Josh Barker Real Estate Podcast #22
Transcription of the Podcast Episode #22*
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Dan: As things green up a little early through the winter, November, and December, it might be a good time to go for it now to maximize the price they're looking for with less competition.
Josh: Okay, so looking at the numbers for last month, 229 closed.
Josh: And then a year ago, 278, but if we were to talk about during COVID, and let's say in the middle of August of 2020, what was the sales volume looking like then?
Dan: Yeah, I'm curious. Tell me, do you remember?
Josh: I remember it being in the mid 350 range.
Josh: Yeah, so obviously sales are off quite a bit. 45% is pretty much what we're seeing across the board, and a lot of that is because obviously interest rates went up and it really put a squash on a lot of people qualifying for mortgages, right?
Josh: So that's one thing to look at. The other one was on the pending, that kind of stood out, too. This last month, they had 218 properties that went pending here in the marketplace. And you go back a few years ago, in August, it would have been close to 400.
Dan: Got it.
Josh: So the buyer demand is definitely off, but because inventory is so low, it's sitting at 680 units for sale right now in the MLS, that's a good thing for the seller but you have to be priced correctly because most of these buyers can't afford what the prices were, right?
Dan: And they're seeing it. When buyers are looking right now, they can see when a property is over-priced.
Josh: Yeah. And it's a tougher conversation, I'm sure. So I know we have some kind of broad strokes about if you're sitting on the market and not getting sold, but let's just say you have a house, it's been on the market for a month and you've had a lot of showings but no offers. What would that typically mean?
Dan: It means we did a good job with the marketing. You're close. You're close on the value. We're just not close enough, so we need to get. We need to look and make a quick adjustment in order to draw that buyer in. It's kind of like fishing. Sweeten that bait a little bit. We can see the fish in the water, but we haven't drawn that offer.
Josh: Right. So could you just drop the house price by 1000 bucks or something and expect that to work or?
Dan: I mean, you could, but we don't recommend it. Again, it's back to the process, we've done the $1000 reductions before, and you're keeping the overall outcome the same with that small of an adjustment.
Josh: Well, let's use this for an example then. we don't have the specific property in mind, so let's just have a general conversation around it, but you've been on the market for a month, you've had a lot of showings, no offers, what kind of a price adjustment would you be looking at?
Dan: If you've had a lot of showings, we missed it by less, so we're looking at a less reduction. In that instance, I'd recommend about a 5% reduction.
Josh: 5%? Okay. And let's say you're that same person though, and you've been on the market for a month or more and you haven't really had any activity at all, what would that mean?
Dan: You missed the price by more, so we need to really get it closer to the right number, so we're looking at a 10% reduction.
Josh: Okay. And it obviously depends on the property, so if you have a really high priced property with a lower buyer demand generally speaking, anyway, then obviously you're not have to be all that aggressive, right?
Dan: Right. Every neighborhood is have to be different, and we can really fine critique some neighborhoods and take a closer look.
Josh: Yep. Kind of off topic, but in the same vein is. I just had it pop into my head, so I'm just have to say it out loud, pools. I've noticed over the last few years that swimming pools seem to be a lot more valuable than they used to be. Are you feeling the same way?
Dan: Yeah, we've been seeing pools drawing a higher price if it's got the pool more so than what we would typically give it value for exactly.
Josh: Yeah. So years passed. If I went back five, 10 years ago, I would say the average pool would increase value by about 5%, but what do you think it might be today?
Dan: I've seen really nice pools, the cost to put in a pool has gone up too. So I'm sure the buyer's weighing the options of, "Well, shoot, it's have to cost me $80,000 to $100,000 to put a pool in?" So if they can get a nice home and the pool with it, they're looking at that cost basis. So it's probably closer to 10 or 15% possibly.
Josh: Wow, that's high? Wow, that's high. Okay. Well, it definitely is costing a lot of money to put the pool in in the first place right now. That's for sure.
Josh: So a couple of things I was have to cruise over too, is that I had this report, I've brought this up in the podcast before, but I have a report that gives me a couple of things, it puts all in one page, I guess it said the median sales price for Shasta County, which right now on this report, as of today anyway, it's 397,429. And then what it does is it gives you the appreciation, it goes backwards and tells you what it was over the years and then what it is now. I'm have to throw these numbers out to you and I just want to see what your response is, okay?
