The $84T “Wealth Transfer” Coming for the Housing Market

21:57Henry Washington:Yeah, I like that about this article. It's like, yeah, they're up in Colorado 115%, which sounds scary, but it went from 27 homes to 58. So, you know, people look at these, they're like, oh, my God, the market's crashing. It's like, dude, that's 31 more houses in a state with millions of homes. Wow. You know, what I really took away from this news article was there's a slow trend going on because I've been talking to a lot of REO brokers that sell a lot of REO properties. And for the last 12 months, and I haven't seen it yet, but I'm starting to see a little bit of it, is they've been saying that they've been working on a lot of files, like hundreds of properties, but nothing's coming to market.

22:36And so they're going through, they're winterizing, they're doing these things, they're securing them, but they're not coming out. And that was interesting to me when I keep hearing this, because the thing that we're looking at, especially as flippers and we're building out our strategy over the next 12 months is how many buyers and what's the absorption rate in the market, which we know is cooling down right now. And then what inventory is coming out that we weren't expecting, you know, because anytime, you know, especially like in 2008, right, that was the issue. There wasn't enough buyers and there was way too much inventory.

23:08Now, we're not going into 2008, but it's something to pay attention to because as we're underwriting how we're going to purchase over the next 12 months, we have to factor these costs in. And, you know, the foreclosures are on the rise, which is going to cause more inventory, but also more opportunities. And then it's how do we look at these opportunities to make sure that they're still profitable or they cash flow. When I was researching this, though, a lot of this inventory actually is in the first time home buyer market. And so, you know, like what Kathy touched on, first time homebuyers are getting older, there's less of them.

23:42There is more inventory coming up, bank owned REO. There's more people on all time high credit card debt that now are taking their properties and they're trying to get more affordable. And that's what we have to watch out for as we're looking at any type of property, right? Whether it's we're buying to resell, like where is the most inventory coming in? And we might want to avoid those areas or increase our returns or increase our timelines. Because that's kind of what's beating up investors right now. They underjudged the cost of the debt and how long they have to hold on to these things before they sell them.

24:12Also, it's telling me where to target and going, OK, well, if there's more inventory coming up, I might want to buy less rental property in those areas, too, because rent could go down as inventory goes up. And so, you know, all these news articles that go out, I'm really trying to pay attention. And it's not about the now like, oh, the market's crashing, more inventory is coming. It's going, OK, what do we do over the next 12 months? And over the next 12 months, if we think there's less homebuyers that's creeping up, there's more inventory, there's more shadow inventory that could become in a market.

24:43That's where you just want to be a lot more conservative and factor for different costs in your deals. Properties we're selling right now, we're still getting close to what we thought we were going to sell. It just takes a lot longer. And so these are really important things for investors to look out for because you don't want to get trapped in a long hold. And more inventory is what causes that. I mean, I think this just mirrors kind of what we've been talking about in terms of what you need to look out for as a flipper. Like you're just doing what you should be doing, which is monitoring the market and then adjusting your underwriting.

25:11Like I'm assuming you're planning on longer holds. Right. And that's really what people need to be watching out for if you're investing or flipping in this market because it is going to take longer. But we've seen the same thing. Things are still selling. It takes a little bit longer. But, I mean, I've only had to drop price on two of my last 10 listings, and most of them sold within the first two to three weeks. So it's just a matter of paying attention to your market, which I think is always what you should be doing. But now it actually can bite you in the butt if you don't. For sure. I mean, there's been a zombie up the street for years and no one would touch it because the amount of work to fix that thing up, it would just be so much easier to tear it down and rebuild from scratch.

25:56Someone finally did. And it must have been a rookie is all I can figure because they had to do so much work and it has been on the market, on the market, on the market and the price reductions. And again, just didn't know the market. Well, that's too bad. Bad timing. I mean, you know, one opportunity on this, everyone's listening. I have seen people chase this unicorn for 20 years where they think all this bank owned inventory is back there. It's shadowed and they're going to call up the banks and try to chase it down and get these really, really good deals. Don't waste your time doing that. It's such a waste of time.

26:29Henry Washington:That's what I was going to ask you. Like, is this even a good idea? I just like people are like foreclosures. I'm like, really? No, they're so dilapidated. I don't mind the dilapidated. It's just the chasing of them. There's literally 61 of them in the whole state of Colorado. Like we can't be telling, we have tens of thousands of people listen to this podcast. Like all of them are going to compete for those 31 properties. Like it's just ridiculous. And half of them probably stink. They're not even worth it. No, they're over leveraged. That's it. They're usually not dilapidated. They're just over leveraged a lot.

27:01Like the dilapidated ones are the ones you want because they're usually under leveraged. But don't waste that time. I mean, there's so many other vacant homes. Target those. The bank loans one, you just got to let them come to market because also if they're Fannie and Freddie backed, they have to sell it within a percentage of appraisal. And so if you want to chase that stuff down, the only opportunity which can work is if you're going to try to go find that shadow inventory, you want to have your title rep pull the deed, see who the lender is. And if it's a non-Fannie Fannie loan, then start pursuing it.

