Josh Barker Real Estate Podcast #25

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Transcription of the Podcast Episode #25

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Speaker 1: Welcome to the All Things Real Estate Podcast with our very own, Josh Barker. With more than 20 years of experience and over 5,000 properties sold, Josh brings a unique perspective to the real estate market. Let's get started.

Joey: Okay. It's December, 2023. Man, that sounds crazy to say it out loud. The end of 2023 already.

Josh: Yeah, it's pretty crazy.

Joey: It feels like it's like March of 2023. So it's December of 2023, we're about to go into 2024, sitting here with the last podcast of the calendar year.

Josh: Good.

Joey: Right?

Josh: Yeah.

Joey: And the big news that just hit was that there's an interest rate drop with more to come.

Josh: Yeah, this month has been... Yeah, it's been interesting. Rates right now are averaging like 6.62%.

Joey: It's down, up one plus percent, right? Like it, did it get to 8?

Josh: We peaked at 8, yeah.

Joey: Okay. I was gonna say. It's big.

Josh: Yeah. And then about a month ago, we were probably around 7.5%. So right now it's 6.62, it's getting really close to that 6.5 mark. And so this kind of lies into what, or ties into what we were talking about before, which is, we anticipate the interest rate environment is gonna be a little bit lower going forward. And you gotta ask yourself the question, if you had the choice, would you rather buy when the prices were a little lower and the rate was higher?

Joey: Oh yeah, of course.

Josh: Or would you rather purchase, on the other side of that would be is, do you wanna purchase when the rate is lower but the price is a little higher?

Joey: No.

Josh: You know, and given the option between the two, folks right now that are purchasing right now with the interest rates being a little bit higher, they're probably already thinking about that refinancing option that just became available to them, right? Which is pretty exciting. So yeah, it's gonna be interesting to watch over the next several months what this does to the market.

Joey: So, and not only did they lower the rate, but is it just rumor or is it they said, "Hey look, we're gonna lower the rate more in 2024."? Is that like a sure thing?

Josh: Well, the Federal Reserve met just a few days ago and they came out and they said that they anticipate that they'll lower the rates three separate times next year.

Joey: That's big.

Josh: It is big. And when you think about that, it doesn't mean they're gonna raise it or lower it by a quarter point at a time. I mean, they could go in and just drop it half a point if they wanted to as one of the times that they would do it. I kind of studied this a little bit because I'm always trying to figure out in the commercial real estate space and on the residential side, okay, forecasting for the following year, I mean, running a larger company, obviously you have to be thinking about those things versus being a smaller team or something where you don't have to worry about it as much.

Joey: Exactly.

Josh: For us, I have to do a lot of forecasting. And right now, I'm looking at the federal deficit and obviously it's in the 30 trillion range. But most importantly, what's coming due next year is really around that six and a half to 8 trillion, somewhere in that range. And when that happens, they're gonna be refinancing that debt at whatever that rate is at that time. When they originated that debt, it was probably sitting around 3.8% on average. Currently, if they were refinancing it today, it would be around 5.25%. So you would almost have 100 billion increase in liability by monthly, or payments that you'd have to make on the interest alone.

Joey: That's insane.

Josh: It's insane. So not to overcomplicate a podcast, but you know, likely if you had control over the interest rates, which obviously the Federal Reserve does, and you were about to have to refinance some of your debt, would you have refinanced it while the rate was higher or would you go ahead and adjust the rate down and then refinance it?

Joey: I'd adjust the rate down, man. $100 billion just in interest? And did you, were you gonna say $100 billion a month?

Josh: Yeah, exactly. It's an interest payment.

Joey: So correct me if I'm wrong, is that $1.2 trillion difference per year in interest alone, right? Did I do that math right? $100 billion a month?

Josh: I'm gonna be careful of that. I don't know for sure if that's right, but I know it's 98 billion increase in interest on that.

Joey: Okay.

Josh: So it's... So what I...

Joey: Still a ton of money. A ton of money.

Josh: It's still a ton, I think for the length of that renewable for one to two years.

Joey: Oh, okay. I was gonna say that's crazy.

