What We’re Buying During This Real Estate Correction

0:00Last week, I spent an entire episode laying out that I think we are in a market correction. We're not in a crash, but we're in a period where home prices may go down. They may stay stagnant. And I hope that was a helpful conversation for everyone to just have realistic expectations for what to expect over the next couple of years. So today we're going to shift that conversation from just data and background towards what you can actually do about it. In today's episode, I'm joined by Kathy Fecky and Henry Washington to pressure test the frameworks and the data that I presented last week. I'd obviously love their opinion.

0:36Compare notes on what they're seeing in their own analysis of the market and turn the playbook into practical steps. During this episode, we're going to talk about trends that we're seeing in each of our own markets, how we're adjusting our own investing strategy, and frameworks that you can all apply to your portfolios to make profitable decisions during this market correction. You're listening to On The Market. Let's get into it.

1:06All right. Well, I am assuming you guys don't listen to the On the Markets episodes when you're not on it. I won't take offense. Last week, I did a solo episode just sort of laying out what I believe to be the reality of the situation is that we're in a market correction. Basically, the gist of it is that home prices are up one or two percent in real terms. But if you look at in inflation-adjusted terms, prices have been pretty flat or a little bit down for almost three years now. And I actually think that's going to get a little bit more pronounced in the next year or so. I think the market is really slowing down.

1:44And we might see nominal, non-inflation-adjusted home prices go down one or 2%. More in certain markets we're seeing in Florida, Texas, they're already down more than that. But on a national level, a couple percentage points. Do you agree? Do you think that's crazy? Do you think we're going to see something totally different. Kathy, let's start with you. I'm so glad because I am the A student on today's episode because I did listen to that show. Oh, look at you. Henry, did you? I listened to half the episode. Yes, 100%. Yeah. So as I was listening, my thoughts were, yes, it's a correction. And my first thought was, if you're in it for the long game, when I buy property, I'm thinking, long, long, long, long, long term.

2:27So it's just part of it. It's a softening. But if you are in the rental business, you don't care because you're not selling. All you care about is our rents going down. That's your income. So where are we there? It depends on your market. Some markets, rents have softened. But if you're still collecting rent, you're in good shape. Yep. Absolutely. I totally agree. And we'll get into some of that about what you should be looking for. But Henry, you're seeing a correction as well? Yeah, I think we're seeing a correction. Now, again, my market has some insulation, I think, compared to a lot of other markets.

3:05But we are absolutely seeing a slowdown. We just hit four months of inventory on the market. And that is about what we need to be considered a balanced market. But because we're so used to listing something and it's selling fairly quickly, even though we're in a very balanced, normal market, it feels like we're not. It feels like we're in a situation that's more dire than that because things are moving slower than we're accustomed to. But if you zoom out, I got in this business in 2017. It was pretty normal to list a property and it sit for 30 to 60 days and you only get a couple of offers and you have to do some concessions.

3:48and then maybe you sell that property for a profit. We were buying properties and getting a 6%, 6.5 % interest rate as a rental property. Like this all feels like it did pre-pandemic, but the pandemic went so crazy and people made so much money that now what used to be normal feels uncomfortable. I kind of feel like the problem with real estate right now is not the market, it's expectations. It's just that people are thinking that real estate is supposed to be the way it was during the pandemic. And don't get me wrong, I think the market is, there's a lot of challenges with the market right now in most places.

4:25Like we're not all magically in Henry's Northwest Arkansas bubble, but I think in most places there are challenges. But I think the biggest challenge is people are thinking that they could make easy money in this industry because there was a period where you could make easy money, But that is the exception to the rule, not the normal thing that happens in real estate. So I think that's sort of why I wanted to have this conversation is just normalizing, one, the fact that these things happen and that corrections are a normal part of the economic cycle. Yeah. And two, that it's normal to invest in this part of the cycle, or at least I think so.

5:03Yeah, it is. Yeah, that's what I wanted to say is it's like when you say people are thinking, I think what you mean is newer investors. and those newer investors are learning, they're growing up. Basically, they're becoming experienced investors because experienced investors aren't thinking that. They're thinking, finally, finally, there's a correction where I could get me some good buys out there and I don't have the competition. We've been waiting for this moment. So you all just growing up, it's part of that, comparing it to the marriage. You had your first little fight and then you get through it And then things are better, right?

