Josh Barker Real Estate Podcast #30

Find Rent Data - rentdata.org 💵🏘❓

Transcription of the Podcast Episode #30

The transcription is auto-generated by a program and may not be accurate to the conversation. To ensure you get all the information from the video properly, you must watch the video.

Joey: So it is May of 2024. Doesn't that sound crazy to say that?

Josh: Time is flying.

Joey: It seems like only a year ago; it was May of 2023, just, no, but it's fast, man.

Josh: It is fast.

Joey: Like the year's almost we're, it's almost, next month is halfway through the year.

Josh: I know.

Joey: And we were talking about where the market was before the camera started, like how the numbers were. The good news is inventory's starting to climb a little bit. Because that's been, I mean, we went, what did we see you, you gave me some percentage, but how many more houses went to market?

Josh: Well, the home inventory was under 500 a month ago, and within 30 days, it increased by almost 25%. It's currently sitting around 630.

Joey: Do you happen? I'm going to put you on the spot. Do you know that rate or how many months, like, at this current rate, if no more houses came, you'd be, you'd replenish, inventory replenishment rate? Right. Did I do that right?

Josh: Yeah, that sounds right.

Joey: Where are we right now? Are we still in that super seller's market?

Josh: We're sitting in the mid-three for absorption rate.

Joey: Okay. So it's neutral.

Josh: It is, yeah. And so even though the inventory has jumped, which is good for home buyers because they have more to choose from, the sales volume has yet to jump with it. We haven't gotten that "spring rush" we're used to. Part of it was because interest rates were in the high sevens early in the month. There were a few days there where they were quoting 8%.

Joey: Wow.

Josh: Even interest rates are now quoting down and closer to the 7% range.

Joey: And I mean, I know that we, it was probably about seven, eight months ago, all the pointers were saying, Hey, they're going to lower interest rates a couple of times, and then inflation rates came back out, and they're like, no. Now, it's not only they that will not lower them.

Josh: Yeah.

Joey: But they might even raise them.

Josh: Yeah. There's a possibility of that. So this last week, they've been coming in with the core inflation and then the CPI, which is the normal inflationary rate, and looking at those numbers, they came in just a bit over what the expectations were. But the challenge is that it's going up. And so year over year, we're still up, which is more than what the Fed wants. Right. So that tells the. It tells us what interest rates are in the industry. We're likely not to see an interest rate cut from the Federal Reserve anytime soon. And if we do see it, it will be closer to the end of the year.

Joey: So, interest rates, the higher the interest rates, it usually pushes the market down. But the writing's inventory could be higher. Is our price still rising on average?

Josh: Home prices overall, anywhere, are not arising. Normally, in the fall, you see the market give back a bit in value. And then, in the spring, optimistic sellers come to the market. They tested the market a bit, and the price was slightly higher than the recent comps to see if they could get it. This year, interest rates are elevated like they are, inventory is now growing, and sales remain the same. I doubt we will see much appreciation this year. I expect that we won't see much. The only thing that could change that, in my view, would be if interest rates were to drop if we get into the mid-sixers or something with interest rates, then yes, that will impact home value.

Joey: Well, I remember we were talking about. I am trying to remember when the report came out, but CBS published it. It was a report based on, I think, a company called CoreLogic, which covers real estate companies that have all the data.

Josh: Sure.

Joey: The average consumer needs to learn about CoreLogic, but they run a lot of real estate data and have many products.

Josh: Yep.

Joey: And they, Redding, was like, oh yeah, it's going to be the number one residential appreciation for the United States.

Josh: Oh yeah.

Joey: 2024.

Josh: Yeah. I mean.

Joey: Does that look different from a bad prediction?

Josh: Well, I think a lot of the projections from CoreLogic that got republished by CBS News and all the agents got all excited about it was with the anticipation that interest rates, mortgage rates were going to go down because a market like ours, we're so, there's so much financing involved in our home purchases. Over 80% of all of our purchases involve some financing. So, interest rates majorly affect what a property sells for. And so when CoreLogic assumed that the interest rates would drop, which they didn't, they thought they were going to a place like Redding, California, where there are so many people with mortgages, they were anticipating the property prices would go up. But we haven't had that interest rate drop that everybody expected. And it will likely be something we'll see happening closer to the end of the year.