27:31Local banks, small banks, hard money lenders, great things to go call on. That's going to shrink who you have to call dramatically. but just don't spin your wheels and go chase the tape of inventory that we've seen. The thing that has worked for me in the past is not chasing the foreclosures, but actually finding a good source of not Zillow, but a good source of pre-foreclosure data. Because some of these sites have really good pre-foreclosure data and they'll tell you when the court date is. And so what I would basically do is go put all that data into a spreadsheet and I'd filter it and anything that had a foreclosure date more than 45 days out, I would send direct mail to.

28:12And I would send a targeted mail telling them I can help save them from foreclosure by buying their house so that they can actually make some money. That wasn't anything that took a whole lot of extra time on my part. And the people who were interested would call because they don't want to lose their home and they don't want to get a foreclosure. And the ones who are still in denial or in some sort of other situation where it's not going to fix it. They don't call you back. But that way, you can still target that list without having to chase that because everybody's trying to chase a foreclosure.

28:43Every new investor wants to chase a foreclosure. And there's a lot of work you'll spend doing nothing. And like James said, the leverage, like sometimes you do get a hold of one of these leads. And there's so many liens on that property that even if you paid it off, you've still got so that the liens eat up your profit. Like it's just there's a lot of pitfalls with foreclosures that I think new investors don't know about. And you get yourself in trouble. Yeah, that's why I made no money in my first year. I spent so much time on foreclosures and I finally get under contract and like, oh, they owe way too much, dude.

29:12You can't buy it. It's a short sale. And by the time that happens, the lawyers have racked up so much in lawyer fees that you have to pay off as well. That that payoff just starts to go up and up.

29:21Henry Washington:Well, I don't have time for this. I don't know.

29:28Henry Washington:All right. But it is interesting. I think if you are a certain kind of operator, it can make sense. And so I think my main message to people about foreclosures is just like, please read the absolute numbers. Like if you see these headlines, like please understand what is going on here and that this is not some crisis. And the amount of equity people have in homes is just remarkable right now. Like the chances that we're going to have a foreclosure crisis. Like market may go down. You know, some things could happen. But like the idea that we're going to have a foreclosure crisis is not really materializing in any measurable way.

30:00Henry Washington:this is a reversion back to the mean where we've had very low foreclosures and things are starting to come back. And that's normal. And that's part of the housing market. And just to remember that. All right, we'll take one more break, but we'll be right back. Tax season reminder for all the real estate investors listening. If you own rental properties, short-term rentals, commercial buildings, basically anything that's not your primary residence, you need to know about cost segregation. It's an IRS-compliant strategy that lets you accelerate depreciation on your properties, which means you're paying less in taxes this year and keeping more cash in your pocket for your next deal.

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33:36Henry Washington:Welcome back to On the Market. I'm here with Kathy Henry James talking about the latest stories that are making news. And mine comes from this very morning where jobs data for August just came out and it was not very good. The economy still added jobs, but only 22 ,000. That's in comparison to, you know, last year when we were adding over 100 ,000 regularly. There were some revisions that showed that in June we actually lost jobs in the economy. And I understand there is a lot of skepticism about the jobs data these days. But I personally, when I look at the labor market, I just like to look at all the data.

34:16Henry Washington:Like, I don't think any one metric is perfect. But I think if you look across all of the different sources, private sources, public sources, survey data, it's all showing the same thing. The labor market is getting weaker. It is not like in an emergency status right now. But the trend is very clear. We're seeing the unemployment rate go up. We're seeing the number of hiring go down. We actually this week, this is a nerdy one. but there's something called JOLT, which is just job openings in the United States. And this past week, we passed some kind of critical threshold, in my mind, where there are now more job seekers than there are job openings in the United States.

34:53Henry Washington:That's the first time that's happened in many, many years. And so it just raises the question of, one, are we going to see a recession, and we're going to see declines in spending because people are losing their jobs? And two, what does this potentially mean for the housing market? Because this, although it's not good, I never would want the labor market to decline. It could be good for mortgage rates. You know, this could lead to not just the Fed cutting rates, which, again, isn't going to directly influence mortgage rates, but it could push down bond yields. When bond investors do get afraid of recession, which this is a signal of a recession, not necessarily going to happen, but this is, you know, sort of an indicator of recession, I should say.

35:35Henry Washington:It could push down bond yields. We already saw them drop today just from this news. So I don't know what you guys are thinking about this. But for me, it makes me a little bit worried just about the economy in general, even if it is going to help the housing market. I don't know about any of this report. Do we ever even figure out if the jobs reports were really that skewed or not? Like, it's like you just get nonsense of people throwing out like, oh, the reports were wrong. It wasn't growing the way it was. And now it's contracting. It all sounds like nonsense to me. I mean, every data collection is imperfect, but it has been done the same way for years.

36:12Henry Washington:So like as an analyst, like the way you look at that is that the trend should still be right. The absolute numbers may not be perfect, which is always true. But if it's been collected in the same way, the trend should be accurate. And so what we're seeing is that there are more job hiring over the last couple of years to now. And like, I guess like this just tracks with also private data. So like, I know a lot of people are critical of the BLS, but like ADP and these other companies do track private payrolls and they're showing the same thing. Hiring is slowing. And so like, yeah, I don't think anything is perfect, but like, does anyone have evidence that jobs are going up?

