Why 86% of Americans Are Wrong About Real Estate

David:
This is the BiggerPockets Podcast show 865. What’s going on, everyone? Hello and Happy New Year. Welcome to the BiggerPockets Real Estate Show. If you’re new here, I am David Greene, your host of the BiggerPockets Podcast. Joined today with my fellow Avengers, Dave Meyer, Henry Washington, and Rob Abasolo to help me out. Dave, tell us a little about what type of show we have in store for everyone today.

Dave:
Well, to start the new year off right, we are going to be taking a look into the housing market and the economy to talk about what’s actually going on and perhaps debunk some of the myths that are pervasive in the media right now about the housing market. As an example, there’s a new survey out from Fannie Mae that found that only 14% of Americans, just 14% think that now is a good time to buy real estate. So it’s basically the four of us on the show and no one else. But if you actually look into some of the data, you could see that perhaps it is a good time to buy real estate and we’re going to provide some investor perspectives and some data about what is actually going on. We’re going to look into a couple of surveys that we dug up that look at consumer confidence, investor sentiment. And our goal here today is to inform and basically arm you with the tools you need to make deals happen in 2024.

Rob:
Couldn’t have said it better myself, Dave. And before we get into this show, we want to take a minute to let you know that you’re going to be hearing some changes on the podcast this year. Our goal is to bring you more stories about people who are actually doing deals today, information and news that can help keep you informed on these decisions and strategies to help you pivot your business in this more volatile market. So you’re going to be hearing some of these changes, but hopefully we’re bringing you in the moment news that can help you in your real estate journey today.

David:
Yeah, and we can acknowledge that in the past, we’ve had a lot of different stories and information that worked for investors at different market cycles, at different times in different environments, but we’re in a completely different housing market than ever before. So we’re going to shift our stories and content to match where we are today.

Henry:
And with that being said, we’re going to need your feedback. We need to know if what we’re doing is actually providing value to you, so we make this free content for you. So please give us a comment, send us a DM, let us know your honest opinion on the shows and how you feel this year.

David:
All right, let’s get into it. But before we jump too deep into the housing market survey, let’s talk about how Americans in general are feeling about the economy. Our first survey shows surprise. Americans are starting to feel better about the economy and inflation. Dave Meyer, what say you?

Dave:
I guess the first thing I find is that my feelings are always the opposite of what everyone else in the country is feeling, but this isn’t about me. The latest release of the University of Michigan, which is pretty much the most well-known consumer sentiment survey, shows that for the last really year, year and a half, consumer sentiment has been climbing. And what it’s showing is that sentiment basically bottomed towards the end of 2022 and has been steadily rebounding. And that is encouraging, but I think it’s really important to note that even though it has been climbing, it is still really low in a historical context. So if you look back at the last decade, we’re still below pretty much any time pre-pandemic, but the trajectory is pointing upward and perhaps Americans are starting to feel a little bit better going into 2024.

David:
Henry, what do you think?

Henry:
I think people are just becoming accustomed to the price of things. They’re becoming accustomed to what interest rates are. Yes, people feel like they’re high, but people are still buying homes, not in the volume they were buying them previously the past couple of years ago, but people are still doing deals. And every time I travel, guys, I just look at the airport, they’re packed. People are traveling, they’re spending money, they’re going out to eat, they’re doing all of these extracurricular activities. And so what I see out in the public kind of reflects what I’m reading in this article that people seem to be somewhat confident or feel like things are normal again.

David:
Dave, you are ever the contrarian. People seem to be feeling better about the economy, but should they?

