Flipping America 561, Market Report Q3, 2022Flipping America

Opening:

The real estate market is starting to slow down. Are the alarm bells ringing in your head? If not, should they be? You won’t know until you know the facts. And if you want the facts, I’m going to give them to you in this Market Report for the Third Quarter, 2022.

I really am tired of hearing people claim a crash like 2008 is coming. I’ve been hearing it since 2018. I didn’t believe it then because of the data. Turns out I was right. Same for 2019, 2020, 2021, and now also 2022. Anyone who tells you the real estate market is going to crash again like 2008 is just trying to scare you and definitely not looking at the data. I’m going to do my best not to bore you with it, but in the minutes ahead I’m going to share with you the data we watch and where that data is. We are definitely seeing the first signs of the slow down that I have been predicting.

Remember when we are talking about averages across the nation, this is going to be an average of a lot of local real estate markets. Although the national data is true, it may not be reflective of your local experience. This doesn’t mean the data is flawed, it just means that somewhere some other market is trending the other direction and the data is averaging them out.

To give you a simple example let’s imagine a classroom where the average score from the last test was an 80. Now imagine the class has just 3 people in it. As the teacher hands the tests back and announces the class average score of 80, Johnny looks at his paper and thinks, “well that’s not MY experience. I got a 60. But Suzanne thinks, Hmmm, that’s about right, because I got an 80. Franklin is thinking there must be something wrong with the data modeling because he got a 100.

So your market might be contracting faster than the national average. And some other market might still be booming. And it’s likely that within individual markets the trends are different at different price points. It’s no easy task to gather this data, and disseminating it in a meaningful way is equally challenging. But I am up to the task because that’s my appointed duty for today.

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News and Resources:

Questions:

Topic: Market Report

Pricing Trends. Impact: Informs our Offer strategy
1. Where is the market heading in the past quarter? Interest rates are up. Reports are coming in that demand is slowing. This will inevitably lead to a slowing in the rate of price increase and may flatten it or even reduce prices in some overheated areas. Median home price in August was $389,500, up 7.7% from August 2021 ($361,500). But the August price is down a bit from the high ($413,800) in June.
2. What is the year over year difference? Which direction is it heading?
Average Days on Market. Saturation rate. Impact: Informs our Offer price due to hold time.
1. How long does it take to sell a house? The national average of days on market was 16 days in August. Interestingly, it was 17 a year ago. It has hovered around this 2 week time frame for some time now. 81% of homes are sold in less than one month.
How many months (or weeks) supply of inventory is out there? 5-6 months is balanced
1. At the rate properties are selling, how long would it take us to sell out the current inventory? Nationally, according to FRED https://fred.stlouisfed.org/series/MSACSR August was 8.1 months. Remember this is across all markets and price points. This points to the market moving toward balance. What does this mean for investors? I’ve been predicting that by the first quarter of 2023, investors may be able to start finding deals on the MLS. It’s been YEARS since that was true.
Housing Starts
1. https://www.census.gov/construction/nrc/pdf/newresconst.pdf
  1. Permits, down 14% from a year ago.
  2. New home starts: down .1%.
  3. New home completions up 10.5% from a year ago.
2. https://tradingeconomics.com/united-states/housing-starts
3. We need permits, starts, and completions to be up year over year to start chipping away at the general housing shortage. This is one factor that keeps upward price pressure in the market.
Mortgage Default and foreclosure rates: Google: “Foreclosure Data” and “Default Rate”
1. https://www.attomdata.com/news/market-trends/foreclosures/attom-august-2022-u-s-foreclosure-market-report/
2. August 2022 – The rate of completed foreclosures is up 144% from just one year ago. Before you go into a panic, understand that this means we are just now arriving at the same rate of foreclosure we were experiencing before the pandemic. And that rate of foreclosure was the lowest in history.
Interest Rates: Impact – Rates determine relative affordability. Can impact sales.
1. August 2022 – the national average for a 30 yr fixed rate mortgage is 6.8% https://www.bankrate.com/mortgages/mortgage-rates/
2. This is twice what it was one year ago but is still slightly lower than the historic average.
3. It reduces the buying power of homebuyers, which will have a slowing effect on the market.
Overall Economic Conditions: August 2022. Wall street is nervous. You see it not just in the stock market but in the activity of investment banks and venture capitalists. Debt instruments for business acquisitions is becoming scarce. The on again off again deal for Elon Musk to buy Twitter now has the investment banks who committed to it back in April staring at losses in the hundreds of millions of dollars in light of the rate increases since then. It’s complicated but suffice to say they planned to sell the debt paper and now they will either be selling at a loss or will hold the paper and have a diminished capacity to lend on other projects. The debt market it tightening. Energy costs are soaring and our President is crazily seeking more oil production from everywhere but within our own borders.
Construction Costs: Affect our rehab and holding costs, impact our initial offer.
1. August 2022 – we have raised our official cost of new square footage to $125/sf. This is a significant increase. We held off increasing our estimate thinking lumber prices would come back down. They have, but the cost of everything else is going up.

