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On today’s podcast episode, I talk about the current state of the real estate market and where I think the market is heading. To listen to the podcast click on the arrow in the black bar at the bottom of this page (please wait a few seconds for the podcast to load).
One of the questions I get asked the most is “what do you think of the market right now” or “do you think the real estate market will crash?” This podcast episode answers those questions.
Disclaimer: I cannot predict what will happen. No one can. There are too many unknown variables like war, interest rates, the Fed, the dollar, stock and bond markets, etc. However, what I can tell you is my opinion on what I see and how I interpret it. That is what this podcast episode is about.
The crazy frenzy that was created from Covid has created a situation where real estate prices moved up too fast too quickly
I was looking at houses today that were worth $150,000 in 2020 that are now on the MLS at $300,000. Prices don’t normally go up by 100% in 2 years in real estate. Many markets have seen this doubling over the past two years. Be very careful of listening to media reports like the “Case Shiller Home Price Index” and other data that is put out by mainstream media and real estate companies. A lot of this data is skewed because it’s an “average” or “median” of the entire country.
Different cities, and different States have completely different demographics, population growth, job growth, and demand (or supply). Averaging this data gives us a big picture of the overall U.S market. But it does not help us become better real estate investors in our local market. We cannot invest in our local market with data based on the entire U.S.
Real estate is very local. If one of my target markets is Port St Lucie, FL, then I am not interested in what is happening in Phoenix, or Seattle, or San Diego, or Philadelphia. I doubt prices in Buffalo or North Dakota have doubled over the past two years. And the reason is because no one is moving there. But those cities are part of the “average” data that we read about in media reports put out by many real estate companies.
People are moving to Florida in droves. Florida is the fastest growing State in the U.S (by far). Florida has been a super hot market for years and the pandemic just made it worse. The past two years have been absolutely insane. Many States were in lockdown and Florida was wide open, so many people visited Florida to escape the lockdown and got their first glimpse of Florida. Some of them liked what they saw and decided to move here. The work from home trend exacerbated this. In 2021, it seemed like everyone in the U.S. was trying to move to Florida. I would see so many license plates of people from other States where I live in Boca Raton, Florida. At the same time that this was happening, I saw prices of houses double. People from the Northeast were moving here and homeowners soon learned that they could raise the price of their house by a hundred thousand or more and these people would still buy them! All of the buyer demand created a situation where the local Floridian felt that the market was “strong” and that there was unlimited demand and no issues. This is the prevailing wisdom. Many people that are local to South Florida feel that the market is “healthy” and do not see a problem in our local market.
However, based on my own research I am seeing some cracks forming. These cracks started in markets like Phoenix, Seattle, San Francisco, and Arizona. Then that started spreading to Nevada, Austin and many other cities. The reality is this: Builders have simply built too many homes. Previously I thought this was a West Coast phenomena for places like Phoenix. But after doing some research, what I am seeing on the ground here in Florida seems to indicate that this is starting to happen here too.
I have no doubt that the declines on the West Coast will start having an effect on builders on the East Coast (including Florida). Almost 25% of the listings of the homes on the Florida MLS in some cities are new construction homes built by builders in the past 3 years. Many of these were “build to rent” homes which were being sold to institutional investors and hedge funds. Many of these homes were also sold to first time home buyers with ultra low interest rates. But now with interest rates doubling, demand has dried up. Contract cancellations on new homes are running at around 65% meaning 2 out of every 3 new home buyers are cancelling their contract to buy a new home. No one predicted that interest rates would move from 3% to 6 1/2%. So these home builders are facing a double whammy. They are facing higher interest rates, and more and more buyers cancelling their contracts and waiting it out and wanting to sit on the sidelines. These builders are sitting on a lot of excess inventory homes that have been built (and are in various stages of completion). They are building many more homes this year. They are having to slash prices on these new homes in order to try and entice buyers to buy. They are offering very generous incentives and rate buy downs to try and entice new home buyers to buy one of their model homes. If you want to see what could happen here in 6 to 12 months, just look at what is happening right now in Phoenix and Nevada and many other places where many new homes were built.
Builders were doing very well selling to hedge funds and private equity funds that specialized in the “build to rent” model. Now one of the builders most consistent institutional buyers are starting to dry up. Many of the largest single family home buyer hedge funds and private equity funds have ceased their buying operations until they can get a handle on this market (and their inventory). All of the big iBuyers like Offerpad, and Open Door are hurting. Open Door recently reported a loss of $1 billion dollars. Offerpad’s share price was below $1 a week ago. These companies and starting to shut down their home buying acquisition divisions.
Zillow exited the home buying business in 2021 .
Redfin stopped buying homes in November 2022
Invitation Homes and American Homes For Rent (the two largest house buying companies) and most of the large Hedge funds stopped buying around the 3rd quarter of 2022. The builders know that there is a big problem. The private equity and hedge fund companies know that there is a big problem. Unfortunately the man on the street, the average person has no knowledge of any of this.
