Here’s What Investors Should Do Now

Dave:
Interest rates are once again at the center of the housing market, but this week’s two biggest rate stories are pulling in opposite directions. The Federal Reserve just raised its benchmark rate for the first time in three years, while President Trump is calling for rates to be cut all the way to 1% or lower. Today, the whole panel is here and we’re breaking down why the Fed moved higher and what all this can mean for mortgage rates, housing demand, and your portfolio. I’m Dave Meyer here with Henry Washington, James Dainard, and Kathy Fettke to separate the headlines from what investors actually need to know. This is On the Market. Let’s get to it. Welcome to On the Market: The Gang. We’re back together everyone. I’m so happy to see you all. This is making my week. Henry, James, Kathy, how are you guys?

Kathy:
Oh, so good.

Dave:
Kathy jumped off a mountain today, so you’re doing great.

Kathy:
Yeah, I did. I parasailed off an Alp. I mean –

James:
That sounds so fun.

Henry:
Yeah, we define fun differently, but to each his own.

Kathy:
I’m not going to lie. It was really nice to have my feet back on the ground eventually.

Dave:
Well, it’s great to be back together. It has been a while since we’ve all been here and we got a pretty big story here. It’s making the news, everyone in real estate is talking about it. The Federal Reserve raised interest rates for the first time since 2023. It’s not a lot, just 25 basis points, but this is clearly the opposite of what I think most investors were expecting or hoping for, at least at the beginning of the year. I have my own thoughts about it, but I kind of want to open it up and hear what you all are thinking about this. Good thing, bad thing. Are you mad?

Kathy:
Ding, you haven’t kept your thoughts private about this at all.

Henry:
We’ve

Kathy:
Been talking about this for I think a year. You actually converted me a while ago. I was like, “He’s nuts. He thinks that inflation’s going to be persistent and that

Dave:
Rates

Kathy:
Weren’t going down anytime soon.” And I was not liking your story, but then yeah, I bought into it and here we are.

Dave:
I don’t like my story either, to be fair. I don’t like that this is what’s going on, but unfortunately it’s all playing out.

Henry:
Well, at least the Fed was unanimous, 12 zero on raising the thing.

Dave:
When do you get that many people to agree on anything?

Kathy:
Right. Which doesn’t bring a lot of comfort, right? They all agree. And does it mean more? I mean, it sounds like maybe one more this year, maybe two.

James:
All I know is I don’t want to do any more prediction shows because every time I predict something at the beginning of this year, I am completely wrong. I actually though we were going into quarter four and the market was going to be red hot.

Dave:
Yeah, it’s going to be ice cold.

James:
It is the shower you don’t want in the morning, that’s for sure. I

Henry:
Don’t know. I don’t know that I feel the same way. I mean, does the rate hike suck for some traditional buyers? I mean, yeah, the higher the rates go, there’s another subset of people that are priced out of the market because they just can’t afford to own a home, which affordability is an issue. I get it. But you asked specifically how we feel about it. And I mean, the higher rates are and the less demand there is, the more opportunities I have to get properties at a discount. Now the catch is, yeah, you can buy them at a discount, but can you hold onto them through the turmoil? That’s the challenging part because as you guys were just talking about and what James is alluding to, it’s hard right now to sell flips. If you’re in house flipping, the business is challenging right now. And so if you’re buying a great deal because the market’s giving you this amazing opportunity, but you can’t keep it and you can’t sell it, then you’re still in a tough position.
So it’s not just being able to buy, it’s being able to buy and weather the storm or figure out a way to get your properties to sell, which is kind of what we’ve done over here.

