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Joey: So we're back again.
Josh: We are back again.
Joey: It is May.
Josh: It is May.
Joey: It is May, right?
Josh: It's May.
Joey: This isn't Russia, is it Danny?
Joey: It's May, and there's still... So many of the same topics that we were talking about last time are still flowing forward, like interest rates. They're still in the fives, gone up. People are freaking out because they're so used to, almost, free money; now that money is not free, they're, Uhhh... But we also still have low inventory. And so we have those headwinds and tailwinds battling right now, but people are trying to... Like, "What should I do? What's the market gonna do?" One of the big concerns that people aren't talking about is what's the difference between purchasing and renting? They're really concerned about interest rates and buying, but they're wondering, "Is the market gonna continue to appreciate? And should I hold out?" What are some thoughts on that?
Josh: Well, I mean, it's kind of a... It's a pretty big question. It'd be really hard for our listeners or viewers to follow this without looking at a graph or something that... The example I could give you is, take a house right now, for example, a $400,000 home, right? And let's say that the appreciation of this 18-20% stuff that we've seen over the last couple of years, that's not consistent, that's not gonna happen. Let's just use a number that we can agree on, let's say that it appreciates at 3%. Which is 5% below inflation.
Joey: I think conservative, I think that's a conservative number.
Josh: And I think most people would agree. Let's say you took a $400,000 home. Next year, it's gonna be $412,000 based on that example. Year after that, it's $425,000. Year after that, it's $440,000. Year after that, it's gonna be $465,000. Within...
Joey: It compounds fast...
Josh: It does compound fast.
Joey: It compounds really fast. In just four years and all of a sudden...
Josh: Exactly. Eight years in, you're well over $500,000.
Josh: That person that bought that property has an equity in that home of at least $100,000, at year seven or year eight, somewhere in there. And that's real impact of appreciation. But here's where the spread really kicks in. If you rent right now, rents right now are projected to go up about 5% a year, every year going forward. And so that means that over the next five... Let's say the next eight years, rents are gonna be up, let's say 50%, when that happens.
Joey: They're gonna climb faster than 3% appreciation.
Josh: Right. So let's fast forward, that person is trying to decide between renting and buying, let's push them out eight years from now. The one that bought probably has well over $100,000 of equity...
Joey: 25% equity.
Josh: Plus they don't have the increase in the monthly living expense because they have a fixed mortgage on their home. The person that rents has no equity, and that person is paying probably up to 50% more in rent at the very end, and if you look at the difference, the delta between those two, it's probably $100,000 or $200,000 difference between the two decisions. And so again, I know it's hard to listen to it without actually seeing the graphs, but what I can say is that, do the math. It's expensive not to own a home, long-term.
Joey: The other thing is that so many people that talk about this, they get put in two groups. One group talks kind of like a day trader, they talk about, the stock market. They talk in these 30-day, 90-day cycles. Real estate is not a 90-day cycle, it needs to be more about what you just said, "Hey, let's fast forward five, eight years." And the other thing is you may not have a 401k, but you will have a place where you lay your head at night. Right?
Josh: Oh. Yeah.
Joey: So I just think that people get caught up in that really short term, "Yeah, well interest rates are really high, and I saw the market collapse 14 years ago." It's like this market is nothing like that market.
Josh: No, in fact we should probably talk about that for just a minute. I think we've talked about in our previous...
Joey: We have.
Josh: Podcast, but just for a few listeners that... If you looked at 2006 or 2007, and that's arguably the peak of that last market. You had well over 50% of purchases were non-owner occupied, they were speculation types of purchases. Now, today, it's less than 10%.
Joey: And that's a huge number.
Josh: Huge difference, huge difference. Second thing is, is that back then, negative amortization loans or interest-only loans with balloon payments were the common types of loans that a borrower would use. They were using risky loan products, artificially low monthly payments that were all going to reset within three years, and they're gonna be paying twice as much for a mortgage payment. Whereas today, people are buying on typically 30-year fixed mortgages, where there is no balloon payment and there's not gonna be any major increase in their monthly payment. And so that's another massive difference. Back then in 2006-7, a lot of purchases were using what's called 'stated income,' meaning they weren't even showing a bank statement. They weren't showing anything to qualify, they were just literally saying, "This is how much money I make." And the lender said, "Okay, no problem," and they gave them a loan. Today, no, no, no, no. Proof of employment, tax returns, bank statements, and sourcing all your income.
