Josh Barker Real Estate Podcast #19

Joey: So it's June 2023.

Josh: Okay.

Joey: Right? And for the last year, plus, it's been the same discussion in real estate.

Josh: Yeah.

Joey: The irresistible force...

Josh: Yeah.

Joey: Of low inventory meets the immovable object of high-interest rates.

Josh: Yeah.

Joey: And they've been just pitted against each other. But in June of 2023, there is a new topic that's actually risen to the top, and bubble sorted all the way to the top. And that's insurance.

Josh: Yeah, you're right.

Joey: Big time.

Josh: Insurance is, yeah, it's a big issue right now. So you're right. We've got inventory that's still tight, we have interest rates that are pretty high, and now our latest addition to the family is higher insurance costs.

Joey: So I know that there's, like, Allstate left last year.

Josh: Yeah.

Joey: And then I think State Farm just announced they're leaving, or they left.

Josh: Yeah, they left. Well, they're not writing new policies.

Joey: Okay. And then AAA left but came back.

Josh: Yeah. My understanding is they got some approvals here recently with some rate increases that they were working to get through the state.

Joey: But why are all these insurance companies leaving the most populated state, yeah, in the United States?

Josh: It doesn't make a lot of sense.

Joey: No.

Josh: Well, from my understanding, and I've been doing some research on this, essentially what it came down to is that back in 1988 or so, the California voters voted that the state insurance commissioner would be required to approve of any requested rate hikes by the insurance companies. And it's been a while since they've been able to, these larger, I would consider them to be like legacy insurance companies, legacy brands that we're all familiar with, it's been a while since some of them received the rate hikes that they've been requesting through the state. And it's gotten to the point now where they're losing. They're paying out more in losses than covering fees or collecting fees. And that's what's creating the problem. So they had to make a business decision. It's for real. Yeah. This is happening.

Joey: I remembered a long time ago, and I don't know if this number's accurate, but way back in the day, insurance, it's like they tried to pay out a dollar for every dollar four that they took in. That was their business model working on, like about a 4% profit margin.

Josh: Yeah.

Joey: And that's tricky. It's a tricky game to play, right?

Josh: Yeah.

Joey: But you and I were talking, and you said recently those numbers were really skewed.

Josh: Oh yeah.

Joey: And it was something like for every dollar they took in, they...

Josh: Yeah. I don't. I'm a little nervous about quoting it because I didn't hear it directly, but I would say a broad stroke, and this is from people that claim to know more, is that, let's say, for every dollar that you're collecting in fee, you're paying out a dollar 10 to a dollar 25.

Joey: This is not a long-lasting business model.

Josh: Not at all.

Joey: That's how you go bankrupt.

Josh: Yeah, exactly. And if everybody's like, "Well, what's happening?" It's the state commissioner historically has taken, the insurance commissioner who approves these rate hikes, has historically used the data from the past to get a feel for what rates in policies should be charging now. But in California, I mean, we had some significant fire seasons in 2016, '17, '18, '19.

Joey: Oh yeah.

Josh: And a lot of losses that came with that. So you had the Napa fires, Southern California fires, the more local Paradise fire, and of course, the Redding's Carr Fire. And all of those absolutely had a tap on labor. And also had a tap on the cost of providing goods and services. They had a tap on the supplies and materials and everything else. And so all these fees are going up. Now part of it, the insurance companies were able to capture some of it, which was, "Hey, we need to justify some of our high rate hikes because the cost of construction has increased, but the cost of actually facilitating services has gone up too." Everybody knows that minimum wages went up and everything else. So just the administrative cost of issuing a policy has gone up. So they've been requesting, from my understanding, for a while, for these rate hikes, and they've continued to be kind of pushed off.

Josh: And now it's at a point where the companies have had to make business decisions to say, "We're out. We're not writing new policies." And for those of you that might have some of those insurance companies right now, I don't want to create a panic right now, I mean, I'm with one of the ones that have pulled out of California, not writing more policies, but they're still servicing my existing policy. The concern will be whether they will renew me and they will renew our listeners. And the next question I think after that is when will they be back? Because it's creating some issues now. There are even bigger issues that are happening because imagine if you right now we're trying to get insurance on a home and you couldn't find it.

Joey: That would be really big.

Josh: It's big.

Joey: That's not something that I think the average person when you're buying a home, you think like, "Oh, insurance, my inability to get insurance premium is what's gonna kill my escrow."

Josh: I think it was always assumed. I've never in my entire adult career ever thought of insurance as being something that I should be thankful to have. You know what I mean?

Joey: Yeah.

Josh: It's like one of those things you don't think about all that often, but in reality, it's a big deal. I mean, we're seeing clients now because right now with those legacy brands that are used to writing a lot of policies, now that they've currently pulled out, hopefully temporarily, writing new policies, people still need policies, which means now they're looking at smaller insurance companies who probably more recently were approved through the State of California. And so their pricing is probably closer to what the actual cost is in today's market, but they're not set up to service this volume. And that's pushing a lot more people onto what's called the California Fair Plan, which is a plan that comes with some higher cost. It doesn't provide as much coverage, but it does help solve a problem if you need help finding insurance.

Joey: Is it subsidized by the state or something when you say California Fair Plan? Is it like state-funded or something?