Dave:
I sort of felt pretty good about the economy overall in 2023, at least in terms of the traditional metrics like the labor market and GDP. And that proved to be accurate. GDP did grow pretty well this year. The labor market has remained resilient, but I’m feeling like there are some headwinds now that may slow down the economy in 2024. I’m not saying that’s necessarily going to send us into super high unemployment or necessarily into negative GDP growth, but you start seeing some data about how savings rates are declining. You see some information about how a lot of the savings that people had accumulate during COVID have been depleted. You have these other headwinds like student loan repayments starting to come up. You see things about credit card debt increasing.
And the other thing is that interest rates on average take 12 to 18 months to ripple through an economy. And so we are really only starting to begin to feel the impact of the first interest rates. Now, that’s different in real estate, real estate, you sort of feel the impact immediately, but the way it gets impacted, it impacts consumers and other businesses is a little bit delayed. And so to me, I think we’re going to see the economy slow a bit in the first half of 2024. Again, I don’t think this is going to be any sort of disaster, but I do think it’s going to slow from where we were at least in the second half of 2023 when things were sort of surprisingly strong.

Rob:
Can I ask you a follow-up question on something you said? You mentioned that it takes 12 to 18 months for interest rates to sort of take an effect on the economy and you said the first set of interest rates, do you mean back when interest rates were like 3% that’s starting to hit the economy or when interest rates hit their all-time highs of 7, 8, 9%. That’s what we’re starting to feel right now?

Dave:
Well, I’m referring to the federal funds rate. So basically, not mortgage rates but what the Fed is actually doing. And so most, if you look at, this is not my research, this is just economist research. They say that typically, when the Fed raises rates, for the full impact of that to be felt really to every corner of the economy from car sales, to employment, to investment in new infrastructure for businesses, takes 12 to 18 months. Now, if you think about it, we’re 21 months from the first Fed increase from this tightening cycle. And so that means that a lot of the impacts from previous Fed hikes that happened months ago are only starting to be felt right now. And of course, this may be different this time, but if you took look at the traditional research, it means that some of the impact of higher rates are still yet to be felt and so that might put some further breaks on the economy at least.

David:
Now, the surveys did show that American savings rates are down as well. Does anyone here see that posing any form of risk going into 2024 for the average American consumer or the real estate investor that depends on that person to pay their rent?

Henry:
I think it’ll play in a couple of ways. One, as an investor who is flipping properties, if people have less savings, then that definitely can play into them feeling like they can afford to buy a new home if they’re not leveraging some sort of down payment assistance program. And so I know there are lots of down payment assistance programs out there, but there’s not a lot of… Most people aren’t just aware that that’s something they can go research on their own and potentially qualify for. And so if there’s less savings, there’s potentially less buyers or people who feel like they can buy a home because they just automatically assume, “Well, I don’t have anything in savings, I can’t even save the 3 1/2 to 5% down payment.”
And on the other hand, as a landlord, yes, you’ve got tenants who are looking to pay rent… Most tenants hopefully aren’t paying rent out of savings. We’re basically evaluating tenants based on what their gross income is per month. But if an emergency happens and they have to take care of emergencies out of their everyday living and they don’t have savings to pay rent, then yeah, I think that that can impact landlords as well. But they’re still pretty high demand for rental properties where I’m at. So there’s not really high vacancy, meaning that if a tenant doesn’t decide to pay and you have to get a new tenant, typically, it’s not a problem to do that. But that’s kind of how I see how these things might impact a real estate investor.

Rob:
I’ve got something to say on this. I mean, I think for the average American consumer, really the big risk is, and it’s kind of a [inaudible 00:08:49] one, but I mean, with lack of savings or a smaller amount of savings than usual, I would say the big risk here is if the tech industry continues getting hammered, people lose their jobs in that side of things. It’s really the big risk here is when people are in high amounts of debt, especially high interest debt, like car interest rates for example, are much higher than they were a couple years ago. I just bought a vehicle and I think it was a 7 or 8% interest rate, and that was a huge bummer compared to the 2 1/2% rate I got two or three years ago.
And so I think a lot of people have been taking on some of this debt and once the other shoe drops, if you will, if you don’t have the savings to combat some of these higher interest debt that’s been coming into play with these consumers, I think that’s where we’ll start getting into a bit of a stickier situation.

David:
Dave, what about you?

