Dave:
This has been an insane week in the bond market and subsequently in the housing market, we have seen bond yields rise to the highest they’ve been in over 20 years. And if you listen to this show, you know that has direct implications on mortgage rates and on the housing market. And so today I have Kathy and James here. And although we were supposed to do our traditional headline story, we got to talk about what is going on in the bond market, what it means. Should we all be panicking or is this actually an opportunity? I’m Dave Meyer. This is On the Market. Let’s get to it. Welcome to On the Market, everyone. Kathy, how’s it going? Good to see you.

Kathy:
It is going so great. I think I’m over my jet lag and back to normal.

Dave:
Glad to hear it. After a glorious European wedding for your daughter, congrats again. Thank you. James, how are you doing?

James:
I’m not as rested as Kathy. I’ve been kind of in the trenches. It’s been a grind the last couple weeks.

Dave:
Yeah. Well, that’s kind of what I want to talk about today. We were planning to do our normal headline episode, but I just want to talk to you both about what’s going on right now in the housing market and mostly in the large economy. Because I’ll be honest, yesterday I had a couple of moments of just sheer panic. I was just getting a little bit worried about what’s going on and I can share why. But before I get into the data, are you guys worried? What is your overall vibe maybe about housing, maybe about the economy or how are you just feeling these days about business?

James:
I mean, right now, whether you’re doing a BRR or a flip property and you’re in the middle of it, it doesn’t feel very good.

Dave:
So that’s why you’re tired.

James:
Yeah. And that’s because you got to shift things around as things change, but your performance is only as good as what you know when you’re underwriting that deal. When you’re looking at the investment, you’re checking all your different data points, whether it’s for rent or for resale, but when you get a big shakeup on interest rates, it throws the performance out of fit. And so you got to grind through it and get rid of things. And I will say people are losing some money right now, including myself, and you’ve got to have to push through. Now what I am excited for is what I’m seeing on the buy side, but you got to get through this inventory. And if you got a lot going on, which I always do, you just got to grind through it. But it doesn’t feel good. Last Saturday, I had the same.
I was sweating Saturday. I went into full tunnel reshape investment mode.

Dave:
I think sometimes a little freak out is necessary. I woke up today, I was like, okay, I’m fine. It’s okay. But yesterday I saw something that freaked me out. But Kathy, how are you feeling?

Kathy:
Well, there’s so many perspectives. So I’m going to give several. There’s my personal portfolio, there’s my business, there’s our syndication business. So I’ll start with personal and really it’s doing fantastic. So short-term rentals, oh my gosh, we hit new record highs and these are high end. So I’m just mind-blown.

Dave:
That’s where you have to

Kathy:
Be. It’s incredible. That’s been super good for us and carrying us through some of the things that are more difficult. Our long-term rentals, they’re just long-term rentals. They just are rented, nothing’s changed there. Now our business is selling investment properties to investors, so that is shockingly doing great. And I’ll tell you why, concessions. I mean, there’s headline news about seller concessions. They are amazing. Not great for James, not great for our syndication side. If you’re a seller, it is hard. It is so hard to sell. And again, depending on where you are, I’m sitting here in Park City at our development here, and actually Park City’s doing pretty good right now. Prices are going up again, but we’ve got our Oregon one that is just sitting. It’s crickets. There’s nothing happening there.

Dave:
Well, the whole Pacific Northwest is rough right now.

Kathy:
It’s rough. So that’s hard. But then the Florida one, ticking away, just still going.

Dave:
Florida’s coming back.

Kathy:
Florida’s coming back, right?

Dave:
Yeah, it is. Yeah, totally.

Kathy:
I mean, we have a lot of rentals there and we haven’t experienced all the issues people talk about, insurance costs going up, but we don’t buy in flood zones. We buy newer insurance rates are lower. So we’re not even experiencing that. They’re just steady rentals and rent’s going up.

James:
You know what? The key phrase is Florida’s coming back. So whatever market you’re in right now, they’re all kind of doing different things. Yes. They do come back. That’s what everyone has to keep on top of their brains because I mean, Florida I know was rough and so was San Francisco 12 months ago and they all rebound. And so you got to put the strategy around what you think is going to happen over the next six months.

Dave:
Okay. But can I tell you what really freaked me out

James:
Yesterday? Yes, please do.

Dave:
Okay. Two things. There’s actually two different things. So the first thing that freaked me out, you guys know Michael Zuber from One Rental at a Time.

James:
Yeah.