Josh: I don't know if it's subsidized through the state. I know that it's managed through the state. And it's designed to help people that can't get insurance in other locations to be able to get it through them. It does, in my opinion, come at a higher cost. It doesn't cover as much. It's not really designed to replace my watch if I lost it in a fire. It's more designed to make sure we can get the house rebuilt. And don't quote me on all of those things, but that's just what our experience has been with the program. The question that we're going to have going forward now is, how long? Like, AAA coming back in was nice, but I've heard they've been fairly selective on what they're working with. I don't know that to be true 100%, and it would make sense, though. I mean, if there's not a lot of competition, which policies are you going to insure? The ones that are lower risk or higher risk?

Joey: No. Yeah, of course.

Josh: So I would imagine some of that might be happening, but I look now, and I say, "Well, I'm hopeful that the state's got... Is paying attention now," because consumers now are feeling the crunch when it comes to finding insurance. The cost is going up, but I have a bigger concern, which is that this is going... Insurance is going up. In my opinion, the cost of insurance is 99% certain it will be higher next year than this year. And I don't see that changing. I can't see any scenario because they're making requests for increases. Once the state approves the increases, those increases, of course, will then be sold or presented to the consumer. So insurance costs are going up. Essentially, we are now going to pay for the five years that we didn't see an increase at that level. You know what I mean? They were trying to push it up faster, and they didn't.

Joey: So your concern is that it's going to what? It's going to hurt buyers even more when you have high-interest rates and the fact that higher than normal insurance premiums, like suddenly they can't afford, that's the problem, right? The downward pressure of the cost to actually buy the home.

Josh: Oh yeah. Well, it will play into your purchasing power because, let's say that you were factoring previously, you were qualified and factoring in for a $150 insurance payment. Now I'm telling you it's $300 a month. Well, that $150 increase is going to have an impact on what you qualify for.

Joey: So now we have two headwinds.

Josh: Oh yeah.

Joey: Before, it was just headwind, tailwind, low inventory battling high-interest rates. Now we have low inventory battling. Because it's still, it's like one of those things that will affect certain people, but with inventory this low and replenishment this hard to do, it's still a battle.

Josh: Oh yeah. No, and my biggest concerns are that this topic is just shocking. How many shocks will the consumer have when they go to obtain insurance or when they go to renew their existing insurance policy and they realize that the cost of insurance is going up across the board? And again, I don't see any way around that. The cost of servicing consumers is going up. I don't think anybody's really arguing with the causes of it. The things I mentioned earlier are pretty obvious. But at the same time, now that it's about to happen and people are really going to see that jump, I mean, it won't affect everybody the same. Depending on where your home is located, it's going to have a good impact on what your rates are going to be.

Josh: So if you're closer to a higher rated fire station or if you have a fire hydrant near your property and you have low fire consumables around your property because you're not on a greenbelt or you're not in the country, you're probably going to be better off. So in a subdivision essentially, close to a good fire department. But the further out you get, and let's say you lose that fire hydrant, let's say that you do have a lot of vegetation around your home and you're far away from a fire station or your fire station is volunteer, you could expect to see a higher rate.

Joey: And so, okay, so that's obviously going to have a... It's going to slow down purchasing. I'm wondering if it will hurt first-time buyers because they probably need to purchase those rural properties, or are they? They're probably in the subdivisions.

Josh: Well, they're going to. Yeah, you're right. I think that the first-time home buyer will predominantly purchase closer to the city, services, and things like that. But I would say that at the same time, their cost will be going up too because the cost of replacement of a home is much higher than it was five years ago. And so you have to insure for that. And the cost of servicing these policies because of all the inflation we've experienced over the last three or four years will also have an effect on that policy. So you have the replacement cost affecting your policy, and then the actual servicing of that policy itself that's going up. So everybody's going to be paying more.

Joey: And this is a state thing. This isn't a federal thing. So the feds aren't going to like to weigh this and say, "Hey, let's decrease interest rates a little bit to try to counter increases." Like, "No, this is on your own, California. You got your own problem."

Josh: Yeah. I would say that, yeah, the Fed has no tools for targeting California to help solve our insurance issue. So no tools that I'm aware of. But there are different states in the union that have different issues. If you're in a hurricane alley in Texas somewhere, you're paying more in insurance. If you're in a tornado alley in the Midwest, you're paying.

Joey: Miami, Florida.

Josh: Yeah, you're paying insurance.

Joey: At least in the Southeast, it gets hammered every year.

Josh: Yeah, you're from the South. In Florida, you're getting hammered. And so there are other places in the country that have experienced this. The difference with us is that, and I don't know the laws of all the states I just mentioned, but again, going back to the law that the State of California passed in 1988, where voters decided that "Hey, you can't raise insurance policies in the State of California without the approval of our insurance commissioner." There's a lot of responsibility in the insurance commissioner, in my opinion, to be very proactive with the insurance companies to make sure that they're not just advocating for the consumer because if you do, you don't have anybody to provide insurance to anymore.

Joey: So the next big, the big valve on this would be that if the insurance commissioner adjusted those, what they could write those rates at, and then State Farm would come back, Allstate would come back.

Josh: Correct.