Josh: Right now, the mortgage credit affordability index right now, it's really low. Meaning that it's pretty tight and difficult for people to get financing compared to 15 years ago. A lot different. The markets today are very stable. And so even if the market slides in terms of demand because of interest rates going up, which we all fully expect is gonna happen, people are not qualifying now that were qualified six months ago. When we see that happen, we're just not gonna see the same shift in inventory. It's just not gonna be the same as it was before.
Joey: Another thing is that, the people that are saying, "Hey, interest rates are kind of high, I don't know if I wanna buy now," you have to think about a couple of things. Number one, if you're gonna wait for interest rates to come down, you're gonna miss out on the appreciation of the market, right?
Josh: Yeah. Yeah.
Joey: Number two, when those interest rates come down, that 3% that you're talking about, it'll be more than 3%. Because every time the interest rates have gone down, appreciation...
Josh: It causes buyers to go up.
Joey: It does. The other thing is if you purchase now... I was talking to a lender the other day, I won't name anybody, but he's a really smart guy, and he was telling me, right now he was saying, he was telling people, "No, go ahead and get the higher interest rate in a couple of years, 'cause we are gonna probably go into a recession, there's probably no way to avoid it... Feds are gonna to be force to bring those interest rates back down, you can always refinance then."
Josh: Yeah you can.
Joey: So normally, you know, lots of times when the interest rates were in the high twos, people were saying, "Hey, look, you should buy this rate down." And now they're saying the opposite it's, "No, no, no go ahead and go with the higher rate."
Joey: You don't wanna pay the fees. Why? 'cause you're probably gonna refinance in 18 months when the feds do bring that interest rate down.
Joey: And you're gonna have picked up that appreciation.
Joey: And there's no inventory in the market. That's a big thing. That's easy to glaze over.
Joey: But it's powerful is that it is very, very hard to replenish inventory.
Josh: Oh. Yeah.
Joey: Very hard.
Josh: And especially in California.
Joey: And it's not getting any easier.
Josh: Not any easier right now. I think we're sitting at 1.98, almost two months, supply of homes for sale. And for our listeners and watchers out there, what it means is that if nothing else comes up for sale, it would only take two months to sell off the existing inventory. That's how low the inventory is right now. And that's right now. I mean, we're in the middle of spring, we're supposed to have more inventory right now and going through summer than we would at any other time. It hasn't been the case though. We haven't seen this massive jump and really, I think what it is a part of it. A contributing factor would be is that so many people purchased with such low interest rates that they're literally looking around going, "I don't wanna give up my, you know, two and three quarter percent interest rate."
Josh: So they're hanging out in their homes, which, hey, I get it. Congratulations. But that is having an impact. New construction, it's not, it's not a huge, meaningful impact here in the community. I mean, we're getting some new construction and I'm certainly not complaining for what we're getting now, but we're still grossly under supply compared to what the demand actually could be or is. And I don't see that changing anytime sooner because the cost for construction is super high, cost of land acquisition is still high, development costs are super high. So, you know, it's just, we're gonna continue to be in a really a housing shortage, you know... Not just nationally, but locally we're, we're still at a shortage too.
Joey: So two of those major contributors, one is labor.
Joey: I mean, anybody who's talked about, "Hey, I need some things done in my home."
Joey: I mean, beyond just the general contractor, all the contractors are under-staffed.
Josh: Oh, totally.
Joey: Yeah. And that's not something that you're just gonna replenish overnight.
Josh: No. No.
Joey: That's gonna take years.
Joey: And the other piece is materials.
Joey: Now I don't know with all of the supply chain disruption. I don't know if it's gonna get pegged back up, you know.