Dan: I'll do my best.
Josh: Alright. So if I look at appreciation historically, if I go back over the last 63 years, which this report actually will do for you, the average appreciation was 4.95% over the last 65 years.
Dan: It sounds really healthy.
Josh: It does, and if you factor in for inflation, I'll be curious to see it, I don't have that to do today, but if we had a report that showed inflation over that same period of time, I'm kind of curious what it is. I know what the Fed probably typically targets, which I think is just over 2%, and if it was appreciating at 4.95 then it was outpacing inflation.
Dan: Right, that's interesting.
Josh: The second one on that was the last 10 years, and the 10-year one is at 5.57.
Dan: Oh wow, even higher.
Josh: It is, and then the last one they have is for the previous five years from now, and it's at 7.24%, so it's creeping up even more.
Dan: It's getting up there.
Josh: Yeah, and it makes me think because when I see that, I go, you know, I feel like the amount of regulation that's coming into the new construction market. You know what I mean? So the tougher it is for home builders to build, the more expensive it becomes to build based on some of those regulations, then it's causing the inventories to be thinner, right?
Josh: I mean, you can't have as many units, right? And as a result, it's having. Inflation is kicking up higher and higher in the housing market, and it's like, man, we have to have either a pretty big disruption, I would think, on new construction and how it's built to bring that cost way down or we're have to have to have regulation back off a little bit, or we're have to continue to have these really tight inventories, at least in the state. What are your thoughts on that?
Dan: Totally agree. I mean, the demand is strong, but if inventory can't keep up with that demand, we're have to see prices continue to go up.
Josh: I think you're right, it's. The pressure is there, and unlike some other markets around the country where they've already over-built, we're just not in that situation. They have the projections on the same sheet for next year, they're projecting the housing values will appreciate by 6%, and then for the five-year they have it actually as high as 26%, so I don't know if I believe that or not, but man, that's crazy to even think about that. The number is not negative or the number is not flat, it's still showing some compounding appreciation over time, which means that. I mean, I think everybody's waiting for like, "Give us some reprieve." Interest rates are super high, affordability feels pinched, buyers are like, "Please give us some room to feel comfortable purchasing," and it doesn't feel like there's any. There's not have to be any release or relief in sight.
Dan: Right. This could be the dip you're looking for, this could be the right moment to purchase a home affordability-wise.
Josh: If this plays out, then I think you're right, it's something that we're have to have to watch. On this report too, this is another number that kind of popped out on me and I was like, "Wow, that's pretty interesting," but they have. On this report, what they try to do is they try to estimate what they call family formations, and this is where they basically say, "Okay, based on people that are have to either be moving out of mom and dad's house or breaking up with roommates and getting their own place or those kinds of situations." They have household formations projected over the next 12 months at 2,254.
Dan: Interesting, here in Shasta County?
Josh: Here in Shasta County.
Josh: And of that, they are estimating that there'll be 1,440 first time homebuyers.
Dan: Oh, wow.
Josh: So think about this, if, I don't know if there will be or not, but let's just say there's somewhere between 4,500 and 5,000 transactions this year. And how that works is there's always a buyer and there's a seller, so if you divide that in half, let's say there's 2,500 properties that are sold, they're saying on this report that potentially half of them might go to first time home buyers, which I don't see that being possible.
Dan: Yeah, that.
Josh: But what it does tell me though is that they're projecting a lot of people trying to purchase right now, and I think why the disparity is that existing homeowners are sitting on interest rates of 3% to 4%. And so they don't necessarily want to go out into the market and purchase right now and relinquish that rate. You know what I'm saying?
Dan: Right. So that. We've kinda gotten away from that demand.
Josh: Yes. That segment, that move up buyer that we used to have right now has really slowed down because the rates are so high, so nobody wants to give up a 3.5% interest rate to go jump into 7.5 or 8%, and that might be where that number is showing up as they're saying, "Hey, the composition of buyers, the volume's have to go down, and oh, and by the way, about half of those transactions will probably be first time home buyers."
Dan: Man, yeah.