Dave:
He got a popular podcast. He put out something and it’s from Twitter or X or whatever, but there was someone, just an analyst from BlackRock apparently came out and said that within BlackRock, they’re testing their financial models for 9%, not mortgage rates, treasury yields. I was like, “Holy shit, we’re all going to die,” was my reaction

Kathy:
To that. Wait, explain it to me. What are you saying?

Dave:
So they’re basically saying that within BlackRock, huge private equity firm, one of the biggest in the world, they’re basically running models to try and understand what would happen to their position if treasury yields went from five where they are today to nine, which would take mortgage rates to 11 or 12%. So I was like, “Oh my God, it all ends.” The whole world

Kathy:
Ends. But we’ve been there. You weren’t, but I survived the ’80s and there were double digits. When I started investing, it was double digit interest rates. I mean, we didn’t die.

Dave:
But if you look at in the ’80s when mortgage rates were that high, the income to price ratio was like three to one. It’s like five and a half to one now. So the affordability is just going to get completely depleted. So I’m not even worried about the housing market. The whole economy would’ve collapsed if the whole government would collapse if yields went to 9%. We cannot afford that as a country. That’s a very good point. That freaked me out. But it’s like they’re just probably doing worst case scenario stress testing that’s not around the corner. But Kathy, this is the thing I was going to tell you. Logan Modashami, who I really love, and I know you do too, Kathy, I’m not sure James, if you know him as much, he’s a housing wire analyst and he’s pretty much always right about everything.

James:
He’s

Dave:
Very good at this stuff and understands the bond market a lot. And he came out with something that said the case for 8% rates. And he was basically saying mortgage rates are going to 8%.

Kathy:
Oh boy. I did see that. I did not read it.

Dave:
Yeah. It just blocks the back of my mind. Yeah, I understand that sentiment right now. But yeah, that could definitely. I mean, they’re at 7.4 right now, so it’s not that crazy a stretch, but I just think that’s worrisome.

Kathy:
We are in an inflationary environment. It’s a different game.

Dave:
It’s scary. I put out a reel yesterday about what I think is going to happen. Basically, mechanically in the housing market, when rates are going to go up, what I think is going to happen is demand is going to drop. We all know that. That’s a pretty measurable thing. We saw mortgage purchase applications. I think they dropped 20% in one week. We’re also going to see new listings go down, in my opinion. So fewer people are going to choose to sell their home because this is what everyone in the doomers get wrong is that it also impacts supply and supply will come down as well. But I do think inventory is going to go up because the stuff that does go on market is going to sit on the market and that’s going to put downward pressure on pricing. And so even if it goes to 8%, maybe instead of one to 2% declines next year, it goes to three to 4%.
But I still don’t see the ingredients for a crash because as of the last months of data, there’s still very little distress. Maybe James, your friends, maybe flippers are in distress, but the average American homeowner still paying their mortgage on time, delinquencies were actually going down. You might see some data about foreclosures going up, which is true, but you have to think of foreclosures as kind of this long cycle. And after COVID, a lot of people entered the foreclosure process and they’re finally actually getting to that end where they’re getting foreclosed on. But if you look at the beginning of that process, people going into delinquencies and early stage foreclosure, it’s going down, which is wild. It’s

Kathy:
Incredible.

Dave:
I guess I feel like 8% mortgage rates are different this time than it was two years ago when they’re 8%. Do you guys feel that way?

James:
At least in the local market where we are, there’s been a lot more economic changes and layoffs. It’s like a combination of the two. Some markets are still doing pretty healthy right now. But I do feel like it’s different. The sediment’s changing because people just, it’s like they’ve been waiting. You know when you’re waiting for something bad to happen and then it’s like, “Oh, it’s coming,” and then it doesn’t come. So every time it comes back, your fear gets bigger. And so we’ve now gone through this a couple different times with the. I mean, when the interest rate shot up, we all had that fear and nothing happened. I mean, that, in my opinion, should have broke the market a lot worse than what’s going on now. Two, three years ago. I mean, that was a huge increase in cost of capital. And we saw a moment of time dip, but then it rebounded right up and people were still buying.
And that’s what I try to keep in the back of my mind is the market was rebounding when the rates were in the sevens.

Dave:
That’s right.

James:
We saw a big, big dip. And so it’s very, very irrational. And that’s where as an investor, you can’t let fear make your decisions and you got to go, okay, what can I do? If I’m in a deal now, how do I mitigate this loss and how can I try to make this better? I mean, I know this is what I spent all day last Saturday doing, going to every deal, looking at my comps again, going, this is my exit. Where’s the velocity behind that exit? And if there’s no velocity, I’m switching the plan. Dave, that house, remember that gem of a house that me and you walked through in Columbia City?

