Housing Market Value vs DOW, Tax Changes, & Property Investing for the remainder of 2021

In this episode, Aaron and Brett chat about their experiences day-to-day in investment real estate and provide their analysis of how the housing market is changing, and they also offer up their opinion on the statistics and projections for how the property market will progress throughout the remainder of 2021 and beyond into 2022.

More about this Real Estate Podcast at:

https://epmrealestate.com/podcast/housing-market-value-vs-dow-tax-changes--property-investing-for-the-remainder-of-2021

 

Richard: So day-to-day, what are you guys seeing in terms of market shift? Are you seeing any difference in what it takes to win offers on behalf of investors and what’s your latest assessment for how this year will play out?

Brett: Nothing's changed. The market is still riding pretty high. I think deals are getting a little bit better and we're finding more and more inventory, versus the amount of buyers we have. I've got quite a few buyers, but the inventory’s got a little easier to get your hands on, especially out in areas like Raleigh and Whitehaven where 3-months ago you threw a bid on a house eight grand over asking, and you weren't even close. I'm hopeful that now that we're getting to the end of summer and close to Fall, the investment market which typically slows down, we've set our investors up to rock-and-roll between Halloween and Valentine's Day. So we have a lot of investors sitting tight with their cash, just waiting for the fall to come, the holidays to hit, and inventory to be exceptionally, much better than it is today. Hopefully, that's what I'm dealing with - writing offers left and right.

Aaron: That's great news. You know, I think I saw a note that you sent the other day, or maybe I was listening to a previous podcast episode, and you were talking about how the ratio of the number of offers that you've been writing versus the number of offers accepted has narrowed. The margin has narrowed. 

Brett: So the win-loss ratio is turning finally

Aaron: That's really cool. That’s great news.

Brett: I went back, you know, because when you go on Authentisign, and you're running a new offer, it tells you what number that offer is.

Aaron: Oh, wow.

Brett: So this year, I've written 162 offers.

Aaron: Wow Brett! 

Brett: Now obviously I didn’t win that much, but I think my win-loss ratio was probably 30:70. But this month [Aug 2021] I’ve submitted about 12 offers and it looks like we'll end up with about half of those accepted. So, yeah, the ratio is changing and none of my offers are over asking  now. Before they were cash, $10k over asking, and we still weren't getting them. Now we're throwing $1k over asking, cash, and we're getting them accepted.

Aaron: One of the things that we're going to talk about today is how the fundamentals are changing in the marketplace. I'm not a huge Jim Kramer fan, but for most people who watch, I think he's on MSNBC. Jim Cramer's out there and he is... he's sort of a bear when it comes to the stock market. He wants to caution people. He's hilarious. He's over the top. Sometimes I think he's drunk! But regardless.

Brett: Probably all of those. 

[Laughter]

Aaron: So, the other day he was really slurring his words. It was pretty funny. But he said something really amazing, 2-days ago on MSNBC. He said, maybe we should just trust this market and see where it goes.

Brett: Think about, every time we've had a serious financial crisis in the stock market, even the housing market. It was when people got warm and fuzzy, thinking that the rail car goes up only and never comes back down and, I'm gonna get on it and ride it. As soon as you hit the point where you have guys that drive a forklift with FedEx now getting a stash out and putting money in the stock market. That tells you that the general public has become comfortable with the volatility of the stock market, enough to where people think well, it's at... What's it at now?

Aaron: Are you talking about the Dow?

Brett: Yeah. 

Aaron: It’s nearly up to 36,000.

Brett: This time last year it was, what? In the mid-20s?

Aaron: It’s been flirting. Once Trump got in there the speed at which it went up increased and so it shot up under his time there. Even crazier and, not to get political at all, but under Biden, not only did it not quit, but I believe that the people saw that the inflationary capacity, which is measured by the CPI, showed acceptable amounts of inflation. That being said, and one of the things we're going to talk about today is that the value of the stocks that are invested in right now can be measured by $5 out of every $6 that that stock is trading for, has actual market value or relevance. So basically the investments are sound. 5/6th of the value of each stock that you could purchase on the Dow, is a fundamental. It can be fundamentally supported. So the speculation is only 1/6th of that stock and at its current trajectory, which Jim Kramer was trying to say, for example, is that there's enough fundamental support of the value in the stock market, that you should not be cautious and that you should be all in.