36:48Henry Washington:Because I haven't seen any evidence of that. I have in hiring. Everyone keeps asking for more and more and more. Like, I mean, we've been interviewing marketing people. We've been interviewing trades. It seems like people have enough work to me. Like it's like what people are asking for is higher and higher and higher. And even when we do post job ads, we get a lot of people applying and then they don't follow through or they got a job immediately elsewhere and they're gone if they're any good. And so in my market, I don't know. I can't find people to work. Well, Seattle might be a little bit different.

37:21Henry Washington:It's like one of the strongest economies and all of the investment in the entire economy. If you look at like where capital expenditures are going in the economy, it's all to AI companies. and what, two of the five biggest AI companies in the world are in the city. So I think that might be a little bit skewed, but I know people get so worked up about the politics of this. Like, I don't think this is a political thing. Like AI is going to hurt the job market. I don't see a way that it doesn't happen. Like this is just a technological thing that is going on. And like you had Mark Benioff, the CEO of Salesforce, huge company yesterday said that he could cut his customer support team down by 40 % already has like this is just the beginning of this.

38:06Henry Washington:This isn't a political thing. I'm just saying like the job market is going to take a hit because of AI like that I can't imagine a way it doesn't. And so like, I just think I just wonder like, it doesn't seem like anyone's trying to fix this. You know, it just seems like we're just waiting to see what happens. It will also create new jobs, but not at the rate that it's going to eliminate jobs. I mean, I went to order chicken from Slim Chicken's drive-thru and the person taking my order at the drive-thru window was an AI customer service bot. It wasn't a person. It was not a person. And when I noticed it was AI, I tried to throw it off.

38:43I was like, you know what? You know what? Scratch that. I want you to do this instead with that and this on the side. And it was like, oh yeah, no problem. Got my order right. And I was like, and it was nice. You try to change your order at McDonald's, see if they're nice to you. Oh, my God.

38:57Henry Washington:I love how nice chat GPT is to me. You know, you ask questions. It's like, great prompt, Dave. What an excellent question. It's just always buttering you up. It just blows smoke all the time. But I'm here for it. I do have one article and it is it's from Unleash Prosperity. This is Stephen Moore, who he's an advisor to Trump. I get I subscribe to all news because I want to hear what all sides are saying. And this said, we need accurate and reliable job estimates from the Bureau of Labor Statistics, and we're not getting them. One of the surveys that just came out, 22 ,000 net new jobs. When another survey, the survey of households was 288 ,000 jobs.

39:39So that's pretty, that's a big discrepancy, which one's right. And he's basically like, which one's right? We've got to fix this problem. What is the household survey? I don't know. I'm just reading what he wrote. And And then, of course, there's always the job revision. So, I mean, the surveys, I can't believe that we rely on surveys for our jobs data. In an era of AI, like, come on, people, we can do better than this. We're on the phones calling employers to see if they've hired. Like, please. It's so lame.

40:09Henry Washington:I agree. There's all these different ways that are not good. But like there are private, like ADP is a payroll company. They actually have this data and it shows the same trend. Like they, it's different number. It's not 22 ,000. It was 54 ,000. But it is, that's what I mean. The absolute number might not be right, but the trend should be right. And the trend is going down. And so like, I don't know if it added, it might've lost, but it just, like the labor market is getting weaker. Like I can't, I really have seen no evidence that shows that the job market is getting better. But I think Henry's right that like the labor market will recover.

40:44Henry Washington:I know that there's a lot of fear, but you know, these things happen. technology changes the labor market. It's happened many times throughout history. It will create new jobs. I do think this is maybe one of the bigger disruptions to the labor market that we'll ever see. And it might not be directly proportional in the same way jobs come back. But even if it does, there's always just this reshuffling period. And it takes a couple of months or years until those new jobs are created and people reskill themselves. And like, I just think we're at that point in the technological cycle that we're going to go through that.

41:23Henry Washington:And that is probably going to lead to some economic struggles for the country and for the world. Like this is not just a US problem, by the way. I think this is just like a problem that we're going to have. And that is probably why we're going to start to see rate cuts. I think there's good reason to think that mortgage rates are going to start to come down if inflation stays under control, which we'll have to see. But I just think this is an important thing for investors to take note of, both for mortgage rates and for vacancy rates and for tenants, for rent growth. Like these kinds of things and people's ability to pay could be impacted if this continues in this direction.

41:58Henry Washington:I want to reiterate what I said. This is not an emergency level. It is just a trend. Things can always reverse, but we are clearly heading in a direction where the labor market is getting worse. And that is something anyone who invests in anything needs to be paying attention to. All right. Well, with that super pessimistic downbeat note, let's get out of here. Thank you all, Kathy, James, Henry, for being here. Appreciate you coming and sharing these stories with us. And thank you all so much for listening to this episode of On the Market. We'll see you next time. Best thing that's ever happened to you financially.

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