Josh Barker Real Estate Podcast #26

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Transcription of the Podcast Episode #26

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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.

Josh: I mean, right now, one of the things that's really standing out is that our home inventory is down.

Joey: It has been for some time though, but we're talking really down.

Josh: Yeah. We're still under 500 though. And it's... I mean the buyers out there in the marketplace are filling right now 'cause when you're out there shopping for a home right now, there's not a lot to choose from. And granted, it's early January, so, you don't expect it to see tons of inventory until spring, but it's pretty tight and most people out there are feeling it.

Joey: And interest rates have come down so that's just sparked more buyers, given them a little, the buyers a little bit more buying power. I was... What is it right now? Is it in the mid sixes?

Josh: Yeah, it's high sixes right now.

Joey: High sixes?

Josh: Yeah.

Joey: And then it was, it got as bad as eight. I was seeing something the other day, and I know that the feds said, "Hey, look, we have plans on lowering... " They flat out came out and said they have plans on lowering it again in 2024. I mean, they did say it right?

Josh: Well, they did. They said that they plan on doing it at least three times. There's all kinds of projections on what they're going to do. I think they will likely lower the interest rates next year. Question is when and by how much, right?

Joey: Yeah.

Josh: So, if they only reduce it by a quarter basis point, let's say in March, that's not going to have a huge corresponding effect in the market. I mean, it sends a signal that they're anticipating inflation slowing down everything else, but inflation numbers that came out, what, a week and a half ago?

Joey: Yeah.

Josh: Something like that. I think it was 3.9, projection was 3.8. That's not so bad.

Joey: No.

Josh: But the core CPI was actually a little bit lower than what they expected. So, I don't, it seems like things are going in the right direction.

Joey: Because low inventory, if interest rates were to come down even a little bit, because I think the psychological part of them saying, "Hey, interest rates are a little bit lower." Cause all the lenders are going to be communicating with their buyers. And they's going to say, "Hey, rates just went down." Even if it's a quarter percent, I think it's going to put a little bit of pressure to be like, you better get it now.

Josh: Right.

Joey: Right?

Josh: Well, I think what most buyers need to understand is that what the price for a home is today and what the interest rate is today will change. Because by next year when rates go down, typically that causes home prices to go up because people can afford more. And so, the question you have to ask yourself is, would I rather buy a house right now at a lower price at a higher interest rate and then refinance, or wait till later when I can buy a house maybe at a higher price, but a lower interest rate? And that's a decision that people have to make for themselves based on what their needs are.

Joey: So inventory's very low. That probably means that there's not a lot of real estate transactions taking place, or it's...

Josh: Yeah, it's pretty crazy. I haven't seen it this low in a while. Right now, the total pendings in the Shasta County MLS for residential is under 200.

Joey: Wow.

Josh: And if you think about it, I think... I don't know for sure, but I think we have like eight or 900 real estate agent participants in the multiple listing service. And so, if you think about 200 pendings with that many agents, there's a lot of people not working right now. And we're starting to see people making some pretty tough decisions about whether or not this is the career that they chose is the one they're going to stick with. So, only time will tell.

Joey: Well, real estate is, you hear this all the time. Real estate is highly cyclical, right?

Josh: Sure.

Joey: It's constantly in this cycle. And we went through clearly the good part of the circle, the incline, the last few years with interest rates and stuff, it was, and so it's naturally that it comes back down. No inventory, low inventory, high interest rates, all the pressure to push people out of the market.

Josh: Oh, yeah. I mean, it's been like this for years. I mean, when the inventory goes down and when the sales volume declines, it's typically the professional agents, the ones that are in it full-time and have really truly made a decision or a commitment to doing real estate at the highest level, they're the ones that are here. And then when the volumes start to pick up, that's when you start to see a whole lot of additional agents come into the industry. It's not unique to this period of time, but right now we're on the downside of a transaction cycle, meaning than there's fewer transactions right now than there was last year. Last year was lower than the year before. And so right now, obviously there's a lot of agents right now that if you can't pay your bills, you've got to go find another job.

