Is a housing market crash coming? Memphis, California, National 2022

Whether you are new to real estate investing or you're a seasoned investor, it’s likely that you’ve heard the predictions of a looming housing market crash. In this episode, Brett and Aaron discuss the likelihood of a housing crash and they present some other factors that other industry experts have potentially overlooked.

Find out more about this real estate investing podcast at:

https://epmrealestate.com/podcast/is-a-housing-market-crash-coming-memphis-california-national-2022

 

Brett: Housing crash! Number one, Richard said expert. There's no housing or real estate expert. In order to be an expert, you've got to be able to tell me tomorrow what's going to happen. Just like a doctor who's an expert heart surgeon can tell me the symptoms, the problem, and how to correct it. So experts are doing the same thing we did, they're giving their opinion based on what they see in the market. While I hear people talk about a crash, yes, I said many times, this next year we're going to see a dip, we're going to see a slowdown maybe 5, 8 or 10%, but these guys that are running around talking about the housing market crash of 2008, all over again, where the housing market is going to just collapse and you'll be able to buy houses for pennies on the dollar and people will be homeless. We're not heading that direction and that’s what I get a little aggravated when I hear these “so-called” experts talk about the crash because what they're doing is they're actually taking people that would be investing today, it's people that should be investing today, and causing them to doubt and to sit and to wait, and then what ends up happening is, the crash doesn't happen and you are now paying more for a property than you could at this year. So, here's my theory. Come January, we're still gonna be rocking and rolling. I think things will have leveled off, coold off. Maybe can get some stuff, a little under market. It'll be more of a buyers’ market. As we get into April 2022 it's gonna pick back up again and it's gonna kick right into insanity where we're buying stuff at $8,000, $10,000,  $12,000 of asking. So if you're gonna be an investor do your investing between October and April 1st. Buy then and then soon as the summer craziness hits, take whatever cash you got left, put it in the bank, and sit and wait. Just take your time and take it easy, because as we get through next summer, and a lot of these current policies begin to take place, and inflation hits that record high and ends up creating a small recession and we start getting into harder times and companies start downsizing and people are losing their jobs. Yes, we're gonna have a housing issue but it's not going to be a crash. It's going to be a correction. It's going to be getting us back to the days of sanity of 2017 and 2018, when a house sat on the market for week before you had offers on it, and you didn't pay way over asking. So my opinion is there is no housing market crash coming. There's a correction coming and that's going to be this time next year and, if you're long-term hold investors, who cares? You lose 5% or you lose 10%. Next year you gain 15. Who cares about the correction? We are not headed for a crash. Now, I didn't see COVID coming, nor did I see Joe Biden getting elected, so I could be wrong.

Aaron: You know, Brett, obviously you and I have read several articles that opposed the notion of a housing crash, you know. So, for our listeners, we're not just shooting from the hip here, like we read. We read every day, articles from, I've talked earlier about, oh gosh, I'm gonna have to look this up to verify this, it's either housingwire or homewire.com. I like them a lot. I like marketwatch.com.

Brett: Well, there's a lot of good articles you can read and if you read into the information they're giving you, you don't have to be a real estate genius to realize we're not headed for some Niagara Falls type of real estate crash. We're heading for a little bit of rapids that we haven't seen in a while and it's gonna be a little bumpy and there's gonna be a little dip in the market here. Places like California are going to get crushed. They will see a housing crisis like they haven't seen since 2008 because of their bubble. Nashville is headed for a housing crisis. If you look at the places where homes are selling for $200, $300, $400 a square foot, there's where your housing crisis are gonna happen because those homes are way over inflated, people are way over mortgaged, and when the economy begins to dip and the value drops, the first people to sell are those folks because they get scared.

Aaron: Yeah, let me give a quick statistic on that. So this is some information I got late last week that wages and salaries of all civilian workers, which are defined as workers in the private sector along with workers for state and local governments but not federal workers. So that was a lot of words, but the point that I'm making is those wages increase 3.2% on a year over year basis since June of last year. Inflation as measured by the CPI, which is the consumer price index, was up 5.4% over the same 12 month period. There's a couple of other statistics that we could talk about.