Dave:
I’m with you, man. I actually think it’s a good opportunity for buyers. I don’t see this as necessarily a bad thing. I guess big picture, I think prices are going to start coming down everywhere. Not a crash, but I just think in most markets, this is going to be the straw that breaks the camelback. We’ve been in this gridlock for four years between buyers and sellers. And frankly, buyers have been holding back because prices and rates make things not pencil, but sellers have just been sort of stubborn about it. I think that’s going to start to change. This low affordability is going to pull more buyers out of the market, and the only way people are going to be able to sell is to lower pricing. And so to Henry’s point, if you’re trying to buy things for the long run, that’s the discount people have been waiting for for years.
Everyone’s saying, “Well, buy when prices go down.” Well, prices are probably going to go down. And I don’t personally think that this is leading to a crash, which is kind of the scenario you want. You don’t want to buy when things are absolutely falling apart, but if this is going to give people more negotiating leverage to buy things at a discount, to Henry’s point, they still got a cash flow. You got to be able to hold onto them. But I think those opportunities are going to become more and more because rents probably aren’t going to go down. And so if prices go down and you can get better prices and rents are the same thing, cashflow prospects are improving. You can walk into more equity if you’re able to buy below current comps. If you’re a buy and hold investor, I think conditions are now improving.

Henry:
If you’re buy and hold, this is it.

Kathy:
It really just depends on where you are. Here’s the thing, inflation is usually a result of a few things. Right now we know it’s partly because of this oil mess and oil prices being up and that affects everything. But also in the report, or at least in certain markets, AI is booming. And I am from California. I have family still in the San Francisco Bay Area. There is so much freaking money. Prices are going up insanely. That

Dave:
Is true.

Kathy:
Insanely. AI is creating jobs right now. I know there’s all this fear that’s going to take jobs away, but right now in certain markets, it’s crazy. And so we’re seeing, again, in the San Francisco Bay Area, prices going up hundreds of thousands of dollars over asking price. So it does just depend on the market that you’re in. And inflation is actually good for real estate. If you’re a buy and hold investor, owning a home over time in an inflationary environment can make you very wealthy. I just want to add one thing because I know it feels depressing, but time does pass and I’ve been doing this for 30 years. This is what I tell people. As you know, I’m in Europe, jumping off of the Alps. The reason I’m here is because my daughter just got married. And when she was born, Rich and I set aside an investment property for this moment.
And Dave, listen up because you just had a baby. I did. You could do the same when you just kind of set aside a house. We knew her wedding was going to be expensive. We knew that that would be stressful at the time, but when we bought this 20 years ago, knowing that it was for this purpose, all we had to do was refi, take all that cash out and pay for the wedding. It was specifically designed for that and even though we put the. I know. We put the loan on it. We refi, there’s a loan on it, but it’s still cash flows. So it’s easy to get caught up in these, oh my gosh, quarter percent rate hike, but it still works over the long term. And I think that’s what people need to understand. Man,

James:
You guys are just full of sunshine and bunnies this morning. Yeah,

Henry:
James is a flipper. Well, you’re a house flipper.

James:
You’re

Henry:
A house flipper in an expensive X market.

James:
I feel like I’m going through a motivational. I’m like, all right, I got to get pumped up. No, it’s not great news, but I mean, at the end of the day, the rates didn’t move much whatsoever if they moved at all. It went

Dave:
Down.

James:
Yeah, it did.

Dave:
Which I said was going to happen, by the way. This is a good thing for long-term rates, but keep going, James. Sorry.

James:
No, and you got to look at, because I had a bunch of people call me freaking out. They’re like, “I got all these houses for sale.” I’m like, “I bet I got more than you.” But at the end of the day, we had to do this. Well, luckily I’ve been listening to Dave for so long now. I’m like, “Oh no, this is a good thing.” That’s what I was trying to explain. I’m like, “This is a good thing because we got to get normalized.” And one thing that I am seeing that could also be a good thing for you flippers out there, we’re seeing so many canceling listings right now. Inventory is starting to shrink in some spots because there’s only a few buyers come in. The buyers don’t like their houses, and the sellers are just staying tight. They’re not really cutting price. What I’m looking at these canceled and Dave, in our neighborhood, because me and Dave, me and Dave are listing our third flip?

Dave:
Third, fourth, I don’t know. But it’s going live today, so you better be giving me good news.