Joey: And we talked about this, there are some really unique factors. So yes, real estate's cyclical, but there's some stuff going on right now that we've never seen before. And a big part of that is there are so many people that own homes that under normal circumstances, they'd be like, it's time to downsize. It's time to upsize. But they're like, hey, I'm sitting on 2.9, 3.2%. Interest rates are, even though they've come down, they're still at the high sixes. They're just, they're not good. The inventory that normally would come to the market won't come to the market.

Josh: No. I think most people that are... Have options are not going to relinquish a 3% interest rate. They might keep their houses a rental and maybe go buy another one, but it's not going to relinquish that as a new piece of home inventory to go to the market. I mean, the folks that we're seeing right now, people that, they're like, hey, this house is way too small. We've got to expand. So, maybe family formation or the growth of a household. I mean, that might trigger an event to sell a home and buy another one. You might have unfortunately, maybe a divorce, job change, job transfer, maybe you had a rental property that's not performing as well as it did in the past in the short term rental market or something, and so you're deciding to relinquish it now. But there's not as many of those, what we call multiple leg transactions happening, where a seller goes, you know what? I like what I'm seeing out there on the market right now. I think I like that house a little bit better than this one. Let's go ahead and put our house up for sale and buy that other one. That's a tough one. Those are the kinds of transactions that we're not seeing as many of.

Joey: And that's, when you think about what brings inventory to the market, you basically have two types. You either have that, someone that has an existing house, whatever factor, whatever reason why they need to bring the house to market. And the other one is building. And both of those are stifled, super stifled.

Josh: Yeah. New construction's tough right now. Actually we just started representing a really large national home builder here in town on a property for them. And maybe it'll turn into more, I don't know. But they seem to be the only show in town that's able to build a home at an affordable price for the consumer. The cost of construction's higher, labor's still high. It's challenging for developers to buy a property, develop the property, build a home on it, and then of course offer it to the market at a price that buyers can afford. It's a tough challenge, and it is a professionals' market right now for sure.

Joey: So, okay. So we don't... We're not going to see any brand new inventory, meaning new homes hit the market anytime soon.

Josh: Not a lot. Yeah, not a lot.

Joey: And here's the thing is that takes so long to replenish, because if a bunch of builders decided today, it's going to be at least 12 months, if not more, unless they have all their infrastructure ready before they have, and even then, it's going to take a while for that to hit.

Josh: Yeah. And the construction industry, man, it's going to be an interesting season that we're moving into because if you think about it here for us, here locally in Shasta County, we had the car fire. And then right after that we had the Paradise fire. And then there was of course a couple of fires that happened in the Napa area as well. So you had this huge impact on overall housing that really in Shasta County triggered a housing boom, and it started since the car fire. Because right when that started to slow down where a lot of those infill lots had been rebuilt, all of a sudden we get hit by COVID. And then interest rates drop and now builders are able to build again.

Josh: So then there's a whole lot more new construction going on in that regard because of the lower rate environment. And so now you have that piece of it. Now we're at this far side of it where obviously a lot of those higher damage homes have been rebuilt, interest rates now at a much higher rate, and contractors are beginning to slow down. And so the question is, will that correspond to a lower labor market? Will it correspond to lower costs for supplies and materials? And they have come down some, but not enough to bridge the gap of affordability for the average buyer.

Joey: Yeah. And so many of those homes, if you were to look at probably 2018, '19, '20, and '21, you're going to see all these homes built, but so many of them were replacing the homes that were destroyed.

Josh: That's right.

Joey: It wasn't new inventory, it wasn't like some of the cities that overbuilt. It was no, we're just trying to go back to where we were.

Josh: Exactly.

Joey: We got so many wiped off the table.

Josh: You're right.

Joey: And that, all that pressure combined with the interest rate, there wasn't a lot of new construction going on that was actually new inventory. It was replaced inventory, which... And we had a labor shortage. Man, what a bunch of variables that got thrown at once, right?

Josh: Oh man. Yeah. And I think the leather one you can think about too is just like foreclosures, I've been getting asked that a lot lately. It's just, what does the foreclosure market look like and...

Joey: What does it look like?

