Josh Barker Real Estate Podcast #17

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Transcription of the Podcast Episode #17*

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Joey: We're back. It's been two months.

Josh: It has been two months, yeah.

Joey: What crazy two months, huh?

Josh: It has been crazy. A lot has happened in the last two months. But the world did not come to an end.

Joey: Yet, Josh.

Josh: Yet, that's right.

Joey: I'm an optimist.

Josh: Good.

Joey: It is going to end soon. Very optimistic.

Josh: That's a good thing to be optimistic about, that's for sure.

Joey: Very optimistic everything's coming to an end. But no, in the last two months, a lot has changed, but a lot hasn't changed. Do you know what I mean?

Josh: Yeah.

Joey: The big stories in real estate are still centered around interest rates.

Josh: They are.

Joey: Right?

Josh: Yep.

Joey: The major headwind.

Josh: Yep.

Joey: And locally, the big tailwind is we're still dealing with low inventory.

Josh: Yes, yes. So a couple of points in that. Interest rates right now are averaging right around six and three-quarters percent.

Joey: Did it hit eight at some point, or close?

Josh: It was really close. It was in the mid-sevens and high-sevens.

Joey: Just down a little bit.

Josh: Yep, and it definitely had an impact, a corresponding effect on buyer demand in those several weeks. Each time it happened, it was noticeably slower in terms of buyer inquiries and offers being written. You could feel it almost instantly. The sevens just broke the market. It just absolutely slows everything down. Right now, at six and three-quarters, we're maybe heading back towards six and a half. Buyer demand is fairly strong. We're going into our selling season, though. This is the time when sell volumes are supposed to be picking up. But rates right now are about six and three-quarters.

Joey: So you said that this is the time when inventory normally ramps up. Is it ramping up?

Josh: No, it's not ramping up really that much. So the last few months have been really interesting. We've been sitting in that 475, 480 range for total homes for sale on the MLS for residential single-family.

Joey: And that's for the whole county.

Josh: Yeah, it's for the whole MLS. Yeah.

Joey: Okay.

Josh: And so the challenge has been, is just that it's been stubbornly low and the price points because they're so tight with the competition, we see in some cases, you have homes that have more than one interested buyer in them, so you get competing offers which is coming at a shock to buyers. So, like, what do you mean? I'm reading the reports. They're saying the market is slowing down, home prices are coming down, and what do you mean there are competing offers on these homes? And it's like, well, you're right. The interest rates are putting pressure on pricing, no doubt. This total supply relative to demand has a huge impact on how competitive that market is, and so our lower price ranges where the majority of buyers congregate if it's a good home and it's priced correctly, you could expect there'd be more than one buyer trying to buy it.

Joey: Yeah, and this is the difference between what's happening nationally and what's happening locally. There are a few different things, but we were talking about how commercial rentals are right now. There are only a few rentals locally. But nationally, those office spaces are dead if you are in the San Francisco area or San Jose. But if you had office space locally, you're actually doing pretty good. Same thing.

Josh: Well, depending. Yeah. You got an excellent point there. I think you're right. So like the city of Redding, if you go to the downtown right now, the vacant commercial space that doesn't have any improvements, there's quite a bit of that. Or if something has to get refurbished to a high extent, then there's some vacancy in that regard as well. But if you have finished office space here in Redding and it's in its moving condition essentially, it's got a demand for it, for sure. That's different than San Francisco. I would not want to own an office building in San Francisco right now.

Joey: Yeah.

Josh: That would be brutal because the vacancy rate for office space there is extremely high. In fact, you guys probably have all heard about some of the banks and some of the issues with some of the banks and stuff like that. A lot of that has to relate to commercial real estate paper.

Joey: Really? I didn't know that.

Josh: Yeah.

Joey: I thought it was all crypto-based. That was like Silicon Valley Bank. It was all like.

Josh: No, no. It might have some of that.

Joey: Blow up from FTX.

Josh: That probably wasn't helping things. But I think that a large portion of the portfolio was being blown up by commercial paper notes that were coming due. And because those spaces were vacant, they didn't qualify for new financing, so now you have distressed properties on your balance sheet.

Joey: Yikes.

Josh: Yeah.

Joey: The bigger point of what you just said is how you can look at the news, but we're talking about the local market because my friends are like, "Oh Joey, you're in real estate".