Joey: And, but it just doesn't... Not like I'm plugged in, but I don't see where like all of a sudden it just catches up in the supply chains. Everything's great and prices just plummet for, you know, materials, lumber. I saw this great photo that tried to show the cost. How much a thousand dollars of lumber would've... You could have purchased. I think it was like 16 months ago versus today it showed two pallets.
Joey: And one was huge and one was tiny. Like to give you an idea physically...
Josh: Yeah. What it's doing. Yeah.
Joey: What it's doing, you know, that eight and half percent inflation. It's a lot more than that with building materials.
Josh: Oh yeah. Well the, I mean inflation right now, obviously, which is why the feds are saying, Hey we're looking at raising rates again. I mean, right now we're in May. They just came out with the report early this month that said that the inflation numbers, I think were at 8.2 or 8.3 which means the fed is likely gonna raise those interest rates sometime this next month at another half a percent another half a point. For our listeners out there right now our interest rates are averaging about five and a half to five and three quarter. That kind of tends to be what the rate is. It's bouncing a little bit right now as the markets are trying to find themselves. But that's kind of the general idea of five and a half, five and three quarters. What interest rates are now for a 30-year fixed mortgage. When the fed raises that rate, we're fully expecting to see interest rates in the low sixes.
Josh: You know, that's a... That's the next increase that we're expecting. It's gonna have an impact on affordability. It's gonna have an impact on demand. We are going to eventually see the housing market stop in terms of the demand. It's gonna start to get killed off by the interest rates going up. We're expecting that. But what I think people need to think about though, is that it doesn't necessarily translate into lower sales prices. What it's gonna do is it's gonna eliminate demand, but there's not a lot of supply in the market. And so if that supply doesn't jump relative to demand, if that supply doesn't continue to grow rapidly as a result, then prices aren't gonna move that much. You know, it's only if that inventory relative to demand really starts to grow. That's really the only way we could start to see prices... Prices, softening. You know what I'm saying?
Josh: But there's...
Joey: And I still think... Sorry to interrupt, but I still think that Redding is a... Unique, because it is one of the last areas in California...
Joey: Before you leave. You know, everybody's leaving. No, not everybody, a tiny percentage is leaving, but a lot of people are leaving the major cities and coming up here. And so LA can see a decline, San Francisco, San Jose, they can see declines and they have where Redding has continued to grow.
Josh: It has.
Joey: Because we are somewhat of an anomaly, within the state where even though the state might be going down, this area is going up.
Josh: Well that report that came out of it, I think it came outta Stanford I think it's the Hoover Institute in Stanford, but you know they determined, you know, what, the number one reason for people leaving the state of California was, and it wasn't politics relative to what some people might have thought, but it's... It was actually just affordability.
Josh: So like, you know, LA, San Diego, Orange County, San Francisco, you know, the Bay Area overall. You know, costs for homes there are extremely expensive, right? Redding relative to all of those things was very inexpensive. And so... And we continue to be less expensive than the rest of the state and we have a beautiful place to live. So we're still seeing people, like to your point, coming in from those locations. Those are our feeder markets, they really are. Those are the markets that tend to see... We see the greatest amount of influx. It's not people moving from outta state, moving to Redding. It's people from inside of the state and bigger cities that are moving to Redding. And we're seeing that a lot.
Joey: Along those same lines I had a head hunter reach out to me in regards to a position with a company in the Bay Area.
Joey: And one of the things that caught my attention was they said they wanted me there two days a month.
Josh: Two days a month?
Joey: Two days a month. So this is... And this is a larger company, but it was just looking for... It doesn't matter.
Josh: He didn't know who he was talking to
Josh: Two days a month.
Joey: Well, think about, think about that for a second. It's like, okay, you have to be in San Francisco.
Joey: Two days a month.
Joey: I mean, that suddenly makes... It opens up that range. You don't have to be in San Jose and Mountain View and commute in.
Josh: No, you got a lot more options.
Joey: Yeah. That's like you fly in for two days a month.