James:
Good news is we have no bad news. There’s no low comps, there’s no bad comps. Okay. I like that. But in this little pocket when I was looking at it, we have over 17 canceled listings in the last 12 months in this price point. This is a market that never cancels. That neighborhood, it sells out all the time because people want to live there. Out of these 17 homes, only two cut price.

Dave:
Interesting.

James:
They just stayed on market for 90 days and then they canceled. And so for people predicting a big crash, because people are like, “2008.” I’m like, “Chill out.” No. No.

Henry:
It’s

James:
Real estate. It goes like this, right? There’s little waves. These things actually for flippers could help too because inventory could dry up a little bit more and we could see rate relief by that spring market now. It’s a good time to buy deals if you could hit that first spring market. I know going forward, I’m trying to chime everything for that spring. And if I can’t, I am adjusting my numbers dramatically.

Henry:
Yeah. Things seem like they’re cooling in a lot of places because they are. But as I was researching for this show, I actually found another article that said that prices are cooling in 46 metros, so they’ve gone down since the previous month, but they’re still rising in 54 other metros. So that is not a big signal to me that there’s some massive crash coming. There’s demand in certain markets and there’s not in other markets. I don’t know, that seems normal to me. Yeah,

Dave:
It is. I think that is normal, but I guess my thought is that rate relief just isn’t coming. I don’t think we’re getting below six and a half anytime soon, and I mean next year. And it doesn’t even matter what the Fed does. We’ve gone past the point where what the Fed does even is going

Henry:
To

Dave:
Impact more. It’s true. The bond market is deciding everything and there’s just clearly a revolt in the bond market. They don’t buy what the US government is selling. Literally, they are not buying. They’re not investing in what the US government is selling. And so what are the ways that the US government can fix that? Well, they could control short-term inflation by ending the war. No one’s even talking about ending the war anymore. That’s even been in the news. That’s not coming anytime soon. And then the other real thing that is going to keep rates persistently high for the foreseeable future, maybe forever, is the national deficit. Bond investors are worried that because we cannot control the deficit, that the government is going to print their way out of this. And that’s probably right. That is a reasonable fear. And until that fear goes away, bond yields aren’t going to go down meaningfully.
And I said this in the show the other day, but you can’t even say or forecast the deficit going down with a straight face. It’s a joke. No one is going to do it. We haven’t had a balanced budget in the US for 26 years. So you have to just think about what mechanism is going to bring rates down. I don’t see one. And so that’s why I just think we’re in for this, not a crash, but persistently downward pressure on home prices because the affordability’s too low. And now I think people are going to just say seven, six and a half seven is the rate and they’re going to not buy things expecting to be able to refinance. And that’s going to push home prices down in a lot of places. Not 20%, but are we going to see three, 5% declines next year?
I think so. All right everyone, we got to take a quick break, but we’ll be back with the whole panel right after this. Welcome back to On the Market. Let’s jump back into our conversation about what the Fed is doing and what it means for your portfolio.

Henry:
Well, it’s interesting that you say that because in preparation for this show, the article I’ve wanted to talk about and I say I wanted to talk about, what I really mean is I want to get Dave riled up and get him to talk about it because one of my favorite things to do on this planet is to get Dave on a soapbox because it is f – hilarious.

Dave:
What is it going to be about?

Henry:
Well, I mean it’s about the rates because right after the decision, President Trump came out and said that he demands that he wants 1% interest rates. And he said that right after the Fed decision. Now I’m bringing this up because this is an article that’s out there. It’s something that he said somebody somewhere is going to read this and think there’s a situation in which this can happen. And so I want to hear from you guys, specifically Dave, on is it even a possibility, what situations have to happen for rates to get that low? And what does that mean? Do we want that? How does that impact us or not?