If the largest private equity and hedge funds, and titans like Invitation Homes and American Homes for rent are not buying then what are they doing? According to my research, it appears that they may be slowly selling. They are trying to reduce the number of homes on their balance sheet and at the same time increase their cash reserves. Why would they be doing this? Because they know what is coming. They are very, very smart. They know what they are doing. They are shoring up their balance sheet and preparing for the battle ahead. You should be too. Pay attention to what they are doing. The build to rent model is not a model that will disappear. It is here to stay. More and more Millennials like the idea of renting a nice home versus buying one. Any substantial dip in prices will probably be met with an onslaught of these home buying companies starting to buy again. I am very bullish long term on real estate. Especially in Florida. Real Estate Prices will double in 15 years. But before they do, they may dip down by 10% or 20%. That will be your opportunity to buy. The funds will most definitely be buying and when that happens you should be buying too. Your competitive advantage is in buying what they don’t like to buy. Look at their “buy box” and you will see what it is. Many of them have it listed on their web site. If they don’t just look at their houses for rent and that will tell you all you need to know.
Six Months ago, if I had asked any of my students or anyone if they thought the market could crash like it did in 2008 , they would answer with an emphatic no. The argument would be somewhere along the lines of “this time will be different. The “experts” who are really backed by the realtor industry and entities like the Realtor Associations will say that this time there was no “irresponsible lending” and that mortgages are solid and most homeowners have lots of equity. That may be true, and right now many homeowners have low interest rate loans and have very little incentive to sell.
My question is how would those same homeowners feel if prices went down by 10%? The prevailing wisdom that people tell themselves in the real estate industry is that everything is fine. Realtors and mortgage brokers and anyone working in the real estate business desperately want to believe this. I have personally seen plenty of cases of irresponsible lending in the past two years. Many of my students have been approved for “no doc loans” from mortgage brokers over the past 18 months. And considering that prices have doubled, I would call that irresponsible lending. Banks wanted to lend when the market was hot. Everyone wanted to lend when the market was hot. The market was booming. Now those same companies that were aggressively lending are laying off people and shutting down their lending businesses.
Goldman Sachs put out a report a few weeks ago of 4 cities that could see a 2008 type of decline in real estate prices. Those cities were San Diego, Phoenix, San Jose, and Austin. None of those cities are in Florida, but often when troubles start in hot markets like Phoenix, that pain spreads to other cities and States. And prices being marked down affects their balance sheet, their financing and how much lenders are willing to lend. And lenders act accordingly. When they feel pain they stop lending. When they see prices decline they stop lending. Don’t feel bad for them though. They know what they are doing. They have weathered this storm before. Will it be like 2008? Personally I don’t think it will be as bad as 2008 but it may be. Will prices decline? Yes I believe they certainly will. I don’t see why prices cannot decline 10% in 2023 and then another 10% in 2024. They may decline by that amount much quicker than that (which to me seems like what may be happening).
I am hearing how bad things are in the real estate industry on the ground from realtors, mortgage brokers, appraisers, title companies, contractors, builders, home inspectors, surveyors. This is happening across the board on a very large scale. If you live in Florida you just have not noticed this because inventory is low and people are moving here. So on the surface things seem fine. But in reality prices are down 10% in Miami and Fort Lauderdale since October 2022. If prices can decline 10% in 3 or 4 months, what can prices do in 2 years? If a homeowner overpaid for a home 8 months ago and purchased a house at the peak, how are they going to feel when their mortgage is underwater and they have no equity? Are they still going to want to keep paying that mortgage? Maybe they will because the interest rate and monthly payment is so low.
But what if they lost their job and had no equity in their property and they couldn’t pay their mortgage? In case you forgot, the government did not allow banks to file foreclosure lawsuits for 2 years because of the pandemic. That expired last year. Millions of homeowners that are living in homes and were not paying their mortgage for the past two years are going to be served with foreclosure lawsuits. Those homes will become short sales that will be listed on the MLS. Many of them will go back to the bank and become bank owned properties which will need to be sold at a discount. That will affect comparable sales. We are also heading into a recession. It’s pretty evident that the Federal Reserve is not lowering rates any time soon. Bank America and Goldman Sachs predict 3 more interest rate increases this year. More and more companies are laying people off. Add all of these variables together and you start seeing the bigger picture that is emerging.
It looks to me like the smart money on Wall Street is not buying houses and is instead selling houses. So my question is very simple. Who is going to buy all of these new homes? The first time home buyer has seen rates move from 3% to 61/2% in the past 12 months. The average home buyer has sticker shock when they see what their mortgage payment will be. They simply cannot afford the payment. So either rates have to come down or prices have to come down. Listening to the Fed Chairmen Powell, I don’t think rates will come down anytime soon. He says rates are going up. He has said that at every one of the past 5 Federal Reserve Meetings.