Joey: Right? And so I think you're just gonna... I think that's one of those contributors and we've had a few. I don't know if we talked about it on this podcast, but when we... When Adam McElvain was... He ran for City Councilman and he had a couple of just fantastic ideas and I haven't heard anything about him. And it kind... It bums me out. But two of 'em, one of 'em was the high-speed internet. To have the City of Redding actually be an ISP. And the whole idea was like, Hey, if you can offer a high-speed internet, this isn't like, yes, you can watch YouTube at home. This is...
Josh: This is like really high speed.
Joey: Really high speed. And we have all the infrastructure for it and there was grants for it. But it would make Downtown one of those hubs where companies would move. Companies that have like 15 employees, 21 employees, all engineers, all people making pretty darn good money.
Joey: Mid one hundreds, Maybe a little bit higher. Like we said before down the Bay Area that's not a lot.
Joey: You're making $150,000 a year you're sharing an apartment with somebody. You're making $150,000 a year here you're easily a purchasing...
Josh: You own have a home.
Joey: You own a home, and a nice home. And so that was a project that's kind of ancillary to the hey, two days a month that kind of thing. The other big thing that I remember him... I am hijacking this podcast, but the other big project that he talked about that I thought was... Building a major solar array outside the city. We're the second sunniest city in the United States...
Josh: Take advantage of it. Yeah.
Joey: Right? And his tagline, I don't know if he made this up was, "It's the dam of the future." Right? Shasta Dam was huge built REU on Shasta Dam. But anyway these kind of projects that kind of... That was kind of anecdotal. That, Hey, more companies are saying, "You know what? If you can just be here a couple of days." That's the kind of stuff I see as pressure. That's why I don't see Redding, not like I have a crystal ball. I don't see Redding coming down. I see it leveling off like you said. I think 3% is a very conservative number. And it's kind of a cooling off after we did have that 20%, I think it was even more than that. And we had it compounded over years.
Josh: Yup. Well, and it's... It is... And I think just being sensitive those two are in the market now they have been in the market. So I was talking about this with our sales team this last week. And I said, there's two different groups of people that you're gonna run into now in the market. You're gonna have the group of buyers that have been in the market for like four or five months since, haven't bought a home yet. And all they've seen over the last four or five months is what they could qualify for or the type of home they were able to buy four or five months ago, had they bought it back then. And compared to what they're able to buy today, they're just watching that diminish. And so they're pretty frustrated. And understandably so. They thought that, "Hey, I could take my time, find the ideal home." And then all of a sudden interest rates start going up. And now this person feels like, "Wait a minute. I can't... What I was gonna get to enjoy for a monthly payment is gonna be up 50% of that now."
Josh: And so it's frustrating and I get it. But there's another group of people. These are the folks that haven't been in the market in Redding until recently. The interest rates that... The way they are today, this is how they're shopping for homes today. They haven't seen it any other way. And so for that group of buyers, this isn't a huge shell shock for them. They're pretty excited. And if you're wondering, well, who's still buying homes? It's a lot of the people that are buying homes right now are people that are just now coming into the market, who haven't been pre-exposed to the lower interest rates that they had. And the relationship to what that could buy you in the market here locally. Does that make sense?
Josh: Okay. And so we're seeing that playing out right now on Main Street. And so we're really talking to folks about... Like we talked about earlier in the podcast, which is as frustrating as it might be. Just think through this for a minute, if you wait longer, if you wait years longer before you decide to buy it as a result of this short-term issue that we're running into with the likely recession, like you said coming. Think about what that cost might mean to you. Based on the example I gave.
Joey: Well, I was thinking... There was this business coach I was listening to the other day. And he he talked about some of the qualities of people that succeed at a high level. And one of 'em was he said, "Their ability to forget, their ability to immediately focus on the next move and not get caught up in.
Josh: In the stuff back there...
Joey: The failure or past or setback. Yeah, exactly. And so that to me that's kind of in that same vein of like, "Hey look, November 2021 is gone."
Josh: It's gone.
Joey: Don't... Take that interest rate quote you got, you throw in the trash it's done. That's behind you. That's the play behind you. And when he was talking about that, I thought about Tom Brady. Because I remember seeing an interview with Tom Brady about it. He was like, "I'm onto the next play."
Josh: Yeah. Can't do anything about the last one.