Dave:
Yeah. The one that had all that different options. You could have developed it, you could have flipped it, you could have turned it into a duplex and rebuilt it.

James:
Yeah. My original strategy was to actually sell novelty and sell this big yard, but that’s at the top of the price point now. I’m like, no, that’s not what I’m swinging for anymore. And so I just literally pulled the trigger on this this week to where now we are doing a dadu in the back because now I can drop the price on the front house from a one four value down to 1,050, because that’s where the velocity is. And so you want to go, where are people buying? Because people are still buying, they just got to be able to afford it. And so you got to put the plan together that is affordable.

Dave:
Yeah. All right everyone, we got to take a quick break, but me, Kathy, and James will be right back. Stick with us. Welcome back to On the Market. I’m here with Kathy and James. We’re talking about what’s going on in the bond yield, whether or not you should be worried and what you should do with your portfolio. Maybe it’s just me, but I feel like there’s just a psychological difference now. I think a lot of people, in my mind, wrongfully, I don’t like this, but a lot of people were just banking on refis. They were buying in 2023 and 2024, assuming maybe on bad advice or maybe it was their own decision that you’re going to be able to refinance and you should just date the rate, marry the house kind of thing. There was a survey of people who bought in the last two years, so just the last two years, and apparently 50% of them say they cannot afford their mortgage without a refi.
So that’s scary in itself. But I think for the other people who have been sort of tire kicking now, there’s no longer a narrative that’s like, oh, you could just refi, which is good. I think they should only buy when they can afford it, but now people maybe aren’t stretching as much. So I think demand is just going to be harder to come back without a real sustained path forward down for rates. And the only two things that can happen are the war in Iran ends and the Strait of Hormuz opens and oil prices drop 30%. Or there’s a serious recession, which has its own problems. And I am not a geopolitical expert, but I’ve been reading a lot about this stuff and the war in Iran’s not going to end. There’s no good

Kathy:
Outlet at this

Dave:
Point.

Kathy:
It doesn’t seem to be.

Dave:
What do you do? Right now we’re just in a stalemate and oil prices are up. No one’s even talking about the fact that Russia and Ukraine are just blowing up each other’s diesel depots and now diesel in Seattle is almost $8 from now. I’m laughing, but it’s not funny. It’s insane. It’s crazy. Anyway, I feel like people are recognizing that there’s no quick fix, and so you have to be careful. Everyone, us too, you just kind of have to assume this is going to get worse. Not that it’s a disaster, but I don’t think we’re about to take some upswing. I feel like it’s going to get a little worse before it gets better. And I don’t see the pain yet with the sellers, which is going to come.

James:
It’s going to be a cold winter.This is going to be a dead, dead winner on velocity sales. Now I do have a little bit of hope for the spring coming in because the spring always helps you get a little bit of a jolt in there, even in a bad market. But it’s a cold winter for sellers, but a great winner for buyers. And I can say I probably have more capital out than I’ve had out in 24, 36 months. It’s coming back and we’re just going to do whatever we can to get that money back because I do think the opportunities coming this winter, it’s going to be buy mode. You can’t think about the deal you have. Investing is the long term. What can you do? How can you change your portfolio? What deals can you get into? Because I am ramped up looking to buy.
Even though I don’t feel good about it right now, I’m buying. I can tell you because when people are freaked and spooked and you’re going in those dark winter months, that is where you can really get into some good buys.

Dave:
For sure.

James:
No one else wants to buy this winter?

Dave:
I would buy long-term holds for sure. Flips, I don’t know. I would be a little worried about flipping.

James:
Buy and hold deals, they’re coming together too. I mean, we’re closing on a property and it’s just appraised for $2 million higher than our purchase price. I have not had that happen in a long, long time on a bigger multi-deal.

Dave:
Is that a syndication one?

James:
Yeah. It’s like we bought it right. And that’s the thing, you just have to buy right and don’t have FOMO just because you want to go buy, just take your time. I was talking to somebody on Tuesday at this walkthrough thing and he’s like, “Yeah, I’m getting in.” And he was a full-time pharmacist and he had 120 grand. I’m like, “Hey, there is no rush to get into this market.” I agree. The most important thing is just take your time, build your teams, get the resources behind you, then go find the deal. Where people make a mistake is they find the deal and then they backfill the rest. But you need to set the foundation, which is who’s going to finance you? How are you going to stabilize that property? Are you going to rent it out? Are you going to use a property manager?
Are you going to sell the property? Who’s going to sell it for you? Get that set up because when you have a better foundation, you can make it through turmoil and a market. If you’re just kind of guessing and firing and shooting, that’s how you can really get clipped.