Brett: And I agree with that. I'm a believer that, unfortunately, we're still riding the train that Trump put into motion and I think the current administration is slowly pulling those brakes on it, one piece at a time.  I think when it starts coming to a stop, the stock market is not going to continue going up, it's going to level off,  and it's probably going to have a correction. The housing market is going to do the same, which we talked about in the last podcast episode. I personally believe it's going to start sometime this time next summer. I think we'll have an inflationary period, continue rising values, a hot market, and then sometime next summer it's just going to take, not a dive, it's going to take a dip. It's going to dip down and it's going to level off, and then we're going to go back to the way it was in 2019, when we are selling houses and everybody's fine. You get it for market price, maybe a little under, and I think we're just riding a residual train of economics that I don't think can withstand what's coming. It’s only my opinion. I'm not a stockbroker. I'm not an expert on anything. I want the economy to continue doing well and I want the housing markets to slow down because I think we're in a dangerous place right now. Like we could set ourselves up for a bursting bubble. If we're not careful.

Aaron: I think there are several variations, to use a popular term right now, I don't know if anybody is watching, I think I can say without getting in trouble, the Marvel movies and the Marvel television shows that are out there. It talks about how there are several different possibilities that can happen in the future, based on what's happening.

Brett: There are always several possibilities.

Aaron: I’ve got to tell you something, I had no idea that COVID was coming. No idea!

Brett: No. Some people did.

Aaron: Some folks did, you're right.

Brett: But no. We couldn't plan for COVID. That caught everybody by surprise. At the same time, we can't predict what's going to happen after the Christmas holidays after everybody has blown tons and tons of money, shopping and buying gifts, and we get into the first quarter of next year and the reality of legislation that's taking place now, will begin to set in then. That's why I think we'll start seeing the housing market begin to taper off and then start sliding down slightly. I don't think it's going to be a fall, and then slowly kind of level off. Then, by this time next year, we’ll be sitting here, laughing about COVID and the ridiculous market last year, and will probably be begging for it to come back, or something like that. 

Aaron: Well, let’s throw some statistics on this conversation. In a recent article that came out, there were multiple sources on this article, one of them is fortune magazine. Somebody basically read and digested what was found in Fortune magazine, realtor.com, and also the core logic index. So we're going to talk about a few things. The reason why there's a huge shift in housing right now is that in 2021 we’ve broken some records already and, if projections continue year over year, from August of 2020 to July of 2021, then we're seeing some trends that are going to permanently impact the US housing market, not the least of which is that, and this is probably the biggest figure in here, prices grew from August of last year until the end of July this year at 17% nationwide. And that's a record. They've never done that over the history of record-keeping of what housing prices have done. Over the entire United States. We have some housing inventory fluctuations as measured by realtor.com, not the least of which is that COVID caught us by surprise. By April of this year, inventory was down 53% nationwide. 

Brett: Yeah. Inventory is down because you put a house on the market and, within three hours, you’ve had 22 offers. Of course, the selling of the properties is lower the lower the number of homes are available but, read that next part, which I thought was very interesting.

Aaron: About how inventory actually went up year over year by 3% percent in May and 9% in June, and so what would you attribute that to?

Brett: Well, I think a lot of homeowners that want to sell, even investors who want to sell, the market was super high, but they weren't quite sure, because they realized well, I'm gonna sell my house, I want to move, but if I sell high I'm gonna buy high as  well. Now they're seeing a slow cooling of the owner-occupant market and, listen, this isn't because people ran out of money. There's no houses. It's because kids are now about to start back to school, where everybody's now moving into their new home today, and very few owner-occupants are buying after August 1st.

Aaron: That's true.

Brett: So, because of that, folks that now own a home that they wanted to sell and move earlier, realized now they can probably get a pretty decent price on their house and actually put a pretty decent price down on another home that they want to go to. The people that are doing that today are the folks that don't have kids starting school. They're people that maybe have high-schoolers that can drive to school, and they don't really care if they're living in Collierville or Germantown. The summer crash for homes was because you had people with 5, 6, 7-year-old kids wanting to move to Collierville, wanting to move to Germantown, to get their kids in these schools, and so they were buying homes literally as if they had gold stuff in the walls. Kind of like going... What's that show where they have the storage units and they just bid on it, open it up, and see what's in it? That's pretty much how they were buying these homes. It was just ridiculous. So now that's tapered off, I think we'll see an increase in inventory, all the way around, and like it says there, it'll become a buyer's market. A  little more in a buyers’ favor and versus how it's been this summer.

