Nick King 0:05
Hi, this is Nick King. Today on the modern money podcast, Jacob and I will be talking about the real estate climate, there's a lot of different factors influencing the price of real estate. There's several vehicles that you can invest to with real estate. And we'll talk about how that may or may not fit within your portfolio.
Hello, and welcome to the modern money podcast. My name is Nick King, and as always had my trusty colleague Jacob Chaparro with me, how are you doing Jacob?
Jacob Chaparro 0:49
Nick doing well, on a nice mid July week here. Enjoying summer? Love it. Yeah, it's my favorite. It's my favorite season. Just I love the sun.
Nick King 1:02
Shocker!! (Audible Laugh) Good, good. Yeah, well, well, you're in California, in the Midwest, here. We've been having tornadoes. But, we're well seasoned. But seeing up and down, it's crazy to see these huge trees falling on houses. Everybody, if you're listening to this public service announcement, please remove those trees that are very old and looming over your house. But thankfully, nobody got hurt my kids school or camp is out for the summer because it tore off the roof. So yeah, it's been a fun week. But that does segue into real estate, right? So very timely subject post, in who even knows if we can call it post pandemic, kind of on the tail end, hopefully, of this pandemic, just seeing prices at very, very high levels.
And it's much different than 2008. I'm hearing very similar parallels be drawn from those that haven't really researched it. So I did want to debunk that. But let's talk about it.
Jacob Chaparro 2:20
Yeah, yeah, we'll talk about that. And just to give everyone just a preface of what we're going to talk about talking about that dynamic of where housing is, Should I buy Should I wait just kind of all things there. Hopefully, with a couple of talking points we bring up and either validates it solidifies kind of your own thinking. We also want to talk about other forms of real estate in terms of investing vehicles that I think a lot of people overlook, maybe you don't want to buy a house, but one exposure to some type of real estate, residential, commercial, whatever it may be. We'll discuss that a little bit. And if we have time, we can go into a little bit of the lending aspect of it, leverage, more advanced topic, if you will, that we've seen being exercised a lot through individuals here to purchase other homes or to whatever it may be, how they're using their assets with just the rise in appreciation of real estate here. So Nick, what Where should we start out with when it comes to the current housing market as we stand?
Nick King 3:28
Well, you mentioned leverage, and I did want to go back on that point of this is not 2008. It's much different. Back then, if you had a pulse, you could basically get a mortgage. quick breakdown of it was those that weren't necessarily deemed credit worthy, which fill out applications. A lot of companies not to be named would turn a blind eye and you would get extremely high interest rates, which doesn't make sense in terms of being able to pay that off. If you don't have great credit. Those get packaged up, got sold credit default swaps, the whole story, I'm sure many know that story. But the consequences in the aftermath of 2008. And the real estate bubble led to Dodd Frank led to more regulations, stress test of banks. So we are in a different scenario. Right now.... We're seeing prices go up on houses, the environment is just different.
Jacob Chaparro 4:31
I think, from regulation standpoint for the requirements that the Federal Reserve has put into play with all the major banks as far as lending restrictions and parameters to get a home right now. You have to be really well qualified. You really do and like Nick just said, they're just people that were making less than $100,000 and somehow got five mortgages 2005 through 2007.
The other thing that kind of throwing a lot of stuff out here. But a lot of good talking points, the the balloon mortgage aspect that really started to take place in 2001 2002, where there's the seven year mortgages, these balloon rate mortgages that a lot of people were not aware of that all of a sudden their monthly mortgage payments increased by 30 50%. Those that started that mortgage process in 2000 2001 2002, that domino effect started take place seven years after is that would have been 2007 2008 2009, and so on and so forth. So that there is not something that we're seeing in this current lending environment right now, where you're gonna have this massive wave of defaults. Anything can happen, of course, but just if you look at the numbers, you follow the data, there's no proof of that even coming close to fruition like it did started in 2007. and beyond.