Joey: If they say, "Look... " 'Cause something that you said in there that could get lost on somebody is, okay, these new insurance companies, why do they get to charge higher premiums? Like, well, because they just entered the California market.

Josh: That's right.

Joey: So they submitted, "Look, this is what we'll charge." And State Farm has been here 30 years, and so they have. And if they have yet to be able to raise their rates in five, six years, they're stuck at that rate from 2015, '16. Whereas Acme Insurance entered in 2021, they're like. So that's, and maybe that's why.

Josh: In broad terms, generally speaking, yes. What you just said is very accurate.

Joey: So, is that maybe why AAA left for a little bit? There might be some period where they just have to leave, and then they reintroduce themselves, and it's kind of like they were brand new.

Josh: Yes. Well, they had to stop funding these policies because they're at a loss. They don't want to take on any more damage. And I would assume that they're probably taking losses on their existing customers too. I mean, I don't know their books, but we all know that it's much less expensive to retain a client than it is to create one. And so for them, they probably did the math and said, "Look, we're probably gonna take some losses on servicing these policies over the next 12 months," or whatever it was, their projections were, "Until the commissioner eventually approves our rate hike so we can get back into the insurance market writing policies." And I'm definitely going out into the weeds with this a little bit with you right now, but just to put some context for the consumer watching this right now, the takeaway is insurance is not going to be less expensive. It's going up.

Josh: And it's going to have an effect on purchasing power. And one last thing I would mention is that in the past, I've gotten those pestery letters in the mail from your insurance courier that says, "Hey, you need to cut the trees around your property," or whatever, or do this or do that. And I've probably admittedly ignored some of those types of correspondence in the past because I didn't feel like it was that pressing of an issue. Well, today, I would tell everyone you get any notice like that from the insurance company that's putting some sort of a request in front of you that you need to comply with, or they might cancel you, they will probably cancel you. So do what they want you to do, within reason, because if you lose your insurance, it's not easy. Right now, we have clients that are requesting appointments with insurance agents. In some cases, it's two weeks out.

Joey: Wow.

JoshJB: Yeah. I mean, I used to be able to call an insurance person and be in there this afternoon.

Joey: They used to call me...

Josh: I know.

Joey: I didn't call them...

Josh: Right.

Josh: Now it's incredible. And so, and I feel for the insurance companies right now, they can't write new policies because, I mean, they're going to have to sell a whole lot of auto.

Joey: Yeah.

Josh: They're going to have to sell a whole lot of home, life insurance, and they're going to have to do a whole lot of other things right now to stay profitable until they can get that homeowner insurance policy back.

Joey: So as you're telling me all this, my mind's kinda going like, "What does this mean to different segments of the market?" And I feel like it is. Nothing's changed for first-time buyers. We have these historically low rents.

Josh: Yeah.

Joey: Not rents as far as amounts, but rental, the percentage...

Josh: Yeah.

Joey: Of vacancies. So that's pressure. You've got the inability to replace lower inventory at some of the current pricing. Right?

Josh: Sure.

Joey: And interest rates, which can come down. The big question is, are they going to go up? Are they going to come down? I'd have to think that they couldn't go up much more.

Josh: Interest rates?

Joey: Interest rates. If they go up much more.

Josh: Yeah.

Joey: It's going to put a grinding halt.

Josh: Yeah. Well, today's the 16th, right?

Joey: I think so—something like that.

Josh: All right, so today, the Fed met. I'm sorry, today we got the reports back from inflation. And it looks like we were only one point of a percent, not one full percent, but one-tenth of a percent higher than what we anticipated, and some of the other numbers were nominal or exactly what they had projected. So the expectation is tomorrow, they won't raise the rates. They're calling it a skip.

Josh: Basically saying, "Hey, maybe the next time we might, but this time we probably won't." Tomorrow we'll know for sure, and by the time this video comes out, everybody will have the answer. My best guess is that they won't raise rates tomorrow.

Joey: Yeah. Because I can't see another 5% increase. Let's put it that way. I mean...

Josh: No.

Joey: We went from twos to sevens...

Josh: Yeah.

Joey: Even at 5%, I mean, we might fluctuate a quarter here, a half percent there, but I don't see it jumping up to 12%. People always quote that like, "Oh, in the late '70s, I paid 18%." Yeah, but you also bought the house for $21,000. But anyway.

Josh: Sure.

Joey: So I think that that headwind it's at its strongest force is what I'm getting at, right?

Joey: And so I think this might still be a great time for investors to buy at the lower end of the market because, I mean, what are your alternatives, as far as investments? What I'm hearing, you're saying that housing is still a great investment. I'm not... And you have to be careful because when I say that, it's like saying the stock market's really good. You can buy a bad stock.

Josh: Yeah. Yeah.

Joey: And there are segments that no, I would not, from an investment standpoint, wanna buy at the high end of the market...

Josh: Yeah.

Joey: But I still think that lower end of the market...

Josh: Yeah.

Joey: Is just, it's like all the forces are pushing against it and it's still stable, which tells you if any of those forces give way, it's going to, it's going to go up. Right?

Josh: Well, yeah. To an extent, I think yeah.

Joey: Have I been spending too much time at the horse track?

Joey: Is that what... Come on Lucky Seven.

