you wouldn't believe. That's what it did.
Michael: It was something that I think a lot of people didn't expect. And then the bonds on the secondary market, not knowing how it affects the world, created an even deeper hole.
Josh: That's right, yeah because people were... Lenders would fund the loan, and then they go and sell that note to a school teacher union in Zimbabwe or something so that we had this stuff going everywhere.
Michael: It affected every country, even small little school districts.
Josh: Oh, yeah. Well, I started hearing the word derivative.
Josh: And I'm like, "Derivative. What's a derivative?" I mean, now I'm sitting there trying to research all of this stuff back then, trying to figure out, "What's going on." And one thing was for sure. The housing market was grossly oversupplied relative to demand. Prices were pushed up to an astronomical number based on really bad loan practices. And now, those loan options were being removed from the market. And it sounds like it was just a recipe for a market correction like we have never seen in terms of value. I think it was called the Great Recession for a reason, and real estate was really the shot across the bow.
Josh: Yeah. Okay. So let's fast forward then now we're sitting around 2010, 2011, and 2012. We're beginning to eat up a lot of that distressed property. What did that look like back then?
Michael: It was still a lot of inventory. But it was a lot of short sales, a lot of foreclosures. A lot of those loans that were becoming due from 2003, 2004. And these people couldn't refinance because the home had depreciated to a level where they were upside down. Yeah. And so, at that point, we had a start that focused on short sales and, well, a lot of foreclosures.
Josh: And then, what year do you think that we started to really see the return of... 'Cause I think it was... I mean, people were buying the whole time. One of the things that we did on our report a few days ago was still having 180 homes selling per month, even though 2007, 2008, 2009, and 2010.
Michael: There are always people who need to buy and sell.
Josh: Yeah, there were always people who needed to buy and sell. And so we saw a transaction still happening. So it was thought that it's all going away tomorrow obviously, it didn't really look like the case when you look back to what has happened before. When do you think the investor returned?
Michael: I think they're... The smart guys were coming in around 2010, and 2011. But we really started to feel it in 2012.
Josh: Yeah, so 2010, 2011 some of the savviest investors felt like, "Okay...
Michael: That it hit bottom.
Josh: "It's a good time to get in." And then, by 2012, Maybe some people were beginning to realize that this was a good time to get in. By 2013 everybody knew it was a good time to get in, and people started buying. Hey, Marcus, real quick, how much time do we have? Are we good on time?
Marcus: Yeah, we're.
Josh: Okay, how much do you have right now left with then?
Marcus: About 10 minutes.
Josh: I just want to make sure we budget out for everybody.
Josh: 10 minutes. Thank you. So okay. We got 2010-11, and some of the savviest investors are coming back into the market. They're beginning to strip away some of the inventory because at that point, how many homes do you think we had on the market about that point?
Michael: What about 2015? Probably around 1900. Yeah.
Josh: About 1900 or so by 2010-11, somewhere in there. And a lot of it was vacant. A lot of it was either foreclosed or short sales, not all of it, but that was a lot of the inventory.
Michael: And I think by 2015, we were at 700... Excuse me, 1500.
Josh: Yeah. So it started to trend down. But savvy investors come back 10-11. They start stripping around at the inventory, '13 or '12, '13 people really start to get the word market's probably bottomed out. We started to see our average sales price start to creep up a little bit by '14, and it was just...
Michael: A slow 3 or 4% appreciation until 2018.
Josh: Yup. So we started to see in 2012-13, we started to see inventory going up. I'm sorry, the inventory is starting to go down, and the valuation of homes is starting to go up. Some investor participation is at a much larger level than it is today. I mean, right now, we're probably sitting on how much investors do you think?
Michael: Probably 10%. I think that's the number that people's...
Josh: Yeah. Maybe not recent in the last couple months, but I would say over...
Michael: No. Over the last year.
Josh: Last year. But back then, probably in '10, '11, '12, '13, what do you think the participation of investors was then?
Michael: I think it was probably 30%.
Josh: Quite a bit. People were going after value.
Michael: These are not the investors that were looking for a quick appreciation. They were more long-term investors. They were buying these under Freddie Mac and Fannie Mae guideline loans. They needed 20 to 25% down. So it was a completely different beast than we saw on 03,04 and 05.
Josh: Yeah, 03,04,05, I mean, you could borrow money out of your own house, five or 10% down, and go buy an investment property or something.
Michael: And you could make a stated income and do zero money down on a non or occupied. Crazy talk.
Josh: Gosh, that's crazy. No wonder it got like it did. So now you look at okay 2015-ish '16, we're still going up. What happened somewhere around '17 and '18? I think the market began to plateau a little bit.
Michael: It felt like we were going through our transition, which would've been our normal cycle.
Josh: Our normal cycle?
Michael: Yeah. Since '72, since we've tracked, we normally see that six to seven, eight-year transition where you cascade up, move up, and then there's an adjustment.
Josh: Yep. So when people talk about real estate cycles, they normally refer to seven, or eight-year cycles?
Michael: At least in our area. Yeah.
Josh: We were cycling up since like 2010-11, and so by 2018, we started to feel like, Hey, things look like they're plateauing a little bit. And I can remember that. I remember having conversations with people being like, "yeah, I can feel something." But what happened that changed that?
Michael: Well, we had our bad luck became good luck, so to speak. We had the Car fire that took place. We had the Paradise fire, where we lost about 1200 homes to the Car fire. I can't remember... The Paradise, what was it?
Josh: 28,000 housing units.
Michael: 28,000, and all those people had to find a place to live. And so at that point, we weren't building houses at any high level. I think when we were doing that, it was probably 80 homes. So 100 permits were being pulled a year.
Josh: Yeah, it was low.
Michael: Yeah, it was super low. Yeah.