Nick King 5:59
So let's talk about some of those driving forces and why it is a different story, this this time around in terms of why we're seeing just across the board. Now, granted, there's pockets, I'm sure where there's some very good value, but generally speaking across the board, very high appreciation in the real estate market. So part of it is everybody's working from home, not everybody, but a lot of people are working from home, people weren't moving there, there's not a lot of supply out there. In fact, the supply was down more than believe 60 to 70% pre pandemic, so supplied that man, just the economics of that is going to lend itself no pun intended to have higher rates in a normal market, right. And then on top of that, we're seeing large institutions come in and purchase up one out of every five house that says, Well, that's just wild.
Jacob Chaparro 6:56
I think this this is, this is different. And you don't have to be in the industry or just this ultra successful investor. What's the good old saying, follow the money, right? Follow the money, follow the money, follow the money. And when you look at dynamic of who's buying these homes the past 12 months, and you if you're listening in I know I've heard this many times is I just got bought out or beat out by a cash offer, right? These cash offers are they're making 10 20% more. It's highly likely it's an institution. And as Nick mentioned, one out of five homes right now is being bought by big institutions such as BlackRock, right, being one of the biggest one right now who, by the way, BlackRock, if you're not familiar with, they, they manage, they have the biggest assets under management, as an institution right now in our country. So if you have some investments, ETFs, mutual funds, whatever it is, your 401k, your chances are probably one or two or three, or if not all of them are through BlackRock.
So I think that alone, if you pinpoint to that when you start to see the quote unquote, smart money, snatching up homes, and what they are, even at these elevated prices, these institutions are pro profit, they make money, so they're not going to buy at least X amount of homes if the expectation isn't there to make money. So that's fairly unique. I don't recall on a mass scale like this historically, studying big institutions buying residential properties at this rate before.
Nick King 8:35
Yeah, let's unpack this a little bit more, because there's another layer to this as well, new homes. If you look at lumber prices, yes, they've come back down recently. But on the retail level, it's still astronomical in terms of trying to buy up supplies for a new house. So once again, it goes back to existing houses, which drives up prices. So certainly if you're needing to move, hopefully, you're selling high, and you're most likely buying high at the same time. But it is tougher for those just looking for their first home, perhaps Yeah, because this is not the norm just from those three factors we had talked about, but let's perhaps talk about how that could change going forward. And there's forbearance, foreclosure forbearance, rather, which there's been a lot of legislative policies around forgiveness of not paying mortgage relief, let's say that will start fading out which opens up supply as the economy opens up, it's going to open up more supply. And then lending goes into this as well too, in terms of if rates go up, there's not going to be as many people out there willing to actually go and seek to buy new houses because mortgage rates are higher. That's pregnant. castigation right now rates are still very low.
Jacob Chaparro 10:03
And in no particular order, a couple observations, one being the one we just discussed about institutions, buying these homes driving prices up. Look, interest rates are just ridiculously low, you try to tie up, you know, and make sense of everything. These institutions, they're saying, Well, I can finance this place at X amount, all the way from the institutions to the to the ordinary household, the average American, I think last time I checked that 30 year mortgage, average national rate was right at three, if not below, it's kind of hovering plus or minus in the range between 3.1 to 2.8. Financing something right now is cheap. It's really, really inexpensive. And when you factor in observation to for me, at least to communicate to everyone listening in.
One thing that I came across here, the past quarter is studying the age demographics in our country right now. So I don't think in in any particular order. But if you look at a country, if you segment people in groups in terms of age, how many people in this particular age group or year are currently alive in our country, I think the top five were 3032 year olds, 29 year olds, 27 year olds, 30 year olds, it was all high 20s, low 30s. This is so important. If this is you, I know that's me, in the mid 30s, so maybe not so much anymore. But there there is this trend right now shift of responsibility, if you will, to the quote unquote, millennial generation where they're growing up, they're growing up, they're having higher paying jobs, more executive level type of positions, they don't want to be in urban areas as much, they're starting to value family and land. And look, there's going to be a very, very high demand for single family homes here, purely based on the age demographics and where these people are. I'm not saying everyone, but but the numbers game, generally speaking, is pretty indicative, where the housing market probably continues to propel.