Josh: Yeah. Lucky seven. Well, I think, well, there's a big difference between real estate, the stock market, gold, and some of the other things that you might choose to invest in. The biggest difference is you can't live in gold, right?

Joey: Mm-hmm.

Josh: And you can't live in the stock market. You can live in a house. And so housing tends to be a necessity to a certain extent. And then it becomes more of an optional choice for investment and stuff like that later. But shelter cost is a real thing. So you're either paying rent to live somewhere or you're going to live in a home that you're purchasing, one of the two, and either one's fine. If you rent, you decided to pay 100% interest because nothing's going towards the principal, or if you purchase, then your portion of your mortgage payment is going towards interest, the rest is going towards the principal and you're paying down a mortgage balance. There's another difference, if you're like a rental property, over time, do rents go up or down?

Joey: Up.

Josh: Of course they do. And on the real estate side, when you purchase a home and you secure a mortgage, does your mortgage necessarily have to go up anymore after that?

Joey: No.

Josh: No. Not really. You might have your insurance go up a little bit over time or the cost of taxes perhaps over time, but your principal and interest payment for the most part are locked in unless you choose of your own choice to reduce the obligation by refinancing or what have you. And so those are the big differences between the two. So if you were to take the situation we're in today, where the vacancy rate in the State of California is 3.9%, there are not a lot of rentals available. And you look at the housing market with 580 units for sale, not a lot of homes for sale. What's going to change that fact pattern?

Joey: Well, I would say, interest rates coming down is going to change.

Josh: So let's talk about that for a minute. Interest rates go down by 2%. What's the corresponding effect on the market in your opinion?

Joey: Oh, the prices go up dramatically.

Josh: Okay. What's the reason why? So the listener knows why?

Joey: Well, because now they... People can afford more... Their purchasing power's gone up.

Josh: That's right.

Joey: If the interest rates go down 2% if they were looking at spending 280, now they can get the exact same payment, but probably get a house that's 340.

Josh: Yeah. And so another way to put it is that today's pricing for homes is currently reflective of what the interest rates are today and, now...

Joey: Which are high.

Josh: Which are high.

Joey: For us, for the last 15 years.

Josh: Yeah. It's higher than it's been. Right?

Joey: Right.

Josh: And is it... And then the next question the person has to ask, and this gets into the crystal ball side of the question, is like, do you think the rate environment will likely be higher in the future or lower? Well, go to inflation. Is inflation looks like it's still going up or is it starting to moderate and coming down? I mean, nobody could argue that the rate of inflation has dropped.

Joey: From, a year ago a year and a half ago when it was just like...

Josh: On fire, right?

Joey: Going crazy.

Josh: Yeah. Yes. And, now it's down, right?

Joey: Like you said, it's 0.1 above what they thought it was going to be.

Josh: Right at this point.

Joey: Yeah.

Josh: So it's coming down and they're still continuing to put pressure on capital and on investment that's causing it to continue to go down. So it's more likely that they will have inflation under control over the next 12 months. I mean, I don't see. There's always that option that something could crazy happen, but, it's likely that it's going to continue to go down. It'll take the pressure off the Fed to raise the rates, and if anything, the rates might likely start to go where?

Joey: Down.

Josh: Yeah. And if they do, like you said, what's that going to do to the price?

Joey: It's going to go up.

Josh: That's how our consumers have to look at the picture a bit broader and say, okay, well, this is what they are. Now the only thing that can really change this and really change the value is supply.

Joey: Which we've established when you're talking about the Redding market, it's almost impossible to enter the market with under 300,000, under 350.

Josh: But what would it take for us to increase our supply right now? Because these are the questions, I keep myself up with asking. It's like, all right, you know.

Joey: People would want to sell.

Josh: Okay.

Joey: Which...

Josh: And where would they go?

Joey: They'd have to be leaving.

Josh: And where would they go?

Joey: Idaho.

Josh: Possibly. But Boise's down. Boise's prices could be better than they're strong as they were. They're starting to get hit. And I'm setting you up for, obviously, the conversation. The way I'm putting it out there is because what I'm trying to do is illustrate a couple of things. When we saw a pretty good exodus about four years ago for different reasons. Political, mostly motivated, is what I was seeing at the time. People were leaving the state, they were going to areas where the cost of housing was actually less than Redding if you can believe that.

Joey: Yes.

Josh: Okay. That is not necessarily the case for most of those destinations that I'm thinking of right now.

Joey: Exactly.

Josh: In most of those cases, those homes have far surpassed our market pricing. And now it's not easy for our folks in our area to move to those areas and get the same lower price that they were experiencing before. So if you were to sell right now, you'd have to find a place that's less expensive in most cases than it is today to receive that same benefit. Right?

Joey: Which would be very hard.

Josh: Really hard. Really hard. And so where would you go? Because that's one of the ways we could do it. If everybody decides to move, we will have more inventory.

Joey: There you go.

Josh: Okay. The next one I thought about on this was, okay, well, new construction, what will it take to increase the number of new housing units available for purchase in the marketplace? Because right now, we see them limping along. I mean, most builders that are watching this right now would agree it isn't easy for them. And God bless you for all the work you're doing. It's a lot of work out there.