Joey: And you were talking about in your market update that there was an increase in building permits pulled, which was.

Josh: Yeah.

Joey: A good, because 2023, it was like, in 2023, there were a little over 70 permits pulled. The year before was like 220 something. So we saw a reduction of about 67%.

Josh: Yes. Monster reduction year over year of last year. And then this year, we've had a little uptick in the first quarter. We were in the mid-20s for permits pulled in the previous year, and it was like seven or something. So it's much better right now. However, those numbers still need to come closer to what is necessary to replenish the housing market. A couple of builders in town are doing their very best to bring products to market. The one that's the most active in the market right now is DR Horton, whose tagline is the. They're the number one national home builder in terms of units built. They built 87,000 properties in 2023 in the country. So they're active that way. Their product is nice for what you get. I mean, they're brave. To be trying to introduce a product to the market right now with all the headwinds they're dealing with, the homes are. They're designed in a way that keeps costs down.

Josh: At the same time, they are offering a new home to the market, which the city of Redding wants to see. They've got a lot of pressure from the state of California of, hey, build houses, build houses, build houses. But the city doesn't build houses. They need to have developers buying property and developing and building houses. So.

Joey: Is the city doing anything to help, like, stimulate that at all? Are they cutting any fees, or are they just saying, Hey, build a house?

Josh: That's a good question. Then, in the last several years, the state of California has been signing some legislation that's made it easier for the city to go in and do things like rezone and modify their existing general plan where before it would've taken an amendment that would've been at the executive level and then voted on. Where is the law of the land in California now? So they're, it's easier for them to go in and re-designate the property, change the zoning, and make it a higher density zoning than what it could have been in the past. AD Uses is an example of how you would find it challenging to rent your property before, whereas today, they want you to. So, things like that are happening. But no, the fees are not coming down for the home builder. No, not at all. And if you add the regulations the state's imposing as well in terms of what they want people to put in these homes, it's just driving the cost up.

Joey: Well, I know two main factors affect the inflation rate. More money was circulating in the market, which would cause inflation. However, the other thing was that the supply chains were all pinched during COVID.

Josh: Yeah.

Joey: And that's given way. What about like the housing materials? Are we seeing any relief, or is that like, No, whatever relief we saw, inflation picked it up?

Josh: Well, we have had. The scarcity of those products initially causes massive inflation. Those supply chains, for the most part, except when you get into circuit panels, breakers, fuses, etc. When you get into some commercial construction situations, there's a huge wait time, six months, to get what they need. Right?

Joey: I didn't know that.

Josh: Yeah. So, some components are backed up. But a lot of that has to do with, like I said, circuit breakers and circuit panels and some of those types of things. There's just a bottleneck there. However, for many other materials, the prices have decreased considerably compared to what they were at one point. Do I? At this point, they are probably ticking up with inflation. But that's. And the labor side of it, although we have yet to see labor prices dropping, what I am hearing from general contractors who do go out to bid to subcontractors, those subcontractors before you had to call them and see if they're interested in bidding your job. Right.

Joey: Yeah.

Josh: Well, now those subcontractors are calling the general contractors and asking if they have any bids I can bid. Right. So now that conversation.

Joey: So labor should go down a little bit. Would you think of a competitive bid structure?

Josh: The conversation's shifting. Now, the subcontractors calling the contractor were before we had to be the other way around. And that could lead to a lowering of wages if. To be competitive is just who cuts first. Right. But you know, the last time we had a major reduction in labor was different from the last time, but we lost a lot of people in the trades.

Joey: Yeah. You're talking about 2008 and 2010, right?

Josh: Yeah. They left the state, went to other markets that were still building, or went into the oil fields up in the Dakotas. Unfortunately, there was a lot of movement out of the construction field at that time. Hopefully, that doesn't happen this time because when you lose skilled labor, it's really hard to reintroduce it into the market. It takes too long.

Joey: So, okay. We talked about inventory replenishment and new construction. That's the obvious one. And although that's ticking up a little bit, it's still low.

Josh: Yeah.