Joey: So it's like saying things like, "The past, it's done." So it's, where are you right now? What does the market look like now? What do you think the market's gonna look like in six months? Do you think suddenly there's gonna be huge inventory and no demand? Do you think interest rates are gonna drop down to 4% by November? Nothing tells us that. But if you lock-in now a year and a half, two years from now, at some point, those interest rates will come back down.
Joey: And even if they didn't, you're locked in a lower interest rate now than if you wait six months and buy and they're at 6 1/3. 'Cause that's where it's going. That's a trajectory.
Josh: Oh, it is. The rates are looking like they're gonna be in, like we said, in the sixes here in the near future. At some point the housing market will break. My guess is around 6 1/2% mortgage rates will push the market and then translate into a recession. Because housing represents something like 17, 18% of the overall economy. It's a big number. Once the housing market gets hit by the higher interest rate and starts to really slow down. I think you'll start to see that ripple effect across the rest of the country in terms of all the other different markets. So if that turns out to be the case once we move into a recession, the Federal Reserve won't have necessarily the same pressure. Because with a recession, you kind of usually assume that you're gonna start to see your inflation falling down too. And at some point that supply chain that we keep talking about, at some point it's gonna begin to catch up.
Josh: And that's really gonna put that inflationary number in a more reasonable level. And then at that point the Fed won't feel the need to raise rates more. When they start to feel like, "Hey, there's proof that the inflation's slowing down." And when they do that like you said, that's when they'll start to maybe even try to help pull us out of recession by bringing those rates down again. Here's the question, housing. Let's just say it was flat. Let's say it is what it is today when we're in a housing recession. If the Fed starts dropping the interest rate in order to stimulate the economy again, what do you think that'll do to home prices?
Joey: Well, They're gonna go up.
Josh: They're gonna probably go up, right? And they're gonna... They're gonna go up in correlation with how fast that rate goes down. And so for folks that are out there shopping it's like you said, it's okay that the rate's are higher, take the home. And when the rates drop, refinance to the lower rate. But if you don't wanna be in a situation where you're falling behind on your equity that you're gaining over time, both from appreciation in the market, paying down your mortgage balance, and then compare that to renting where rents are going up, it's a still... Financially, it's a pretty darn smart move, I don't see too many experts that would boo-hoo at that too much. Housing is not like the stock market... What did the stock market do over the last couple of weeks...
Joey: It's been tanking big time.
Josh: Big time housing market hasn't...
Joey: Crypto has been tanking, big time.
Josh: Right and it was all that fake money stuff, helicopter money falling out of the sky, it went right into Crypto, It went right into the stock market, and that's why we had these nice bubbles there. Housing market didn't do that. It didn't do that.
Joey: I'm trying to remember the other day, I was talking to my financial advisor and he was telling me about a stock, I won't say it, but it was trading at about a quarter of its high...
Josh: Oh well. Wow.
Joey: Right, and he was like, "Oh, I think it is value." And I said, "What's the PE ratio?" And he was like, "Hold on, 37." And I was like...
Josh: Hold on, our listeners don't know what the PE ratio is.
Joey: Price to earnings ratio, so that means for every share, how much money do they make versus how much it costs, right? So if they said, well, there's a billion shares and they made a billion dollars, and the stock was trading a dollar, you're like, "Oh, the PE ratio is one to one." which never happens by the way.
Joey: But you would be like, "Oh okay, I bought the share for a dollar 'cause it made a dollar." And so then it dropped down 75% of its high value and it was still trading at 37 times how much they were actually making.
Josh: Which is really crazy. Is what Joe is saying on this...
Joey: That is insane like, like I'm a stock guy, but I remember I first started reading stocks 23 years ago, and PE ratios would be like 13, for high PE ratios.
Josh: 15, 17...
Joey: Those would be high PE ratios. Now though the tech world, it's just the PE ratios are insane.
Josh: They're not... Well, it's not attached to reality anymore.
Joey: At all. Not at all.
Josh: It is because there's so much investor participation in the stock markets.
Joey: So much emotion.