What does all this mean?

Although there are some indications that the market is still hot and anyone who needs to sell their home can do so pretty quickly, we are also seeing signs that it is beginning to slow down.

Will we see a spike in foreclosures? We at Flipping America will be watching the foreclosure rates over the next few months to see if they level out. I don’t expect them to level off just yet. I believe we will go beyond pre-pandemic levels, topping 1% in the next few months. But I also expect it to come back by the end of the first quarter 2023 to the pre-pandemic levels.

Why? Primarily because of the national average of 16 days on market for a house. If you are facing foreclosure, it’s usually pretty easy to avoid it. You may not get all your equity out because you have to sell it needing updating or repairs to an investor, but you CAN sell it if you really want to. And you would have time to do so.

But I believe foreclosures will remain relatively low because of the loan provisions written into law with the Dodd Frank act. They have ensured that all borrowers since 2013 were truly qualified and had the ability to pay. Life happens to be sure, but total destruction of one’s finances is thankfully relatively rare. So we have a good borrowing base, short days on market, still relatively light available inventory and although interest rates are up, they are not prohibitive.

As the overall economy continues to sour, you will see increasing opportunities for investors. Now is a great time to be stacking up cash and working on your deal structure skills. The next six months are going to be very interesting.

Quote of the Day

In previous years I’ve used a series of quotes from Mr. Rogers and Dr. Seuss. Today we begin a series of quotes from Michael Scott of The Office, played by Steve Carrell.

“Do I need to be liked? Absolutely not. I like to be liked. I enjoy being liked. I have to be liked. But it’s not like this compulsive need like my need to be praised.”

Michael Scott

Expected Air Date: Friday 10/14/2022

Guest: None

Transcript

[0:00] The real estate market is starting to slow down.

[0:03] Are the alarm bills ringing in your head? If not, should they be?

[0:17] Music.

[0:29] Show that teaches you how to make money in real estate wherever you are, whatever your situation, there is an opportunity for you. And now, here’s that flipping America guy, Roger Blankenship. Thank you, Kathy Curtis and hello, America.

[0:44] I’m really tired today what I’m tired of is I’m tired of hearing people claim a crash like 2008 is coming folks that was a once in a lifetime thing.

We are heading for a market correction but we’re not heading for a crash. I repeat it again. We’re not hitting for a crash.

And if I turn out to be wrong I’ll be glad to come on here and say I was wrong but i think that we should base our predictions on the way the data is trending now I’ve been hearing this,

Crash news since 2018 i didn’t believe it then because of the data turns out i was right.

[1:19] The same thing happened again in 2019 I watched as the clickbait wanna be on youtube would get,

700 1000 half a one 1 million views claiming that the market is the market crash is eminent it’s gonna be 2008 all over again and I wanted to respond but you know you can’t get.

300 1000 people,

To listen to the voice reason i guess i don’t know I haven’t triggered out how to do it anyway except here on the flipping America show and I appreciate you tuning in well we heard it again in 2020 and especially when the pandemic came out.

