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In this Motley Fool Money podcast, David Greene, host of the BiggerPockets real estate podcast, weighs in on:
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This video was recorded on July 17, 2022.
David Greene: I’ve seen this several times throughout my time of being investing in real estate and running real estate sales teams as well as the mortgage company. Anytime there’s a change in the status quo, the initial response from everyone is to freeze. You’re walking through the woods, you hear a twig snap, the first thing you do is freezing.
Chris Hill: I’m Chris Hill and that’s David Greene, host of the BiggerPockets real estate podcast. I caught up with him last week to get his thoughts on the current state of the housing market. The numbers he thinks are most relevant to watch and the most common mistake people make when listing their homes for sale. But I started by asking about his unusual career pivot. Before becoming a real estate broker and posting a podcast, David spend a decade as a police officer. I just wanted to know, how does someone make that switch?
David Greene: I had no intention of becoming a real estate investor, which is funny because we typically teach people to be intentional about the life they want to live in pursuing it. But I didn’t start off that way at all. I wanted to be super cop. I was going to be a police officer for my entire career. I was 100 percent invested in that career and I would say it was part practical. If you watch the news you’ll see that the relationship between law enforcement and the public is not what it was when I first wanted to get into that job and it was part what I would say spiritual. I felt like there was a plan that God had in my life that it wasn’t going to stay in law enforcement forever, that I had been there to learn a couple of things about myself and be developed in certain ways.
But there was a next step. I see that both of those things were playing out at the same time. But the reality came down to, if I want to be a full-time real estate something, investor, agent, loan officer, whatever it was, you need to have some stable income to replace the stable income you’re leaving. This is the dilemma that every single entrepreneur/full-time investor has to face is yeah, I could go do all these great things, but I still got to pay the bills In the meantime. I call it a ballet. I want to climb to the top of this, bounce in, but I need something that will catch me if I slip.
For me it was buying single-family residential real estate and renting it out. It’s not the demos, glamorous way to do something. It’s a very blue collar way of building wealth, but it’s compared to other forms of real estate investment. It’s very solid, it’s pretty reliable. It’s not like a short-term rental where you never know what you’re going to get. I just grind it away, worked a lot of hours, saved up all my money. I lived in other people’s houses and just renting a room from them to save and started buying rental properties across the country until I had enough rent coming in. That was roughly the same as my salary as a police officer and then I had that freedom to go take the next step.
Chris Hill: I wanted to get your thoughts on the current state of the housing market. But before we do that, let’s go back in time a year-and-a-half or so. You’ve been involved in residential real estate for well over a decade. Had you ever seen anything like what we saw in housing that started early in the pandemic? Because I don’t watch it as closely as you do. But I was blown away by not just the stories I was reading, but also the anecdotes I was hearing from friends of mine in different parts of the country.
David Greene: I had seen it before and I had seen it between 2000 and 2006, which was the huge bubble that burst. That’s what caused a lot of people to think the same thing was going to happen in this market because it looked very similar. Now if you understand the fundamentals of what made it occur, it’s not very confusing. That market at the time was driven by bad loans being given out that caused the asset values to skyrocket. Because if you could borrow cheap money and a lot of it, you can keep paying more for a property and that brought more demand than there was supply. Now the thing that was different is at that time supply was still being created at a very fast pace. They were popping houses up everywhere.
There were just new home developments constantly. When the demand dropped, there was way too much supply, not enough demand that created the bubble. Immediately everybody stops buying houses and then you get this residual effect that amplifies the problem where you could buy a house, but the prices are coming down so you purposely wait and that’s where it goes all the way to the bottom. This time around the reason that we saw this crazy run in prices be a nice way to say it was a lack of supply. Now you take a lack of supply because we didn’t have enough homes because we stopped building after that traumatizing experience that the country went through with real estate in 2009, 2010. But people kept becoming of home-buying age every year when we’re not creating supply. This is obviously very generalized because local markets are different.
But on top of a lack of supply, now we’re creating cheap money. We’re keeping interest rates artificially low for a long time. Now we’re printing ridiculous amounts of that cheap money. Quantitative easing hit what we had never experienced. That doesn’t get talked about enough in my space that for a long period of time, $80 billion a month are being introduced into the economy that did not exist before. It’s always shocking to me that that doesn’t get brought into the conversation about why real estate prices went so high, but prices of everything went high. We’d take an asset like real estate that is very easy to highly leverage. I’m just adding all of these catalysts that you throw into that same little pressure cooker of not enough supply.