Brett: And that gap’s only gonna widen, right?

Aaron: That's exactly right.

Brett: And as that gap widens people become less able to pay. Let me clarify my statement. I wasn't saying that rich people are gonna be in financial crisis. What I'm talking about is you take up a state like California and take Nashville. You can take a home out of Raleigh that you paid $80,000 for and drop it right outside of LA in California, and that house… It costs you $350,000 or more. Now, that same person buying that house, and the only reason why I say that is have a lot of investors that come from California, show up, and they're not wealthy people, they live in a little 3 bedroom, 1 bath house in California, and they happen to sell one of their homes for half a million dollars and then come here and invest it. They're not rich. They live paycheck to paycheck. But, they realize, I can get rid of this $500,000 home and go by five or six rental properties in Memphis and make $3k or $4k a month. I guess my point I'm getting back to, I need to get back to it, is that California, the affordability issue of the average person, as soon as the market changes and unemployment goes up, inflation goes up, that's who's going to get hit. All these policies are in place are not for let’s tax the rich. It's basically going to hurt the guy that gets up and goes to work and works 10 hours days, 6 days a week, and lives in a little 3 bed, 1 bath somewhere in California or out on the outskirts of Nashville. You know. Right now you go by 3/1 over there and it's 200 300 400,000 dollars.

Aaron: Right. You know, there are some other factors that are here that are going to play a part in the localized housing correction. So I think that's what we both agree on there are going to be localized housing value corrections.

Brett: Memphis won't be hit as hard.

Aaron: Nearly as hard and so here's a cool distinction. One is, Southern California is, I mean, California is the world's seventh or eighth largest economy as compared to world governments. You know what I’m saying? We hear, and I think statistics prove, that there is a mass exodus out of Southern California, okay? They're moving to Texas, Oregon, all the western states. Tennessee, right?

Brett: Quite a few show up here.

Aaron: We have, and please come. We encourage. Please raise the intelligence quotient of our state. We love working with Californian's, we love your vision. So, the point that I'm making is this, the localized correction is going to be on changes specific to that region, right? And that geographic location. They're going to have a governor change here very soon. Don't know where that's headed. They may have a change in their labor market. They may have a change in the jobs that are being hosted there. One of the things that I hear from Southern Californians more than any other population is this: Well, thanks to COVID I can work from anywhere. So there has been a ton of people up until COVID, up until the Zoom-Boom, the remote meeting boom, and all that stuff, who were required to live in Southern California. That's changing and that effect is going to have a long-term effect on the value of California housing. We haven't even seen the beginning of that yet. So the cool thing about Memphis, though just to bring it back here locally, is that Memphis is full of people who are in the service industry. In other words, I make my money serving people that live in my same city, right? and they make their money serving me. So, we have a community of people who drive work trucks every day and, you know, offer online services and all of these things. So, Memphis actually has quite a robust service economy. That's what's gonna keep us going and though those needs in those services aren’t going to change because of a massive change in the economy. I still need to go to the dry cleaner. I still need to go to the grocery store. I still need my plumber to come out and repair my, you know, whatever. So we love Memphis. That's one of the reasons why Brett is still here. Listener, please understand Brett could work anywhere in the United States and make money. But there's a great opportunity here in Memphis for him to do what he does very well, which is to connect investors with property that they can say, “I'm so glad I purchased that!” in 5, 10, 15 years when they consider what they're going to do next with it. It's a very very vibrant marketplace.

Brett: And I've been a real estate in quite a few areas. Predominantly in Louisiana where I did development and buying and selling. One of the unique things about Memphis, which is why I've been here as long as I have after I moved up, was because of uniqueness of the market. Yeah, I could go anywhere and make money. Anywhere and develop a subdivision but, I tell myself and other people all time, yeah I get asked all time, are you ever gonna be back home? I’m like nah, probably not. If I decide to, I can't right now because Memphis is where it's at. I mean, the ability I have here and the amount of volume and work that I have here due to the makeup and the economy of Memphis and its people that live here. It’s unmatched anywhere else. I haven't seen that kind of opportunity anywhere else. So, you know, I’ve built my business here. 