Joey: Well, they're going to need one or two things. Either they're going to need for their cost to decrease dramatically, or they're going to need the price of housing to go up, much higher than the supply, the components to build the home so that they actually have a profit margin again.

Josh: Okay. Well, I agree. So let's break those into two pieces right now. So we have. Let's go to the supply side of this. So the cost of supplies and goods going down, right? We know that lumber went down. We talked about that here in the previous podcast.

Joey: We did.

Josh: But if you look at the appliances and some of the other machining products that are necessary to facilitate home, those are purchased now on the world market essentially. And the economies in which we're competing for those things they're in inflation. They're all still experiencing higher inflation than we are. And so there's a lot of demand for products right now that can be sold around the world. Lumber is a bit more local than you would think. Most of our wood that's created lumber-wise here in the United States is actually produced in North America. I don't think very much of it's in South America, but it's certainly in North America. You don't see it coming from overseas in Europe so that's why lumber by itself, you've seen the numbers drop as much as it has for, again, the things we talked about earlier. So there... So that's one piece of that. The other thing is the labor side, labor potentially could come down a little bit, but not a ton. Right?

Joey: I'm about to say I don't see that, 'cause what you just said about inflation, the cost of housing. I mean, if they're... If labor comes down, what are they going to do for a living? How are they going to... How are they going to live?

Josh: Yeah. And it might come down a little bit. I'm a bit more bearish on that than most on that. I think it could soften a bit but still not a lot. Not enough to where it's going to be night and day. And so I guess we could say that maybe the cost of construction could come down, but not a lot. Would you agree with that?

Joey: Agreed.

Josh: Okay. So let's look at the other side. They need housing prices to go up, right?

Joey: Exactly.

Josh: So, in order for us to have more inventory that could have an effect on value, we need to see prices go up. How does that happen?

Joey: Interest rates come down. I mean, obviously, we're at low inventory so that driving tailwind is constant. That's a constant right now. And it won't get taken care of unless there's a ton of supply, which is, I mean, you're going to see... I think you're going to see that coming way before it happens because it takes so long. If you today decided that you were going to build a subdivision. I mean you're not going to have a product hit market for...

Josh: No.

Joey: Well, over a year.

Josh: I mean, you're right.

Joey: Well, over a year. So you'll see a lot of... When you see a bunch of projects going on, something you brought up, it was either the last or I think it was the time before when you were like how many new housing permits had been pulled in a year. And it was like seven. This was the year before '70 or '69 or something like that.

Josh: Yeah. This is through April. And I looked actually just prior to this meeting today, just to see if we had an update from the city and they haven't updated it yet since April. They probably saw the number in April. So we're not getting them the new Mays now. [laughter] But it was seven years today, at the end of April. And it was '63, I'm sorry, the year before it was '70 at the same time through April.

Joey: So a decline of 90%. So you're, so you're going to see that coming is what I'm getting at. It's not going to, you know, go to bed on a Tuesday and wake up Wednesday, and there's 400 new homes.

Josh: You're right.

Joey: You're going to see that coming.

Josh: That's right.

Joey: So it's gotta be interest rates coming down. The insurance thing isn't going to be settled. I guess if the... No, it's not going to be settled because even if the insurance commissioner said, "Okay, I'm gonna let you guys increase your rates," that's increased rates to the consumer.

Josh: Exactly.

Joey: So that's not going to come down. I mean the best you could do is they let 15 people increase their rates and then 15 insurance, everybody comes back and then they start to squabble a little bit and they try to get that profit margin down as low as possible.

Josh: And that's the only thing that they can... That's the only thing they can... That's the only thing they can file down is just a little bit of the profit margin. But the cost of replacement's still there. The cost of servicing the policy is still there and maybe a little bit of the profit when there's competition, which it needs to have. And ease of service too. I mean, like I said, we have clients waiting two weeks for insurance. I don't want to repeat that, but that's... That's what's going on. It's taken a while to get people in, but so I agree with you. I think interest rates would be a way to potentially, push those prices up. Another thing that could happen that we can talk about for just a brief minute would be that we'd have to have some sort of an influx of buyer demand that exceeds what we currently have. And for example...

Joey: Aren't we already there?

Josh: Well, no, I'm talking about like, let's say that a plant was to move to town and bring a thousand jobs with it.

Joey: Ah, got it. Okay. Something new.

Josh: Yeah, something new that we're not really thinking of. And if a plant came to town and brought a thousand jobs with it, and let's say that, as a result of that there was going to be 400 homes purchased off the existing market, well, then that would cost prices to go up. Builders would be like, thank you very much. And now they can provide some supply. But I'm not aware of that thousand jobs, so please, nobody ever can come back to me and say that I said that because I don't know of any job right now, that's coming to town that does that, but...

Joey: Well, in economics, I'm not an economist, but I play one in my garage.

Joey: I know that there are some terms around replacement, right? So when they would do the whole CPI, the consumer price index, and the basket of goods and they say, you know what we're going to do, we're going to replace sirloin with chopped, with hamburger. Yeah. And so I wonder one of the other things they could do as an alternative, you see the ADUs being built in people's backyards. Although that didn't really, I think part of the problem, that was a great idea. That was like, hey, you can have a thousand-square-foot house for $390,000, and wait, what? That's not a good deal. What? What? The whole idea was...