Josh: Yeah.

Joey: You're in real estate, so they always ask me real estate stuff, and they're reading headlines, and these headlines are all national-level headlines.

Josh: Yep.

Joey: And same thing like what you said where people or buyers are bringing an offer and they're like, "What do you mean there's competing... "

Josh: Yeah.

Joey: I'm being told that sellers are giving stuff away, and it's like not locally. But also within that, you have segments because we talked about how many homes sold in certain segments now at the higher end versus last year.

Josh: Oh yeah.

Joey: So the higher segments, they're not moving over, but those lower segments are still very, very competitive from a seller standpoint.

Josh: They are. It's weird, so if you look at the active inventory, there are more homes for sale this year in the lower price ranges than last year.

Joey: Really?

Josh: There is, yeah. Part of that is because there was a rental moratorium that was in place last year.

Joey: So, they couldn't.

Josh: Yeah.

Joey: Okay.

Josh: So some of those sellers were reluctant to try to evict the tenant for obvious reasons. And now that that process is beginning to move forward again, you're starting to see more of that inventory, and a lot of it comes into the market. Not all of it, of course, but a lot of the increase would have been rental market-related. The upper end didn't have that as much. And so this year, the upper end has fewer listings coming to market compared to last year.

Joey: But also fewer moving. We were talking... I think you were telling me about the 700,000, 800,000...

Josh: You're right.

Joey: Segment.

Josh: Yeah.

Joey: There was nothing sold last month?

Josh: Yeah. So last month, and this would be for the month of March, zero homes closed escrow between 700,000 to 800,000 in the Multiple Listing Service. And a year ago, there were nine in the same month. So it's definitely a difference-maker there. But during COVID, and most people can appreciate this, we saw some really high dollar sales that were frequently popping.

Joey: Well, interest rates were still... I mean, a year ago. Had interest rates gone up a year ago?

Josh: They were starting to go up a year ago.

Joey: Yeah.

Josh: We're probably in the mid-fours.

Joey: It's still great.

Josh: Which would have been really good compared to now.

Joey: People would love that right now.

Josh: Yeah.

Joey: Yeah, but they were climbing.

Josh: They were. And this kind of leads to an interesting situation: the chicken before the egg or the egg before the chicken analogy. We need more inventory to inspire people to put their homes on the market and buy something else. But those interest rates that they're locked in at right now. What did they say? 90% of all mortgages are priced below five and a half percent.

Joey: Wow.

Josh: And 50% of those are priced at approximately three and a half percent. And so if you're thinking about selling your home and moving on to another property, you also have to accept the reality that you're going to be relinquishing a really favorable interest rate that you may not see again, and that kind of plays in into the slow down, if you will, of replenishing the market with the resell market.

Joey: And when you think about replenishing the market, the thing that comes to my mind is new construction because we are a small market.

Josh: Yep.

Joey: And so with people moving here, we've gotta have new construction. It can't just be about people upsizing or downsizing.

Josh: Yep.

Joey: And new construction is slowing down.

Josh: It is. And if you look at the composition, if you will, of the homes that are selling right now, a big portion of it used to be what I described earlier, which was the move up or move down or downsize or move vertical, whatever type of buyer, selling something and buying something. Now a lot more of it is people not participating in our local housing market, so they're either renting right now or staying with family, and now they're purchasing. Okay? And then we also have people from out of the area still coming in. In fact, I just made this conversation with our sales team at the beginning of the week because we're always trying to figure out what our buyer demand is outside of the Redding market coming to Redding.

Josh: And one of the ways we do that is by looking at the phone number because if the phone number isn't a local area code, we used to be able to assume that's an out-of-town buyer. Today that doesn't work as well because people move up here and keep their phone numbers the same, so it's harder to identify if they're local. We have to ask the agents, how many of these buyers are you working with right now from out of the area? Because we're just trying to get a gauge for what does that look like. It helps us with our advertising and our marketing budgets because we know where those feeder markets are. And I'm shocked because every single one of the agents on our sales team right now is working with buyers from outside of the area.

Joey: Wow.

Josh: Every single one of them. But more of it is still local. I don't want to mischaracterize that. But we are still working with out-of-town buyers right now.