Aaron: Yeah. To quote one of our favorite investors who's been with us for five or six years, who at one point had 33 properties, just liquidated 13 in order to offset the cost of another investment where he lives. He's telling us that in 2022 he's coming back to start investing again in Memphis. His words, and I love this guy, he said the reason that he bought in Memphis had nothing to do with you or me. It had everything to do with the statistics, and he said that opportunity, especially back in 2014, for him to get in with cash by either in 50% or 100% cash or on his commercial lineup of credit that we got for him to be able to just acquire, acquire, acquire real estate was unmatched by any other city in America. He measures us against places like Cedar Rapids, Iowa.

Brett: Little Rock Arkansas was big for a while. 

Aaron: It was.

Brett: Nashville. I get a lot of questions about Nashville. 

Aaron: It's Little Rock is on one of Yahoo's Top 10 just for housing correction. So, back full circle, back to our question of the housing bust, right? Basically, we don't see it, listeners. We don't see it. We don't see it in the rental market.

Brett: Well, but I think we have to differentiate owner-occupancy versus investment. Okay. 2008 was an oddity that'll probably never happen again. As as it did, it will get close but it'll probably never happen like that again. But, in Memphis when you have, I think the latest statistic I looked at was 48, almost 49% of every resident inside the city limits of Memphis, rents and doesn’t own. The latest statistics. When you have that kind of a renter base, the rental market’s gonna boom. It's gonna continue to boom, because there are always renters looking to rent a house. I've always got an investor wanting to buy a house or an investor trying to sell a house. So that's a constant. What happens in the investment market is people get too tied up in market value instead of rent comps. The only way the housing market on the rental side is going to take a collapse is if we have a massive recession and FedEx has to layoff 5,000 people and Nike and Amazon, they're all starting to layoff distribution people. Yeah. Now we're going to have a crisis, but as long as those companies, stay whole and functioning, the owner-occupant market may have a shift, not a collapse, but a correction, but the rental market is going to stay steady as it did through the collapse in 2008, the average state saw anywhere from 20 to 45% loss in property value. I think at its peak Memphis’ highest point it hit was 16 or 17. The lowest in the nation. The value loss of real estate that caused this collapse of the market.

Aaron: I think from the top to the bottom. So that would be from early 2007 to about 2012, I think that we maybe saw a loss commensurate with the rest of the nation, but it was on the lightest side of it. So, I think 16% is about is about the maximum that we lost over the course of how many years is that? Four? That's tremendous.

Brett: The reason behind that, I believe, is that the renter basis is so massive here that investment real estate kept the housing economy in Memphis from completely going over Niagara Falls, as it did in California, in Texas, and in a bunch of states that got hit really hard. Tennessee got hit really hard. But Memphis, as a city, did not, even Shelby County, did not see that massive crush. So what do you attribute that to? I attribute it to the fact that there are so many people that rent here that the rental market stayed hot, stayed solid, values dropped, guys got better deals on properties, but those properties recovered quickly, why? Because they're cash flow properties. The market value was immaterial at that point.

Aaron: So, one of these days we're going to have to get into what inspires investors to invest.

Brett: Okay, cash flow.

Aaron: Yeah, right now. Right now, that's true. But we're in an atypical marketplace.

Brett: In 2008 was equity. I can buy this for $100,000, it was worth $200,000 last year, it's going to be worth $200,000... I have an investor that I worked for that you know, that did that. They made a ton of money buying up properties, pennies on the dollar.

Aaron: We had one, in fact, if the listener wants to go back, and I forget which episode it is, 7, 8, or 9. Joe Veramontez made some decisions, a great guy. He bought all of his properties on equity between like, you said, 2000 and 2005, I think is when he stopped because in 2006 and, this is why people liken him, this is why people say, oh, we're headed towards another housing crisis. Look, I'm not trying to make fun of you, but the point is they say that where we arel right now is similar to where we were in 2006, right? Gas prices are going up, housing prices are at an all time high. The difference is, what's the major difference with housing prices?