Chris Hill: When we see the market starting to cool off and we just got a report from Redfin about how in the month of June, 15 percent of sale agreements on existing homes were canceled. Home-builders are starting to see higher cancellation rates. When you hear data like that, do you think, well, this is just the normal ebb and flow? Do you think it’s due to rising interest rates and their impact on the housing market or is part of this maybe people getting cold feet because I don’t know if you’ve noticed, but in 2022, the stock market hasn’t done that well.
David Greene: Yes. Both of what you just said are true. They’re working together. As far as people getting cold feet I’m sure in most investment asset classes you see the similar thing. People feel more comfortable when they’re doing it as a group. I call it the flock of birds syndrome. Like when you see a flock of birds going and they all move in one direction. Human beings feel more comfortable with that. You could refer to the whole bunch of gazelles when they cross the river at the same time. In general, when people see stock prices rising, when they see real estate prices rising, it makes it easier to get over the initial fear of what if I lose my money? What if something goes wrong? Everybody rushes there at the same time.
Which is why most intelligent investors are telling people to make their decision based on fundamentals and numbers, not off of that emotional safety that you get when everyone does it. However, the majority of people that are investing in stocks and real estate and crypto are not experts. They’re doing it because they heard someone else do it and they have fear of missing out. You do see when everyone was doing it, everyone else wanted to do it and now that there’s a little bit of uncertainty, it’s very easy to slam on the breaks. If you think about it like I’ve seen this several times throughout my time of being investing in real estate and running real estate sales teams as well as a mortgage company.
Anytime there’s a change in the status quo, the initial response from everyone is to freeze. You’re walking through the woods, you hear a twig snap, the first thing you do is freeze, is that a tiger? What is that thing? What am I going to do? This isn’t shocking me when you mentioned that ebb and flow, it’s very normal to see rates went up. That’s a bit of a shock. It’s not what we’re used to. People stop and freeze. I saw this in 2017 when rates went up. I saw this with the very first shelter in place edict that came out during COVID. There was these several month of like, no one really knows what’s going on and they all wait to see what’s going to happen. When no tiger jumps out of the bush and you realize, the market didn’t crash, home prices aren’t plummeting. We’re not going into a depression. Business goes back to his usual and it’s a bit of a pet peeve of mine that every time you see this little pause, which is very normal to be all this click-bait comes out where people’s too, is this the next depression? Is it all about to fall apart? Then four months later it’s back to normal and no one ever talks about all the fear that got pushed into the market.
Chris Hill: Well, selfishly, I liked that there’s the housing bears, just like the stock market bears. There are always going to be bears out there who are just all too willing to provide the fodder for click-bait articles like that. We were talking before we started recording. I’m very much a novice when it comes to the housing market. I will see articles occasionally about specific cities in the United States and a lot of times it’s insert name of cities. Housing market is red-hot and unless that city is New York, no disrespect to LA Chicago or any other city out there. But unless it’s New York, I always have the same thought which is, wait. What am I supposed to do with this information? Like is this row, like if Seattle’s market is red-hot, am I supposed to do something with this information? As someone who works in this field, one, how do you react to those types of headlines? Two, are there actually cities or regions of the country that you think are maybe bellwethers too strong a word, but indicators of the overall housing market?
David Greene: I would say no, there’s not cities that are indicator to the overall housing market. That’s not something people should worry about. When you see an article that says Seattle real estate, red-hot. Austin real estate, red-hot. Los Angeles real estate is slowing a lot. San Francisco real estate is slowing a lot. The question, shouldn’t be, should I invest there or should I not invest there? The question should be, what made that happen? Because if you can understand the fundamentals there, very simple and real estate is one of the reasons that I really like it. It’s easy to scale and this compared to other things, because you don’t have to be a genius to understand how real estate works once you get the fundamentals. If you look at the cities that have had the most amount of articles saying this city is red-hot, everything’s going a $100,0000 over asking price, no contingencies.
There’s some patterns that you can see popping out with them. They were all very tech heavy cities. Tech companies are moving into those cities and they were becoming very successful. Money was everywhere. It’s very easy for them to raise money. It’s easy for them to collect it now they can pay more wages. The top talent is moving into the textile industry. Now, you’re making a ton of money because you live in Seattle or you live in Austin, and there’s still limited supply. Of course, prices are going to go up. You’re able to afford more. You can get approved for more and there’s not enough inventory. As supply remains constant and demand increases because you can pay more, it’s not a shock that those prices went up. You did not see this happening in agricultural towns. Nobody was saying Bakersfield, California real estate is on fire.