Based on what Nick said, right now, home builders are building a lie, it's expensive things are lowering down, there's gonna be a lot of demand. And when there isn't a lot of supply, and there's a lot of demand, assets appreciate it's really intriguing to understand and study the age demographics and the actual potential demand pool of people, if you will, that are going to want to buy homes.
Nick King 12:48
Let's talk about , if you're in that situation where it is your first time purchasing a house, or perhaps you're switching cities, and you have a brand new job and the underwriters are looking at your income and saying you don't have established income, you're sitting here, you're scratching your head. Well, that's from 2008. So So what do you do? There's a couple different options there is, and this is also speaks to if there's somebody in your family needing help as well to the option of collateralized loan. So using securities that you have, we work with Charles Schwab in terms of taking your assets, using that as pledged assets, basically, to get money a lot easier than the typical underwriting process. So if you're needing a mortgage per se, you know, or alone, rather, you could do that or there's a family loan you could set up there's there's actual standards to set that up. Any questions on that? Certainly give us a call we can help out. But
Jacob Chaparro 13:56
yeah, like, right now, you have to get creative. To get out these cash offers you have you cannot be the norm. Or if if you've already gone out and put in a bid and you lost, you probably understand already, the norm isn't going to work out highly likely in this environment and probably moving forward for who knows how many years? So at the next point, you have to be creative. How can you go about creating better offer and generating more wealth where it's more down payment, you have to tap into that creative piece and whether the phone call or email goes to us or your respective planner, whoever you have in mind.
Talk to someone because then the average ordinary person out there looking for a home, I would be willing to say doesn't fully understand the entire gamut of their options, and different advantages you already probably have based on what you've already saved in different avenues. In resources, that's where like Nick said, it's useful to talk to someone to be able to uncover everything, put everything on the table, turn every stone into hopefully, if you're in the market, put something together where it is going to put you at the front of the line, not the 10th best seventh best option, but top three, which you can actually compete.
Nick King 15:23
Let's talk about how real estate works in terms of investing in your IRA, let's say.
Jacob Chaparro 15:31
Nick, if I if I could, before we move on I the one thing here too, just to bring up to summarize, you know, observation number three, your comment for our listeners here to take away, do not let previous 2008 bias make a clouded judgment on what's at stake right now. And that's a very specific example. But I can think of many where you we naturally fall back on the most recent event, or what is most impacted our lives. I get it, 2008 was crazy. housing market plummeted. You look at states like Florida and Nevada, Arizona, I mean, these they were 50 plus percent in the red, when you're looking to make a solid judgment. To understand, I would say that you're very well suited, in my opinion, to not compare 2008 situation to the current environment, because frankly, there just isn't a lot of comparisons. This market home valuations cool off are correct. They probably do. Correct? I don't think so cool off, I do think so. But do they go down 50% in some markets 40%. I don't see many scenarios of that happening. So what I'm ultimately getting at is, don't operate under fear, every time you operate under fear. And especially when it comes to your money, your wealth, your investing doesn't typically play out well. And because that's what's most freshest in your mind. Don't get caught in that trap to get clouded by that recent event.
Nick King 17:05
I love that, tune out the noise, tune out the noise, focus on your personal situation, make sure you have money saved up for that particular goal. It's meant for something short term buy short term, I mean, within the next two years, you're purchasing a house or putting a down payment on a house. Keep that within short term assets, such as cash, or ultra short term CDs. You don't want to put that into stock market, because stock market ebbs and flows. You don't want to be caught in one of those ebbs with the market and then having to use that money for your house, assets might not all be there.