Do I foresee a price decline? You bet I do. I see prices that are already down 10% to 15% in my local markets. The Core Logic Us Home Price Insights Report (which came out last week) shows that home prices increased 6.9% from 2021 to 2022. That data tells us nothing about what prices have done in the past 6 months. Prices could have gone up 16% and then dropped 10% resulting in a 6.9% year over year increase. In my local market, I see declines of 10% to 15%. New home builders have slashed the prices of new homes from $420,000 to $380,000 in just the last 3 months. That’s a 10% decline. Core Logic says prices will be down 3% for the next 12 months. I would really like to believe that. I think it’s more likely that they will be down that amount in the next few months! So I would not be in a rush to buy.
I would be patient and wait for the opportunity. As more homeowners see their equity decline they will be more likely to not want to make their mortgage payment. As we head into a recession (which is almost certain) and more people lose their jobs, they will have a harder time paying their mortgage. And as the foreclosure moratoriums expired, there is a backlog of foreclosures coming down the pipeline. None of that translates into prices going up over the next 12 months.
Be careful in this market. Pay attention to what the home builders are doing and how they are pricing their new homes. If the prices of new homes are being marked down, then what does that do to the price of existing older homes? I think the answer is obvious, they will get marked down too. So should you be buying in this market? Yes, if you can find a wholesale deal, and as long as you are buying right, and you buy at enough of a discount to fair market value you should be buying. If normally you buy at 70 cents on the dollar I would reduce that to 60 cents on the dollar. And locally in South Florida there is still a shortage of inventory. I believe that this will slowly change as more homeowners decide to sell.
Soon there will be an opportunity to buy bank owned properties and foreclosures at 60 cents on the dollar. I have been talking about this for quite some time. We reviewed this for 3 days at the Foreclosures, Short Sales and Bank Owned Properties Boot Camp. There will be many opportunities to buy properties at a discount. There will be great opportunities to buy new construction homes with rate buy downs and seller credits. We are starting to see those opportunities now, and they are going to get getter (and cheaper). Take advantage of the fact that these builders want to liquidate beautiful 2023 built new model homes. If you buy these right, and you hold them, these houses will double in value 15 years. And there is a lot less maintenance (and insurance) on a new home than an older home.
Understanding different creative financing offers that you can make to motivated sellers in a market where many people are entering foreclosure is very important. Sellers that did not sell in the past year are frustrated that they missed the peak. They are much more motivated today than they were six months ago. And six months from now, they will be more motivated than they are today. Start learning how to market to homeowners that are in pre-foreclosure and foreclosure. If they are in foreclosure they will want to sell their house fast. They may have a super low 2.75% fixed rate mortgage on their home. You may be able to buy that home and assume their mortgage. As a real estate investor you need to learn how to do this. Listen to my recent podcast episode on Creative Finance Methods including buying houses subject to their existing mortgage by clicking here.
Watch the iBuyers, and whether or not they start buying again (or whether some of them go out of business). That will affect demand and supply tremendously. Listen to the earnings calls of large publicly traded companies that buy tens of thousands of single family homes, and read their earnings reports and what is written in them. If you are my coaching student I share this information with you in my training’s. Pay attention to the details. I believe that prices will come down and that 2023 and 2024 will be years where prices decline. There will be many great opportunities to buy real estate at a discount. At some point, when the market has come down a lot and the recession is bad, the Fed is going to have to pivot and start lowering rates again. But that could be a year from now. It could be longer than that. But when the Fed pivots and starts lowering rates (whenever that is) it will be the start of another run up in real estate prices. Another real estate bull market. And I really hope and pray that you purchased some real estate at the bottom of the cycle. If you did, it will make you very wealthy.
When the market bottoms, the hedge funds and private equity funds will be ready to pounce. Be patient. Wait for the right price and then when you see deals that make sense buy them. Buy any rental that will cash flow for you. And keep an eye on interest rates. These new construction homes if they slash prices another 10% to 15% and offer you a 4% mortgage with seller credits and rate buy downs – that would look like a really good long term investment to me. If you are a builder and you are reading this, I would love to buy a 100 homes like this (at the right price). As an investor, keep an eye on the builders, and what they are doing, their inventory levels and their list prices (and price per square foot). If you see inventory declining, then we are nearing a bottom. Don’t be the investor that misses the bottom.
Learning to invest in real estate can create financial freedom and wealth for you and your family. Many of my students are now millionaires and quite a few are multi millionaires. One of my students has a $25 million dollar rental portfolio and receives over $1 million per year in rental income. He started just 8 years ago and was making $50,000 a year working in a restaurant before he walked into my boot camp. Understand that having the specialized skills and knowledge of knowing how to find properties below market and how to buy these properties using other people’s money is key to being able to exponentially increase your wealth, your income and your ability to get closer to financial freedom.
Take your first step today in getting the knowledge and education you need by watching my free training webinar on how to wholesale real estate and flip houses by clicking on the “Reserve Your Seat” Button Below. Make a point of registering. And then make a point of watching the entire webinar from start to finish. It will take around an hour. Commit to that hour and staying on the webinar until the end. See some of the case studies of my students that have achieved success and then ask yourself if you could do what they have done. At the end of the webinar there is a nice bonus for you. Reserve your seat for the training by clicking on the “reserve your seat” button below
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