When that started everybody said see I told you so the market’s gonna crash and I came on the air the internet I said no it’s not and then we heard it again in 2021 now it’s surely gonna crash and because of

After the foreclosure moratoriums it’s gonna be a disaster well listen the foreclosure moratorium,

Has been over for really all of 2022.

And has your market crashed? No, it is not. So, it’s not gonna crash in 2022 and it’s not gonna crash in 2023. Anyone who tells you that the real estate market is going to crash just like 2008,

Is just trying to scare you and definitely not looking at the data I’m gonna do my best not to bore you with it but in the minutes ahead I’m gonna share with you the data we watch.

[2:38] And where that data is.

We are definitely seeing the first signs of the slowdown that i have now for almost a year been predicting and been predicting that it would happen in the fourth quarter of 2022.

When we’re talking about averages across the nation this is going to be an average of a lot

Of local real estate markets not all of the national data is true it may not be reflective of your local

Experience. It doesn’t mean that the data is flawed. It just means that somewhere, some other market is trending the other direction and the data is averaging it out. Let me give you a simple example, okay?

[3:20] I don’t want to be guilty of oversimplifying or

I want to show you how this works out with averages and statistics in the simplest way possible so that everybody can get it.

Even though it’s from Bayou Labatri. Alright. Well, anyway.

[3:41] I’m just kidding I don’t think we have any listeners from Bayou Lebatri if so i don’t mean you I mean the people from Moultrie Georgia.

Let’s imagine a classroom where the average score from the last test was an 80.

[3:56] That’s the average score for the class. Now, imagine this class just has three people in it. As a teacher hands out the test,

Johnny looks at his paper and thinks well that’s not my experience i got a 60 so there must be something wrong with the data Suzanne thanks hmm let’s about right because I got an 80.

And Franklin is thinking there must be something wrong with a data modeling because he got a 100.

[4:25] But if you take a 60 in and 80 and 100 you come up with the average of it you’re gonna get an 80 so.

All that to say your market might be contracting faster than the national average and some other market

I can think of many of them might still be booming and it’s likely that within individual markets

This is important now even within the local market where you are the trends are different at different price points it’s no easy task to gather this data and the seminating it in a meaningful way

Equally challenging that’s why those who wanna take shortcuts and sound the alarm bills.

[5:01] Can get their videos and their shows up quickly and get the clicks but they’re not necessarily right.

Well, I am up to the task and that is my appointed duty for today.

Before I get into all that here’s how to get in touch with us. You can follow us on social media, Twitter, and Instagram at flipping America on Facebook

Go to Facebook. Com slash flipping America media if you have questions about real estate or real estate investing send those questions to,

Questions at Flipping America. Net alright now get ready

And not if you don’t take notes if you’re driving but if you’re not driving here’s a couple of phone numbers for you if you wanna call us you can call 877 55 Roger that’s (877) 557-6437,

If you press extension one, you can leave a message or a question. Now, here’s another number for you. If you wanna subscribe to the weekly newsletter, text the word wit.

WIT we call it the weekly wit you can send that to 205858 flip.

(205) 858-3547.

[6:11] It’s gonna ask you to enter your email. We will not be keeping your phone number with you just you just need to send the text from your phone number, okay? You will be subscribed to the weekly wit. The wits stands for whatever it takes this little newsletter has a weeks,

It has the week’s real estate and flipping American news and investing tip a joke and a blessing it’s usually about a five to seven

Minute read with links to

Some different things, some resources, and also the podcasts that we released the previous week and YouTube videos that we do. It’s all right there in the weekly width and you can get it automatically, completely free.

205858.

Sponsor Flipstarter and

This this special that you’re about to hear about is only good for another couple of days it is absolutely going away this weekend and the price is gonna go back to the normal price.

[7:13] We’ve had some emails and questions about the show notes the show notes are not appearing in the app anymore and that’s due to initiate beyond our control.

Explain the I would have to do it’s not worth the time but we are working on another way to make the show notes available to you and we’ve hit on something that.

Well the show notes are gonna be available on the website and.

