Be The Bank S4 Ep19 - The Sky Is Not Falling
On episode 19 of season 4, Justin Bogard and Richard Thornton breakdown how we are in a cooling market but it's still a sellers market!
Key Takeaways:
Resources and links discussed
About the Host
Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!
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Be The Bank S4 Ep19 - The Sky Is Not Falling
On episode 19 of season 4, Justin Bogard and Richard Thornton breakdown how we are in a cooling market but it's still a sellers market!
Key Takeaways:
Resources and links discussed
About the Host
Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!
Connect with the Host:
Interested in real estate. How about wealth? Well, they go hand in hand and here you'll learn all about it, about it. Welcome to be the bank, a podcast where we discuss and debate the topics centered around real estate. Investing your host, just in Bogar shares insights into investing in real estate to create real wealth and passive income for you and your family. He'll share stories of real estate investments done, right? Walk you through the process of owning a real estate note, and most importantly, educate you so you can be the bank bank. This is be the bank brought to you by bright path notes. Now here's your host, Justin. Bogar
Justin Bogard:Welcome back. You are now listening to episode number 19 of season four of be the bank podcast. Today. I'm going to have my friend Richard Thornton on again, and we're going to be talking about, well, the things that people are talking about and the things that people are not talking about as it pertains to real estate and the current market and kind of direction that we're going in. So stay tuned. This episode is brought to you by bright path notes. Good afternoon, Richard.
Richard Thornton:Good afternoon. How are you, sir?
Justin Bogard:I am doing very well. Thank you for asking and how are you,
Richard Thornton:Uh, doing great. We've finally had some rain out here in California this weekend. So everybody is happy for that. Um, that starts to dampen the fires. And that's a good thing.
Justin Bogard:I was just gonna say that. Is there any fires or smoke now because of all the rain,
Richard Thornton:Uh, you know, there's in some places in the state, there's still some, but there's, uh, over 45 fires going right now in the state. So it's not a happy place.
Justin Bogard:Is it all through the entire state or is it just certain parts of it?
Richard Thornton:Uh, primarily mountain regions here in Nevada, up in there.
Justin Bogard:Okay. Well California's a pretty big state, so lots of places have fires, right?
Richard Thornton:That's right.
Justin Bogard:All right, Richard, thanks for being on again today, as you kind of heard me talk about in the opening package, I hear a lot from real estate agents. I hear a lot from real estate agents that really shouldn't be talking because they don't really know a lot as far as the macroeconomics is concerned, as far as real estate and real estate investing. And I hear some people kind of predict things and they're kind of maybe embellishing or maybe going too far extreme on the other side. Um, we've been in such a great seller's market for so long at the slightest tweak, the slightest change in the other direction. People just go bananas. In my opinion, they, they kind of go bananas and it's not really, I don't think it's that necessary.
Richard Thornton:Um, I can't imagine anybody embellishing things to make themselves sound smart. I just, right.