Joey: The other side is people that have homes are saying, Hey, I want to sell my home. I either want to upgrade or downgrade. Right?

Josh: Yeah. Only a few of them, though.

Joey: Yeah. Because of the whole interest rate, these people are sitting on two. A two and three-quarter to under 4% interest rate. And as you just said at the beginning of the month, interest rates were flirting with 8%, and even though they've come down to mid-sevens or low-sevens, that's still a huge jump.

Josh: Yeah.

Joey: So where is inventory? When you say, what, did inventory go up 20, 25% in a month?

Josh: It did.

Joey: Who's selling?

Josh: Yeah, that's a really good question too. So what's, who's selling right now, has changed a lot. So we, the sellers, used to have multiple leg transactions where a seller would sell their home. So that's providing a piece of inventory to the market, and they would buy another home, which would create another sale there, whether they were upgrading, downgrading, or moving to another type of situation. Those types of transactions still need to be higher. What's happening right now is we're seeing things like, let's say, a divorce situation. In the past, in a divorce, maybe a husband and wife, one would buy the other out. Okay?

Josh: And when that happened, the interest rates were low enough that somebody could do that. Well, today, if a couple decides to split, and one wants to buy the other one out, in many cases, they can't afford the new interest rate to do it, which means that the property's going to get liquidated. Right. Another one is the short-term rental market properties. So, some of these properties anticipated our higher cash flow and needed to achieve that goal. And so when they.

Joey: They're like Airbnb-type stuff.

Josh: Yes. Yeah. Like Airbnbs. Looking at the long-term rental market, that projection is less strong than the short-term one. And so they're going, let's liquidate the asset instead of holding it. Another one is still probate. That's still consistent. People do pass on, unfortunately, and those properties do come to market. Then, we saw some modifications in the rental markets itself. So, even in the long-term rental markets, some are also being transitioned to resale. The executive branch is trying to propose a first-time home buyer credit. We don't have all the white papers on that yet, but they're trying to do some things to incentivize. However, it's this darn interest rate. They need to make it easier for buyers to enter the market. It's making it difficult for a seller to relinquish a lower late rate you mentioned earlier. And so it's slowing the whole thing down.

Joey: My brother-in-law, he, some money came his way, and we were talking, and he has a 3.2%, and I was like, don't ever pay, you pay that off at the minimum time. Like, you will, do not take that money, take the money because he could pay his house off. It's like, no, no, no. Go, get a CD. CDs are over 5%. But don't pay off. Don't go cash out at 3.2%.

Josh: That's right.

Joey: Mortgage.

Josh: Yeah.

Joey: I mean, you're not. You're never going to get that money again. I feel bad because I wish I had, at that time, just gone and bought something I should have. What do I mean when money's darn near free?

Josh: Sure.

Joey: Borrow. Right. Because now you'd be sitting on, and many people did that.

Josh: Yep.

Joey: In Redding, something else we talked about a minute ago, you just kind of alluded to, you talked about commercial. How does the commercial inventory look? When I drive around town, there are a lot of empty commercials. Do you know what I mean? There are a lot of signs.

Josh: Yeah. It's interesting. So, it depends on what you have. So, the strip mall situation, right?

Joey: Mm-Hmm.

Josh: Retail, larger box retail primarily. It's a really hard time. You know, we've got shopping centers sitting vacant still. We have the office Max and the Barnes and Noble. Right. Those are. The old Barnes and Noble, not the new one. Those are huge box retail stores, and they're not; they're not getting leased out very quickly.

Joey: That rail's the old rail that's been still sitting empty for a long time. It's huge.

Josh: Yeah. It is. If you will, it is a well-managed, small retail mall where the units are smaller. It is less of an issue than the Shasta Center here off Churn Creek. It's almost awful. It's well managed, though, too. So the owner's always on site, so he's making sure to communicate with all of the tenants all the time. And he is always proactive about who's coming in next. That part's okay if you look at commercial construction or buildings that still need to be improved and need that facelift. There is only a little activity on those right now, too. Even old or newer construction with no TI right now is moving slower. And again, because it requires a lot of capital to get it started. And with the interest rates where they're today unless you're paying cash for those improvements, you'll pay a pretty penny to get them in.