Josh: Yeah. I mean, if that number is true, that tells us as a company, we gotta do a lot of educating. You know what I mean? Because if that's the case, then there's a lot of hand-holding, there's a lot of education in time that our agents have to put into helping our clients understand the whole process, you know what I mean? Because when you're working with a person who's already owned a home and buying another one, not that you don't offer value to that person, but because they've done it before, they're. You're kind of moving a little easier because everybody kinda knows what the rules are, but for a first time home buyer, there's a lot of education goes into it. But in this report, all of that I just said, 2,254 household formations of which 1,440 first time home buyers, there's only projected to be 373 new homes built.
Dan: Yeah, so inventory, it just won't keep up.
Josh: Yeah, inventory won't keep up.
Dan: We're definitely still a feeder market, we're seeing people coming up from down South and Central California's still a very desirable place to live, and when you take away the people moving up or upsizing or downsizing, you've got first-time home buyers and those who can afford from other markets.
Josh: Yeah. So when you're negotiating your contracts, how many of those do you feel are coming in from outside of the area?
Dan: You know, we were just talking about this last week. I was telling you, I'm seeing a lot of that, people moving here from other markets, and we're also seeing a lot of VA buyers right now.
Josh: Yeah. Those too.
Dan: Yeah, those are kinda the two primary buyers right now.
Josh: Yeah. If you were to do an estimate, and I won't hold you to it, Dan, don't worry, but if you were to estimate, on your listings right now, how many of those do you think are outside of the area on a percentage basis?
Dan: Yeah, good question. I would venture to say maybe 30%, 25% or 30%.
Josh: That high?
Josh: Okay. That's pretty high. And of those that you're selling right now, how many? What's the percentage do you think that are VA?
Dan: Right now. This is why it sounds impressive to me too, but I think it's over 50% of my inventories.
Josh: Are you serious?
Josh: That high?
Dan: Right now. Pending.
Josh: 50% of what you have pending right now on the listing side.
Josh: Is going to be probably VA?
Dan: Yeah, veteran. Yeah.
Josh: How many do you have pending right now?
Dan: I'm sitting right around 15, 16.
Josh: So seven, eight of them are VA?
Josh: Wow. So everybody. It's not like you have two in Escrow and one's VA.
Dan: Right, right, exactly.
Josh: You got a lot in Escrow and half of them are actual VA.
Josh: Yeah, that's. Well, that's kind of a testament to the program too, so low money down or no money down, and then a pretty favorable interest rate too.
Dan: They get a really good rate and no mortgage insurance, so they're passing on the mortgage insurance.
Josh: That's right. And then the loan amounts, too, obviously they're not capped at the same as a conventional FHA either, so it gives them some flexibility there as well.
Dan: Right, right. And we're utilizing. It's a newer thing, but there's a form that we can use now that no longer requires us to get a termite clearance per se for the section one dry rot repairs and things of that nature.
Josh: Let's talk about that for a minute, I have to grab a little bit of water here. But let's talk about this for just a minute. In years past, I can't tell you how many times I've had a property owner tell me that they were concerned about accepting a VA offer, not because of the veteran but because of the stipulations that might be put on the seller from VA like you have to have a section one termite clearance and a section two termite clearance wouldn't. For those listening, not to get too analytical on it, but a section one it would be active dry rot or active termites.
Dan: That's right.
Josh: And then section two would be items that could lead towards active dry rot or active termites, right?
Dan: That's right.
Josh: And there might have been a few other things that would be more strict than an appraiser might call out using the VA. Now, that's changed a little bit. So go ahead and say what you just said again, and now that people understand that, in the years past, sellers were a little bit reluctant to do VA or accept VA offers because of the concerns about the stipulations of the lender, there's a form. Tell us about it.
Dan: Yeah, so in essence, we no longer have to worry about, hey, are we signing a blank check, because, in a lot of cases, we might not have the inspection done already. So when we're accepting an offer, we're committing to go off the market to find out what those repairs are. So there's a lot of unknown there, and it's risky to go off-market for a period of time and not know what you're diving into.
Dan: But now we've got this form, so we can say, "Hey, have you seen termites?" It's far less likely we won't get this deal done because we only need to sign off on termites alone.