Brett: We did not lend the money to every person that had a pulse to buy $300,000 house on a stated income loan.

Aaron: So that's a government, a federally mandated requirement. Okay, so we had federally mandated requirements once over here, guess who picked up on that? It was the banks. If you look back at the interest rates in 2006, they were 6%, and there there were these weird variable-rate loans where people would pay interest only at least 8-8.5%. We're not seeing that right now.

Brett: The pin in that grenade finally pulled was in 2005 or 2006 when they expanded the federal loan guarantee program and it all started back with the community reinvestment act and then all of a sudden, I forget the senator’s name, but he was on the senate banking…

 

Aaron: Dodd or Todd?

 

Brett: One of those two clowns. Dodd! Anyway, they were threatening banks because they weren't lending enough money to minorities, right? So, what did Bank of America do and Citibank? Well, I mean, the government's gonna guarantee it, so guess what? Here's a new non-stated, no-income loan. You just say, I make 10 grand a month. Great, here's a $300,000 mortgage so you can buy your house? So you took people with no financial skills, no money management skills. You tell them, I’ll give you a $300,000 loan and you can go buy this beautiful five-bedroom house in Cordova and fill it with furniture. The first thing, they’re going to do is think well hell yeah! Okay! Well the rate 6.5%. I don't care. Bank of America doesn't care. Who's backing up the note? The taxpayers. So if that homeowner collapsed or defaults and, we had many that never paid a mortgage payment, when they default, Bank of America then takes that home, forecloses on it, sells it at auction, then the US government, Fannie Mae, Freddie Mac then write a check to Bank from America to make them whole, and who walks away? Bank of America. Meanwhile the homeowner lost their house, the taxpayers sucked up the loss, and Bank of America walked away whole. And I'm not using Bank of America as an example; all the banks did that. The stated income loan was the hinge pin they pulled that caused this domino effect. So the economy started sliding, gas prices went up, and we started getting into a recession. So what happened? People started getting laid off, now they couldn't pay their mortgage, and when those people got laid off and couldn’t pay their mortgage, then all of a sudden they began to realize, wait a minute, that person we laid off. They can't pay the mortgage. Probably should have never had a mortgage to begin with for $300,000. They only make $30,000 a year. That was it. At that point, the snowball had started down the back of that hill and there was no stopping it. 

Aaron: Well then there are two other things that happened then that led to that. One is, I think the philosophy of homeownership was that it was cheap and easy, right? Like everything you just said, it led to the mentality of, it's easy to buy a house, right?

Brett: In your application says do you have a pulse? Yes. What's your blood type? A positive. Great, you're approved.

Aaron: So when they lost that house, that they couldn't afford, and that's the story we heard from everybody. Well, I mean, and because you were in a completely different industry, we won't go there, we've been there. We're gonna return there. But you know the reality is that people said okay yeah, I got in over my head, I lost my house, not a big deal. I'm gonna rent for a couple of years and I'll go right back to it. What they didn't realize is what was coming. That suname of, you know, changes in the federal government, changes in legislation about what a borrow was allowed to borrow, changes in the strength of banks, the closing of all of these banks.

Brett: And the strength of the buyer.

Aaron: Well, but the strength of the buyer was never strong. It wasn't strong in 2006.

Brett: That’s what I'm saying that we're not going to see that kind of class because the strength, the requirements for a buyer today are way more, they're like they were back in the 80s. You really had to have some cash in the bank, or a good credit score, a good job. There are some loans out there that allow you to get away with the lower down payment through FHA, but they're not just giving money away to people that should not be buying a $300,000 house. You know you can't afford a $300,000 house if you make $30,000 a year, the bank knows you can’t, but the banks still gave you the money. So those days are gone. This crash that they're talking about, this dip is all it's going to be, we're not going into that crash. If inflation hits and then we roll into a recession and costs keep going up, yeah, there are people around the country, they're going to be laid off from work, and there's going to be a housing crisis locally. But what you don't realize is in Memphis, this is a distribution city. Nike, Amazon, Fedex, all of these major worldwide distribution centers, that are here in Memphis, are going to have to keep operating. So we're not going to see an unemployment issue or crash here in Memphis. So if you have homes here, don't stress.