Josh: You'll lose money. It'll be great.

Joey: It'll be awesome. Your friends will love it. I thought it was supposed to be some type of affordable solution and it ended up not really being affordable for various reasons.

Josh: Yeah. I think what the second dwelling has done is for some people it's an extra unit and maybe they were able to get the cost down to a point where it penciled out for them. But I think really what it did, was a print of some flexibility for if I want kids on my property if I want my mom on my property. I mean there were some pretty stringent rules that even the city was hand tied. I think that they were happy actually. I think when the state came up and said, "Hey you're gonna have to provide for additional housing units, and here's one of the ways in which we wanna see you do it." And it gave them some cover from the general plan to be able to deviate from it and allow for secondary units on properties. Because there were some pretty tight rules for a while. And I think overly excessive.

Joey: I think as you say, all that, something else popped into my head was that, we're probably going to see alternative housing projects, so we're going to see more apartments. Maybe some town homelike, not necessarily condos. Maybe even condos. But something that's like, hey, we're not single-family homes on a large lot is not going to cut it right now. People aren't going to be able to do it, but we've got these, two, one units and we've got 70 of them that we're going to build. Because then what you're going to do is you're going to get investor money. You know what I mean? That's who's going to build, it's not going to be Bob building these 70 units, it's going to be investors.

Josh: I agree. Well, I think that yeah, multi-family...

Joey: Because people have to live. They have to live somewhere.

Josh: They do. And multi-family can solve the problem much faster than just adding an ADU on my property. What I do appreciate about the policy though is that essentially they're saying, "Hey, we're not going just to take one approach. We're going to take a lot of different approaches and let's just start working on the problem." But we still have the cost of construction that's a real deal issue. And it does create some issues for people to be able to do it. I think multi-family is going to be a way to solve a lot of it for the state. But there's that... Not my backyard mentality that most people have. And I would too. I mean, somebody wants to build a massive apartment complex next to my house. I'm going to try not to let it happen.

Josh: And it's not that I'm selfish, it's just that I didn't buy my house thinking that I was going to have that 12, that massive apartment building next to me. And so I can appreciate where people are coming from. There are no easy answers to it. But I think that we all know that California's housing is extremely expensive and if we don't want our kids to move to other states, we're going to have to solve it.

Joey: Yeah.

Josh: You know, bottom line.

Joey: So I feel like we didn't really solve anything today.

Josh: No.

Joey: I don't feel like you, and I came up with an answer. I feel like we just stated the facts.

Josh: Well, I kind of... I wanted today's conversation, I really just wanted people to hear the bigger picture. Like, Hey, there is an issue going on with insurance and I'm afraid it's going to hit the mainstream in the next week or two.

Joey: Sounds like it already has.

Joey: If people are waiting two weeks to get... I mean, you're at the forefront because you're seeing escrows and you're seeing what normally would be like, hey, we'll just get insurance on day 21, and you're like, no, day seven, we have to book an appointment for day 21.

Joey: And then hope that we can get a premium that you can afford.

Josh: Yeah. Really like day one.

Joey: So you're at the front of the line.

Josh: Yeah. No, we're feeling it. Last week is when I brought up this conversation. In fact, the email that I gave out to our clients or our agents and our team was sent on Thursday last week. And it was because I wanted to make sure everybody was aware. Look, we have this issue all last week from Monday till Thursday of last week. I was running into it more and more. And by the end of the week I had talked to enough people that I was like, oh no, this isn't good. This is going to be a challenge. This is a headwind for now.

Joey: Yeah.

Josh: The good news is that I truly believe that by Q3, Q4, some of those legacy brand issues that we're seeing, I think they're going to be back.

Joey: Okay.

Josh: And that'll take off the pressure of at least getting an appointment.

Joey: So you think the insurance commissioner, the pressure they'll make, they'll do something.

Josh: I hope so, I mean, I don't know how they would possibly think it's a good idea to have some of our largest insurance companies in the nation not participating in California.

Joey: I'd Love to know more about that California, what'd you call it? California Fair Fund or Safe Fund?

Josh: Yeah. California Fair Plan.

Joey: California Fair Plan. I'd like to know a little bit more, knowing more about how that works. Because if that's like, oh, it is subsidized by the state, that would put pressure on the governor and you know what I mean? If they're like, "Hey, wait a minute, we're paying for this."

Josh: That's a good point. Yep.

Joey: But if it's like, no, it's part of a fund that's controlled by an LLC out of Montana. You know, I don't know. You know what I mean? Like a conspiracy theorist. I assume you know.

Josh: Well, all our listeners are welcome to jump on and try to figure it out, but I think that it's definitely something that's sponsored or overseen by the state. It's like I said, it's more expensive. It's designed to provide insurance in situations where you can't really find a private or the private market, the private side of the insurance equation to solve it for you. But what a lot of people do is they'll get the fire insurance premium or policy through the California Fair Plan, and then they end up getting a renter's policy.

Joey: Ah, supplemental.

Josh: Yeah. Supplemental policy through a Farmer's or State Farm or Allstate or...

Joey: And so they will do that then.

Josh: Who's that?

Joey: Those insurance companies will do the supplemental insurance.

Josh: On new policies right now?

Joey: Yes.