Joey: And what are commercial rates? Historically, commercial rates have been slightly higher than residential rates.

Josh: No, I don't think so. So, I just leased out a, and I only do a little leasing, but I helped a friend out here recently on a commercial building, and we've leased out 2100 square feet for $3500. And it was about $1.50 a foot or so, and it was in good condition, move-in ready. It had private offices, nice flooring, carpet, paint, and everything else. There was nothing that the tenant needed to do when they moved in but secure a three-year lease at that price. It took me seven or eight days to find a person with enough interest and who wanted to take it so that property type was available. Well, it was liquidated quickly.

Joey: Yeah. Real quick.

Josh: Yeah. With no issues. And I was surprised because it might sit a little longer than that, but it didn't. And there isn't a lot of office space in good condition and move-in ready where somebody doesn't have to come out of pocket to make it work. That's a big reason why those units are going fairly quickly. But if you look at houses, for example, let's take the average three-bedroom, two-bath, two-car garage, about 1400 square feet. I think rentdata.org would tell you it's probably $2100 a month.

Joey: Wow.

Josh: For 1400 square feet.

Joey: That's crazy.

Josh: Yeah. And so, I need to find out what that price is per square foot.

Joey: $1.50, wouldn't it?

Josh: Pretty similar. Yeah. So here's your answer to your question. Yeah.

Joey: Wow. That's man. $ 2100 for a 1400 square foot, three bedroom, two bath, sounds crazy.

Josh: Single-family home. That's the average, too. There's one that is paying more.

Joey: Wow. I lost my voice. It got me clumped with that data. So looking forward, looking forward to, what will the summer be like in terms of interest rates? There's, they do it every quarter, so. Right. Like the interest rate either goes up or down. Yeah. By the quarter, as far as the Feds are concerned,

Josh: Yeah. Well, if they're going to do anything.

Joey: Yeah. So the next one is in June—next month.

Josh: Yeah. So there's another conversation they'll have in June. We just had the, they just came out and said they're not doing anything. So, most of the tea leaves are pointing towards. If the data continues to come in the way it is right now, there's probably not going to be any incentive for them to cut rates at all. There would have to be a significant change in the fact pattern between now and then before they do that. And could a report coming out between now and then cause that? I don't see rates modifying too much from the Federal Reserve's perspective. Still, interest rates are interesting, and mortgage interest rates are interesting because a lot of them have to do with what investors think the long-term bond is going to do in the future. So, for example, if I don't know. Our listeners, I want to ensure a podcast is completed correctly, but the rate for a 30-year bond is tied to a mortgage rate, right?

Joey: Mm-Hmm.

Josh: That has to do with the future expectations for what that bond will be. So, if the bond today is at a 30-year low, seven is what those numbers are. If they anticipate that it's likely to be 5% in the future, then they will buy more of them. They're going to buy the bond at seven right now.

Joey: Yeah, of course.

Josh: But the more that buy the bond at seven right now, the lower the price because it's all about supply and demand. So if more people want it at seven, then the rate comes down slightly to about high sixes, and then you see how many people want to buy at high sixes until it levels itself out.

Joey: Yeah.

Josh: Right. And so.

Joey: Does it ever really level out or just swing back and forth?

Josh: No, it always swings. Yeah. But we were in the mid-force for years. Yeah. We had almost a 10-year run at four and a half percent. So you owned your home at four points a half when you decided to sell it. You got a new house at four and a half, and when you sold that home, you got another one at four and a half. You know what I mean? So, it was super stable on the financing side. And that has been completely out of balance recently. Most of our buyers are now coming in, Including our local buyers, but our feeder markets are in California.

Josh: So Sacramento, the Bay Area, southern California, and the middle of the valley are getting priced out of their markets there. They might have a job that allows them some flexibility or take a job up here. And our housing is usually less expensive than the rest of the state.

Joey: Oh, yeah, by far. I can't imagine a market that has hospitals, a Costco, and the various amenities that we have that have lower.

Josh: Oh, it's incredible.

Joey: Yeah.

Josh: Yeah. And so many of them are moving up here for that reason. It's funny. Just last week, I went on a listing presentation and met with a seller, and they told me that the other agent who was interviewing for the job told them they specialized in international marketing.