Justin Bogard:It's it's like every time I see a real estate agent list, something, I wish I had the descriptions that they do because they, everything they, they sell or do they have this most beautiful description about the property or the way it looks or how it, you know, could work for you. And I always laugh on my breath going, why? Yeah. Nobody says anything negative about it. Right? Why would they, it doesn't make sense, but it's just funny how some, when I hear the same real estate agent talk about a property, it's always the same description and, oh, this is so beautiful. So immaculate and you look at it and you're like, this is a plain Jane House. Like there's, this is a starter home. Like there's nothing, I wouldn't say there's anything beautiful about it. It's just, just a regular home right now. If I was looking at a 8 million mansion, I might say, yeah, that's a beautiful home. Mm-hmm<affirmative> I guess I just, I I've lived in too many starter homes or seems too many starter homes. So anyways, Richard, that's not what we're talking about today. I'm talking about the real estate agent that tells me, or tells a group of people of how we are in a market that is a more buyer market. And we're going into a real estate recession where we're going into a real estate correction market. And I've actually heard this talk for quite some time. And Richard, nothing hasn't really changed a whole lot. We're still kind of a seller's market right now. We're not really a buyer's market. Uh, we see the market cooling in certain areas faster than others, but in general, Richard, we are, we're looking pretty good. The national delinquency rate is 2.8, 9% at the end of July, which is a pretty darn good delinquency rate. If you ask me mm-hmm<affirmative> concerning, the average has been between four to, I dunno, Richard, probably three to 5% is a really good national delinquency rate. And we're well below that. We're well below that even before, um, COVID have, so Richard, I, I say this because I feel like there's a lot of misconception out there as far as what's going on in the market. Uh, you and I have talked about, yes, we both agree. And we see that there's gonna be more non-performing loans coming through the pipeline at some point, right? Because we had 8.2, um, million forbearances go through and not all of them made it into a reperforming status or they resold the loan or they recasted the loan or they, they got a different loan or they sold the property. Like we did not. All of them did that. Let's just, let's just call it a half a half a million, maybe are in serious delinquency trouble, meaning they're going through loss mitigation and they may end up going through foreclosure. So that sounds like a lot of loans. But if you spread that over entire country, that's not that many, right? I mean, at worst Richard, when we went through the real estate, uh, debacle, I guess, is what people call it least in my mind, that's what they call it. That was about 11% delinquency rate. And you saw about 250,000 foreclosures going through every month. It was like just, just wheel barrels of houses. If you will going to the courthouse steps and just auctioning'em off for sale. And right now, Richard, we only see between 15 to 25,000 starts per month,
Richard Thornton:Right?
Justin Bogard:This is way different than what it was at our worst. It is way different than what it was during going through COVID because we had zero, right? We have any, so any number in the positive direction is going to skew a percentage that says it's really bad right now. If you just look at percentage numbers, excuse me, sorry. I had to cough, but Richard, it's not really that bad, is it?
Richard Thornton:I don't think so. Uh, I'm out here in California and we don't see it yet. I mean, yes, the market is slowing a tad, uh, but the sky is not falling. Chicken little is not right. Um,<laugh> so, uh, uh, things are, you know, those things that we're overpriced to start with, um, are softening a little bit, but we're still getting price. Uh, people are still getting offers, um, at asking or slightly over, depending on, um, uh, the different house and the desirability. So, no, I don't think, um, we're not crashing down here yet. Anyway,
Justin Bogard:I, I wouldn't even consider this a buyer's market yet, per se. I know I said that a few minutes ago, but I just want to get that point across. It's still a seller's market. Like we don't have a balance inventory of, I think, what is it? A six month supply of inventory is a healthy balance of, uh, of inventory in general for real estate. Right? I think we're still leaning towards the, uh, less than 30 days for houses to close, which is still an exceptionally fast rate of closing on these homes.
Richard Thornton:Yeah, because you demand is still there. Now rates are going up and that does affect, um, uh, people's ability to get financing. The number that I heard recently is that for every full point that, uh, mortgage 30 year mortgage rates increase, um, there is a, uh, 40% decrease in, in that PRI price bracket's ability. So when they say price bracket, they mean people in the a hundred to 200,000, 200, 300, um, depending it, it dings 40% of that bracket, which is pretty significant, but still all told, um, there's tons of demand out there for houses.
Justin Bogard:Yeah. Even at the mortgage interest rate goes up another two or 3% there. Somebody still has to buy a house, right. It's, it's just, it's a bad timing that they get stuck in that window of having a higher interest rate, assuming the interest rate's gonna drop back down to more of like a four or 3% in the future, which we don't know, cuz the Fed's gonna do what the Fed's gonna do to establish inflation and deflation. And they're gonna try to control out the best they can with that rate. But in all actuality, the, you know, the, the interest rate does change things. And you, you projected those numbers that you just heard, you didn't projected. You, you commented on the numbers that you heard of. And that makes total sense. If 1%, one point you say one point raise made a 40% drop in, in, in certain classes mm-hmm of buying bands. Mm-hmm,<affirmative>, that's pretty interesting, but there's still people buying houses, right? There's still people have to buy houses. So it may eliminate some of the buying pool and you may not have that much competition. And that may be why we seeing we're seeing a cooling of the market and it's not days on market aren't as, um, short as they used to be. But yeah, I just, I just kind of wanted to vent a little bit richer today and just, and touch us, talk about how people's perception of what's going on is kind of skewed in, in a way that's not really faction in my opinion.