Josh: Yeah, 'cause it's only for that... 'Cause this is short term interest rate debt that we're talking about. So they can't even sell this to somebody else 'cause it's too short term. They're carrying it. And so when that money comes back and it's due, they only have a couple options. They can reissue the debt again at whatever the rate environment is, which again, they control so they could bring it down or they could print money and pay off a portion of that. But of course that causes inflation.

Joey: Which we just pulled out, yeah.

Josh: Yeah. And they'll probably do a little bit of one, which would be to probably print some money to deal with some of it. And then they're probably gonna refinance a lot of it at whatever that rate is. And so when you do the math on it, you're like, "They're gonna bring the rates down."

Joey: Have to.

Josh: And there's just... And that's gonna be a positive thing for the mortgage market because if the rates go down, that also trickles into the 30 year mortgage. So folks right now that last year or I'm sorry, several months ago were paying 7.5, 8%, they're probably paying 6.5 here in the next 30, 60 days.

Joey: Nice.

Josh: Don't quote me to it, but that's what I think could happen. And then if you go into next year, if they continue to do this, which we anticipate they will, you could see rates again in the mid 5% range pretty easy.

Joey: Which is just gonna spark the housing market because all the people that are like, "Hey, I can't afford that house at 8%. Wait, I can afford that house at 5.5%." 'Cause that's, 2.5% you said what? 1% is 10% power of purchase?

Josh: Yeah, for every 1% the rate goes up or down, it has an impact on a buyer's purchasing power by about 10%. So let's say I'm qualified right now to buy a home or I should say a few months ago I was qualified to buy a home when the rate was 7.5%, let's say I was qualified to buy a house at $400,000. Well, if the rate drops to 6.5%, I'm now qualified to buy a home at $440,000. And everybody thinks, "Well, that means I can just buy a bigger house." It's like, well, yes and no, because the people that you were in the market with that were also qualified at 400,000, they also, with the rates going down, they're also gonna be able to pay a little bit more too.

Josh: And so the hard part about this is, and we've talked about on previous podcasts, is that lowering the rate by 1% or 2% isn't necessarily gonna solve the problem because it's likely just to cause the housing market home pricing to appreciate right now. Again, it would have to get down into likely or between 4% and 5% interest before you have folks that are sitting on 3% interest rates going, "You know what? It's close enough to what we have now. We want a bigger home, or we want a smaller home, or we want a newer home," or whatever the reason is, and be willing to relinquish that 3% rate and then be willing to accept a 4% to 5% rate. We're not gonna be there right now.

Joey: I was talking to a friend the other day that he's moving back to Redding. He moved away a few years ago and they didn't care for it so much. But he said something interesting. He said, yeah, we're buying this house and we're assuming the loan that the seller, the seller has a loan.

Josh: Sure.

Joey: And I said, "Oh, wow, that's awesome." And he's like, "Yeah, the rate's 3.2%." And I was like, "Oh, wow." If you are thinking about selling your home and you've got that rate, and I don't understand like what loans are assumable, you know how much more you can get for your home versus somebody that was like, "Well, I'd wanna buy that house, but I was... " Definitely at 8% or even at 6.6%, and they can assume the loan at 3.2%. That's huge.

Josh: It is huge. There's a few opportunities and even in our local market where that's the case. So if you look over the last 24 months, I mean, the average sales price obviously has gone up, but it hasn't gone up significantly. And so if you had somebody that bought a house, let's say, 18 months ago on an FHA loan and their rate at that time might have been, I'm just guessing here for the purposes of the conversation, but let's say it was like 4% or 3.5 to 4%.

Joey: Sure.

Josh: Now, the situation with them is that if they wanted to, they could allow somebody to assume their mortgage, okay? That buyer would simply come in and pay the difference between whatever they wanna sell the home for and what the loan amount is. They would come in with that amount of money and then they could assume the existing loan. And to assume it, they would still have to basically apply as if they were getting a loan.

