Josh Barker Real Estate Podcast #15

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.