Aaron: So like we talked about. We touched on how the labor market is going to be changing in places like Southern California where they have more of an intellectual property marketplace. They are producing and operating systems and they can produce and operate those systems from anywhere in the world. They don't have to live in Southern California anymore. Corporations are loosening up and they're actually saying look, to go back to COVID, we're not going to make you vaccinate, but you're not coming into the office building. 

Brett: One thing COVID taught most big companies is, you know if I'm a CEO of a company, I own a 20-story building to house 5,000 employees, and all of a sudden COVID hits and I have to scale down and run a skeleton crew and have put everybody at home with technology to work from home, and we figure out a system to monitor their work performance and what they're doing on a hourly basis, and we’ve got all that figured out. The firs thing I would say is this building is gone. I don’t need this building anymore. Then the next step of that is, for Bob, who's been working for home, tells his boss, you know what? I'm moving to Houston. I can work from home all day long. I'm just gonna move to Houston. I'm tired of California. So, I think California is in for a rude awakening in the next five to seven years. I think that they have no clue what's coming. What you're gonna end up with in California is, you're gonna end up with a bunch of Hollywood elites in their mansions cutting their own grass.

Aaron: Well yeah, and here’s what I see. Okay, I see in Southern California more stratification of incomes.

Brett: There is no middle class in California anymore. Very, very few spots have a middle class.

Aaron: I could see from a hyperbolic standpoint how you would make that statement. But, I met with an investor Monday of last week, they came in and they would be middle class in California. They're considering relocation here because of the cost of living and because of the economic opportunities, in fact, he himself said a week ago, I could work from anywhere, right? I can work for my California company living here in Memphis. So, they're looking to liquidate their assets there, not only their personal home, but also several other investments, and they already own, maybe 5 properties that they bought at between $60,000 and $80,000, which have now already added between 20 and 30% increase value over the course of the last 18 months to 2 years. The point that I'm making is that they are definitely middle class. I see a stratification happening in the California. I see the state, the red aspect, the conservative aspect of that state, dwindling because they're moving away. So with they become removed from the population, what's left are people who are much more focused on, how can we better organize the state? Instead of stay out of my business, the constituents of California are gonna say, how do I join the California government in better organizing my direction? Obviously, what we're talking about is highly, highly controversial. I still think movies are going to be made out of LA. I there's going to be an elite class, like you're talking about, I think the movie industry is the most popular and profitable industry in the world as far as the amount of effort that you put into it and you return on that investment. So I think California is going to be fine. I just think it's going to shift in who's making the decisions. As far as Memphis is concerned just going back to the, you know, for the listener, service-based economy, these are people that get up and probably do something outside of their homes for a living every day, and we all need that stuff. We all need it. You need it? I need it. And so we don't see there being a housing crash, really at all in the country. We also don't see a major housing crash here in Memphis. That just seems absurd.

Brett: The worst crash in our recent history we massed 16% loss over 4 years. If you had bought a property in 2005, lost 16% in 2008, by 2012, you'd gained another 5 to 6% over those 16% you'd already lost.

Aaron: 16% lost over the course of 4 years and what just happened between August 2020 and the end of July 2021, we increased value 17%. So, that 1 year gain would have offset a 4 year loss.

 

Brett: That’s the key. So, just make sure if you're focused on buying real estate. Actually, if you want to focus on buying a Memphis, go to EPMrealestate.com, go down to the bottom, look for me, Brett Bernard, my cell number is on there. You can give me a call anytime or shoot me a text. I’d be glad to talk to you and educate you on the Memphis market. That's a shameless plug from me, just to try to top Aaron’s.

Aaron: You know what? you're here, right? Like, you're here recording with me. Nobody else is so dude, you get the plug! 

Brett: Yeah. If you're interested in the Memphis market, just give us a call and we'll fill you in on our opinions. But yeah, don't freak out, we're not coming for a crash. We're going to have a correction and that's all it's gonna be. You'll see a dip. It'll come back, you'll be fine. You'll get to see a another day.