I don’t wanna say too much about it but when we get finished, you will have a searchable database of every show we have ever done.

[7:50] That it’s it’s gonna be pretty amazing. I’ll probably do a YouTube video about that when it comes up.

Let’s take a quick break here from our sponsor today which is flip starter and then when we come back I’m going to do the third quarter market report.

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My hands were literally shaking as I hand it over the chicks for the purchase.

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[9:07] Let me give you just a quick little history for those of you that are new listeners since we started this.

[9:14] When.

Was not really paying attention to the larger trends. I was just you know head down, buying houses, and doing what I could and I should have sent to something was company coming like a lot of other people should have since it but I really wasn’t thinking about it and it never happened before.

And so, I got caught. Now, fortunately, all of our properties were bought with cash.

And those of you that know my story know that I was doing equity partnerships with cash investors and fortunately we didn’t get eaten up by interest rates and we didn’t suffer a financial catastrophe.

We were able to muddle through in my income was way off for 2008 and after 2009 it was a little discouraging but.

Once we figured out how to make money in that market we kinda went crazy from 2009 to 2012,

Then once the market started healing again and getting back to normal and then got overheated.

I I did share some of those concerns. Frankly, that you know, we were going to repeat the same mistakes and so.

I decided I would not be caught unawares ever again.

[10:33] I do think a lot

A few years later when we started the flipping America show these were already a part of something that I did and then when I first started hearing the

Watching the alarm bells being sounded by people I went back and looked at my data and,

Going all the way back to show 187. Now, this is show number 561. So, it’s been a minute. It’s actually 4 years.

I published then.

The statistics that we watch,

Over the years we’ve been watching the market and so i’m,

Not talking to you as someone who just wants to argue a point or defend a point i am talking to you as someone who has been watching this for years

The predictions of doom and gloom.

[11:48] Be shown to be incorrect.

What else can I say.

[12:13] You know how long does it take actually to sell a house.

We watch this is AA big one. We watch the mortgage default ratios or the default numbers and.

Default notices and then completed foreclosures and so forth and then we were watching interest rates that has an impact but as you heard on the last show not as big as an impact as you might think

And then we look at cost of construction now.

[12:52] These last three interest rates overall economic additions and construction costs they don’t really determine our prediction about what’s gonna happen but they do,

Some of our tactical decisions in the field what we’re going to buy and how we estimate cost and so forth so I’ve been looking I’ve been watching these eight.

[13:14] Indicators for years,

And I’ve got websites that I go to and guess what? Those websites are in the notes for today’s show. You’ll be able to get them if you access the notes and that’ll be a post on the website in a few days,

I do this as a public service.

For you right now. Mainly because I haven’t figured out how to get anybody to pay me to tell them this, but anyway, here it is. Let’s let’s talk about pricing trends. Now, this informs our offer strategy. Where is the market heading in the past quarter?

We know that interest rates are up.

Been reports are starting to come in that demand is slowing nationwide this will inevitably lead to a slowing in the rate of price increase and may flatten

Or even reduce prices and some of them more overheated areas.

The median home price cross the country in August was $389500 that’s up.

Seven. Seven% from August of 2021 which it was 361 500 okay

So, it’s up seven% or seven. 7 year% over year. It hasn’t gone down. There has been a crash. We’ve been conducting foreclosures all year and there has been no crash.

[14:27] Alright, you with me? Okay, now.

This year in June in June the national average picked at 413,

So, what does that mean? That means, that’s an indication that it’s starting to slow down.

Occurring.

Just as i predicted by the fourth quarter of 2022 we would be seeing price price increases starting to slow down.

[15:08] Yeah I have to keep on hammering on the fact that my predictions are.

Not scare tactics.

How long does it take to sell a house

Was 16 days in August. Interestingly, it was 17 a year ago. It’s hovered around this 2 week time frame for some time now and 81% of all homes are sold in less than 1 month

That is astounding. That is a hot.

Market an average market is 30 to 45 days on market and another 30 days to go from

The opening of escrow to closing or,

We still have a hot market. It is and and is really no different. It’s actually.