Josh: I don't think so.

Josh: No, that's the thing. I think they're...

Joey: Oh, you think that might be the solution?

Josh: Well, no, I'm saying they're doing that. They're doing that right now, but right now some of those bigger companies aren't writing new policies, so you have to go to smaller companies to get those policies.

Joey: Got it. Okay.

Josh: This is that area where it's going to start getting interesting and dicey. We're running into it right now with our consumers trying to find insurance is number one, and then the cost of the insurance after the sticker shock is number two. And then everybody's asking, well, will it go back down? And it might go down a little bit from what it could be today at this point, but it's going to be higher than it's been in the past. The cost of insurance for all of us in California is going up.

Joey: There's no way around it.

Josh: No way around it.

Joey: Not right now. Not anything you and I can do.

Josh: No, there's nothing that I can see. There's nothing that I can see.

Joey: Clear the weeds around your house.

Josh: That's right.

Joey: Trim back the bushes.

Josh: That's right.

Joey: Make sure your smoke detector batteries are, small little things.

Josh: Yeah. Do the little things not to lose your policy. I had bought a rental property, well, not to rent, but to fix and then resell it, and they had a wood-burning stove in it, and they made a request.

Joey: It has to go.

Josh: Yeah. They wanted me to inspect the stove, which we did. And then we found out that the stove was not within the inches that it needed to be away from the wall or whatever. And so my office manager came to me and said, well, what do you want to do? And I said, just pull it out. It doesn't meet the code. I don't want to sell it without it meeting the code, so just get it out of the house. And then we took a picture of it and sent it to the insurance courier before they canceled me. I had another property purchased here this last year, and they told me I had to replace the roof, which the roof was replaced right before I purchased it, but I had to furnish reports.

Joey: What?

Josh: Yeah.

Joey: Oh, okay.

Josh: I had to furnish reports to prove it.

Joey: Okay.

Josh: And they said that they saw some peeling paint that they wanted for the insurance company. Never had an insurance company asked me if they wanted my peeling paint to be addressed. And which was the property manager that owned the property before they took their sign down. And so the picture or the wall was painted the old house color before it got painted.

Joey: Yeah.

Josh: So I had to fix that. Never had that ever happened before. And then there were some trees that I had to cut back, which I thought were valid and I think we needed to do it too, but I was like, I talked to the insurance person, I'm like, man, how much time do I have? He's like, "Don't mess around, get it done now." But these little things were popping up several months ago that I wasn't catching as being issues and just one-offs, one-offs, a one-off. And then this last few weeks I'm like, whoa, whoa, whoa. This is a blow dryer. It's hot.

Joey: So really, the only two things that we should really, we're kind of waiting with bated breath on interest rates.

Josh: Yeah.

Joey: That kind of thing.

Josh: Yeah.

Joey: There's really nothing. It's nothing that can be done. Right?

Josh: No. Yeah. And well, and for those who are sitting out there going, well, should I wait or should I pull the trigger now? It's like, look. I don't know what your plans are next, but again. Shelter cost is a real thing. If you rent, well, you know what the market's doing right now. It's a 3.9% vacancy rate. You're likely going to have pressure on your rent prices going forward. And if you purchase right now, there are not as many homes to choose from, but there are people who are buying homes every day. And then when the rates do eventually come back down, you have the option to refinance if that's what you decide to do. But there are no easy answers right now.

Joey: We didn't get to talk about what used to be a staple in our conversation. Was the. What's the term? It's the absorption rate or it's the.

Josh: Rate of replenishment.

Joey: Thank you. Rate of replenishment. Do you don't have it... I'm putting you on the spot.

Josh: No, I do. I brought it.

Joey: I'm curious because we always discussed that number a lot because we were in such a hot seller's market, and we started inching up.

Josh: Yeah.

Joey: And we went neutral, and we thought we were going to buyers, and we never do. We came right back down.

Josh: So new listings came to the market, and this is for the month of May, 350. A year ago, in the month of May was 412. So new inventory coming to market was down 15% year over year. Homes that went pending last month were 266. A year ago, it was a little over 280. Yeah. So...

Joey: Less inventory, but the same volume of movement.

Josh: Yeah. So what we're starting to see is this, I think next month's market up that I'll be doing the one that's the five-minute one for those of you that watched that. For the five-minute one that I do next month, the numbers will be very close from this year over last year.

Joey: Okay.

Josh: And the reason why is because when interest rates went up last year, those big jumps were done by July. Not that they were done, but those big jumps. The shocking ones.

Joey: The shock was over.

Josh: Yeah. It was by July and the sales had already dropped as a result of that. And so we're going to start to see numbers that are going to be much closer together starting next month, is what we're anticipating.

Joey: Do you have the replenishment rate in there?

Josh: For last year?

Joey: No. For this last month.

Josh: Well. Again, it was 350 new listings that came to market.

Joey: Okay.

Josh: And a year ago, it was 412.

Joey: Because I was... Now, remember how we had the X number of months?

Josh: Oh, you mean the absorption rate?

Joey: That's what I was—the absorption rate.

Josh: Yeah. Yeah, 2.8 supply.

Joey: See, that's the seller market.

Josh: Yeah. Well, yeah, we're still...

Joey: Under three.