Josh: And so they'd have to show their credit, their work history and employment, all the things you'd normally need for qualifying for a loan in the first place. But that process is happening a lot. So, or it can happen. The FHA is one, so if you have an FHA loan, that's an opportunity to look at having an assumption done. A VA, although in some cases you may or may not want to because you may be relinquishing your VA benefit if you're the veteran.

Joey: Got it.

Josh: But that's another one. And in some cases, case by case, conventional loans, and those you have to dive in a lot closer because there's many, many conventional loans where they don't have the ability to assume those loans.

Joey: Sure.

Josh: And so you just have to know...

Joey: You have to talk to your lender. Good to know.

Josh: Yeah. And you look at the type of loan that you got initially and go from there, but it is another tool or another instrument that people can use.

Joey: Yeah. No, I just thought that the value of your home... So that, let's say there's two homes for sale and one of them has an assumable loan, let's say identical homes. Okay? Same neighborhood, all that kind of stuff. And they would both go to the market for, let's say $400,000. One of them has an assumable loan at even 4%, and the other doesn't. The assumable loan home is going to get, could get more money for their home than the non-assumable loan/

Josh: Oh, sure they could.

Joey: Because their loan payment, because that's what it's real... What you're really talking about is the payment. So you take the two homes that are completely identical, both $400,000, but you say, what's my payment at 4% versus what's my payment at 6.62%?

Josh: That's right.

Joey: So the person with the assumable loan can go, "Well, I think my home's actually worth $420,000," and the payment's still gonna be lower than the neighbor at 400,000 because you have to get the loan at 6.62.

Josh: Yes. However, it takes a little bit longer to do the assumption loan itself. So you'd have to have a buyer that doesn't have the same time constraints because it's not a fast process to assume a loan either. It's not cut and dry, it does take some time. On average, it could take you about 90 days to just facilitate an assumption of a loan.

Joey: But if somebody is thinking about it, they can call in to you and you guys can look at it and tell them whether or not, or you can connect them with...

Josh: Oh, yeah. We've done them now. I mean, currently over the last couple years, we've done several transactions where the buyer was able to purchase the home and assume the existing mortgage that was on it. It was an FHA loan in that case, or both cases when those happened. And so they came in with the difference between the purchase price of the house and what the loan amount was, and they came in as that was their down payment and then they assumed the existing loan.

Joey: That's awesome.

Josh: Yeah, it was great. It saved them probably 2% or so on the mortgage rate based on what the rate was today and what it was when that original loan that they assumed was issued. So just a good situation. But if you go... Again, if we look bigger picture though, I mean, the question I think a lot of buyers are asking is like, okay, well now that rates are going down, what does this mean? And I would say most experts right now are projecting that rates going down by 1% to 2% in the short term, it's likely gonna cause the housing market to increase in value or I should say increase in cost. Value is speculative because you have inflation. But...

Joey: Well, it's also gonna depend on the markets. You know, the markets that are overbuilt, like we've talked about this before. I think I saw where Boise and Austin are examples of where a lot of people were moving there and they just went crazy with building. And so then all of a sudden, the interest rates went up and they're sitting on inventory. You don't have that in Redding and you're not gonna have that for quite some time because we don't even have, to my knowledge, and correct me if I'm wrong, I don't see any large projects, even in the early phases. It's kinda like everybody kind of slowed down and put a halt on building.

Josh: Yeah. I think, DR. Horton, which is one of the larger home builders in town, they're sitting on quite a bit of inventory.

Joey: Oh, really?

Josh: Yeah, vacant lots available to construct. And so, and there's builders in town too that are local as well that have those lots, although they're not really in the process of proactively building right now. But here's a statistic that's interesting. I just read a recent report where it stated that for every 1% that the mortgage interest rate goes down, that it actually increases the number of buyers who could purchase by 8 million nationally.

Joey: Oh, wow.

Josh: Yeah. And so when you bring the rate down by 1%, you're essentially inviting more buyers into the market. Now, the challenge that we have...

Joey: Demand going up.

Josh: Demand going up, and right now, we have a challenge, inventory is at 550...

Joey: Supply is down.

Josh: Supply is down.

Joey: Day one of economics class.