Dave:
I think that makes a lot of sense and I think as you guys have said, that we’re starting to see I think more potential downside in terms of rent, household formation, maybe vacancies in both long-term and short-term rentals. But I want to make clear to people that even you hear the word recession or economic slowdown and a lot of people associate that with housing prices falling and that certainly did happen in the last major recession in 2008. But if you look at the last six recessions, housing prices actually went up four of the six times. And so it doesn’t necessarily mean that a recession or an economic slowdown and prices in the housing market move in the same direction. And this is a whole other topic, but there’s a lot of reason to believe at least in this year that if there is an economic slowdown, that that will bolster housing market demand because it will probably bring about lower interest rates.

David:
All right, so far, we have discussed consumer sentiment at large about the economy. And next up, we’re going to get into Fannie Mae’s National Housing Survey and RCN Capital’s Investor Sentiment Survey. But before that, a quick break. All right, welcome back to the show. Dave Meyer, tell us a little bit about Fannie Mae’s National Housing Survey.

Dave:
Well, this one’s pretty easy to explain. People are pretty down on the housing market right now. The first metric that we looked at is Fannie Mae’s National Housing Survey, and people have been just really grim about it. It peaked back in February of 2020, and ever since then, fewer and fewer people have said that it’s a good time to invest in real estate or to purchase a home, really. It’s not for investors. This is also just home buyers. And it really hasn’t shown much sign of recovering even over the last couple of months. So the conclusion from Fannie Mae’s National Housing Survey is pretty clear. People do not like real estate right now, and it’s important to know that this isn’t just investors. In fact, it is not investors, it’s focused on primary home buyers. And basically, since the beginning of the pandemic, people have gotten more and more pessimistic and negative about the housing market.
And as far as back as we have this data, which is only to 2011, so we don’t really have the last downturn, but it is far, far below anything that was going on pre-pandemic and people don’t even think it’s a good time to sell. One of the sort of side effects of the pandemic was that even though people thought it was a bad time to buy, many people, and it was a good time to sell. Now, people think it’s a bad time to buy. Less people think it’s a good time to sell and frankly, that’s reflected in the rest of the housing market data. We’re seeing fewer and fewer home purchases and transactions going on because people are just really down on the housing market in general.

David:
All right, Henry, you got your boots on the ground out there. You’re in the trenches looking for deals every day. What are you seeing out there? Is there any merit to this negativity that people seem to have about the housing market?

Henry:
I mean, I definitely think there’s some merit to it. Things have absolutely slowed down from even three or four months ago. Homes are sitting on the market a little longer. Buyers are negotiating more concessions into their offers, and I’ve had one house literally fall apart at closing two times in a row now because sellers either found something else they wanted or just decided at the last minute they didn’t want this. And so that didn’t happen a year to two years ago. If it was getting under contract, people were figuring out a way to close and it’s not happening now. I think that things are still selling though, David, so it just takes a little longer and it has to be…
You have to really focus on the fundamentals of investing right now. You have to renovate to what the general public in that particular part of town wants. You have to go a little bit above what they’re expecting. You can’t just put the same stamp on every single property like you could a year ago. You have to really pay attention to the market. Who’s buying there, what are their other options? And be slightly above them. It’s forcing us to be better operators. But people are still buying homes and I, on the buying side, I am still buying great deals in this environment. So the transactions are happening, but I can see how the pessimism is playing into the bottom line for real estate investors because the longer I hold a property, the more that thing is costing me and holding costs every month. I’ve got to spend a little more on my renovations than maybe I had to maybe about a year or two ago. It’s forcing you to be a better operator. Absolutely.

Rob:
Can I have a follow-up question on that, Henry? Because I’ve talked to a couple of realtors recently that said that they felt like they saw a pretty instant uptick in interest, inquiries, offers based on the fact that interest rates kind of fell over the last couple of weeks. So I’m curious on your end, obviously you’re saying that things are sitting down on the market here for a little bit longer than they were a year or two ago. Are you feeling any sort of, I don’t know, quick upticks from interest rates falling or have you not seen that across your business quite yet?