You have this pattern of your epicenters of business, which has been tech, but it could be anything like whatever the flavor of the month is, where those industries are paying more. If they have the ability to create more supply, you won’t see prices expanding. This is not happening in Kansas where there’s land everywhere. Austin is a very specific city that only has so much square footage. Especially if you are inside of the city limits, like inside of the river, it’s going to be even more expensive than these developments that go outside of it. What you notice is that once those cities become too expensive, people start naturally asking, well, I don’t want to pay that much for a house or I can’t afford it. Where can I afford? Then they expand concentric circles away from the epicenter as they’re cheap and then those areas start to go up in value.
If you can understand that’s all that’s happening, that’s making these cities’ values go up, you can find another area, for instance, Miami is, I think in my opinion, probably the hottest market that I’ve seen. They can’t build houses fast enough and like you mentioned, New Yorkers are leaving New York and they’re going to South Beach and big money is going there. Remember I said earlier that tech was paying their wages very highly. Well, as Wall Street goes somewhere, they bring a lot of money with them so you should expect the wages that people earning in South Florida are going to go up a lot exponentially. I’m now looking at cities outside of Miami. Where is that demand going to push into? I’m going to invest there where it’s a solid market, not a red hot market. As Miami overflows, those are going to be in the next places that go up. That’s what I think people just look for when they see the article. Miami real estate is ridiculous you can’t get a place if you wanted. Well, if the fundamentals are strong in Miami and we think New Yorkers are going to keep moving there and bringing all their money, where would the next place be that that overflows and can I get in their first?
Chris Hill: Are there national numbers that you look at or are they irrelevant when it comes to investing in real estate?
David Greene: They’re largely irrelevant. They’re interesting to chew on, like a piece of gum, but it’s not going to give you any nutrition. They frequently make their way into the headline, into the articles, into the thing that catches your attention and you get to listen to, but there are many cities in America, many where houses are sitting on the market for 90 days and they’re not selling over asking. It’s funny because you know you’re dealing with one of them when someone says, we got a full asking price offer, as if that’s a big deal. Where I’m from, full asking price means you screwed up really bad. You should have went way over asking price. That’s very normal. It really just comes down to understanding supply and demand. If you’re investing in an area where they can build more homes and they are building more homes, prices are not going to rise incredibly quickly and you’re not going to end up in these bidding wars.
The other component of real estate that probably might seem a little confusing to people that are not used to investing in it, would be that the cash flow in real estate is much more important than most stock investors would consider, like a dividend payment. That’s the closest equivalent to it. But from my understanding is, when you’re investing in a stock that pays a dividend, that’s like icing on the cake. That’s cool. In our world that is the cake. The appreciation of the property is much more akin to the icing. When we’re buying homes, what we’re spending more time looking at is this individual specific house. How much money would it pay me every month to own it? If it goes up in value, that’s great. That’s one of the reasons that the national data is largely irrelevant to the real estate investor who’s picking an individual home.
Chris Hill: Are there national home builders that you think are worth paying attention to or that you and your colleagues pay attention to? Is KB Homes a better company to give an indication of where the overall market or individual markets are going than say, DR Horton.
David Greene: No, I don’t think so. I think that the individual home builders, because if you think about what they need to be successful, a lot of it is they have to have connections with the municipality and land that they can buy at a cheap price and then get the city to agree to allow them to develop it. It’s not something that can be scaled. It’s very highly dependent on the relationships that you have within that specific area and where you can get the opportunity to get undervalued land versus something like in the stock market, the ideas that that company has that you’re investing in can take place from anywhere in the country and are not interdependent on a local area.
Chris Hill: Let me go back to the previous question I had regarding national data. What is the data that you pay attention to? You can take that in any direction, including, by the way, other writers, other podcasts, because plenty of people listen to BiggerPockets to get a sense of how to think about real estate. I’m curious what the co-host of BiggerPockets is paying attention to.
David Greene: I keep saying it and it doesn’t pick up traction to be honest with you, Chris. I’m not sure what it is that I’m doing wrong, that people aren’t understanding how important it is. I think probably the people that enjoy investing in real estate, there’s a dopamine hit that they get from the actual seeing the house, making it pretty, looking at the numbers on a spreadsheet. The individual home is what’s fun as opposed to the overall numbers but in our world the numbers that you should be paying attention to are macroeconomic indicators of the government as a whole. I include myself in this group. There are a lot of real estate investors that have done very well over the last six or seven years. Many of my colleagues are giving themselves the credit for why they’ve done so well.