Josh: That's right. So right now you've got home inventory sitting at 550 homes for sale. You have interest rates that are going down. It's likely that the homes that are on the market today will have higher demand for them because the rates have gone down. It's really gonna get interesting as whether or not the Federal Reserve decides to pull out a scalpel next year and to carefully construct a mortgage purchasing plan where they might buy mortgage backed securities, let's say, at 4% to 5%. If they did that, what it could do is it could cause again, like I said earlier, those people with the lower interest rates to bring their homes to the market, and that could help, really help to supply the housing market.

Josh: Because when you talk about inflation, it gets kind of interesting. Inflation, one of the larger components of inflation for core inflation is housing, is shelter cost. I think it's 30%. Don't quote me on that, but I think it's about 30% of the overall core inflation number is housing or shelter cost. Right now rents are starting or are really holding, and in some markets, they're actually going up and it's because the inventory is low, there's not a lot to choose from. A lot of people are sitting on 3% mortgages, so they're like, "Well, I can't buy a house right now and the rates are a little too high, so I'm gonna go rent."

Joey: We were, I was talking to, at the Christmas party the other night, they were talking about our kids are in college, and one of them was saying how much their daughter was paying for rent in Sacramento, and she said she's paying $1,600 a month to share a one bedroom apartment with another person paying $1,600 a month.

Josh: Wow.

Joey: And I was like, "What? That's insane." That's Sacramento, that's not Manhattan, that's not downtown San Francisco. So, I mean, 'cause I'm completely in... We've talked about this before, like some of the things you've talked about is the national level, which I don't plug into because I'm like, there's too many factors, right?

Josh: Sure.

Joey: I'm just, I'm much more hyper localized. So I'm like looking at rents here, looking at inventory. That blew my mind.

Josh: Well, let's shrink it up here for a minute then. Let's touch that. So on average, according to rentdata.org, a three bedroom, two bath, about 1500 square feet with a two car garage is gonna average around $2,000 to $2,100 a month.

Joey: In Redding proper?

Josh: In Redding, correct. That is still at this point a price that's more competitive than if you were to buy that home right now with the interest rates, which is why the rental market right now is so tight. I mean, the property managers are telling us that their vacancy rates are around 6%, but that's really accounting for units that you just got back and you're remodeling, replacing carpets, painting, and then turning them back over to the rental market again. So you're gonna have some vacancy just from the normal transition. The new home market when these rates come down, I think they're probably the biggest winners in the short term. So like, if I look at interest rates right now of going down 1%, that's not really gonna help replenish the housing market with resale homes. It's gonna help builders.

Joey: Got it.

Josh: Because builders now are gonna be like, "All right, great. We have a few more buyers that can come into the market now that weren't there before." Let's say I'm a home builder that my lowest priced product is 420,000.

Joey: Which is about as entry level for a brand new home in Redding as you can possibly get.

Josh: I totally agree.

Joey: That's pushing the limit down wise.

Josh: Totally agree. That's right. But let's say two months ago, the average buyer... There was buyers that were there that were at 385,000, they just couldn't quite get there because of what they qualify for. Well, when that rate just dropped, now those folks are qualified for that home.

Joey: Got it.

Josh: And that helps that home builder go, "Great, I've now sold another property and now I can take those funds and start to build another one." And we're gonna see that here locally. I think that, again, the rates dropping 1% to 2% in the short term would be tough on housing in terms of appreciation 'cause it could cause more appreciation in the housing market, but it would help builders.

Joey: I was thinking about, there's a couple of different headlines that I've read that one of them was the iBuyers. They were talking about trying to put legislation in place to not let the iBuyers, or not necessarily the iBuyers, but these...

Josh: Institutional, yeah.

Joey: Yeah, Berkshire Hathaway, BlackRock. And I thought like, well, you kind of missed the boat because they're probably not gonna do it now. They had the foresight when interest rates were at 2.8, 3.2 to say, gobble up as much inventory as you can because the cost of money is gonna go up. And so these assets are gonna highly appreciate, so they're not, I don't think, they're probably not really in the market right now buying houses at 6.62%.

Josh: No.

Joey: So kind of passing the law now is like totally after the fact. You know what I mean?