Dave:
Okay, here we go. First and foremost, I think what Trump is talking about is the federal funds rate, not mortgage rates because it came out right after the Fed decision. And so just to be clear, that is the one interest rate the Federal Reserve controls is the federal funds rate. It’s basically what banks borrow and lend to each other at. It’s kind of the lowest baseline for interest rates across the economy. It is not what dictates mortgage rates. And so big picture here, could it happen? Yeah, for sure. The FOMC, the people in the Fed who vote on monetary policy could absolutely choose to get the federal funds rate down to 1%. It was at zero during COVID. It was at zero during the GFC. So

Henry:
There

Dave:
Is precedent for interest rates to go that low. The problem that the Fed has is that if they do that, it is going to completely backfire and have the opposite effect of what everyone wants. Because the reason bond yields are going up and mortgage rates are going up is that people are afraid of inflation. And if you lower the federal funds rate when we already have an inflationary environment, that is usually fuel to the fire of inflation. You

Kathy:
Get more of it.

Dave:
Exactly. So if you’re a bond investor and you see the federal fund rate go down to 1%, you’re going to stop buying 10-year US treasuries at 5% and you’re going to demand 6% or you’re going to demand 7% to compensate for the risk of inflation. And when bond yields, when 10-year treasuries go from 5% to 7%, what does that do to mortgage rates? That takes them from 7% to 9%. And so this would have a really bad impact on real estate in my opinion. This is why I’ve been rooting for rate hikes, not because it’s good in the short term, it’s not helpful for real estate in the short term, but long-term, we need to control inflation. That is the way we get back to persistently better rates and to a better environment. And I know a lot of this on both sides is politically motivated, but if you’re just truly rooting for the long-term health of the US economy, which I am, job number one is to win the battle against inflation.
So that’s why I was happy. Even though that means some of my properties, the value is going to go down on paper. James and I might be screwed on this flip we’re listening to. Oh no, we’re not.

James:
We got good going out.

Dave:
But anyway, that’s my take on this. Was that riled up enough for you, Henry? I

Henry:
Felt like I wanted a little more heat, but I’ll take it. That was a very reasonable and honest approach to answering that question because headlines are headlines, right? They’re clickbaity, but this actually happened and that’s part of what we do on the show is let’s talk about what it really means for people and take the clickbaity out of it. I

Dave:
Mean, I think would commercial real estate investors like the federal funds rate at 1%? Probably. They sure would. Because those loans are much more tied to the federal funds rate than the 10-year US treasury. They just work a little bit different. So that would be helpful for commercial real estate, but for residential, it would backfire for sure. Would the

Kathy:
US treasurer like the rates down to 1% so that the interest on the debt would be lower? Yes. They sure

Dave:
Would.

Kathy:
They would sure like that too, but just doesn’t work that way.

Henry:
I think this is a great time for the seasoned or kind of mid-tier investor to be evaluating the portfolio and seeing what’s performing and what’s not performing and taking a look at things they’ve bought recently to see how those are performing and then make some decisions about how you want to go about continuing to grow. Because if I’m a buy and hold investor who’s looking to grow, I’m probably looking to see how I can get a little bit more aggressive in this environment while there’s opportunity to buy at a discount. And if I’m a flipper, then I’m looking at the market and this I am doing, then I’m taking a hard look at the last 30 days of properties that have gone under contract or sold and figuring out what price points are selling, what neighborhoods they’re selling, how long were those on the market, what amenities did those have, what did they.
I am analyzing all of that hard because if I want to be profitable in this market where things are a lot slower, then I’ve got to do what people want. And what people want right now is not what people wanted even 60 days ago. The market’s moving quickly. And so this is when you really need to be analyzing. Another

Kathy:
Thing you could do as a real estate investor in this environment, and I’ll be actually talking about this at BP Con, which is going to be awesome and coming up very soon. I’m so stoked.

James:
Yes.

Kathy:
But yeah, it’s harder to find cash flow today in an inflationary environment. So how do you do it? Well, you’ve just really got to look at the expense side. And so that might be how do I cut insurance costs? How do I – How

Henry:
Do you cut insurance costs? Because I’m trying.