Josh: I remember reading reports for that, the city of Redding. So for our listeners, new construction in the city of Redding was probably less than a hundred housing units per year for many years from like 2000, well, 2010, it was probably less than 50, I don't know. But by like '14, '15, '16 up through like 2018 before the Car fire, it was probably a hundred or less a year. So it was not significant by any means.
Michael: No, it wasn't. We were definitely in a resale market.
Josh: Yeah. We were in a resale market. You're right. And so fire hits 1,000, 1,200 homes here locally, 28,000 in Paradise, collectively, we've got a big issue. We've got a huge amount of demand coming out nowhere, but we had a lot of inventory. So what happened? I mean, what did our prices do at that point?
Michael: They still kept adjusting up.
Josh: Was it significant, though? We had a lot of inventory back then, so.
Michael: I would say it was pushing up maybe 6, 7%. We didn't see the big adjustments until probably that last episode with COVID. Yeah.
Josh: With COVID. Yeah. So fires came in, and they obviously had a big impact. We had a huge amount of construction boom here locally, obviously, because of that.
Michael: The replacement of insurance money. We also had that with the roofs that had to be replaced because of the hail damage. There was something like 30,000 roofs.
Josh: That's right. We had a storm that... A lot of contractors have been busy the last few years.
Michael: And when Redding has always boomed since the '70s, '80s, '90s, and 2000s, it was all based on construction booms. This was our bad luck became our good luck.
Josh: Yep. I got the contractors really busy.
Michael: And they were able to charge top dollar, which created them spending it in our marketplace. So it was a trickle-down effect.
Josh: Yup. So contractors making money is a good thing, and then they start spending money in the economy, which is even a better thing and ultimately creates more stimulus for our local market. So how much time are we left with up there, Marcus?
Marcus: I'll let you know.
Josh: Great. Thanks. So with that, we're looking at it going okay, well, contractors are starting to build homes now, outside of the Car fire issue where they're building homes now, and they're being able to build 'them for a profit. And so now would you say that there's a lot of new homes relative to demand right now being built?
Michael: No. I think we are underdeveloped for what we need.
Josh: I think you're right. I think we are too. I think that we're still probably short on housing. Well, if you look at the absorption rate at just over two months, the supply of homes for sale.
Josh: Yep, 2.15. There's just not a ton of inventory, so the builders right now have not oversupplied the market. Would you agree?
Michael: Not at all.
Josh: This is a lot different than in 2005 and 2006.
Michael: Well, the difference is the cost and effect and the available loans that allow people to buy things they probably shouldn't have. And today, it's still Freddie Mac and Fannie Mae guidelines, meaning they have to qualify and have a certain amount down. They have to have a credit report that's 640 or higher, so certain things must be followed. So with that... That's probably the biggest problem is our demographic. If we have the average family makes $55,000 a year. Still, the numbers are older, they're showing $42,000, $44,000 a year, but the expectation over the last year it's gone up.
Josh: Yup. So the interest rates then, I mean, when we look at it right now, and if I have to summarize this for our listeners because I tried to... I wanted to give you to give them that history lesson of what it is. It's what that market looked like before. But right now, new construction is still way short of what it was in 2005 and 2006. So we're not sitting on a huge amount of inventory that exceeds demand. Interest rates right now are averaging, probably close, let's say close to 6% just for this podcast. Would you agree that home valuation will likely be closely tied to the overall inventory relative to demand and what interest rates are doing?
Josh: I mean, those are the two major factors?
Michael: One is supply and demand and where we are with it. And the next is affordability.
Michael: And so, being that these homes, these interest rates, have increased to a point where, from December to today, you're probably spending 30% more on the same product per month.
Josh: Yep. Per month.
Michael: And you add that to the other costs, with inflation that we're dealing with, it's pretty rough.
Josh: Yep. I agree. I think Warren Buffet talks about it and has said it best over the years that interest rates serve the value of an asset like gravity. So, as the rate goes up, the gravity on an asset's value gets pulled down more, and the gravity grows. And then, the lower the rate, the less gravity, and the more the asset's value can go up.
Josh: So, right now, would you say that home pricing, because rates are going up, is probably more stable than they were prior to the rates going up?
Michael: Absolutely. But because we have that, again, supply and demand issue, as long as that supply stays at this level or maybe even slightly above, we're not going to see any big changes or corrections in price point because there's still a huge need with the rental market being what it is today.
Josh: Right. I couldn't believe it. I was talking to a guy yesterday, he's getting married, and he and his wife, or soon-to-be wife, are out shopping for an apartment, $1000 a month for them.
Michael: Were you getting married, or...
Josh: No, no, no. A friend of mine.
Josh: And he and his bride, or soon-to-be bride, went out shopping for a one-bedroom apartment, $1000 a month for the one-bedroom apartment.
Michael: I'm seeing some numbers at which I'm shaking my head.
Michael: I mean, we see homes in Mary Lake, 1900 square feet, going for $3200.
Josh: Yeah, that's just crazy to me.
Michael: And again, our demographic, what the area can afford is probably $1800 a month as being our top, and that's now our average, which was from three months ago.
Josh: So, really, we're short on housing units, period.
Josh: So, if interest rates go up, it impacts affordability, which puts pressure on value. You have a hard time appreciating when the cost of the purchasing and mortgage goes up, right?
Josh: Buyer needs more money. But with the housing shortage, it's still going to be challenging for the values to go down because the demand's too high.
Michael: You have to have more products come to the market, pushing the prices down.
Josh: Yeah, I totally agree. Well, Michael, thank you very much for taking your time with all of us today. I mean, the value you bring to a conversation because of your experience is huge. So, for all of our listeners out there, I hope you enjoyed the conversation, and we'll talk to you guys soon. Thanks a lot.
Michael: Thank you.