Aaron: Right. In a couple of more factors that are going to factor into this going to become a buyers’  market, is that the federal government has been protecting homeowners from foreclosure, okay? So we've had these foreclosure prevention programs, we've had forbearance programs that have been required by the federal government with the banks. I'm not sure that the banks are offsetting that debt at all. They're just simply requiring the banks to hold off.

Brett: Well, that ended July 31st. But here's a difference, and I get this question a lot from investors. Why shouldn't I just wait until all these foreclosures start hitting and we have this massive housing issue, and then just pick everything up pennies on a dollar? We're not gonna see that, alright, because Bob and Betty Jones pay $200,000 for our house 7 years ago. They're now behind because Bobby got COVID, was in the hospital, lost his job, and they can't pay their bills. Bank of America, tomorrow, is gonna send them a notice that they're now eight months behind on their payment, right? You don't qualify for a modification, you don't qualify for forbearance anymore. So, therefore, you need to get current or we're gonna foreclose on you. Two things are going to happen: 1) Bob's gonna get pissed off and tell the bank to stick it where the sun doesn’t shine or he's gonna ride it out until the bank forecloses on him. The bank will probably sell the house for $300,000 at auction, give Bob the $80,000 that was there, but the more likely scenario is that Bob realizes he can't catch this up, he’ll get an agent, throw it on the market for $275k, and sell it the next day, pay off the bank,  and move on. So we're not going to have this huge long list of national foreclosures across the country that you can just go and scoop up for pennies on the dollar. I think there's way too much equity in the properties that will be foreclosed on, that homeowners will be willing to take that short-sale, put a little bit of cash in their pockets, and move on. 

Aaron: So, I mean, I do think though, based on what you're saying, that that is going to give an opportunity for investors.

Brett: Sure.

Aaron: And for you and me. Like if you wanted to go and upgrade your house and if I wanted to go and do the same, we probably could.  And in a softer housing market, which is influenced by more inventory, right? Then there are gonna be some opportunities, especially in the foreclosure market, for us to be able to step in as owner-occupants which, for our listener, traditionally the federal government has preserved the rights of an owner-occupant above that of an investor or an institution to purchase a foreclosure. So, that means for Brett and I,, as individuals, if we find a property that's in foreclosure, we find out when it's going to be auctioned off at the courthouse steps, and as long as we've prepared to do what they require of us, we should be able to go there and say, I would like that home and I'm going to bid against other buyers that are going to be owner-occupants, ahead of investors and institutions, looking to purchase those properties. So I do think that there are going to be opportunities and I I think you and I agree that our investors in 2022, starting in 2022. and maybe for a couple of years, are going to be able to take advantage of a new wave of distress buyers, and be able to pick up properties for less than their market value.

Brett: Right, and listen. Buying a home or getting an investment property with equity is obviously a plus. But when you're fighting in a competitive market and you're going up against 10 to 15 other investors trying to get the same home, focusing on the market value is kind of a short sided way to approach this. The way you approach it is: What's my all-in cost and what's it renting for? If it's producing $1,100 a month and you pay $110,000 including all repairs, you're in at a 1%, and that's great. Let's say the market value says it's only worth $95k, who cares? You're getting $1,100 a month for it, you can get your 1%, because what's going to happen next year? That value of that property is going to go to a $100k, maybe $102k, then $105k, and what is the rent going to do? It is going to go from $1,100, $1,150, to $1,195. for you listeners out there if you're not already doing this, focus on the cash flow and you're all in cost and quit worrying about what the CMA says or what the market price is.  I've had so many investors lose deals because they would not go over asking even though the ROI and rent calculations showed they could go up another $10k and still make a cash flow the way they wanted. But they wouldn’t do it, and they kept losing. Smarter investors threw the value out of the window and just went straight with the rent comps and how much money they were going to have invested when they turned it over.