Well, 1 day doesn’t make much of a difference. 16 days in August 17 year ago that’s like no statistical difference. Alright. So.

The next item that we look at is how many months or weeks or supply of inventory is out there.

[16:28] Everyone says that 5 to 6 months is a balanced market and what what this is the the absorption rate or the saturation rate what this is is.

[16:39] If no more properties were put on the market based on today’s rate of selling how long would it take to sell out 5 to 6 months is normal.

Nationally according to Fred,

It’s it comes from the fed. I I don’t remember what Fred stands for but I’ve got a link in the notes. The

Other absorption rate was eight. 1 months in August. Now, remember, this is across all markets and price points.

I’ve been predicting it by the first quarter of 2023 investors may be able to start finding deals on the MLS it’s been years since that was true now,

I will admit that in 20,

I predicted that it was late 2018. It was in the 2019 prediction show. I predicted that by 2020 we would be finding deals on the MLS and i was wrong.

I mean, you can, some, if you use a tool like Privy.

[17:50] Goodness it’s been 15 years ago now but I remember being able to look on the MLS for Hud house listings.

[17:59] And make offers and it was a pain in the drain to make a hood offer my poor realtor.

He is signed one of his new realtors maybe it was an assistant and I would sit there with her and it would take the better part of an entire day to throw off eight or 10 offers on hood houses,

You know.

It was exhausting. It’s a lot easier now but anyway, it’s been years since we’ve really had any kind of quantity of houses available.

Next does look at housing starts.

Slash NRC slash PDS slash,

Permits are down 14% from a year ago,

New home starts are down. One% new home completions are up 10. Five% from a year ago.

[19:01] What does it mean? Well, here’s the way I interpret this. We need permits starts and completions to be up.

Year over year to start chipping away at the general housing shortage and i did a show I don’t know two 3 weeks ago on the housing shortage and we’re you know about 500 1000 houses short and that’s one factor that keeps,

In the demand high and the upward price pressure in the market.

And nothing is really being done.

When I when I put this into the balance I know that the market is slowing down and I’ve given you some stats on that but when I put this on balance we’re not building enough new homes to meet demand that means that demand is going to remain a above average,

Remodeled houses and resales.

[19:59] We’re looking at the,

Rates of foreclosure and you can google foreclosure data and default rate if you wanna do this research yourself,

ATTOM,

Interesting places that have information you can access for free but if you don’t wanna do that, just listen to the show. Because I’m doing it.

[20:34] Alright, August of 2022, the rate of completed foreclosures. Now, listen carefully. The rate of completed foreclosures is up 144%,

From just 1 year ago but before you go into a panic

Understand what this means it means that we are just now

But we’re about to be. Well, a year’s a year ago, we were doing no foreclosures virtually, no foreclosures nationwide,

You know, more than double

Call to your attention a show that I distinctly remember from February of 2020 before the pandemic hit the before we realized we were about to have a pandemic

That,

And I went into the reasons for that. It has a lot to do with the dog frank act

Okay but.

[22:00] You wouldn’t think that would be something they’d have to write into law you would think the self interest of any lender would sort of guarantee that but because we’d come through many years of crazy loans and

And ridiculously easy qualifications for unqualified buyers they had to write that into the rules and now it’s law so but when you do that,

You know, it has an amazing effect. You have a whole pool of qualified buyers buying houses.

Where they’re unable to get another job to close the gap or a divorce happens where they’re relying on both incomes to make the mortgage you know those things are gonna happen but they don’t happen as often as you think,

And if you begin with a pool of qualified buyers you’re not going to have a high rate of foreclosure.

This is 2020 February 2020 was the lowest in history.

[23:07] You know, the, I’ve been calling it a bump. We’re gonna have a bump in foreclosures that’s, that’s going to occur during the first quarter of 2023. And maybe the fourth quarter of 2022, we’re watching it,

And we’re not afraid of it. We don’t believe there’s gonna be a crash. Most of the people that I know that actually pay attention to the real numbers. In fact,

Every single person that I know that pays attention to the real numbers believes what i believe we’re gonna have a bump but we’re not gonna have a crash.