Jacob Chaparro 17:52
Thanks, Nick, for entertaining that last little comment before we proceed. I just have been hearing it so much. And I in fairness to people listening that shouldn't come into play as much if if you're more conservative, by all means, but make the best decision not yet putting the emotion part of it here that that's not doesn't work out for a lot of people in short,
Nick King 18:17
There's there's already too much fear and panic already. When you to turn on the news and everything else. So point well said. But yes, shifting, you're in terms of real estate within your portfolio. Oftentimes we hear REIT, real estate investment trust, and typically see pretty crazy yields that come along with that. So let's talk about that. How that works. Where that may be advantageous. The position within your portfolio.
Jacob Chaparro 18:50
So to relate it to people tune in, then I'll give you the the good, right, the relatable piece here. Maybe you don't have enough money to for a downpayment, maybe you don't, you know, you can't afford the home, I don't know. But maybe you want real estate. And obviously, it's difficult to get into a home right now. These other solutions allow you to do that. And when Nick is talking about real estate investment trusts or read it a fun, essentially, and there's many types of them, whether it's investing in commercial, whether it's in properties or residential, it's real estate related, why we should understand what these are and for you to get familiar with. Because if you do want to get into real estate, maybe you can do so indirectly through these types of investments. You don't necessarily need to buy a second home or rental. Now there's other cons to that, if you will, other things to consider. But , maybe Nick, you can kind of tell us on that. I don't want to be the bearer of bad news here. But but that's good. The pros are there but there's also things to consider, that's for sure.
Nick King 19:57
So, real estate investment trust is essentially a trust, right, it's in the name set up to hold a basket of real estate investments. The other term you might hear is a Unit Investment Trust. The difference being a unit Investment Trust typically is set it and let it go. And you can slice and dice as you UITs, that's the acronym for unit investment trusts, send it out, typically a lot less liquidity with those and less flexibility REITs real estate investment trusts are going to see price fluctuation, you can have them on the private or public market, public market, they're gonna trade under stock symbol. And there's ETFs of them as well, too. And why there's such a high yield usually, on these type of vehicles, as are called pasture vehicles, meaning everything that's earned from that basket of real estate is passed on in the form of a dividend. Problem with just focusing on that solely which I've seen this mistake way too many times, is you're not focusing on what's underneath the tip of that iceberg if you're in the ocean, because, hey, that might look really good. But underneath that might not be the greatest investment. If you're getting 40% on something that went down 50%. That's not that great of a yield.
Jacob Chaparro 21:24
yeah, the case of it. Yeah, definitely. I mean, I've seen so many people, clients, previous clients, people just in general, don't don't chase dividends don't chase yields, that, that we want income, no doubt. But you should be focusing on what is deemed total return. And and that is what what Nick is saying is, don't get caught up the shiny carrot at the end of the stick saying, Wow, this yield is X amount, right? double digits 20 15% something ridiculous because all right, there's, there's a catch that people are trying to make money, they're not just gonna give you money, there's always a catch. And the dynamic of the reads is very consistent, right? This this perception of the high yields, but the actual open, we say total return, we factor in the actual valuation and market value of your investment. quick example. Maybe you invest $100,000, and they're going to give you a 10% yield, but maybe you're $100,000 lost 10% in value. So the quick easy math is your even you didn't make any money, you might have given you 10%, but they got it back because your your actual investment depreciated, right. And that total return needs to be there. So whether it's, they give you 5%, and maybe you got 3% of return on your actual investment, we're looking at an 8% total return there, these are good numbers there, you should run or really be on your toes. If you see a double digit yield, do your homework, because there's always something on the backend. I guess the takeaway is don't get caught with the dangling tear at the end of the stick. Because these companies that are to make money is just a nature of understanding how they do so so you can find the best investment for you.