Josh: And, I started to smile, and I'm like, I can appreciate that, but have you heard of a thing called the internet? Every listing now is international. And only a few buyers are looking for real estate in Redding, California, or Hong Kong.

Joey: No.

Josh: Or Singapore. So, I don't know. I'm going from there. We focus heavily on those feeder markets. Because we know the data tells the truth. The majority of buyers that are coming from out of the area are already in California. And so that's where we put the most of our energy. Not that we don't market the ground the rest of the country and internationally, obviously, because we're all multiple listing services. But we know the reality is the buyers are not international. And if you, if that's your strategy, you're crazy, you're much better off focusing on where most of the buyers are coming from.

Joey: What about the higher end? Like you bring that up, because I imagine that would be international, you're talking about the higher end of the market and are, and how affected are they by interest rates or are they not affected that much?

Josh: They're not as affected by interest rates. The luxury market, which we refer to as it, is much more affected by optimism. If the economy's doing well, the rates can be high, but if the economy's doing well and my business is expanding, my optimism about buying a big piece of real estate is pretty high. Right. Now, on the flip side of that is if, even if rates are low, if the economy's shrinking and my business isn't growing like it was, well, now I don't have that same optimism, and I might not be in the market for those luxury homes as much.

Josh: So, the luxury market is much more affected by economic growth projections than interest rates. And it's the opposite for the lower end of the market where the mom and pops are spending their time. Right. For them, it's all about monthly payments for everything they do. So it's not so much about the market optimism going forward. It's more about what the interest rates are today and what I can afford based on those interest rates. You know what I'm saying?

Joey: Totally.

Josh: And that's the difference between the luxury market and the rest. The challenge that our luxury market has in Shasta County is that if you were on the report for over 1,000,005 over the last three and a half months, one property.

Joey: Yeah.

Josh: Sold. So when you go out there and meet with these property owners, and you share with them the reality of, Hey, this is what's happening in the market in the upper end, and it's not COVID anymore, and it's not post-COVID with low interest rates either. This is a whole; we're back to what we were, which is that the upper-end market is challenging to sell in, except when rates are super low and the economy's expanding.

Joey: Well, in the stock market, all the indexes are higher than ever, or they're flirting with the highest. But it also makes me think about Berkshire Hathaway, run by Warren Buffett and Charlie Unger, who just passed away. But these guys, even the average person knows, has heard Warren Buffett's name, the Oracle of Omaha.

Josh: Sure.

Joey: I just saw where they, he's sitting on $290 billion in cash, and they were like, Hey, what are you going to do with all that cash? And he is like, oh, we're waiting. So he's thinking the mark. That's his way of saying, Hey, it will come down. The stock market is high right now, but it might be high for reasons that are not right. You know, and then I was listening to Chamath Paliha Pitiya. I butchered his name, but then he never got my name right. But he was talking about, like, it was at the, I can't remember, it was like in November, and interest rates were high, there were just all these factors that the stock market should come down, and it bumped up.

Joey: And he said, well, it's because these money managers have to do something with the money. They're sitting on a lot of money and must direct it somewhere. Yeah. And so they're directing it in the stock market, which is driving it up, but it's not the underpinning financials driving it. It's just supply and demand. There's the supply of money.

Josh: That's right.

Joey: And so, like what you said, if everybody's buying those bond rates at 7%, well, they're going to, like, whoa, whoa, whoa, whoa. If you buy it at seven, would you buy it at six? Right. Yeah. And they're just going to keep going down until it levels out.

Josh: That's right.

Joey: And so I'm thinking about that higher end of the market, which is that people that have luxury homes, they better have a really good marketing plan because. If the higher end sees that, will they be optimistic over the next 12 months? Right.

Josh: Well, yeah. A marketing plan is extremely important. And at any price point, it doesn't even matter if it's in the luxury market. The difference is that you have to set proper expectations. I mean, you, it's a stubborn fact, but over 1.5 million, just about one property sold in the last 90 days. It's really difficult to create a market that doesn't exist. Now, you can create more incentives with your property because in the upper end, if you decide to liquidate that asset and move it faster, price is the lever you can pull. After all, you have three levers you can pull: you can pull the marketing lever, you can pull the condition of the home lever, and you can pull the lever on the price.