Aaron: Right, and we've seen more of that, you know, Enterprise, as a company, has been very conservative and all the agents that you'll speak to here at EPM Real estate are also conservative. Look, we don't want you to make a mistake at all, but there's a point in the investment curve, where the future benefits of your investment that you're making now, based on projections and value and rent price growth, and all of that stuff, it makes sense to take more risk while you can, absolutely especially in light of what we're talking about right now. Which is that this is the very last year of the Trump tax plan. Next year is the first year of the Biden tax plan. So many people, there are a lot of sellers in the market right now that say look, it means more to me to sell you my house now and not take those major hits on my personal taxes then it will for me to wait and sell it to you next year, and be in an unknown tax year. 

Brett: The issues of the taxes are going to hurt the short-term people, right? The long-term people, whether you're buying and living in it or whether you're buying and holding for 10 years, the new tax plan is not going to affect you. It's going to affect your income, but it's not going to affect your capital gains. 

Aaron: The seller is who I'm talking about. Let's break this open real quick. It is way important for so many of our sellers to get rid of the house this year. So, to our listeners, and I'm very excited about this point, we are in the last 6-months of what could be the most advantageous tax year for the next foreseeable 4 years. Okay. So having said that, for all the sellers that you and I speak with, they are in a closing window. They need to sell this year. So again, I think they're gonna be opportunities for buyers as the market softens a little bit as this housing boom, as some of these articles that we've read say, it is cooling. Dude, I think they're gonna be some great buying opportunities in the 3rd and 4th quarter.

Brett: Sure. I do too. I don't know if the tax situation's gonna be as detrimental. If you sell a home that last year you made $100k on, this year you can make $170k on it, you could still sell it next year, make $170k, pay your taxes on it, and still come out more than you would have last year. So I guess it's really going to come down to looking at the dollar signs for the seller, whether it will work or not, or whether the tax issue will be a bad thing. Now, granted, you're going to give up a lot more money, but you're still going to come out way ahead. 

Aaron: You know, a lot of our sellers that are liquidating with us right now, have multiple properties across the country. So that the net value of, or the net proceeds to their bottom line is actually going to increase their tax bracket.

Brett: That's true.

Aaron: So, just because you and I are selling one house to a buyer. We're assisting, you know we do a lot of buyers' representation, so we're selling one house to that buyer. We have no idea what the tax implications are going to be for that one house to that seller because they're looking at their entire portfolio. Some of our sellers are thinning their portfolio. They're strategically keeping their best houses while selling their marginal ones. Some of our sellers are at the end of their investment life and so they want to liquidate everything while they can. We don't know their 1031 exchange situation. A lot of our sellers are looking to take the proceeds of the properties that they're selling and move them into other properties in Hawaii, or in the mountains, Wyoming, Idaho. sorry. This is such an exciting time and I personally believe that there's going to be a ton of energy in the market. All the way up to December 31st. You and I are going to be getting calls and closing attorneys are going to be working on New Year's Eve, trying to close these houses before the end of the year.

Brett: If I’ve done my job right with my investors, they're all sitting on a pile of cash waiting for November 1st to start hunting. I just had a call with a new guy. He's out of New York, he's got a ton of cash, and he's wanting to start hunting. So I said, why don't you just wait until Halloween? And then, let's look for a good deal for you. I'll find you something that if it's out there, that's worth getting today. But if not, be patient. Wait till November 1st and we'll hit the road and we'll spend every dime of that, and you'll get a much better deal. Because you'll have more inventory than buyers. It's basic economics.

Aaron: I think the month of October is going to be practice buying. I think what's going to happen for you and me and, for our listeners, this is something that Brett and I do all the time. This is really an important benefit of working with us, Investors get to know me or Brett independently and we introduce each other. Brett is in sales and me as property management and we start helping Investors project what the actual return on their investment is going to be. Brett of course is assisting them and saving as much money as possible on the buy. I, of course, am speaking with them about the potential rent growth over the next 2 to 3 years, and we're helping them construct the concept of how that investment is going to perform. So all that to say, I believe that practice purchasing with Brett and with me, buyers, if you're wanting to know what the potential value of properties are, what the return on investment is going to be, start calling us in September and October, particularly if you're looking to make offers in November, that's really crucial. Price fluctuations will be marginal I think between October and November, but the number of properties which can be picked up, that's going to increase. I believe as we move into November.

Brett: Yeah, supply’s going up, the demand will drop, and that'll curb the Super Bowl pricing issue we had this year.