Josh: Well, it's starting to climb a little bit. I mean, a couple months ago we were probably in the 150, 160 range for total single family homes in some stage of foreclosure in the county. Right now we're like at 190, 195, for total homes that are in some stage of foreclosure. And something you got to remember is that foreclosures, just 'cause you're in a stage of foreclosure, doesn't mean you're going to foreclose. You fall into a notice of default that puts on somebody's radar. They start communicating with you about loan modification or perhaps some other solutions. Maybe you come in with the money necessary to reinstate your loan and get back on track, or you decide to liquidate the property altogether instead of even thinking about letting it go to the stage of foreclosure. So it's unlikely that much more than maybe 30, 35% of what I just stated would even make it to the actual foreclosure process. But it is growing. And so if people are curious, what does that number look like? Well, right now it's in the 190s, in the county for single family, it has grown a little bit, maybe 10% or 15% maybe, over the last 60 days. And the question, will that trend continue?

Joey: That ratio of 190 in the foreclosure process to less than 500 inventory, man, that seems like a huge... The number of homes that are potentially coming to foreclosure versus inventory, it's... That to me is a tremendous opportunity for if you're in that process, that you can get out of that process by selling your home versus when there's a glut of inventory, there's no negotiating room, it sounds like, if you're potentially in that space right now, there are some variables, some factors that are in your favor...

Josh: Yeah. There's...

Joey: That wouldn't normally be in your favor at all.

Josh: That's true. I totally agree. And some of those folks that are in that stage, they will have the option if they choose to sell the property and solve the problem altogether.

Joey: But they need to be proactive?

Josh: They do have to be proactive. 'Cause every month that you miss a payment, essentially, you're just adding that onto your loan balance. And so when you go to sell the property, not only have you diminished your credit more, but you know you're still going to be paying it anyway when you go to sell. So yeah, if you're falling behind in your payments and you think you have equity in your home, it might make some sense to get ahead of it and consider selling the property while you can, and putting that money in your pocket instead of giving it to a banker or an investor. There is one thing though this brings up though. There's a trend that's been growing here locally, which is called subject to where we're getting offers multiple times a week. In fact, it's to the point where I just did a little video here a couple days ago, just trying to get this word out to the marketplace. Like, hey, subject to's are not everything you think they are. You got to watch out and make sure you make good decisions around that, you know what you're doing.

Josh: But essentially what's happening is you have folks that, let's say they don't have a lot of equity in their home, for whatever reason, they're not able to keep up with their payments or they're concerned that they may not be able to. And for that reason, they're getting offers from investors that are saying, "Hey, well why don't you just deed me your house and then I'll make your mortgage payment for you?" And it's called subject to, basically subject to the existing loan.

Josh: What a lot of folks don't understand though with these types of loans is that once I deed you my property, if you don't make the mortgage payment for me, then I'm going to start falling behind on my mortgage payments It's going to affect my credit negatively. Which means that I only have a couple options, make the payment for you even though I don't own it anymore, or try to have some sort of a legal remedy, hire an attorney and try to sue for the fact that you didn't make the payment you said you'd make. But it's not as easy as just foreclosing 'cause I don't own the property anymore.

Joey: Wow.

Josh: Yeah.

Joey: That's sticky.

Josh: It's tough. It's tough. And the flip side of this ting too that you got to think about is that, some of these folks, they don't realize that when they go to try to buy another home in the future, if that loan's still existing, they're going to have a hard time getting credit. I mean, if you want to go buy a car, you might have a hard time. If you want to go buy another house, you might have a hard time because you still have this loan out there that somebody else is paying on. There is one other thing that's a concern about it, is that normally when you sell a property, unless you're a government insured loan like an FHA or a VA, most conventional loans have what's called a due on sale clause. Which means I deed the property to you, subject to the loan that's on it.

Josh: But once the lender finds out I sold it, they oftentimes, they're going to foreclose on you anyway because they have what's called a due on sale. Meaning once you sell that property, they have the right to foreclose on that note. And I've had a little bit of pushback from agents going, oh, why would they do that? And it's like, well, let me ask you a question. If I had a note out there at 3% and now you sold the property and I have a chance to call that note due and take that money back and go loan it out again right now at today's rates at 6.5 or 7%, what are you going to do?