Joey: We're a destination, we are. For people south of here, this Redding is. That's the other thing. We live in a smaller neighborhood, and my wife is constantly saying things like, "Hey, that house around the corner is listed for... " And she can't believe it, right? And then it's sold. "I can't believe that house sold for that." I'm like, you have to understand, somebody that just sold their house in Sacramento, San Jose, anywhere south, even Bakersfield, Fresno, LA, any of that, they can't believe that you can buy a house for $385,000.

Josh: In California.

Joey: Yeah, regardless of the fact, "Yeah, but it's only a two-bedroom, one bath with a... " It's like... We just went on vacation down south, and the other thing I noticed was that everyone's yard is about the size of a patio. You take it for granted how big people's yards are, and that blows their minds.

Josh: Yeah.

Joey: So to them, they're not overpaying for 385,000 just because five years ago, that house sold for 290,000. They still think they're getting a phenomenal deal, right?

Josh: Yeah, that's a really good point. And we hear that too but understand too that when a buyer comes here from, let's say, LA, for example, they're initially really excited about the advertisement of a home or something they saw that we were marketing down there. But when they get up here, make no mistake, they're still comparison shopping.

Joey: Yeah.

Josh: They're going to come up and look at that home that lured them here, but they're also going to wanna look at other homes in the similar price point, so they can get educated on the price range and know what's a good value from their perspective.

Joey: Of course.

Josh: And so it still... I don't want to give the impression that you could sell it for anything if you find someone from LA. It's like, no, they come up, and they compare shops and do what you would do. Of course, if you were moving somewhere else, you would do the same thing. But what's different now than I can recall in 23 years of doing this is that I haven't seen a time where Redding has been as popular in the minds of the consumer coming in from out of the area as I've seen it over the last three years.

Joey: Oh, wow. That makes sense. COVID probably had a huge impact on that...

Josh: It did.

Joey: Because of all the teleworking and just there's a couple of different factors that all hit at once to make Redding...

Josh: They do.

Joey: Yeah.

Josh: And politics aside, I'm not into the politics side. I'm much more into the economic side.

Joey: Absolutely.

Josh: But the cities right now are having a harder time selling the value of being there compared to a community like Redding, California. And it's continuing to be the case for all the reasons that I don't even need to mention. And so we're still a destination, as you said earlier. And if you think about what we have available, what we're offering, and what this community is all about, I'm super excited for the future. Our biggest challenge will be, can we continue to provide new housing units to the market at a price that people with a career or full-time employment are working hard they can afford? And that's the goal. We have to do everything we can to continue trying to make that possible because, like Marcus behind us, I would imagine you wanna buy a house someday, right, buddy?

Marcus: Absolutely. Yeah, that's definitely the dream. I used to own it but sold it. But yeah, definitely, it's always the best decision to make. Renting sucks.

Josh: And affordability is a big part of that process.

Marcus: Yeah, absolutely.

Josh: When you talk about the millennial buyer coming into the market now, it's something where you want to make sure we have products that are available at a price they can afford. So that's going to be a challenge for us going forward. We want to see that happening.

Joey: You know one of the things why I was out of town, I was just... I always like to look up data and stuff. But I was looking at the median income for Shasta County, and I was looking at the median home price. And I'm wondering, is there a factor that's like... You know how industries have factors? Is there like a, "Hey, you should buy a home that's this many times? Don't go over this many times your annual salary." Is there some rule of thumb?

Josh: Yeah, there is. It fluctuates, so I don't quote that. A lender is probably best prepared to give that.

Joey: We're not gonna hold you to it.

Josh: Well, I would say that most people will be in that mid-30 % range in terms of debt to income. But what's changed these days, making that a lot more complicated, is that you have many more expenses related to life now. Not everybody had cell phones before, Hulu, and all these additional amenities that we can only live with now. These all play into what you can afford for a monthly payment. So people have a pretty good feel for what they can afford for what I call shelter costs, whether renting or buying. Here's what my budget would provide me to make it monthly to afford." When you move into the world of home ownership, though, there is this maintenance component that you have to think about. You can insure it a little bit and mitigate some of that risk by getting a home warranty. But I think that if you approach it and say, "Okay, well, if I thought I could rent a house for $1500 a month and that fits within my lifestyle and budget, what's the corresponding amount that I could qualify for a home?" You know what I mean?