5:42Yeah, you learned how to get through the fight. You know, I compare it to something you said in that solo episode. What you said was there is a cycle to market conditions. And so the experienced investors are kind of excited for a period like this because, A, we know how to make money through a correction, right? It's just a matter of adjusting what you're willing to buy and adjusting how much risk you're willing to take on given the more risky environment, but you can still be profitable. But we know on the other side of this correction, if we've bought during the correction, that we're going to see a lot of equity and appreciation and growth on the other side of it.

6:24And so it's exciting for people who have that experience because now we're like, we can buy good deals now. We'll make money. We won't make 2022 flip prices if we're flipping the house, but we'll make a decent profit. But if we hold on to things, and even if they're breaking even now, we'll be able to sell those and or get increased rents later or leverage the increased equity that we're going to get. Like, I'm excited because let's get through the rough part so we can get to the good stuff again. Totally. One of the things you said in the show, Dave, was affordability. Something has to give. If things become unaffordable, and that's probably the most important metric to ever look at whenever buying.

7:05Can people afford what you've got? And if what you've got is something you're trying to sell, you're flipping it, and people can't afford it, you're in trouble. If you're trying to rent it, and people can't afford it, you're in trouble. It's always that. And so when interest rates are low, that creates incredible affordability, obviously. And then prices go up. And then when prices go up, and then rates go up at the same time, which is what we've seen, affordability is out the window. So something breaks. And whatever that is, everybody's been waiting for the interest rate to break. Like, please be at that.

7:39If we could just get that to come down, then everything will be fine. But because that hasn't happened, something else is going to break, and that's pricing. And so that's what we're seeing. It has to happen. It's what we have been waiting for. It's why we just started our multifamily fund. It's breaking. And And you can only get great deals when there's a bit of a crisis, right? That's how it works. That's what we're seeing. And not as much of a crisis in the single family world. People aren't as much in a hurry to sell. They don't have to in most cases. And when I say they, that's lumping a lot of people into one category.

8:16There are obviously people in crisis because we are seeing the foreclosure rate creep up. But nothing out of hand, nothing abnormal. But more people are in that struggle bus. And again, that means deals. I hate saying that. It's like, I don't want to be a shark and take advantage of people in a difficult situation. But it's during distress that you get the deals, right? Yeah, it's just it's adapting and taking what the market is giving you. It's not like you are putting those people in distress and they're going to put those properties on the market. And I'm not trying to make real estate investors sound like angels.

8:50But a lot of what happens in a normal correction is investors set the floor for how things can fall. Because a lot of times what happens is normal homebuyers get spooked by a correcting market. We saw this in 2008. That was a crash, not a correction. That was a real crash. And homeowners, no one wanted to touch real estate. And actually, if you look at a lot of studies of what happened back then, the academic studies credit institutional investors getting into the single family. space with setting a bottom for that market and allowing prices to bottom and then coming back in. And so I think you're right, Kathy.

9:28Investors do play an important part of getting the market back to a normal level because a lot of those distressed sellers aren't going to be able to find homeowner buyers, especially when those homeowner buyers have more options right now and could buy stabilize properties at a discounted rate. And so I just think you're entirely right that different people play different roles. And it's, you know, I'm not wishing for anyone to lose their shirt. I certainly hope no one gets into distress, but that is sometimes part of this. But as you also said, it's not even going to be a big part of this, I don't think, in this correction.

10:05You know, you look at distress levels, you know, delinquency levels, like you said, it's just not that high, which makes it to me seem like it's, yeah, we're probably gonna have declining real home prices for a couple, I think maybe a couple of years even. But to me, that's at least predictable, right? Like that's, as an investor, the only thing I want is like something that I can predict and can understand and is somewhat stable because it's the really big swings that really are worrisome to me or create a lot of uncertainty. If we see a period of time where home prices stay flat, I can invest around that, like can't you?

10:40Absolutely. I mean, that's what you want, right? Exactly. We haven't had predictability in a long time, right? And so predictability, there's comfort in predictability because you can make more long-term decisions, or I guess you should say you can make more mid-term decisions because in the long-term, real estate's going to go up in value, right? If you zoom out long enough, but it's the short to mid-term that can be a little more volatile. And so it can help you have a more well-rounded investing approach where you buy some deals that are going to make you money in the short term, you buy some deals that are going to make you money in the midterm, and you buy some deals that you're going to hold and keep forever and create that true passive generational wealth.