Joey: Yeah.

Josh: And that's what's subject to...

Joey: Yeah. Banks normally do the right thing, Josh. [laughter]

Joey: They normally do the moral thing. I don't think profits. [laughter]

Joey: I think that's a side effect of them doing the right thing all the time, is they just make money, right?

Josh: That's pretty good. Yeah. Yeah.

Joey: I was drinking Kool-Aid earlier and...

Josh: Well, it's a concern. I mean, I think that when I look at subject to, I think, oh boy, that's, that's not going to be...

Joey: Is there any... Well, can you think of any instance where you're like, okay, yeah, subject to, that'll work. Or is it like, man, you're really just, you're gambling?

Josh: Well, we had one, it's about maybe three or four months ago. It didn't close. And I think that the person that was purchasing it didn't, decided they didn't like the way that we were going to structure it. And what it was is that, somebody had proposed a subject to, the client was interested in doing it. And I came back and said, well, maybe what you could do then is why don't you put a note on that property, a first deed of trust that exceeds the note amount that they're assuming. Okay? That way if they failed to make the mortgage payment or make that payment to you...

Joey: You can foreclose.

Josh: You can foreclose.

Joey: Oh, that's brilliant.

Josh: Yeah. And so that was one way we structured. Of course the investor didn't like it, 'cause they're like, well, wait a minute. Well, then you retain the right to foreclose. I'm like, well, yeah. That's what the property owner should be able to do if you fail to make the payment.

Joey: Only if you don't make payment.

Josh: Yeah.

Joey: Yeah. Wow. Talk about bad faith.

Josh: Well, and this is where... This is what's getting interesting. My wife and I were talking about it the other night where there's just been this massive drain of experience and knowledge in the industry right now. It's not good. I got to be very honest, it's not good. There's... People don't know how, and I say people, I'm going to rephrase that. There's a lot of agents that have never been taught how to actually facilitate real estate. And outside of just the normal standard purchase contractor, you know what I mean like, people didn't know what subject to was. It's not new. It's been around for years. It's been here since I got into the business 23 years ago. And it was, 70s and 80s there was some of, a lot of loans were assumable, so people had to do things that way. I mean, this, none of it's new. But what we're noticing now is that mortgage companies, real estate companies, title companies, a lot of their experienced people who have been doing this for 20 years, 30 years, they're starting to retire.

Joey: Yeah.

Josh: And with that, all that knowledge is getting pulled out with them.

Joey: You're starting to see some of the local brokerages, they seem to be consolidating or going away, or, I mean, I don't know if you run the reports or anything like that on that, but is that's what seems like is happening 'cause you're not seeing any of their marketing material you don't see them anymore. It's like they disappeared.

Josh: Yeah. It's not... Well, if you look at the real estate brokers world, I don't mean to turn this into a lesson on brokers or anything, but if you look at the real estate brokers world of the 70s and 80s, what you had was you had a broker, and typically a sales manager that was in the building. And transactions that were formulated and created in those offices were overseen by people. I mean, the brokers were involved in transactions. They carried liability. They carried the responsibility. Oftentimes they carried their name on it. And as a result of that, they were micromanaging a lot of the business that was going in and out those doors. Well, somewhere around late 80s, 90s, there were some companies that came in and they, basically, what they did was they said, okay, well, we're going to offer our agents a higher compensation.

Josh: And so there were these companies, I don't want to bring up the names, it doesn't matter, but these companies that came in and offered hiring compensation for agents. So come to our company, we'll pay you more. And what they did was over time is that they started paying the agents more, but they started eliminating middle level management. They started eliminating oversight. And so that way they could have their agents get paid more. They just reduced their profit and loss statement by reducing the amount of oversight that was taking place. And...

Joey: Quality assurance.

Josh: Quality assurance, all of it.

Joey: Production goes up. That's common. Quality assurance comes down. That's universal in business.