Joey: Yeah.

Josh: And that's what people have to evaluate essentially. And right now, that won't buy too much when the interest rates are at 6.75.

Joey: That's right 'cause you were talking about what we want is we wanna be able to allow first-time buyers, people just starting to purchase homes, and that would be the challenge, are we kinda pushing those people out of the market, right?

Josh: Yeah.

Joey: But I think those people have to be pushed out of the market across California when you talk about the bigger cities, right?

Josh: Yeah.

Joey: And their entry points are so much higher than ours.

Josh: Yep.

Joey: So when I was looking at that, it was like the median income for Shasta County for a family was in the 60s. But the medium home price was low 300s, so it was a factor of five.

Josh: Yep.

Joey: So that's what you were talking about, the 30% security. I was just thinking, we're pushing more and more.

Josh: Oh, yeah.

Joey: And you and I were talking about how it's so hard to replace that inventory because even if somebody gave you a lot in the City of Redding, you just want it, it's you inherit it, whatever. You can't build a house for $300,000, you know what I mean?

Josh: Oh, very hard to do. Yeah.

Joey: Once you were doing all the permits, materials, and labor. And then if you did, it would be a very small home.

Josh: Yeah, yeah.

Joey: And so I'm wondering where this inventory is gonna come from.

Josh: Well, this is why I have so much appreciation for home builders. If you think about the investor in today's market who's taken the biggest risk of all, I would say it's our home builders. Because what people need to recognize is that it takes years to fulfill a vision for an area. So I drive down a road, I see this empty piece of ground, and when I see that piece of ground, I have this vision that I will build a 150-home subdivision in it. But then the hardcore reality of what it takes to get there starts to set in, so negotiate and offer price for the property, okay. And nobody's going to give away anything for free, so you're paying whatever that value is. So now, I have to get the army corp of engineers, the fishing game, CEQA, and a lot of different agencies involved to give me permission to develop the property I want to develop. Then you have to come up with a map, and then you've got to submit that map for a review and approval process even through the State of California for a subdivision map. Then once you do that, you have to get out there and get bids for dirt work. And then you have bids for all the utilities and all the things that go in.

Josh: This is several years, this is two, three, four years before they get to enjoy, maybe pour in the very first slab. And if you think about what it takes and what the economy does during that time, we can have ups and downs, and we can all appreciate that nothing really stays the same. Yet, these builders and developers are taking all that risk during that whole season and I can tell you that that is a field that, thank God, we have people like that willing to do it.

Joey: You always hear stories, at least I do. You always hear stories of people either really making it or it breaking them. You hear about this builder, oh, he made a killing, he did the subdivision. Now he owns this or, like, oh no, that bankrupted. That guy was a successful businessperson, and that subdivision bankrupted him.

Josh: Yep, buried him. Yep.

Joey: It buried... It's all or nothing.

Josh: Seen it too. I was foolish enough to build five commercial buildings. I was 30, 30, 31 years old when I did it. And I couldn't do it today because I had an incredible amount of... Not sleepless nights, but maybe two or three hours of sleep because I was doing everything I could to keep the project moving because it was costing me money every day and interest while those projects were being built out.

Joey: Yeah.

Josh: And so whatever I could do to push everyone, I was probably a tough owner to work with. In fact, I can remember I sat down with a guy that was pouring slabs for us, and he was doing another job on another person's property, and I came up to him, and I said, "Hey, I'm here for you, but I need you back at my place." And I couldn't do that today because now I see a bigger picture and realize this person was already stretched too thin, and I wouldn't do it again. But man, that's where I got the appreciation for that because I've done enough construction to know, number one, I'm not a great builder because I don't have the temperament for it. It's a very stressful thing to do. I'd much rather be selling it than building it. And I don't know if I'd want to take those risks. I think I'm a much more conservative guy.

Joey: Especially in this market.

Josh: Yeah.

Joey: And that's probably why we see the huge slowdown, are the really good builders have to project. They have to think way ahead, and all the signals right now are telling them to be careful. You know what I mean?

Josh: Yeah.

Joey: And the interest rates and the buyer's market. That said, the local market, I mean, we still have builders, right?