Henry:
That’s a great question. Yes, I would say that we are seeing an uptick now. Obviously, the rates dropped within the past couple of weeks. You’re not going to get a closing that fast, but I have seen showings increase on the properties that we have on the market since the rates have come down. So as soon as those rates came down, we really started to get showings and more volume on properties that have been sitting a little longer than most.

Rob:
Yeah.

David:
Dave, what do you think?

Dave:
I think, David, the question you’re asking is probably one of, if not the most important question for the housing market next year because the impact of rate fluctuation on demand is pretty well-known. Rates go down, more people want to buy. But I think what’s really been surprising over the last few years is rising rates has reduced supply, fewer people want to sell. And so if we start to see rates come down, more people are going to want to buy, I think that’s pretty obvious. But are we going to start to see more inventory is sort of the question I’m very curious about. There’s not really much of a precedent for this and it’ll just be interesting to see because if both sides start to come back, buyers and sellers, we could start to see a much healthier housing market. Whereas if we only see demand come back and not the sellers, we’ll start to see, maybe it’s possible that we’d see rapid appreciation again, similar to what we saw during the peak pandemic years.

David:
Yeah, when that happens, what you just described, we tend to see wealthier people are the only ones transacting in real estate because they can afford to buy houses with bigger down payments that will still cash flow, they can make these deals work. Whereas the person who’s just trying to get started has a very hard time busting into the market when there’s not a lot of supply. So prices stay high. And there is demand, but rates are so high that they really can’t compete with the big dog. So that is a significant thing to be concerned about because I think all of us would agree, we want to see your average American who’s trying to climb themselves out of a financial pit or just get into more secure financial footing, be able to use the real estate market to do so.
So we’ve heard about how Americans in general are feeling about the economy and the housing market, and now, we’re going to dig into what investors are thinking about. It’s time to dig into the RCN Capital and CJ Patrick’s Investors Sentiment Survey for the fall of 2023. This was regarding residential real estate where different investors were interviewed and asked questions about what they thought about the market. Dave, what did we find in this survey?

Dave:
Yeah. So I really like this survey because it really focuses on the niche that we are all in here. We started this conversation talking about consumer sentiment. So basically, everyone in the US. We drilled down a little bit into home buyers, and now, we’re just talking about residential real estate investors and how they’re feeling. And how they’re feeling is basically what I experience all the time, is that it’s completely split right down the middle. So the question asks, how does the environment for residential real estate investing compare to one year ago? And the number, the percentage of people who say that it’s better or much better is about 39%, whereas the percentage of people who say it’s worse or much worse is 37%.
So about 35, 40% of investors say it’s getting better, 35 to 40% are saying it’s getting worse, and the rest say it’s about the same. So it feels like investors are really quite split right now, which actually, I’m kind of intrigued by because this is residential real estate investing. At least in my conversations with investors, most residential investors I know feel like it’s a little bit better this year. Most commercial investors feel like it’s much worse. So I’m curious what you guys think, but that’s sort of what I’ve seen.

Rob:
I mean, I feel like there’s always half the people saying it’s good, half the… For the last five years, we’ve had such a good real estate run that there were always people that were like, “Oh, I can see the writing on the wall, I can see the writing on the wall.” for five years in a row, and then finally when it happened, they’re like, “See, told you.” And it’s like, “Well, you’ve been saying that literally for 10 years.” And then now, it’s flip-flopping, and then now, I don’t know. I always feel like it’s always going to be split a little bit. I feel like the fact that interest rates are dropping is a little bit of a, okay, I can at least kind of breathe and sort of re-strategize now, but I mean, I’d assume that there’s still probably a very large portion of people that are just, they got a little bit of scar tissue and probably just being a little bit more cautious moving into 2024.

David:
Henry, what about you?