Josh: So just the actual termites themselves?
Dan: Just termites, yeah.
Josh: So if there is termites, you'd have to kill the termites, get rid of those.
Dan: Right, do a full house treatment.
Josh: Yep. And then sign this form that basically waves the section one, and section two clearance, and you can now sell the property that way.
Dan: That's right. And you don't need to worry about the dry rot repairs; in Redding, almost every home has dry rot.
Josh: Yeah, sure. Somewhere, fascia boards or whatever, the sun's really hot in the summer, peels up that paint, and then starts to rain in the winter.
Dan: Exactly, that's right.
Josh: So another report I have out here, want to bring up is just the new construction report. I've talked about it already just a little bit, but this report here is from the city of Redding, and what they do is they put out a residential permit statistical report. This is a month year to date, so it has to be from the beginning of the year until now, and unfortunately, the last time they've uploaded the city of Redding is at the end of July. And based on the numbers I'm about to tell you, I wouldn't want to update it either.
Dan: Yeah, yeah.
Josh: Because the numbers aren't good.
Dan: We'll see, let's see.
Josh: So year to date through July, 31 permits pulled in the city of Redding. To give you some context for it, if I go back one year ago, from January through July of last year, 123.
Josh: So off by a difference now year over year of 75% cumulatively for the year. It's just crazy to see that. There's only a handful of people who are actually pulling new permits right now at all. However, to that other report, I was saying a few minutes ago where you're like, the actual housing unit is estimated at, 373 might actually be high, those actually might not even happen.
Dan: Right, keeping the supply that much lower.
Josh: That's just it. And it's an interesting situation that I think the Fed Reserve has put itself in, is that you've got people that are sitting on really favorable interest rates, fortunately, 3%, 4% on a home mortgage from a few years ago. They're reluctant to relinquish that because if they do, they have to have to take a 7.5% interest rate. In many cases, they won't have a better home than they have now. In fact, I had. Recently, we did some work on this, and just looking, a lot of the buyers who purchased three years ago would not qualify to buy the home they're in today.
Dan: Wow, that sounds right.
Dan: That's impressive.
Josh: And Redding hasn't had that kind of situation happen for a long time. If you go into the Bay Area, that's happened a lot. Suppose you go down into LA or San Francisco, San Jose, Santa Clara, those folks that have been there a long time. In that case, they're all in that situation where their house has appreciated so much that they couldn't re-buy the home they live in because they wouldn't qualify, but that's truly the case right now in Redding, is that with that difference in the rate. So the Federal Reserves got themselves in a situation now where, really, they're adding to the housing inflation because there's not enough new homes coming to market because of what I just said.
Dan: Mortgage rates.
Josh: For rate reasons, right? And so if the Federal Reserve were to bring the mortgage rate down, all they'd have to do is buy mortgage-backed securities to do that. I mean, saying all you have to do sounds pretty simplistic, but truly, if they decided to buy mortgage-backed securities right now with, let's say, 5%, if they did that, then if you were sitting on a Mortgage at 3.5, you might go, "I might sell my house now and buy something else," 1.5% is not the end of the world. You know what I mean?
Josh: But the Fed hasn't done that yet, and we're looking at pretty high-interest rates right now, and so we're sitting there going, "Man, the high rate environment is actually causing lower inventory, which is leading towards housing inflation or at least keeping the prices up." What are your thoughts on that?
Dan: They paused on the last rate hike?
Josh: Yeah, they did.
Dan: They took a pause?
Josh: Yeah, they didn't raise the last time, and right now, you've got experts that are kind of. Right now, I see a. Two different views on this, one person saying that they think they can raise it as many as two more times, and then I have other people saying, "Hey man, the wheels are rattling. They do not have to raise it anymore at all." So it's. Right now, it's tough to call.
Dan: I don't know where I see the wheels rattling outside of real estate. That's interesting.
Josh: Well, you have a couple of things, like right now, you have the strikes that are happening in Michigan. The three big automakers right now are striking.
Dan: That's right.
Josh: That's have to have an impact. Fuel prices now, I drive a truck that uses diesel, I just pumped gas this week, and I think I paid 6.30 or 6.40 a gallon.