Kathy:
Yeah. I mean, one way we’re doing it, we have a single family rental fund in Texas and we were able to put all those properties under one insurance policy and we dramatically lowered our costs actually that way. So again, I’ll be speaking in detail about how to do that, but shopping it around, trying to pay points, especially if you’re a buyer today and builders, it’s actually going to be my next story, so I’ll save it for that. But how do you pay points to lower the payment? But right now it’d be really, really important. Again, if you’re a buyer, make sure that you’re getting every inspection possible so that you don’t get stuck with costs you’re not expecting because it costs more to fix things. Everything is going to cost more. So get more inspections than you would normally get to protect yourself. I

Dave:
Love the idea of paying down points, Kathy, right now. I think that’s such a good move in this environment because as I’ve told you, I don’t think rates are really coming down in any meaningful way anytime soon. And the move right now is to buy long term, in my opinion. Better assets are coming for sale, better quality assets. So you want to buy something for 20 years, get a concession from the seller or pay down the points so you can lower your interest rate into the fours. Yeah, it’s like 20 grand upfront, but a lot of times the seller will pay that for you or you negotiate on price and then use the savings to buy down the rate. That’s what, to Henry’s point early in the show, that’s a way you can buy a great asset and be sure that you hold onto it through this downturn until things get better.
And obviously you just have to buy at a good price.That’s just kind of the name of the game right now. All right, we got plenty more to talk about, but we have to take a quick break. We’ll be right back. Welcome back to On the Market. Let’s jump back in with Henry, James and Kathy.

James:
People really need to spend some time getting clarity in their own buy box because what Henry wants to buy, what Dave wants to buy, Kathy wants to buy, what I want to buy, it’s all different. But when you’re in an unstable market, the best thing that you can have is clarity. Don’t worry about what you won’t buy and what’s going on. What will you buy? And if you’re going to put in your money, what does it need to pay you? That’s

Henry:
So true. And if

James:
It doesn’t hit that number, don’t buy the thing.
But everyone needs to spend some time getting clarity behind that because it’s no longer the COVID boom where you just buy things and pray. It’s put a strategy behind what you want to do. And in the meantime, if you have product that you have and the numbers aren’t good, my buy box today is a lot different than it was nine months ago. I’ll tell you that much. It is vastly different. And what we’re doing right now, I was going through my spreadsheet this morning. I’m going through all my short-term debt right now and you go, okay, well, how do we get over the hump? Because every time there’s bad news in the news, we get these little stall outs. How do you get through it? I’m literally refinancing. I just went through this. Instead of chasing rate, I’m actually chasing liquidity because no matter what you do in this market, you can cut price, it could still sit.
You got to make sure that your liquidity is balanced right now. Cash is really, really important that you don’t get yourself in hot water. So reach out to all your lenders. Do they do interest reserves? That is a huge thing I’m using right now. I’m looking at all my loan to values and some of these deals might not be profitable anymore, but there’s a lot of equity in them because we have a lot of cash in these deals and we’re refinancing those. I’m going to pull four month interest reserves on every one of those because it just buys me till the spring. Then I don’t have any financial pressure and I can make smart decisions. So get clarity and set yourself up where you can make smart decisions because reactionary ones are the ones you really get hurt on. That’s

Henry:
Such a great point because where the hard part is for me, and I think for a lot of investors right now, it’s not avoiding bad deals. Those are pretty easy to spot. The hard part is being so locked in on your buy box that you’re willing to leave a deal on the table that still has some room to make some money, but it doesn’t quite fit your buy box because those are the deals. If I look over the last six to eight months, the deals that have bit me in the butt are the ones where there was some margin there, but I needed everything to go perfectly in order for me to get that margin. And that market just doesn’t exist right now. We don’t know what’s going to work and what’s not going to work in every single deal. It’s very hard for me to predict which houses are going to sell fast and which aren’t unless they’re just super cheap.
And so where I struggle is when I’m underwriting a deal and yeah, that deal might have $30,000 of profit built into it, but right now I’m not doing flips unless I’m going to make at least $40,000. And so I have to leave the $30,000 ones on the table because there’s just too many areas where you can screw that up and end up in the red. And so those are the ones, the ones where I’m like, “Ah, I could make it work. I could do it.” Then I end up losing sleep. I’m stressed out the whole time. Maybe I’m profitable, maybe I’m not, but it wasn’t worth my time. So the discipline right now to stick to your buy box is very challenging. I know