Oh, I invested my money in the best thing, I’m up this much, this house has this much equity, cash flow is so high. We’ve been running with the wind at our backs and it’s a heavy wind for a long time. They have literally printed, well not printed isn’t the right way to say especially if I said literally, but money has been created by clever means so much that anything that you bought, any asset with any form of scarcity was going to go up. People are trading baseball cards. Bitcoin had a huge run because people were so concerned about the fact that inflation is eating up the value of dollar. I spent a lot of time looking at what is the federal government doing? Are they going to be printing more money? This is one of the reasons that I did well after COVID.
When the Shelter-in-place hit, conventional wisdom was cash is king, pull your money out, keep your powder dry, we’re going in a depression, there’s tons of opportunity, you’re going to jump in and you’re going to buy houses for pennies on the dollar because someone lost it. I would say, all things being equal, that is what should have happened. In a purely capitalistic society, that advice makes a lot of sense. I just bet on the fact that the president that was sitting in place and congress, all of them were not going to let the market die. Just that the too big to fail thing is now an acceptable answer in a lot of ways and I said no, they’ll print more money. They started this with President Obama with quantitative easing. There was no big pushback, there’s a handful of people that are salty, the angry conservative guy banging on the table and everyone shoos him away.
I could see that because there wasn’t a big backlash they’re going to do it again. That’s why I kept buying and I advised our clients, you should get. Sure enough, we had a three, four-month window where everyone was scared and the market was soft for a little bit and then boom, it took off and it hasn’t stopped. To sum this up, if you want to look at national data that would make sense for the type of asset class like housing, look at how much money is in circulation and look at the tax code. Are you rewarded for owning this asset or are you punished for it? Are they making a lot of money? Because that money needs a place to go and real estate is one of the easiest places to park a lot of money compared to starting a company and trying to run it yourself.
Chris Hill: Before I let you go, let me just ask a couple of very specific questions relative to the home buying and selling process. You don’t have to name names because I don’t want to get you in trouble with your clients, but what is the most common mistake people make when they are listing their homes for sale.
David Greene: That’s a really good one and we’re dealing with this right now. Greed. Sellers hear about everybody else’s house was selling for such a certain amount and then they assume their house should as well, and they don’t take into account what it is that made the other houses sell for more and then emotions get involved. The house down the street sold for this much you think yours should too. Theirs is way nicer than yours or a much bigger lot and you are stuck in this, but this is my home and I think that this is just as pretty.
Chris Hill: Is the mistake that they’re working with a professional like yourself and you’re like, I think we’re listing to this a little high and they’re like, no, this is what I want to go with.
David Greene: No, it’s more that the real estate agent, if they tell them what they need to hear, they’ll sell with someone else. Then real estate agents want to tell you what you want to hear and hope eventually that you figure out you went to high and it damages the relationship. The problem is frankly, is that if you tell someone would they want to hear, you’ll get the listing and if you shoot straight with them, they’ll go with someone else, but that’s literally the opposite of what would be in your best interest.
Chris Hill: Some friends of mine recently sold their house and they went through the process of staging it. They got rid of a lot of their stuff and worked with a company that essentially staged their home. It wasn’t until after they had sold it and they had moved out of town that I thought of this question and I can’t ask them so I’m going to ask you. Do you have a favorite neutral color? It just seems like when you’re looking at neutral colors, it’s all, it’s like fifty shades of white, fifty shades of cream. Do you have a go-to neutral color?
David Greene: Grays were very popular for a while. I noticed that which is weird. I think that’s something people are going to look back on and our kids are going to say, why were you so depressed? What does every house look like Eeyore, the way we look at the Greene shag carpet? [laughs] What were you guys thinking? No. I prefer like the sand tones. I like browns and beiges and lighter shades of brown, but it doesn’t mix well with gray, so you typically go grays and whites or browns and lighter ones. I think a lot of it has to do though with the area that you’re in. What you tend to see is every local area has a taste or a trend that everyone likes and it’s tapping into that because this is what they’re used to seeing.
Chris Hill: Goes back to what you were saying earlier about the heard mentality. It’s like, well, everyone’s doing this so let’s go with this.
David Greene: Way too much of that goes on in real estate, but you’re exactly right.
Chris Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill, thanks for listening. We’ll see you tomorrow.
Chris Hill has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Redfin. The Motley Fool recommends KB Home and recommends the following options: short August 2022 $13 calls on Redfin. The Motley Fool has a disclosure policy.
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