Henry:
Yeah, I think Dave and Rob, you both nailed it in terms of residential real estate investors. For me, this is… I’ve viewed this past few months, but really, this past year, as one of the best times that I’ve ever seen in terms of the ability to buy real estate. Yes, the interest rates are high. I get that. I’m not saying it’s the best time in terms of cash flow. Obviously, cash flow is better when interest rates are lower, but it has been the best time in terms of the ability to buy a property at a substantial discount that is going to be a great long-term investment. I’ve been able to buy more deals this year than I think I’ve ever transacted in a 12-month period, and then for the past 90 days, I’ve been even ramping up on that because of those situations.
If you think about, we talked about the sentiment and how people feel about the market, and so you’re right, people don’t typically feel like it’s a good real estate market, and so those people who are actually selling right now probably need to or else why would they be doing it in a market that they’re not confident in? And so because they need to sell and there’s some situations that they need to get out of, investors are able to get in there and negotiate better prices or more concessions or things that are going to benefit their investing portfolio in the long-term. Now, the caveat of the catch has been like, can I sustain this thing in terms of will it pay for itself? Am I going to make monthly income or at least will it cover for itself? And so my strategy has and continues to be, I’m going to buy value, I’m going to buy a good deal.
So just because it’s a good deal, doesn’t mean it’s going to cash flow. So I may buy something and buy it at a substantial discount and at a 9, 9 1/2% interest rate, maybe it doesn’t cash flow or maybe just barely cash flows a little bit. But if I walked into 50, 60, 70, $80,000 worth of equity, then I’ve kind of got this cushion that if I need to sell it, I can and I won’t lose money. And if I can hold it, then I’m banking on what’s that equity and appreciation going to get me in two, three, four years, and then what’s that cash flow going to be if and when rates come down and I can refinance it? So in terms of buying, it’s just been a phenomenal time right now.

David:
Rob, moving into 2024, what is the play for real estate investors based on the information that we’ve learned from these surveys?

Rob:
It’s kind of going back to Henry’s last point, which is if interest rates are high, the cash flow is going to suffer. My philosophy on real estate really since I’ve gotten into this game is figure out other ways to make money for cash flow. Never pay yourself from real estate. Focus on the equity, don’t lose money on it. I’m very anti-losing money on a real estate deal, but I’m fine with breaking even or making a little bit of money. And so I think that’s probably the mindset a lot of people have to focus on going into 2024, is like, “Hey, this isn’t going to be my cash cow.” That doesn’t mean that you can’t build wealth through the equity and appreciation, but figure out other ways to make money to supplement what you hope to be making from real estate. And I’ll say that advice no matter what time period, no matter how great the economy is, don’t pay yourself from real estate cash flow, dump it back into the portfolio.

David:
Dave, what do you think?

Dave:
Yeah, I totally agree with Rob. I have the same personal philosophy. I think there’s a lot of people who want to quit their job, and that’s a fine aspiration, but I do think right now, in today’s market, it is risky to try and do that, particularly if you’re inexperienced and haven’t been doing this for a while. And if you haven’t been doing it for a while, you probably haven’t built up enough cash flow to confidently retire. So I think it’s a good time to invest, just like anytime is a good time to invest, as long as you’re investing for the right time horizon. If you want to invest in real estate just to be in it for two or three years, don’t do it. It’s just not a good idea ever. It’s particularly a bad idea right now.
If you’re trying to invest for 3, 5, 7, 10 years and build up a business or build up equity over the long term, then I do think it is a positive time to invest because there is less competition right now. As we’ve seen from the surveys we’ve talked about today, fewer people want to get into this housing market. And I know it’s a very long time ago, and people now, when they look back at buying in 2010, 2011, 2012, they think, “Oh, my God, it was so easy back then.” And in retrospect, it was, but people also thought you were crazy to buy back then. I can attest to that.
And so I think you need to sort of think about the long run and think about that housing in the United States goes up over time. If you can just hit your wagon to the average performance of the housing market, you’re going to do pretty well and just not focus on timing the market. To me, that’s where a lot of people go wrong when they’re getting started.