James:
It’s hard because there’s so many deals out there, you have to be disciplined. There’s a lot more opportunities floating around, but be picky. Geez. Dude,

Dave:
Patience is the number one thing right now. I think you got to go out there and look because there are good deals, but there’s a lot of trash too. And so you just got to be patient. And again, there’s a flip side, a silver lining to every market. It’s bad for some, it’s good for other things. And right now you got time. I don’t think there’s a window closing for buying opportunities right now. I think we’re going to be in a period where buying opportunities might even just keep getting better, especially heading into winter. I think two, three months from now, we’re going to start to see really good deals come onto the market. And so that doesn’t mean don’t look now because we’re getting to a point where the market is inefficient, which sounds bad, but as a buyer, that’s kind of what you want.
You want there to be inefficiency in the market where you can find these opportunities where things are priced below what they should cost or not even what they should cost. They are priced to what they should cost for an investor. And so those opportunities are out there, just don’t buy anything that’s not really safe. If you are worried that prices are going to go down 5%, buy something 15% under market comps, buy something 20% under market comps to Henry and James’ point, and just don’t waver from that. If that’s the number that makes you feel comfortable, that’s what you should stick to. Yeah. And

James:
Explore multiple exit strategies. There’s so many different ways you can cut up a deal because the more strategies you have, the safer it is. And so really go through the basics. There’s a property right now that I just listed. Gray area is worth 175. I’m at 165. And instead of cutting more price, I’m like, what’s the point? Because if I need to get into a new financing bracket, I got to be below 1.5 at this point. That’s a huge drop off the list price. But what I’m going to do is drop it to 1.4 because that’s moving, but I’m also cutting off the backyard. I’m flipping the lot off for two. And so there’s so many different ways that you can do this business. Just look at how you can cut because my next price drop is a hundred grand and then I’m in the red, or I can drop at 200 grand, but cut the backyard off and one four is really moving in this neighborhood and the lot’s worth 200 because it was worth 300 12 months ago.
And so it’s like, how can you cut it up? You got to explore every different exit.

Dave:
Well, I think this is the exact sort of sober perspective that investors should be hearing is that this isn’t all bad. The headlines and the media make everything seem scary. And if you were trying to sell every property you own this week, it probably is a little bit scary. But if you’re in the game for the long run, I think you just have to do what we always talk about, which is find what the market is giving you. Sometimes it gives you good pricing, sometimes it gives you great appreciation. You never get all of it, right? You never get a perfect market. And right now what we’re going to get, in my opinion, is better pricing. And so use that. Go explore that. That’s awesome. I feel like we’re going to get better deals than we’ve seen at least four or five years. So that to me is encouraging if you’re in this game for the long run.
So thank you guys for all the sober, good perspective here. Any last thoughts? Yeah,

Kathy:
My final thought is that the builder sentiment came out this week and it was very weak. Builders are frustrated. They’re needing to move inventory. And the important thing I think for investors to know is that they are giving incentives,

Henry:
So

Kathy:
Many incentives. That’s what we are focused on. Like we talked about earlier, they’re buying down your rate. You could get extra things added on, but mainly lower prices and buying down the rate. So there is opportunity. It’s a bummer. It’s hard to be a seller right now, but that’s something to think about and that people should be looking into. Be

Henry:
Careful out there. It’s

James:
All about clarity. And you know the best way to get clarity? Come to BP Con and listen to a lot of smart people talking and then adjust your strategy. It’s going

Dave:
To be super fun. If you haven’t bought your ticket yet, still tickets available. Go to biggerpockets.com/conference. We’re all going to be there speaking. We have Morgan Housel who wrote The Psychology of Money, one of my favorite books, and so many other incredible investors and teachers and networking and so much fun to do there. Well, thank you all so much for coming and giving these great perspectives. This was a lot of fun. Kathy, stay inside the plane on your flight home from Europe, and hopefully we’ll see you all at BP Con, but if not, we will see you all for another episode of On the Market very soon.