Josh: That's right. And they pushed the responsibility of lead generation onto the agent. The broker slowed it down, stopped doing it. That's why you're saying, well, I don't see a lot of these officers anymore. That's 'cause they're pushing it all onto the agent. And the agent doesn't want to spend the money on it. And so it's not happening. And so now what you have today, and the most recent developments over the last five, six years is that we have what was called our cloud-based brokerages. Which, they're typically not local...

Joey: Big rise of those.

Josh: Yeah.

Joey: There was a couple of big ones, but now there's a lot.

Josh: There is, yeah. And they're typically not locally owned or anything like that. You're going to have this glimeth, massive company that's national. And then in each state, they'll put a broker as the on for that state.

Joey: For the whole state?

Josh: Yeah. In a lot of cases for the whole state. Some of them are starting to add a few more brokers because of the amount of challenges I'm assuming that they probably are enduring from it. And then the agents are basically, they just log in to a virtual brokerage. Which makes that company incredibly efficient in terms of operational standpoint because you've basically eliminated brick and mortar, you've eliminated a lot of the middle level management. You've centralized your transaction management. You've centralized of your oversight. And so, now you're offering your agents a really high commission split or what have you. But unfortunately, agents don't have anybody physically around them teaching them, guiding them. Like to our example earlier about how to structure a deal where it protects your client. You don't have a whole lot of that going on anymore.

Joey: There's no oversight.

Josh: There's very little oversight. And that's the challenge that you run into with these new environments. And we're going to have to wait to see how the industry goes now because, I can tell you that the way that we do our business here, it's a lot different. Because we obviously have, myself, I got four brokers in the office. We have a sales manager on staff, and we're overseeing everything that goes in and out of this building all the time. And not that we're perfect people by any means, but we catch a lot. And I couldn't sleep at night if I had to think about having agents doing business all the time without that oversight. I don't know if I could sleep at night.

Joey: Yeah. I think this it's probably always happened, but it's more now than ever is when you go through that great cycle, like you said, all these people are attracted to real estate. They don't have that, you can't... Real estate is one of those things that on the surface you're like, Hey, it's just marketing. It's like, no, there's so much legality. What you just talked about, about the client that was going to do the subject to. And you knew enough to say, "Hey, what we need to do is make sure we structure it so you're carrying the first." And then of course, the buyer backs out, which just goes to show you, like I said, that's bad faith. I'm sorry. But it's like, well, there's, it's only a problem if you don't make the payment. [laughter]

Joey: Exactly. That's what we were planning on doing. Goodbye. Forget you. Like, okay. There's no way the average... Somebody that's only been in the industry one or two years, how are they going to know that? I mean, that's legal. That's deep in the contract.

Josh: Well, and that is the top part. If you don't have oversight, then you truly don't... If you're an agent that's newer in the business, or even if you've been around for a while, but you haven't done a lot of business, if you don't know what you don't know, how would you know to ask?

Joey: There you go.

Josh: And that's where good team environments, and I don't need this turning into a program for that. But in a good brokerage or a good team environment where you have that oversight, you see these trends with your agents where you're like, okay, they don't know about this particular type of transaction. Let's train the whole company around this transaction. Let's make sure they understand it so that when they see it in the future, they have a better way of serving the client.

Josh: And it's those kinds of best practices that get captured in those environments. But there's this new cloud-based brokerage world, unfortunately, I just don't see, I mean it's, there's a reason why we're not doing it, for us. And it's just 'cause we're, we'd rather just be a locally owned, I always call it a boutique real estate company focused on just really high value service and value to the customer. And we probably micromanage more than most in terms of what we send in and out of the building.

Joey: But that's quality assurance.

Josh: I think so.

Joey: That's what we talked about. Yeah.

Josh: Yeah. Yeah. So that's where that's going to go. I didn't mean to diverse too much, but...

Joey: No, that was awesome.

Josh: Yeah. I got a buyer in park one.

Joey: Buyer in park one.

Josh: That's wonderful.

Joey: Perfect timing, Josh. Hey, I want to thank you for your time, January.

Josh: Thank you too.

Joey: I'll see you in February and happy new year to everybody. Thanks a lot, Josh.

Josh: Yeah, thanks a lot. Happy New Year buddy.

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