Josh: Yeah, we do.

Joey: We still have several subdivisions that are... It's just slowed down a little bit, and the smaller builders are probably tightening the strings.

Josh: Oh, yeah. And I've got a lot of friends in the construction industry, so what they're doing, the majority of them are doing right now, is that they're slowing down because they recognize the volatility in the market. They want to stay within what demand looks like because they're hopeful prices will move back up too. But they're trying to keep their crews. They're trying to keep their labor intact because if they run out of work, their labor is moving on. And if they move on, it's really tough to reengage that labor. And so you have crews right now that are just trying to just to keep things going and knowing. We all know that we're in a market cycle. We're at the end of this. Moving into probably some recession, if everybody's right, by the end of the year. It doesn't appear to be too painful, but we've got through 2023. And most of the people in real estate, in lending, in new home construction or contractors associated with that, everybody's got this mindset, let's get through 2023. And then with the expectation and the hope that 2024 would start to show signs that, hey, we're beginning to move back out of this cycle that we're in.

Joey: And the... So the things that we can think about and focus on interest rates are controlled at the national level, so we can't control that.

Josh: Can't control it.

Joey: We cross our fingers and say, I hope.

Josh: That's right.

Joey: Because I go right to what kind of buyers, and we've talked about this before. If you're at the entry point, you have to weigh. Can you afford a mortgage with these interest rates? But if you can, it's not going to... Or I guess this is subjective. I was saying it like this is just a matter of fact, Josh.

Josh: Yeah.

Joey: But I don't see the lower part of the segment coming down. It may dip a little bit, but I don't see it like, oh yeah, it crashed.

Josh: Yeah.

Joey: It's like all those houses now they're 215. You can just buy a house for $215,000 in Redding.

Josh: Yeah.

Joey: I don't see how that comes back, right?

Josh: Yeah, yeah. And I think what you're describing there is that the higher price point has softened probably more aggressively, right?

Joey: Yes.

Josh: And as that price point moves down, the compression is less.

Joey: Yes.

Josh: And so if you look at the lower end of the market at this point, it's pretty well compressed. I'm not saying that it won't go down because interest rates would greatly impact that. If rates went up into the mid-sevens and it stayed up there like that, it would have a diminishing impact on value. But today, if rates were in the mid-sixes, then we're close to being compressed there because the buyer demand is exceeding supply in a lot of cases. As I said, good homes priced well sell with competing offers. That's an indication that the market's still strong. The demand is there. We see it.

Joey: So that would be the piece that if it was going to come down is that the supply would have to... There would be, like, a ton of homes, and there are no buyers, and we're not seeing that.

Josh: Well, and again, it goes to what we saw earlier, again, about the interest rate part, right? So you got a lot of property owners that are sitting on interest rates that are in those mid-threes.

Joey: Yeah.

Josh: And they're not interested in relinquishing that rate, which is holding the inventory down because you're absolutely right, Joey. If the inventory were to double, then you could assume the prices would soften at that point, you know what I mean?

Joey: Yes.

Josh: Unless buyer demand for some reason paced with it. But it's unlikely that that would happen, so inventory growing or spiking quickly would have an impact on value.

Joey: Yeah, I think the probability of the lower segments going way down, I mean, oh, they dipped 4%. In the long-term, that's nothing, right?

Josh: Right.

Joey: It's even... I wonder what the lower part of the segment dipped down from the height a little over a year ago, right? You can say the overall market in Redding is down, let's say, 9% from the hype.

Josh: Yep.

Joey: Yeah, but what about the lower segments? And I know that's a really tough thing to measure, but it's much lower than 9%. The reasoning is that we've seen a greater than 9% reduction at the higher end of the market.

Josh: Yeah.

Joey: So something's teetering. They both can't be over 9%.

Josh: That's how you get the average, right?

Joey: Exactly.

Josh: Yeah, yeah.

Joey: So it's like that. I just don't see it.

Josh: Yeah.

Joey: I don't see it because also what we said about, okay, let's build a bunch of homes. So we can build a bunch of homes and go to market for 320,000. No, you can't. Even if the dirt was free, you couldn't do it.

Josh: And what you're saying is you can't really replenish that inventory that priced there anyway.

Joey: No, no.

Josh: Which is why it's so firm in terms of its pricing currently.