Nick King 23:16
Right, and I think there's a void to with such low interest rates, that we're naturally attracted to these higher yielding investments. So it's not a knock on reads themselves as vehicles because, doing your due diligence or having somebody do due diligence for you. They could actually be good investments. And typically where you want to position those is something like your IRA, pre tax or after tax because you're protecting yourself against that k one income which dividend income which throws off typically a K one tax form, which if anybody's filed is an absolute nightmare and head. You don't have a CPA doing it for you. So so that's the long and the short of that one, very timely again. So kind of wrapping it up here in terms of and rounding this out. The Fed, coming back is seemingly been in the news every single day and inflation it's transitory that word I've heard about a million times every day is too. So transitory meaning it's here temporarily. Jay Powell has consistently said that Yellen has as well, too. Well, inflation goes up quite a bit. The Fed reigns it in by raising interest rates, which trickles into lending rates, mortgages, things like that. So I don't know if you want to expand upon that...
Jacob Chaparro 24:50
We can approach this many different ways. The one thing that I think that comes to mind just based on this past year of talking to people, friends, everyone social media or client Today, Jay Powell, the the chair of the Federal Reserve came out and spoke publicly. And he again confirmed that they're going to be very open to communicate when interest rates start to go up. And they're not expecting to do so until 2023, potentially end of 2022. And even more. So the term we've talked about this through various channels tapering them starting to reduce their bond buying program, which takes back in move interest rates, needless to say, is interest rates actually from I think March have come down a good chunk, I think the high was 177 on the 10 year Treasury. And right now we're sitting at around 132. I believe. That's a lot. Why, why is this important? The 10 year Treasury note is your best indicator to understand what your loan is going to look like, and the dynamic of understanding how much you can afford. If you have a low interest rate, you're going to be able to afford more of a house and vice versa, interest rates go up, all things stay equal, you're going to afford less of a home. So I think the question I posed to everyone, when they asked me, should I buy a home now or later, after understanding their own dynamic, I said, Look, here's probably the two cards, you're going to be dealt with. Either you buy a home right now, and you may pay premium, maybe. But we know for a fact that you're going to be financing at a very, very good rate right now. Money is cheap. If you wait a couple years, maybe the housing market corrects, maybe it cools down, but I think it's highly likely that interest rates are gonna go up. Because it's literally been communicated to us, it's just a matter of when. So if that's all stays even, then if the worst case scenario, interest rates go up, home prices continue to go up, you're essentially out of the game. And and I think that is, in my opinion, the most likely scenario, which I think is is good to say, if you're on the fence of Should I buy now or later, again, talk to your professional talk to us to consider other things. But I think that's on my end, like a good ending point to go off of is the two scenarios are buy right now. Finance cheap? Or wait, you're gonna finance at a lot more premium? And maybe housing, housing prices stay the same? Or if they continue to go up? You may be priced out?
Nick King 27:41
So I think it merits conversation with professional and a lot of it is tied to process not prophecy, way too many things can happen really focus on savings been responsible taking care of your everyday debts, your credit card debts, just elimiting that you have a great chance of getting a much better loan financing for whatever it is you're setting your sights on. Great topic today, I really enjoyed the conversation on the Modern Money Podcast and anything you want to wrap up with your ticket.
Jacob Chaparro 28:19
I want to just give a quick plug to the hard working lenders right now in the country, the good ones, because they have had a very busy year. For the lenders who are listening out there that are trying to find homes, or I should say mortgages, the right solutions for their clients and they're keeping up with all that and client management. I know not person on we just bought when we kind of saw firsthand what that looks like. There's some really good people out there and they deserve a little bit of praise during these crazy times.
Nick King 28:53
Yeah, I'll second that as well, too. So Well, once again, really enjoyed the dialogue. Hopefully, whoever's listening took something away, they haven't learned before and certainly if you need any help, visit us at Zenith. I am bat calm and have an excellent rest of your day.
Thank you Nick.