Josh: I totally agree.

Joey: Yeah. But I saw that where they were trying to say, okay, 'cause they were such huge buyers. So I wonder what their long-term strategy is for relinquishing that inventory. Are they waiting for interest rates to maybe come down a little bit and then they start selling? Like, I wonder, do you know anything, any of these, what is their strategy? Is this like a five year hold and let go? Or is this like, no, this is forever, or what?

Josh: Well, if you take a company like BlackRock, for example, and some of the information they put out, they're forthright, and they have chosen in some cases to take some of their profits and liquidate some of their assets and re-index the portfolio a little bit. But they run everything through algorithms. So for them, they literally ran an algorithm on it I'm sure probably three or four years ago and said the best play we could do right now is gonna be to go buy real estate. They started that before COVID though. I mean, they were already buying, in larger metropolitan markets, they were already buying when rates were at 4.5%. They'd already decided that real estate was the best play.

Joey: Well, before COVID hit, I'm trying to remember the guy's name. He's a famous guy. We had talked about this in one of our earlier episodes, but I listened to him. He was brought on in like Morgan Stanley, Bear Stearns or whatever, I can't remember. These companies always merging, whatever. But he came on there and gave, they had him come in and talk and he said, "Hey, look, let me show you all the data." This would've been probably 2019 where he said, "Hey, we're gonna have a serious inventory housing shortage, and we're gonna have... There's going to be a tremendous pressure." And he basically said the 2008 crisis wiped out so much inventory, builders from building inventory at a normal pace, that it was... The pendulum was going to swing. So what was happening was based on just birth rates or what have you, he's, the idea was that we were going to have a housing shortage. And this was before the two point something percent. So I'm sure they were looking at that data saying, "Okay, housing shortage, that's... "

Josh: We knew that in 2012 though.

Joey: Okay.

Josh: Yeah. I mean, that was, because we saw all the new construction essentially stop.

Joey: Stop. Yeah.

Josh: Like you said, right? And then unfortunately you liquidated your best asset, which was the people that were building those homes. They went into other vocations. I mean, they... In our local market they went to oil fields up in the North.

Joey: Yeah. In the Dakotas.

Josh: Yeah. I mean, they did some some things and left the area in some cases to stay busy or find different work. They changed vocations altogether. Even in our local town, we have police officers that were in the construction field back in those days.

Joey: Yeah.

Josh: And so you think about it and you go, okay, well, you've liquidated your most precious asset, which was your labor. And now in the way the world is today, a lot of these kids they're not too attracted to the thought of working in 100 degree weather putting on the bags and climbing on a roof anymore too, right?

Joey: No. Yeah.

Josh: So because you liquidated that asset, that precious asset back then, now you have nobody that's kind of inspiring anybody else to get involved in it. You know what I mean? So yeah, you've got a labor shortage there. Although it's soft at the moment because obviously with interest rates being higher and us being on a downward side of, I think of a cycle, if you will. But it's just going to swing back the other way. Well, look at the other thing, look over the last three years, I don't know what our immigration is, whether it's legal or illegal, it doesn't matter. They're here.

Joey: I think it's been going down. I think it's negative. I think we're... Right? Don't we have negative immigration? I don't know. [laughter]

Josh: It's definitely not...

Joey: Channels I watch say it's negative.

Josh: Oh, okay. All right. Well, I have a feeling that it's probably sitting somewhere around 18 million, somewhere in there that's immigrated into the country. And again, it doesn't matter whether it's legal or illegal, they're here.

Joey: They have to be housed, they have to be fed, they need services, infrastructure, right? Infrastructure needs to exist.

Josh: Yeah.

Joey: That's what we're talking about, not politics.

Josh: Exactly, not politics, talking about economics of, hey...

Joey: Demand. Demand is going up.

Josh: Demand's going up.

Joey: Yeah.

Josh: And all the indicators are pointing towards it. So that's where it's at. I mean, when you look at housing right now and you look at a historical perspective, it's been at a 45 degree angle or steeper for a really long time. And I don't see anything at least in the short term that's going to change that. I mean, you could argue birth rates I guess in the future.