Josh: And so if you've got a good agent doing good marketing, that lever's been pulled. If you have a good home in great condition and there's nothing else you plan to do. Okay, well, that lever's been pulled. And the last one that you can work with is the price itself. And I live in a decent home. I understand it will be challenging when it's time for me to sell it because I have a small buyer pool compared to properties with a different price point.

Joey: Yeah.

Josh: You know.

Joey: And you don't. You're going to need more investor buyers. I mean, you're getting people who are luxury home buyers, and like you said.

Josh: Well, I'll sell to either one, so that you know, but.

Joey: Somebody wants to invest.

Josh: As long as the price is right.

Joey: I think that also the luxury home sellers, from my time when I worked in real estate, the issue was that you would go against other realtors that would tell them whatever price they wanted, and so they were less. When dealing with the smaller segments, you can give them a lot of sales data. As you said, only one house, or 1.5 million, has only a few comps. When selling a house at $370,000, you've probably got a ton of comps. They're like, Hey, these are pending right now. These just closed escrow. The data is very concrete. Right. But when you get into the luxury home market, it's harder.

Josh: Oh, yeah.

Joey: So those conversations are more like, Hey, look, a little more reality. That's harder. Do you find that, or have I been out of the game for a long time?

Josh: No. Well, it's, it, the difference is you're right. More comparable data needs to be pulled from. So, if you look at just sold data, there's little there. Right. So, what we typically do with our property owners in the luxury market is look at the active inventory. Then, we encourage our clients to consider being in that first position regarding value versus price. Because you, if there's only going to be, at the very best case, one to two properties that will have an opportunity that month. For a person to look at them, if you're number five on the list versus number one or two, you will probably get picked over.

Josh: And so you're trying your best to maintain a good position so that when the buyer does come through, you can sell it. Right? And that's a management piece. You're doing that all the time. You're looking at the active inventory and making adjustments based on that, and then you understand their motivation, too. Some sellers that. For most people in the luxury market, it's not common that somebody will come to us and say, Hey, we need to be out of here in 30 days. You know what I mean? Because they're usually not in the position they have to do that. And so they have more time, and time and price must be weighed out.

Joey: What would you consider the price point for the luxury market in our area?

Josh: It starts to pick up, right over a million. Yeah. That's why we set our cap there. People probably don't know this, but we cap our fees at a million. So, if it sells for 1,000,005, we don't charge any more than if we sold it for a million.

Joey: Oh, nice.

Josh: And we do that because we know the work we're putting in at a million is the same as at the work at 1,000,005. Right. So it doesn't make sense for us to create more revenue there. It's not fair from our perspective anyway. So that's one thing that we do. But that's where the luxury market starts to kick off. And that's where it starts to get more challenging, too. The sales volume drops rapidly. You've got dynamics in the market with comparables and things that change regularly, and you just have to stay on top of it.

Joey: So before we, because we're running close on time, what do you see over the next month? Do you see the inventory going up? Do you see sales? What's the Josh Barker crystal ball?

Josh: Yeah. In the next 30 seconds, we expect inventory to climb for sure between now and the next month. Sales volumes will grow with it unless interest rates drop faster than anticipated.

Joey: But it's still when we talk about the lower end of the market, so let's say below 425. I mean, you're still, as soon as interest rates start to come down, those house housing. The price of those houses will go up because inventory won't be replenished by new construction. It's only going to be replenished by people bringing it to market. And so I would still push to marry the house, date the interest rate.

Josh: Don't disagree.

Joey: Yeah. Because I don't, they'll never, it'll never be. I saw a stat the other day that talked about when. If people, the last time interest rates were at about 7% or 8% was in the early 2000s, that people said, Hey, I'm going to wait until the interest rates come down. By the time they did, the house had gone up 40%.

Josh: That's right.

Joey: Yeah. And we'll see that again. So, yeah. Well, thanks, Josh.

Josh: Thank you too.

Joey: I'll see you in June.

Josh: All right, sounds great. Thanks.

Post a Comment