Joey: Exactly.

Josh: Yeah, I think that's a very good way to talk about that.

Joey: So first-time buyers, the point is, if you can't afford this interest rate, it's probably not going to get any better. It returns to marrying the home and dating the interest rate in hopes. And this is a good segue into something else we discussed: Is there any light at the end of the tunnel? Is it just going to go to 9%, or is there? Do you see a time when interest rates might drop in the fives?

Josh: Let me respond to that part real quick with the cycle, right?

Joey: Okay.

Josh: So I think when I look at the market, let's say, two years ago, everybody was running around aggressively trying to purchase homes, highly optimistic about the real estate market. And you couldn't get anybody to stop talking about it. And as a result of that, people have this optimism, right? Yet it was probably from a value perspective. It was probably a much higher point than it is today. But yet that's how everybody felt. And then you go to today, where now we're at the lower side of this cycle now, and home pricing is softer than it had been in the past, largely because the interest rates went up. And now things are beginning to show signs of firming up towards the bottom of the cycle but think about the sentiment of all of the consumers. In their mind right now, it's, oh, it's not as good right now to do something. You get what I mean?

Joey: Exactly.

Josh: And that makes it interesting because it's like, no, in your mind, you have to flip that and go, you don't want to buy as much in the highs, but you do more in the lows, right? But to your question on the interest rates, I agree with Goldman Sachs when they came out earlier this year. They had a very, very well-thought-out presentation on interest rate pricing, and they said that interest rates would likely be in the sixes throughout the majority of this year, and we probably won't see the fives until next year. I tend to agree with their assessment.

Joey: And you've said before, a 1% decrease does what to your buying power?

Josh: A 10% impact on your purchasing power.

Joey: So if it were down to get in the fives, the people... That's 10%. A house, it's 360 versus 330, something like that?

Josh: Yes, and that's the risk. So if we're at the bottom, and I'm not here to say that today's the day, I'm just saying if we're at the bottom right now and rates are at 6.75, okay? If rates are 5.75 next year, the price of that home will likely be higher next year.

Joey: Exactly.

Josh: And I think that's...

Joey: Maybe not the $800,000 market, but certainly the 329. What is our median right now? Is it like 320-something?

Josh: Yeah, I have it written down right here.

Joey: That's what I'm saying.

Josh: So our median sales price last month in March was 364. It's down from 378,950 last year. So it's down about 4% over last year.

Joey: Which is not... Oh, it's down 4%. Tell me what stock is down. Tell me what crypto is down.

Josh: Oh, I know, I know.

Joey: Tell me what... You know?

Josh: Yeah.

Joey: I think maybe gold's up, right?

Josh: Yeah.

Joey: But what else besides that? So that's not really taking a hit. Because I have this conversation with my friends a lot, and it comes back to how I started this, which is trying to separate the national market from the local market because we have a tailwind that they don't have, and that is incredibly low inventory and the inability to replenish supply at this price.

Josh: And we started with affordable housing in the first place.

Joey: That's right.

Josh: In comparison to the rest of the states. So Marcus is waving at us. We have like a minute left.

Joey: Maybe he just wants to jump in. He's got some ideas.

Josh: He just wants some attention over there.

Joey: Yeah. Young master Marcus.

Josh: Alright, buddy. So any closing thoughts from you on that?

Joey: That you know what, get a realtor, go look at the market, be educated, don't listen to the news channel and think you understand it. Go out and look at inventory and get a real idea of the price. If you're listening to the news, by the time you know that it's turned, you're weeks behind.

JB: Yeah.

Joey: Somebody already purchased, you know what I mean?

Josh: Yep, yeah. You're right. That's a good word. And I agree with you. It's get educated and try not to be influenced by the media. Media has one job: to keep your attention so they can sell ads through that.

Joey: That's right.

Josh: And so recognize that they're going to try to hit the hot buttons. Dive into the economic data, and you'll see more of what's happening. So like I said, separate politics from economics.

Joey: Very good.

Josh: Alright, now.

Joey: Well, thanks, Josh.

Josh: Yeah, thank you.

Joey: Hopefully, it won't be two months before I see you again.

Josh: That sounds great. I look forward to it.

Joey: Have a good one, man.

Josh: Thank you.

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