Kathy:
As far as buying this fall or if interest rates continue to rise, it’s kind of more of the same, a lot more of the same where affordability gets worse. People still need a place to live. Sellers will have to do more concessions if they want to sell to make up for that difference to get back to that affordability level. So I think it’s going to be an incredible time to buy. Again, if you’re flipping, that’s different because you’re both a buyer and a seller. If you are buy and hold, you just get to be a buyer in what is definitely going to be more of a buyer’s market.

James:
Again,

Kathy:
More concessions. And you see these reports of, what is it, $18 trillion in home equity or something like that. So there’s a lot of home equity out there. There’s room for sellers to lower prices. They don’t want to, but they might have to.

Dave:
That’s a really good point. Yes.

Kathy:
There’s room for it. It’s not like everybody’s underwater. We’re not negotiating with a bank in a short sale type thing. You’re negotiating potentially with a seller who needs to sell.

Dave:
It’s psychology. Yeah. They anchor in their head to some price, but it’s still all gravy for them.That’s what eventually they’ll have to realize.

Kathy:
And that’s what people have to understand when rates go up, prices have to go down unless the economy’s booming. If wages are going up at the same pace that rates are going up, then it’s okay. But if that’s not the case, then there has to be some kind of balance there. It’s the same if rates are low, the prices tend to go up because that cost of financing is lower. When the cost of financing is higher, either prices stabilize or come down. So I couldn’t agree more, James. It will be an amazing time to be a buyer. It’s going to be really tough for renters and people trying to buy their first home.

Dave:
Yeah. I think a lot of boomers are about to find out that their homes are not worth what they think is what’s going to happen.

Kathy:
And that’s okay because they have so much equity.

Dave:
Yeah, exactly. I listed a house for sale, a rental that I’ve been wanting to get rid of for a while and I just eventually got around to it. And it’s not selling for the price I want, but I’m looking at when I bought it 12 years ago, I’m like, it’s still a home run. If you just lower the price by 20 grand, it’s okay. It’s hard because you want the 20 grand of course, but no one times the market perfectly. You never always sell at the top. I think James, your point, it’s like this is just the cost of doing business

James:
Is there is

Dave:
Some volatility in the market and it’s so important, as James said, to not count that as your money until it’s in your pocket and then it’s probably going to go out and go into another investment. So it’s just like you can’t get anchored to what you think it’s worth because the market is constantly shifting right now. All right, we got to take a quick break, but we’ll be back with more right after this. Welcome back to On the Market. Let’s get back to it. So before we get out of here, can I ask you guys a personal question before I soft pitch this to Jane?

Kathy:
Sure.

Dave:
So I live in a house that I bought in Seattle. I’ll just give you the numbers. James knows because he was my realtor for this. I bought it for $1.365 million. The intention of maybe doing a live in flip, maybe living in it forever, and I’ve gotten it all modeled out. It’s going to be quite expensive to renovate this home. And I’ve been reading a lot of Morgan Hausel. I don’t know if you guys know Morgan Housel, but I’ve just been thinking about how do I lower my cost of living just from a values perspective. I just want to live a cheaper life. Should I do the opposite of what I tell everyone to do and try and time the market and sell the house now because I’m worried about the Seattle market, maybe rent for a little while and then buy in a year or two when I think the market will bottom out?
Is that a terrible idea?

Kathy:
Would you sell it for profit?

Dave:
Probably not.

Kathy:
Probably not. Okay. If you rented that house out, would it cover costs?

Dave:
No, because it needs the renovation still. It’s not in bad shape, but it couldn’t command high rent.

James:
I don’t think that’s a bad idea.

Dave:
Oh, okay.

James:
I think you bought your house fine and it’s in a really good spot and it’s a cool architecture. And what me and you just realized on our flip is when you have the right house, the right style and the right neighborhood, even in a slow market, it sells quick. And so I think you get the right product, but the cost of rent is a lot cheaper than owning in Seattle. It’s so

Dave:
Much cheaper. My mortgage is like, it’s a lot. It’s like 7,600 bucks a month. And I can rent in the same neighborhood, almost the exact same house. It doesn’t have the view, but it’s nice. I think it’s like 4,500,
Which is not all that different when you think about it, because after the mortgage tax deductions and the principal pay down, it’s not really $3,000 savings. It’s less than that. But there’s something about the flexibility of it I like, because I do feel like to buy again, I don’t know if I want to deal with moving out of my house, staging it to sell it, trying to probably renovate a new home, move into that. And I’m like, maybe I just do it in pieces. And Kathy, I got to be honest, one of the things I’ve been thinking about is how do I house hack again? Can I buy a big lot and build a ADU? It’s pretty fantastic. It’s great, right?