Josh: Yeah, well, and every time they print money every single time, it always does the same thing, it flows into a couple of areas, and typically it's gonna fall into the stock market somewhere as a result of that. And we've printed so much money over the last couple of years, there's no such thing as a free lunch. Right, so we're all paying the price now for that free money with inflation, and every household now is gonna have to deal with it, everybody's talking about the gas prices and everything else, and that's having a real impact... And if you wanna draw that back to real estate, fuel prices are having an impact on the more rural communities around Redding. The values of homes are having... Are being impacted in some manner because of the commutes getting longer. So if you live in... If you work in Redding and now 30 minutes away... You are and living, 30 minutes away from your office in Redding now it's no longer as attractive as it was before, because the cost of fuel now is $6 a gallon. While when you thought about doing it before, it might have been $2.50 a gallon, $3 a gallon. You know what I mean? So we're having some impacts from that indirectly too, with like fuel prices.
Joey: So to recap it... Yes, interest rates have gone up, but Redding has very, very low inventory. It's gonna be incredibly hard and slow to replenish that inventory, Redding is a destination for people to move to, people are not leaving Redding, you may have a... "Oh my friend moved to Idaho, what are you talking about." For every friend that moved to Idaho, there's two or three people that moved from San Jose, Stockton, Roseville, to Redding so...
Josh: And people moving back, I've had friends move back from Idaho... I have had friends move back from Montana, and I'm not boohooing any of those locations, but everybody thinks the grass is greener, and then they go and they look and they go, "Wait a minute, so it's the same green grass I had before," you know so...
Joey: Well, I'm not gonna say any names. But We have several friends that moved east of here, and every one of them... It was hard for... We get on calls with them, and they don't wanna flat out admit, but you could just hear it when they would talk about ice storms and weather.
Joey: And I was talking to one of them the other day, and I won't say who. And I won't say where, but there's a TV show based on where he moved. And he said, "People here just don't care." and what he means is... They don't bath. They don't care. They just don't care. And he goes, "At first it was kind of cool 'cause there was not this pressure," he's like, "But at some point you're like... "
Josh: I wanna care.
Joey: You have been wearing that shirt four days in a row, you need to go... He just... And it was a buddy that... I mean... He left California and he shook his fist when he left, and he was like, "Man, California is so awesome." I was like, "Why?" I was not gonna be like, "I told you so." I was not gonna rub his nose in it, and I tried to support him, I'm like, "Hey man... "
Josh: It's tough. If you're chasing kids around the country and you wanted to be around the grandkids and all that stuff, I totally get all that. I mean, family, you wanna keep the family together, that makes total sense. And you know, kids might be chasing work and then... Then the parents start chasing the kids so they can be around the grandkids, I get all that. If my wife and I were to leave Redding, it would probably be because we were chasing grandkids somewhere, I'm sure of it, that would probably be with the only that pulls us away. And it probably wouldn't even pull us away full time, it would just be a potion of the time. Because Redding at the end of the day, when you think about the fact that we are surrounded on three sides by just majestic mountains, that we have lakes that most of the time have water in them, we have... We would ski just an hour away from home and get to the coast in a couple of hours and have a great weekend, you can go down to the city if you wanna go and to experience the city and the people... We live amongst some of the coolest people in the country.
Joey: That is a bold statement, Josh.
Josh: I believe it though, I really do. And they're awesome people. I can understand why people from the Bay Area or Southern California, they come up here and spend a couple of weeks with us and get to meet some of our residents up here, I'd fall in love with this place too, so... Yeah, I'm definitely biased, but I also think that for those of our folks that have left the area, it wasn't because of Redding that they left, I would say they left because of the state of California.
Joey: Taxation and things like that.
Josh: And they were frustrated about other things, and that's a part of the equation, I'm sure. But at the end of the day, man, this is a great place to be, so you can cast me on it. I appreciate the time today. Again.
Joey: Likewise, man.
Josh: I always have fun rapping with you a little bit on this stuff.
Josh: But for all your listeners out there I hope you guys have a great May and we'll talk to you guys next month.
Joey: Sounds good. Thanks, Josh.
Josh: Yeah thanks.