Richard Thornton:Yeah. And I, I know whenever we're talking about anything like this, um, I'm always, um, hesitant to just believe the broad statement. Um, I'll give you two quick examples. One is, um, there's very different markets, uh, in my town town, Petaluma at California, just north of San Francisco here on the west side versus the east side. Okay. Well, why is that? Okay. The west side was primarily built, uh, anywhere from, I'd say 1860, uh, to, um, the mid 1920s. So you got a lot of really older homes, um, not necessarily bigger, but it's very different style than the east side. The east side wasn't built out until the 1960s through the, the nineties. Um, and it's still, uh, being expanded into totally different markets. I mean, they're within, uh, a mile of each other, but, um, the west side, uh, is much more desirous. Uh, people like old Nido Keno, you know, uh, Victorian style homes, uh, which is what this is. So your demand, uh, is a lot, uh, longer, um, on this side as opposed to that side.
Justin Bogard:That's interesting. So you have a east Petaluma and a west Petaluma or still called Petaluma in general. You just have an imaginary line that divides east
Richard Thornton:And west. It's just imagin it's, it's the highway 1 0 1 divides, uh, Petaluma. And so, um, that is the, the, the line that is demarcates east from west, but you know, it's all called, uh, petal.
Justin Bogard:So highway 1 0 1 is the prime Meridian for PETA
Richard Thornton:<laugh> yeah, pretty much so<laugh> so, so, so here's right. So here's another prime Meridian though. Okay. Um, right now, uh, my mom passed a while back and she had lived in a condo. I don't usually act as realtor, but I am, um, in this instance, since I have my broker's license, uh, and so she lived in a seniors community. So most of that market, I mean, in this, this particular market, this community, they have over 11,000 units. Um, most people buy all cash, so you'd say, well, so what difference does it make? Um, if, uh, rates go up, well, it doesn't affect the buyers in that market. There's a very latent effect when Reids go up. What happens is, is that mom or dad wanna sell their house. That's outside of that area. Okay. They're, you know, two bedroom, three bedroom house. They can't get quite the price for it. They want maybe, maybe they want to get that over asking, but now they can only get asking. Um, and so they sit on it for two or three months longer. So that slows down the, uh, eventually slows down the sales, um, in that retirement community has doesn't really affect the, the prices there it's, um, affects the turnover because people are still paying all cash. So that's another good, good example of sort of a submarket. Uh, so if people are really looking at to buy a house, they have to be very specific and ask about their submarkets.
Justin Bogard:That's interesting because you're exactly right. People don't actually take it more granular and talk about the submarkets within their community. Even. I'm not sure how big Petaluma is as far as population. What is it? Uh, 50,000 people.
Richard Thornton:It's about 60,000. So it's not, not very big right.
Justin Bogard:In your, and, and in your view out there. Right. And, and here in the Midwest, if we were to say there's a, a city of 50 to 60,000 people, that's, that's a pretty, that's pretty dense populated city, right. For, for Midwest city, unless you're in the main, like the main state capital, like Indianapolis, obviously would've more 50,000. I'm talking about like, you know, the green woods, the fishers, the Carmels, the Zionsville, those are kind of like the, the cities that are outskirts just outside of Indianapolis, but around the big loops, which is 4 65 here in Indiana, those, those will be nice size, uh, areas. So it's, it's all relative, right? That's why the word I was trying to think of. It's all relative to where you're at.<laugh> and by the way, those of you that want to watch the video version of this podcast, episode number 19, brought to you by bright path notes, you can check out the bright path notes, YouTube channel, and that's where you can find the video and just see, check out what Richard and I are wearing today. He's got a nice little flannel shirt on, looks like it's a little cool out there with the rain going on in California. And I got this, uh, pretty boil maker. Uh, just, just a nice t-shirt with a ball hat, baseball hat on mm-hmm<affirmative> uh, so you can come check us out on the Brett path notes, YouTube channel, and also see all the other videos that we have to offer as well. So, Richard, I liked what you kind of digressed into the submarkets. Um, I, I find that there is a specific neighborhood in downtown. It's a more of a historic type of area it's called fountain square. And if you watch the H G TV shows you'll know that there is a specific show called good bones, who is, uh, two girls, uh, it's a mother and a, and a daughter. I don't think the mother really is currently active in the flipping business right now, but the mother and daughter would flip houses there in fountain square, which is historic area kinda historic area in, uh, downtown ish, uh, found, uh, Indianapolis mm-hmm<affirmative>. And so I was on that street, flipping houses in about the 2017 era. And I found that it was a street by street, um, issue<laugh>
Richard Thornton:Right.