Kathy:
It’s crazy. I do it. It’s crazy. I literally live for free.

James:
But remember, Kathy’s also a Malibu, so the rent on hers is going to be a lot bigger than your ADU on your property. But

Kathy:
It’s phenomenal that I can make that kind of money on a primary.

James:
Oh, I’m so jealous.

Dave:
I don’t need to make that much money. A part of it is also Jane and my parents live across the country, and if we short-term rentaled it, then they could come and stay and have their space and then we can rent it out some of the other times. And there’s something just like, I’m like, I want to live in a cheaper house for some reason. It’s not like I can’t pay my mortgage. I’m just like, I don’t want to keep escalating and I want to take a step back mentally. And I feel like that would be just helpful for the rest of my life.

Kathy:
That’s the most important thing, is your family and where you are in life. And perhaps Jane wants to stay home with the kids and if moving and downsizing would allow that, that is more important than any kind of money you would make.

Dave:
Totally.

Kathy:
You can always make money later. Oh yeah.You’ll still make money as you’re doing that, but simplifying life, love that if it’s going to give you peace of mind and a better family life.

James:
I know how you could house hack, Dave.

Dave:
How? Tell me.

James:
There’s so many developers getting smoked in Seattle right now. It’s gnarly. I feel bad for the builders in Seattle really, and we’re one of them. We sell your house and we go find a half built duplex or two side-by-side townhomes, the cottage ones, and the builder will

Dave:
Hail

James:
Out. It’s framed. We finish it and you pick it up on rip.

Dave:
I want a single family though. I don’t want a townhouse. I want to downsize my lifestyle, but I’m a little bougie still. I want a house in the front and the ADU in the back. Can we find that?

Kathy:
Or us, our ADU’s in the front at the front of the driveway, so the back is still our private yard.

Dave:
Private. Yeah. Perfect.

James:
I mean, Dave, but just so you know, on your house, your pocket’s doing fine. It’s not doing what a lot of other Seattle’s doing. You have zero inventory.

Dave:
That’s the part that I didn’t explain is that my little pocket of Seattle is still doing great. I don’t think prices have dropped here at all. The rest of the city is doing pretty poorly because it’s a really nice area. The schools are good here. So it’s just like, I’m like, maybe get out while I can. If

James:
You’re thinking about it, I think you test it because you don’t want to think six months later, I didn’t do that. And if you really want to make that move, then make the move. But there’s even one that’s pending at 2.1 million in your zone. Cool house. Really? Things are moving in your pocket. You’re not going to lose money on it for what I’m seeing. So about what you’re presenting and value-wise. So if you’re going to move into our rental anyways and you make the decision, then just move in and I think this will move.

Dave:
Yeah. All right. Well, that was in my panic yesterday about anything. I was like, “I got to sell this house.” Now I’m like, “I’m totally fine,” but I think I freak out everyone. When you just spend too much time looking at economics like I do, you can focus on the wrong thing sometimes.

Kathy:
Oh, absolutely. Sometimes you

Dave:
Got to take a

Kathy:
Deep breath. I’m in Malibu where the freeway’s about to fall into the ocean. You got to go, “Maybe I should sell now before that happens.”

Dave:
Yeah. But anyway, we’ll all be fine. It’s going to be okay. Well, this is fun. I enjoyed this episode. I really like just chatting with you guys about what you’re thinking, but I’m glad to hear in the light of day, long-term optimistic, short-term, a little nervous, but the wheels are not completely falling off, but expect a little turbulence for the foreseeable future. I think that’s kind of the vibe.

Kathy:
Yeah.

Dave:
All right. Well, James, Kathy, thanks for being here.

Kathy:
Thanks, I think.

Dave:
Did I scare you? You’re like, “I’m never coming back.” All right. Well, thanks so much for watching everyone. Let us know what you’re doing. We’d love to hear what you’re thinking, how you’re managing your portfolio over the next couple of months or years as the market is confusing and it can be a little daunting, but also filled with opportunity. Tell us what your next move is in the comments below. Thank you all so much for watching. We’ll see you next time.