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14:05Welcome back to On The Market. I'm here with Kathy and Henry talking about how we're adjusting our own investing strategies during the market correction. Let's jump back in. I like what you said there because I set my own goals. I have long-term goals, what I'm trying to get to financial freedom. That's like a 10, 15-year goal for me. And then I have a three-year goal and then a one-year goal. And I find the three years the hardest right now. It's really hard to figure out where we're going to be three years from now, or it has been. But I actually think it's getting more clear personally that we're going to be in this correction.

14:38Rates are not going to come down very much. Prices are going to be pretty flat. There's always these black swan events. Things could happen with the Trump shakes up the Fed. If we have a massive job loss recession, you know, of course, those things could change that. But as of right now, it just seems like we're going to get back to pretty flat and boring. And I can plan around that. You called it in your amazing keynote at BP Con, Dave. I loved it. Thank you. Yeah. And you gave these four different scenarios of what could happen. But you also gave this example of in, what was it, 2010 or when did you call it that?

15:132010. It was like my first deal. Yeah. It was scary. People, everyone's like, oh, I wish I could have bought in 2010. But if you were there in 2010, it was terrifying. The world was falling apart. We didn't know if we'd be the United States of America. We were stocking food. And so to go out and buy real estate took a lot of nerve. But you did it. And you didn't know if prices were going to continue to go down. And in fact, they did. But you bought that fourplex based on fundamentals, like wherever the market goes, it doesn't matter. This fits what I'm trying to do. Over time, it's going to work out.

15:45It turns out prices went down for a few years. You weren't selling, didn't matter. and then, whoa, prices took off and unbeknownst to you, you made a crap ton of money. Yes, that's right. Exactly. Yeah. There's obviously a lot of difference in 2008, right? Prices are not going to get that cheap again. I think that might be a once in a lifetime kind of thing for the value that we got. But I don't know if you guys follow Bill McBride, a housing analyst, but he put together this chart that just shows real housing prices, which is inflation adjusted housing prices over the long term in the US. And what it shows is that the housing prices in terms of beating inflation, it's actually like, you know, you have like seven years of flat, and then it kind of goes up.

16:30And then you have seven years of flat, and then you have these periods of amazing returns. And this actually goes back in time. In the 90s, it was pretty flat. Then you had the bubble. Obviously, that wasn't great. You know, we saw actually for many years after the crash, it was flat. Then it went up. We're three years into flat again. I don't know when it's going to go up again. I don't know when real home prices are going to go up, but I want to get into the market so that I don't miss it. Because if you miss that, then you're waiting another seven years. And so my whole game right now is like, how do I find deals that make money today?

17:03There are deals that make money today, but I don't care if my prices go up or down 2 % next year? Because what I'm in it for is that next bump. I'm waiting. I'm just going to buy stuff. And then if it's two years from now, it's four years from now, it's five years now. Sure, I'd love it to come sooner, but I don't really care. I'm just like trying to buy things that make money now and then get in for that next bump. And even if the next bump is 10 years from now, I'm still making money now. So it's fine. Like that to me is like the psychology I'm approaching this with. How have you sort of, Henry, changed your mindset given where we are right now?

17:40Yeah. It is all about having multiple exit strategies for deals and one being short term and one being more midterm or long term. And if you can buy things that have multiple exit strategies, then that allows you to stay profitable. I'll give you an example. We just closed on a house. We paid$102 ,000. It's a four bedroom, three bathroom, but it's not in a neighborhood where it's going to sell for$400 ,000 for a home being that size. The ARV on this property is somewhere around$270 ,000. Now I bought it as a flip. The goal is to spend about $50 ,000 to$70 ,000 on the renovation and then sell that property for$250 ,000 to$270 ,000.

18:26Now there's some caveats. There's some problems with the neighbors in this area that could affect my sale price. So there's some problems that could cause me not to sell this property for what I'm hoping to sell this property for. But at the end of the day, I bought a property worth$270 ,000 for$100 ,000. Yeah. Who cares what the market's doing? Who cares? Who cares? Because if I try to sell it and I don't get what I want, I can throw a tenant in it and I can rent it for$1 ,800 to$2 ,000 a month. And it'll cash flow at that price. And I can just make money as a rental and I can keep it as a rental for a long time, or I can keep it as a rental until the market tells me it's a better time to sell it.