David:
So on that topic, let’s end with this, I want to get each of you’s opinion. When it comes to timing the market, obviously, with hindsight, we see that buying eight years ago, six years ago was really good timing of the market, but at the time you have to make the decision, you don’t know. It can go down just as much as it can go up. We can go into a recession or depression just as easily as we could go into a boom. What’s your overall financial advice for investors, taking into consideration that we don’t know exactly what the market is going to do? Henry, I’ll start with you.

Henry:
Yeah, I said it earlier. You’ve got to buy value. I’m walking into equity on day one. Now, that equity and price that I’m buying that house for may not cash flow a ton. That’s okay. Cash flow is just one of the ways real estate pays you. But if you’re walking into value or equity, if something happens and you change your mind, and we’re talking substantial value here, not a house listed for 300 that you buy for 295, right? I’m buying properties at a 40 to 50% discount, and so that gives me a cushion. If things were to shift, meaning what if values come down 10, 15%, right? What if something crazy happens? We haven’t talked about the political landscape or the sociopolitical landscape.
If something crazy happens and that ends up having an impact on the market, I’ve got some cushion to be able to turn around and potentially sell these properties or to be able to refinance them if and when rates come down a little bit to create some of that cash flow. There’s equity in them and that allows me to be able to refinance. So I would tell anybody, if you’re getting into this right now, you need to have a long-term perspective longer than the next two to three years, and you need to be able to have value.

Rob:
Yeah, let me jump in on that. I mean, I agree with everything you just said. Honestly, everyone looks like a genius 30 years from now if they bought real estate today. And I think that pretty much holds true in almost any scenario, unless you just have really bad luck with one specific house, but we all look like a dummy at some point in our real estate career, and then all of a sudden, 10, 15, 20 years, appreciation does its thing and then it’s like, “Whoa, you bought in Los Angeles when houses were $600,000? That’s crazy. They’re $4 million now.” Right? That’s what I say to people now who tell me they bought a house in Los Angeles for $80,000 back in the ’90s or whatever, and I’m like, “That’s crazy talk.” Because now, houses are so much more expensive. So just understand that if you are in this in the long game, then time is on your side. Time heals pretty much all real estate wounds.

David:
Dave?

Dave:
My best advice for trying to time the market is just don’t. And I think the strategy that I’ve used both in real estate and in the stock market is something called dollar cost averaging. If you’ve ever heard of this, it’s basically, rather than trying timing the market, you decide to invest a certain amount of money at a certain interval. So it’s easy to understand with the stock market. I’ll invest $1,000 every other week into index funds because I don’t know what’s going to happen. Sometimes I buy it at the top, sometimes I buy it at the bottom, but over the long run, it averages out to what the stock market is doing, which is 8 to 9% every year over the long run. If you can do that in the housing market, you’re going to enjoy a lot of appreciation. Now, obviously, everyone can’t buy a house every week, but if you say, I’m going to try and buy a rental property every year or every other year.
Once I’ve saved up enough money, sometimes you’re going to buy in a great time to buy. Sometimes it’s not going to be the best time to buy in retrospect, but as David said, you don’t know when you’re buying. So you have to just keep doing things with regularity. And if all you do over the entire course of your real estate investing career is do as well as the average housing market over the next 20 or 30 years, you’re going to be just fine. You’re going to be very happy with how your investments turn out. So to me, you just don’t even try and time the market and just invest at regular intervals, and you’re going to do just fine.

David:
Thank you for that, gents. If you have enjoyed this podcast, if you like hearing this information, please do us a favor. Leave us a five star review wherever you listen to your podcast. That will help us out a ton. If you’d like more information about me or any of our hosts, please check out the show notes where you can find our information to give us a follow. And if you haven’t already done so, check out biggerpockets.com. It’s an incredible website. We’re more than just a podcast with tons of resources that will help you on your investing journey, which we would like to see nothing more than that. We’re going to let you guys go. This is David Greene for Sir Arthur’s Knights of the Real Estate Roundtable signing off.