Josh Barker Real Estate Podcast #14
Transcription of the Podcast Episode #14*
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?
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?
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?
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."
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.