Dan: It's not coming down?
Josh: I don't know. We might be at seven bucks by the end of the year, and so this is all that has to contribute to an inflationary market. You have student loans, a lot of student loan payments are resuming now where these folks are now having to pay that $300 or whatever it is, student loan repayment, and all of that sucks cash out of the economy. So if I'm paying more in gas, that sucks more cash out if I'm paying more in interest, that sucks cash out. If I'm paying more in student loans than I wasn't paying before, that's sucking cash out of the economy, so we're looking at. I would say the tea leaves are pointing towards a slower market altogether going into next year.
Dan: Right, right, yeah.
Josh: But we've been saying this for over a year now. We're like, "Oh, recession in eight months from now." But it could be looking better. I would say 2024.
Dan: You think will be there?
Josh: I think there's a really good chance we could be there. Yeah, yeah. That wouldn't necessarily be a terrible thing, I think. And I've never seen the actual quote, but somebody told me that it was Reagan who said it, that a recession is when your neighbor loses their job, and a depression is when you lose yours.
Dan: Oh wow.
Josh: You know what I mean?
Dan: That's heavy.
Josh: Yeah, it's heavy, right? So if the job market starts to show some weakness, I think it will have to roller coaster really fast.
Dan: Right, right.
Josh: If you were to talk to a seller right now who is thinking about maybe waiting until the first part of next year before they were to do anything, what would be your advice to that person?
Dan: Yeah, good question. You know, at the end of the day, I really try to dive into what their unique situation is and put myself in their shoes so that I can have a better understanding of what their goal is. And in a lot of cases, I just try to show them their options now, and we don't really know what's have to happen next year. Still, if all were to stay the same, I kind of explain the way we're trending now and give them the option to wait until next year or go for it right now. Still, one thing is for certain, right now and through the winter season, inventory is lower, so any time you have a lower inventory, it means less competition. So it could mean getting the price they're looking for now, especially if things are. Start to turn green. We always say, you taught me this, green is free, so. As things green up a little early through the winter, November and December, it might be a good time to go for it now to maximize the price they're looking for with less competition.
Josh: No, that's good. Let me flip the table on you, let's say that you're a home buyer right now who's out there in the market and trying to navigate so many of the things that we just talked about. These are real things, right?
Josh: What would you say to them?
Dan: Yeah. Buyers looking to buy right now, you can also find really good opportunities because the sellers that are selling in the winter have a good reason they're selling right now and not waiting till the spring, so you might be able to capitalize on a good opportunity that maybe wouldn't present itself in the spring.
Josh: Yeah, no, that's a good word too. And I kind of I'm looking at that too. I'm like, "Gosh, if I was a seller right now, why would I sell? And why would I buy now if I was a buy right now?" And I think there are good reasons for both, but on the selling side, depending on what your plan is, if you were to sell your home now and relinquish that rate, it better be worth it. You better get the house you want.
Dan: Right, totally agree.
Josh: That would be one thing I'd say. On the buying side, and this part sucks, but it's like getting into a home now because the tea leaves don't look good for the long term. It looks like the housing prices have to continue to be pretty strong. Even in a recessionary situation, that just means home builders have to build even less, which means even tighter news around the inventory, right?
Dan: That's right.
Josh: The bigger picture is, if you have a rate now that's not all that favorable, this is good news actually, is that I was just reading an economic report projecting that there's a really good probability by the end of next year rates will be below 6%.
Dan: No kidding.
Josh: Yeah, so.
Dan: That would give us a little bit of a runway for.
Josh: I think so too.
Dan: Back to some serious appreciation.
Josh: That's right. And so if you're a home buyer and you buy right now with a higher price and a higher rate, and the next year when the rates come down if they do, now you're in a situation where you refinance to a lower rate, it goes back to the old saying that you marry the house. Still, you only have to date the interest rate.
Dan: That's right.
Josh: Right? So you can adjust that later. Alright, man. Well, thank you very much for your time today, Dan.
Dan: Yeah. Thank you, Josh, thanks for having me.
Josh: My pleasure, I appreciate having you. And everybody, thanks again for watching the podcast; we'll see you guys next month.
Dan: Alright, see you guys.