Justin Bogard:We would buy a house for 10, 20, 30,$40,000. We may have to tear it down completely and then rebuild it. And we could see potential in it for selling three, four,$500,000. Hmm. But then one or two streets over, you may see not very many flips coming on and the values over there. If you flip the house may only be, uh, one 50 to two 50, but the street that has more flips on it would be valued more three, 400,000. So it's quite interesting how we, we had a very specific, uh, dynamic within that market that excuse me, that we were in. Cause I was on the wrong street. I'm always on the wrong street, Richard. That's why I don't flip houses anymore. That's why I suck at it.<laugh> I don't do that anymore. I lose my shirt on it if I, if I try to do one, but that, I thought that was pretty interesting. So I like what you said about the submarket.
Richard Thornton:So why is it on a street by street basis? That's unusual.
Justin Bogard:It is such a place that was so, uh, hot for flippers to get in there and flip houses. My, I was talking to my grandmother and she had one on, I think the street was called state street and she remembered that that was a house that she lived in, in the forties. Hmm. In the thirties, forties. And she said she paid like$5,000 for the house. Right. And we were laughing and she was talking about, you know, how much did you have to pay for, you know, this house? I was describing it. I was like, it's completely, uh, demolished on the inside. There was no dry wall. There was just studs up there. There's, you know, trash all over the place. There's no, no ceiling. It was all torn down, but someone just couldn't finish the work. And so I bought it for, I don't know, I wanna say like$12,000 or something. And she was laughing because she had a fully furnished house and everything for brand new house for 5,000 in there just, you know, 70 years ago, per se.
Richard Thornton:So does one street have, I mean, if I hear something like that, I start to think, well, maybe one street for whatever reason has larger lots and larger houses or deeper lots, or is there some, something particular about the different streets, the way they were built out?
Justin Bogard:Not that I can recall. The lots were pretty similar. They're very, uh, shotgun style houses to where it just a very long house. The lots are very narrow, but they're very long, uh, with the, with, with the alleyways that run across. So I don't think it's a lot size. I really think it had to do with people kept flipping houses on the same street and they built them up to where you're making this brand new neighborhood, but it was on a street basis. And so if, if you only had, if let's say you had, um, 35 houses on the street, uh, both sides, uh, this, this one street and you had five or six houses that were being remodeled on that street. And they're being remodeled to new standards with new, um, uh, millennium style houses. Let's just say the architecture is just more futuristic and the designs aren't kind of like, uh, colonial style. They're just more kind of new, new era type of house builds. Mm-hmm<affirmative> and you have another street that maybe two streets away where you have any one going on at the same time. Mm-hmm<affirmative>. And so it's, and there's a lot of, I sores around it. Mm-hmm<affirmative> so, because there's more, I sores around it. My belief was, I was way too. I was about two years too early on a street that I did houses on the same street. And, uh, that was a big mistake, but it's just funny how the different streets actually were seriously different. As we, we drove by the houses were selling for a half, a million dollars, two streets away, no different than what I was building. It was just, you know, they were, they were at the right time. I was at the very wrong time on the street that I was on because there was, there was nothing on my street that was really getting remodeled mm-hmm<affirmative> so it was shame on me for not doing homework and seeing that, but mm-hmm<affirmative> yeah, that, that's quite interesting.
Richard Thornton:So are flippers making money today?
Justin Bogard:I think they're making money today, but they are not making money like they did 10 years ago.
Richard Thornton:Mm-hmm
Justin Bogard:<affirmative> even six years ago.