Aaron: A couple more quick statistics as we leave this topic. One is that the core logic index has said that they predict prices nationwide are going to continue to climb from August 1st 2021, in through June of 2022 by an additional 3.2%. So that tells us two things. One, we are still on a growth pattern when it goes to the average home value in the United States. Secondly, it indicates to us that the housing boom is slowing. So this meteoric rise in prices, 17% year over year, ending August 1st, 2021, that that is cooling to now 3.2%, which is a much more reasonable factor of appreciation over the next calendar year. Then the second thing I wanted to point out right before we left statistics is this. It is a proven fact that the cost to rent to the renter, or the rental value of properties, is a trailing indicator of housing value growth. So, and I know I make this point all the time to our investors but, you're a believer, you know? So the reality is that, you know what? If we've got a 3.2% growth in housing values over the next calendar year until June 2022, we are probably going to continue to see rents grow even for a year to two years after that June 22nd point. So, we're going to see inflation in rental costs for several years and, Brett just made this point earlier, you’ve got to take that into account when you consider the future performance of the investment property that you're purchasing.

Brett:  You do it this way. You don't buy stock because it's at the peak. You buy stock in the market banking on it's future, right? Its rise and its increase in value. You should buy real estate the same way. If you go in and buy real estate for what it is producing today, you're selling yourself short because you'll end up missing deals that you could have picked up just by being more aggressive and just working on the cash flow versus all in cost, and get away from the market value. So, don't sell yourself short. When you go out and put in an offer, be aggressive. Look at your numbers, see what number you need to be all-in at, and write an offer $10k over asking, contingent on inspection. Then if you go in there and realize it needs $12k of work, great! Negotiate the price down. Get your all-in-cost at $110k and rent it for $1,100, and be happy. Or wait until that tenant vacates at $900, do all the work and you're in at $110k, and rent it for $1,100. You need to be looking at what your performance is going to be 4 or 5, 6 months from now, when that current lease expires and once you've done all the repairs, and get away from the market value. Market value means nothing to me when you're talking about rental properties, right? If you spend a million dollars on a house, if it only rents for $1,000 a month, it's not a good investment, right? So it works both ways.

Aaron: Well, fantastic. You know, our producer had asked us to talk about what's going on, you know, right now in the marketplace and then, of course you and I do what we do and go down a really good rabbit trail. Yeah. That was good. So I just wanted to tell you a bit about property management. One of the things that I predicted earlier in this year was that the number of homeowners who were dissatisfied with the property manager that they had picked up initially in the first six months of 2021, the previous year 2020, that they would become frustrated with a lack of organization or they felt like the property manager was inexperienced and so they wanted to change property management, and this is a great time to change your property managers. You can only improve. Hopefully, if you're working with a smaller, newer, less organized property management company or, let's say, that your realtor that sold you that house is managing that property while also selling investment properties to other homeowners. Not paying attention to the day-to-day requirements of property management. Now is the time to move. Now's a time to move to a property manager who has been around longer, who has a more mature approach to the public, has more notoriety with the tenants here in Memphis, has a stronger more organized maintenance approach, better accounting, better bookkeeping and, just in general, a better reputation and a better approach to property management. So the point that I'd like to make is that we're covered up in new management calls. I love brand new investors to Memphis. I love talking about what we could do, but also seasoned property owners who have said, I've done everything I can to work with this person, I can't do it anymore. I've given them a termination date, will you take over management? and then the difference in those calls, by the way, when I talk to a new homeowner, it's at least an hour, and then there's introductory paperwork and some other stuff that we do when we end up working with that new buyer for 3-months, and we love it. We love that very much, and want more. These seasoned investors, where they have 8 to 10 houses, they just want one month's accounting to look correct. They're like a 10-minute phone call and then they're done. They're like, I'm sold to the paperwork, I'll sign it, go for it! The number of those has increased tremendously. I would say in the last 18 months, you know, it is specifically in the last 60 days. So that's exciting for us. If you go to our website right now, if you go to MyMemphisRental.com, you'll see 3 houses for rent. 3! That’s out of well over 500. That says a lot about the market but more houses are coming on, there are more vacancies that are coming on, and we are seeing an increase in rental inventory here in Memphis, too. So, both of those things, inventory should go up in both of our realms of real estate. 

Brett: I expect mine too, to jump. I’ll probably end up with about 60 or something houses, maybe 70 this year. Most of that, the majority, that's going to hopefully happen between October and Christmas, which is normally a time I can sleep in and not have anything to do half the day!

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