[23:38] Okay. Now, there are gonna be more foreclosures than you’ve seen in the last few years. If you’ve only been a real estate investor for the last two, 3 years. It’s gonna be very different than what you know but it’s going to be very familiar to those of us that have been around for a.

[23:52] Now, let’s talk about interest rates

And it can impact sales in August 2022 the national average for a 30 year fixed rate mortgage is six. Eight% this security to bank rate

Bankrate. Com.

It reduces the power of home buyers and it has a slowing effect on the market.

The higher price homes out of reach for people that just a year ago.

[24:36] May have been able to afford them.

Prices are coming down and you know I’ve I’ve routinely about every other week I will take a look at the luxury market in it

Just Atlanta where I live. I’m just watching the homes that are selling in sort of informally. It’s almost standing totally. It’s not really of full on research study but I’m watching what’s happening with the

Home prices and

30 minutes or so I surveyed all of the homes on the market that are in what we would consider the luxury price range in Atlanta and I noticed that a lot of them have experienced reductions because they’re sitting on the market,

Desirable home, some of them recently updated. And some of those reductions are like reductions of $500 thousand now. That’s not.

[25:34] A lot when you’re looking at a, you know, three 1 million dollars house but still, it’s a significant number.

And so in the luxury markets prices are coming down at least in Atlanta in this one area and I don’t wanna draw a broad generalization across the country based on that

This is the impact of the rising

Mortgage rates and so the market is cooling off in the in the luxury areas if you’re thinking about flipping luxury houses you need to plan on having a little bit longer hold time and maybe not selling it for as much as you would have a year ago.

[26:08] What about overall economic conditions.

The Wall St is officially nervous.

Those of you that follow the news know that we have an on again, off again, deal for Elon Musk to buy Twitter and frankly today, I don’t even know where it stands today. I think it’s back on, but I don’t know.

The investment banks who committed to it back in April are staring at losses in the hundreds of millions of dollars in light of the raid increases since then.

It’s complicated and more than i wanna go into here but suffice to say that they plan to sell the debt paper and now they will either be selling it at a loss or or gonna have to hold the paper which gives them a diminished capacity to lend on other projects the dead market is tightening

Energy costs are soaring and our present is crazily seeking more oil production from everywhere,

Accept within our own borders.

[27:22] Took you inside my imaginary situation room and

Had I imagined that the strategic advisors were coming up with ideas to solve problems and they said which ones are the stupidest designed to hurt the American people the most those are the ones we’re gonna go with

Yeah, that’s what it seems like anyway.

And I’ve been thinking of this for a while my formulas have used for years $100 a square foot add new construction to our to add.

But

Tells me that it’s actually 130 to 140 dollars a square foot to build new now

Officially here flipping America we have raised our cost of adding new square footage to an existing structure which is less expensive than building a new house,

But adding,

New square footage we’ve raised at $225 a square foot. This is a significant increase. We held off increasing our estimate thinking that lumber prices were gonna come back down and they have but the cost of everything else has gone up.

And you know the interesting thing about it is once the cost of something goes up.

[28:45] I know this gonna be crazy but I’m sort of addicted to Diet Mt. Dew.

And I’ve been drinking it for years so naturally I’ve been monitoring the prices of diet Mt. Dew and this sort of my bellweather.

[29:06] All of this means we’re gonna have some interesting opportunities in the next year. So, and now is the great time to be stacking up cash and working on your deal structure skills. The next 6 months are gonna be very interesting.

We’ve been doing famous quotes for a while and I’m right now we’re doing Michael Scott from the office and here he says.

Do i need to be liked? Absolutely not. I like to be liked. I enjoy being liked.

[29:33] I have to be liked but it’s not like this compulsive need like my need to be praised.

You’ve been listening to flipping America real estate investing for everyone. Listen three times a week on stations across the country or on the flipping America app free in the app store

Find and follow us on Twitter and Instagram and keep your eyes open.

Flipping America

Flipping America 561, Market Report Q3, 2022