Richard Thornton:Mm-hmm<affirmative>
Justin Bogard:I think the, in the Midwest here, I used to be pretty confident when we were flipping houses back then about five, six years ago that we could make$15,000 a profit per$100,000 of sales price.
Richard Thornton:Oh, that's a good, good indicator.
Justin Bogard:And then now it's more like, maybe I'm not flipping houses today. If I had to venture to guess it'd probably be like maybe 8,000 to 5,000, per hundred thousand mm-hmm<affirmative> to flip a house mm-hmm<affirmative> uh, and make the return on it. I just don't see them getting the blighted properties for such a big discount as they used to versus they are today because the tighter inventory. So the right, the flipper in our groups here locally in Indianapolis, they, the, especially the small time flipper they're, they're the ones that are really concerned. Cause I think they're getting gobbled up in the wash and the bigger players are able to kind of, kind of get through this as far as volume, cuz they can make their profit in volume as opposed to the smaller flipper that may have, they have to really make their profit on a per deal basis.
Richard Thornton:Right. So do you see there in your areas of the Midwest also, do you see, um, tech and the ability to work at home affecting housing prices? Cause I mean, my gosh, uh, if I were to be working for Microsoft or Google or someplace like that, and I could make$300,000 a year and move to your area and buy a castle for 200,000.
Justin Bogard:Yeah.
Richard Thornton:Seems to me that that would, um, uh, seriously affect the, uh, pricing of your house. Is there,
Justin Bogard:It might, I, I don't know the answer to that question really. That that's a great question. And I, I just, I just don't know the answer to it where, where I live is pretty further away removed from Indianapolis. So I don't see the downtown Indianapolis area as much as I used to my, my previous cohost super E she would have a better, uh, landscape on that. Mm-hmm<affirmative> as far as if that's really true, it sounds like it would be true. Mm-hmm<affirmative> there are a lot of millennials and a lot of young people that like to live the downtown lifestyle. Like I want to walk everywhere, so they don't really have houses with garages. They may have a street parking or they may not have a vehicle at all. Maybe they just have a bicycle or something, or maybe they live in a condo downtown. They have a big parking garage, they their vehicle in and just walk everywhere. But that's kinda the lifestyle of being in downtown Indianapolis. Cuz the idea is just for you to walk to a lot of places, um, not like in New York or Chicago, you know like, like a big city, but there's, there's, it's more, um, spread out, I guess in Indianapolis it's kind of spread apart instead of squished all together in, in tight spaces.
Richard Thornton:Right? So the reason I ask is because there's a, a town here in the Sierra, Nevada, it's not in the foothills, it's actually physically in the Sierra Nevadas, it's about 8,000, uh, feet up in terms of elevation. And you know, it's a small sleepy mining town at one point. And uh, what several developers in the area decided to do is they, um, actually sponsored some coffee houses and things like that. Okay. They intentionally had, um, workspace for digital nomads. Um, and then they built up a, um, live work office type thing. So they created a nucleus and basically created a, a when you drive up to that town, um, it says, you know, li li um, what was it live here and, and, and work in tech. Uh, and it's made a huge difference in their real estate market.
Justin Bogard:That's catchy. I like that. Mm-hmm<affirmative> I can see that working.
Richard Thornton:Yeah. Yeah,
Justin Bogard:Definitely see that working all Richard, thanks for being on again today. This is episode number 19, brought to you by bright path notes and we are out of time. So we're gonna just jump off and get right into the transition and we will see you. Uh, well, Richard, I'll probably have you on again for the next episode on episode number one,
Richard Thornton:I would love it. I would love it.
Justin Bogard:All right. Don't forget to check out the bright path notes, YouTube channel. So you can see the video cast of this podcast as well. So next time guys, see you.
Richard Thornton:Bye.
Narrator:Thanks for listening to feed the bank. We hope you learned something from today's show. If you enjoyed this episode, please rate and review us. Plus check out our bright path notes channel on YouTube and follow us on Facebook and Twitter at be the bank and on Instagram at be the bank podcast. Be the bank is sponsored by bright path notes. Thanks again for listening.