Josh: Yeah, that's right. We're at the tail end of the seller's market right now. And it feels that way because if you talk to agents on our team, for sure. But I would imagine with other agents in the market, when a home is priced correctly out the gate right now, it's not unlike you're going to have competing offers on it, which is crazy. We have these headwinds in the marketplace, but we have competing offers. And that's because the inventory is sitting around 575 580 right now. But if I were to tell you, I'll give you an example, I won't give you the street just in case something happens and I want to make sure those people enjoy the benefit of another sale, but we had a property here this weekend that we sold.

Josh: They had something like six offers on it. And I talked to the agent that was representing the property on our team, and I said, well, how much higher did it go over price? And it went over price by 10,000, six offers. So we priced it on the nose, and we got competing offers on it, but it didn't sell for that much more than the asking price. And that's pretty telling because, in COVID, you would've listed out a price, received six offers, and sold it for 60,000 over the asking price. And that tells you that the consumer today is up against that stubborn wall of affordability. They'll do everything they can to be competitive on their offer, but at the end of the day, they could only go up to 10,000 over. You know what I mean?

Joey: Yeah.

Josh: And that's what happened. And that's the situation.

Joey: So it's not a crazy market. There is pressure there, but it's not.

Josh: Yeah. And that's a one-off, that's one example, and I'm trying to pick the one that was pretty stunning to me. We've had other ones where it's gone 30 or 40,000 over, but that's usually when the selling price is much higher and there's a pool involved and maybe some other extra things that really can sway the valuability or the value to a person. But that's an example. We feel like it's pretty tight.

Joey: Yeah. But you know what? Those numbers say that you're in a seller's market.

Josh: Yeah.

Joey: And the sellers did sell it.

Josh: Yeah.

Joey: And they sold it for more than they were asking. So those are all. It is not a crazy hot market, but it is the seller's market.

Josh: It is.

Joey: For all the reasons. And that's just to me. If you are thinking about selling, those are good signs.

Josh: Yeah.

Joey: You know what I mean? It's that those are really good signs. And if you're thinking about buying back to what you said, I mean, it depends on what kind of buyer. These are very different. If you're renting, you're paying 100% interest.

Josh: That's right.

Joey: And if you can't afford a mortgage, the big question is, can you afford the payment? But if you can, and you're a first-time buyer, this I. You go. You're so politically right when you talk. Now you make me want not to say something that I will find myself in court later.

Joey: And hear like, and you said. Well, I thought the market looks good now versus, like, oh, you have an interest rate. Yes. But fast forward a couple of years, and interest rates have come down. You can refinance and you don't have to pull equity out. You could just refinance what you owe at a lower rate. And not go shopping. You know what I mean. A lot of people don't know that so there's a little public service announcement. When you refi for a better rate, you can just pay off what you owe. And that's how you get even more equity in your home and pay it off sooner.

Josh: Most of the people in this that have... Have owned homes. So for the listeners out there, if you've owned your home for 20 years or more, ask yourself the question, is your home worth more today than it was 20 years ago? If you were to be in the market 10 years ago, and you asked yourself the question, "Okay, I bought a house 10 years ago, is my house worth more today than it was 10 years ago?" If you owned your house five years ago when you bought it, and you own your house today. And you ask yourself the question, "Is my house worth more today than it was five years ago?" The answer is most likely going to be...

Joey: Most likely, yes.

Josh: And so it's continuing... That is the theme of real estate most of the time. And there are exceptions to the rule, but more times than not. It's going to be a good investment for the long term. It's a forced savings account. It's a hedge against future housing shelter costs. You have tax savings for home ownership in many cases. You're paying down your mortgage balance while you're paying to live there. And that's why I say it's different in real estate than it is owning a stock or owning a piece of gold because you can't live in those other two asset classes, but you can live in your home. And to me, it's still one of the best investments. If you have yet to make one into real estate and you need a place to live, this is a great place to start investing for your life. You know what I mean?

Joey: Absolutely.

Josh: So for those reasons, I still love real estate and have a huge affinity for it.

Joey: Oh, yeah, of course.

Josh: Yeah. So...

Joey: Well, I didn't know if you had anything else you wanted to go over this?

Josh: Yeah. We're good.

Joey: It was kind of a big one.

Josh: It was.

Joey: Tackled a big topic and we'll see how it plays out over the next month.

Josh: We did. Yes.

Joey: I got a feeling we're going to be talking about it next month...

Josh: We'll see, we'll see what it is. Hopefully, we get to report that some of these insurance companies are at the tail end of their Exodus and coming back into the market. And we will be excited to hear the good news on that. But for all the listeners out there, this was really. This one today was more about your guys' requests. We had a lot of people asking for us to get into this topic here in the last week or so. And I thought, you know what? I think you're right. I think it's a big enough situation and we probably should talk about it. So a big fat disclaimer, and Marcus, help us out with this, buddy. Make sure that we put on our podcast here that these are opinions and they should actually be ignored in most cases. Fair enough?

Marcus: Will do.

Josh: All right.

Marcus: I will do that.

Josh: All right, then. Joey, thanks again for your time.

Joey: That's my legal advisor over here.

Josh: That's right. Yeah. Thanks for your time, buddy.

Joey: Thank you, Josh.