Joey: That's going to take quite some time to kick in.

Josh: Well, we immigrated last year. I mean, normally it takes 18 years or I'm sorry, 19 years to raise an 18 year old and that's how long it takes normally and have somebody that goes out on their own and participates in the housing market. Well, you just brought in a massive amount of people who a lot of them are already 18 years old. So we didn't have to wait all those years. That demand is today which is going to be interesting how we accommodate it.

Joey: Yeah. And that's a California thing, but it's a... I mean, it's a United States thing...

Josh: Well, that's a US thing.

Joey: Yeah, it's a US thing, but I think California is going to feel it more than Wyoming. Let's put it that way.

Josh: Well, sure. I mean, because, well, their infrastructure in Wyoming is it going to be as close enough to accommodate it, right?

Joey: That's what I mean, the pressure is going to be here.

Josh: Oh yeah.

Joey: And so it's gonna... So I think back to how we started this, interest rates going down is just going to... I think people that were selling their home, they're going to get a lot more for it this year now with, they've got a green light.

Josh: I wouldn't use the word a lot. I don't want to give the wrong perspective there because I still think...

Joey: More than zero?

Josh: Yes. And interest rates are going to play into it. So look, if the rates...

Joey: Think about what you said about the builder.

Josh: Yeah.

Joey: 385 now they can buy at 420. To me, $40,000 is a lot of money.

Josh: It is a lot of money.

Joey: You know what I mean? I don't drive a Bugatti. So $40,000 is a lot of money. Yeah, so that's what I meant by a lot.

Josh: Yeah. Well, it's going to go up. It's highly likely with rates go down and unless you bring supply on the backside of that, if rates go down...

Joey: Which is so hard to bring.

Josh: It's really hard to bring it...

Joey: Outside of...

Josh: And again, and we've talked about how you'd have to do it. It'd be great to get what we call multiple leg transactions moving again where I own a home in town, I decide I want a different home. I put my existing home up for sale, I go buy another home. So I'm taking a home out of the inventory, but I'm also providing one.

Joey: Yeah.

Josh: That works great. But that's not what's happening right now. What's happening right now is a lot of those folks don't want to put their home on the market. And so the only people we're having is family formation is contributing to it right now, to the demand side. And maybe people relocating into the area...

Joey: Also known as immigration.

Josh: Immigration. Whether it be from another area in the state or what have you, but they're coming into the area.

Joey: Sure.

Josh: But they're not relinquishing a piece of inventory locally. They're only taking a piece of inventory. It's a game of a... What's the game with the music and the chairs? Musical chairs, I think. If only they had a name for it. [laughter] Well, it's harder when you're not giving up a home. And so that's where the pressure is right now on the supply side where, and I think most buyers in the market today that are shopping are going, "Man, it's hard to find a good home," but I think there's some hope ahead. It'd be very interesting like I said, I don't mean to repeat myself too many times on this, but I would love to see the Federal Reserve pull out a scalpel.

Josh: Wouldn't it be great if they came out and said owner occupied purchasing a home will buy the mortgage backed security for an owner occupied home at between 4% and 5%. If they did that, you keep investors out of it, you're keeping secondary home purchases out of it, just help the homeowners themselves. You have more people transitioning into housing. It would reduce the pressure on the rental market and also have a corresponding effect on keeping our core inflation down. So it would be a good thing, but I'm just a lonely realtor in Redding. I'm just a cave man, I don't understand these things. [laughter]

Joey: Well, okay. So I don't know how much time we have left, but...

Josh: Like a minute or so.

Joey: We've got a minute, that's it?

Josh: Yeah.

Joey: I wanted to talk about commercial because I didn't really understand commercial. So we're gonna have to save this for next time about the whole, how's the commercial rate track with the residential rate? And then the fact that, yeah, you might...

Josh: It doesn't track with it.

Joey: It doesn't track at all?

Josh: No, it's...