19:11And I can make my profitability later. So I can make cash flow now, sell later. I can make cash flow forever. I can not make any cash flow and sell it for a profit. Even if I have to sell it for$230 ,000, I'll still make money. Right. Like it's it's about finding deals that make sense with multiple exit strategies. And then you can choose how you're going to make money on it. The way to mitigate the risk is you've got to pay the appropriate price to weather the storm. That's just fundamentals, right? Like this is what we're talking about, right? It's just like it's just called real estate investing.

19:46Yes, I know. But I think it's important for people to remember that buying quality assets at a good price in a good location is just still the game. Like that is – it's just it, right? It's like whether you're flipping or rental or short-term rental, whatever it is, that still works. The price you're willing to pay has changed. Yes. Because there is more risk and you have to be more disciplined about what you're willing to pay. If you were buying in 2022, if you overpaid by 10 grand, like who cared? It didn't matter. Now it matters. So pay less. There was a time I would have paid 150 for this thing, right?

20:29Because I knew I could profit on it later, but that time has passed. And it's interesting. My realtor called me not long after I bought the property and he was like, buddy, I'm worried about this one. And I said, well, what are you worried about? He was like, I'm just worried that it won't sell for what we want. And I was like, yeah, but I mean, I could rent it for 18 to 2000. And he was like, oh yeah. Oh yeah. Yeah, you can do that. You're just fine. The thing that always is, I'm in awe for those of you who flip, is that you have to be good on the buy side and the sale side. And that's a lot of pressure.

21:04And you have to do that in, we're talking months. And most of the time, the market's not going to shift that much in three to six months, but it can. And that's why the flipping world terrifies me because, you know, as buy and hold, you really only have to be great on the buy side for the most part. Like right now, it's not the best time to sell. It's just not everywhere. But I'll tell you what, probably what you've got to be better at right now than anything is pricing right and is selling it right because it's a buyer's market. Buyer has the power, seller does not. So if you think you can get last year's price and act like a staunch, I don't know, like, this is my price.

21:45I put all this money in it. And you're trying to, that you think you can get what you got two years ago, you're going to be sitting. And that's the death of a sale. We have somebody who put their house on the market next door. And I'm mad because they went like, okay, granted, I am where I am, but millions over their actions, what it should be. And all the agents are like idiots. See, like no one is buying it. It's just going to sit there. And that's not great for me. But yeah, so right now you better be darn good at listing. To me, just talking a lot of flippers and starting to dip my toe into it a little bit, at least in Seattle and other markets I'm in, it feels like we're still at this sort of tail end of what feels like the riskiest part of the market, which is the transition from sort of a growing market to a correcting one, where you're still buying at higher prices.

22:39And then by the time you go to sell, things have sort of flattened out. Even in a market like the one I believe we're going into, which is going to be maybe negative, that even I think is less risky because you know that going into, again, it's the predictability. And you know, you're going to buy even more disciplined, expecting or assuming that prices are going to go down two to 3 % by the time you sell them. But it was sort of like over the last year, it's kind of been this time where like, okay, sellers were still had a lot of power. By the time you go to sell, you've kind of lost your power as a seller.

23:12And that's, I think the riskiest part as anyone is trying to sell a property, right? Yeah, absolutely. It's all just healthy. I think there are ways to make money in this business right now. And I think there are very risky things to do. And as you can tell in this episode, like risk is determined by who you are, where you are and what your strategy is. You know, Kathy sees us what I'm doing as risky and that's fair. It is risky for her. And I see what I'm doing is, is far less risky because I am buying as a landlord. I am buying as a hold because that's what my strategy is going to be. If it doesn't sell for what I need it to sell, you've got options.

23:52So my risk is, can I afford to have multiple rentals come on at the same time, right? If I can't sell anything, right? Can I afford to keep them all as rentals, right? You just, that's where you get in over your head because it does cost money to operate those properties as rental properties. We got to take a quick break, but we'll be back with more on the market right after this. People love to call real estate passive income, which is interesting because most of the investors I know are very busy, busy finding deals, busy managing teams, busy worrying they picked the wrong market. Rent to retirement flips that model.

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