Joey: Oh, okay. 'Cause I was wondering what that's going to do. And also that whole idea of the commercial rate about how, yeah, it's amortized over maybe 25 or 30 years, but it's due in five or 10. That's a, it's kind of a different kind of concept. And I wanted to go over what's the logic behind that? Like why? Why would... But I think that's way too long for a minute.

Josh: Yeah. Well, it's... How much time do we have Anthony? Anthony: Two, three minutes.

Josh: Two or three minutes? I'll give it a shot. We'll see if we can...

Joey: Okay. Let's go for it.

Josh: All right. We'll see if we can get it. So on the commercial side you're right. Normally you're going to see a five to seven year fixed on their mortgage on commercial real estate. So it's normally amortized over 25 years and then it normally has a five to seven year maturity. Their interest rates are much more tied to the Federal Reserve's discount rate, it has a lot more to do with it. And if you guys are wondering, well, what's the difference? Well, when the mortgage backed securities are being purchased by the Federal Reserve, that was almost in a separate market than the Federal Reserve's discount rate.

Joey: Yes. Okay.

Josh: And right now obviously they're very similar in terms of what the mortgage rate is on the housing side and what the Federal Reserve's discount rate is. But on the commercial side, we're hearing quotes that are anywhere on the low of maybe 8.5%, on the high of 10.

Joey: That's...

Josh: Yeah, it's tough. And it's in a shorter term debt. They might have a few other options they can look at like interest only. If they have a large down, they could do interest only payments and things like that. But there's a balloon payment at five to seven years that a lot of them are facing. We have commercial buildings locally and a lot in the state of California that are coming due and...

Joey: And they're empty.

Josh: And they're empty already.

Joey: That's... Yeah, man, that was... That's going to be tough. I wonder what's going to happen to that market. What's going to happen to all those people that have it due, the rate is insane and they don't have renters? That's kind of, the word that flashes in my mind is bankruptcy or you know what I mean? Like, what does that mean?

Josh: Well, the banks are ultimately likely going to have to take those products back. And when they do, they'll have to sell them at today's fair market value. And depending on whether or not that was a non-recourse loan or not, the investor that owns that building will have to make that decision. But a lot of the folks up here in our county that own commercial buildings, they have their own name on the line too. When you think about institutional investing, buying big sky-rise buildings in San Francisco or whatever, a lot of those there's a a veil between their personal assets and that investment itself.

Joey: Yes.

Josh: In this situation, a lot of folks here in town, they own a building, they have a business, their name is on the line for that mortgage payment. And if they don't make it, they're going to likely have the building get sold in foreclosure. And there's a potential... Significant potential for some recourse.

Joey: I'd like us to talk about that next month and just maybe some impact, if you can get some numbers and stuff like that, because I feel like that's about to hit Redding, hit everywhere but I think like housing, because I can think of several people I know that own a small business and they are one of the units in like a five unit commercial. You know what I mean? So they're... It's not just...

Josh: Well, and that's a little bit of a different situation. So let's say my building is already full. And that's great, it's full. No problem. I'm collecting in $10,000 a month, my mortgage on it was $13,000 a month and I was collecting... Or I'm sorry, I was collecting 10,000 and my mortgage was only 8,000. And the bank was fine. But now that I'm going to refinance and the bank is saying, "No, no, no, no. If you're collecting 10,000 a month, we're going to want to see that your debt services may be 6,500 to 7,000 a month."

Joey: And the interest rate going up to possibly 10%, that's not going to happen.

Josh: Yeah, exactly.

Joey: It's what I mean.

Josh: So they can't refinance it at today's rates based on what they had it on before, they can't... The debt service ratio is all out of whack. And so they're forced to come in, it's like a cash call, basically. They have to come in with money, pay down that principal balance enough that when they refinance to the new rate, it meets that formula. And very, very hard to do right now. Extremely hard to do.

Joey: So that's on the horizon. Well, I think that's all the time we have. And so merry Christmas, happy New Year, happy holidays. Right?

Josh: Merry Christmas, happy New Year.

Joey: Yeah. So I'll see you next year.

Josh: All right. Looking forward to it.

Joey: Thank you, Josh.

Josh: Yeah. Thanks everybody.

Joey: Have a good one.

Josh: Take care.

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