Is Housing Overvalued? Smart Homebuying Decisions

All right, everybody, welcome to our, I'd say Facebook Live. It's not really Facebook Live anymore. It's live Everywhere. Live on YouTube, live on Twitter, live on our Facebook page, live on our Facebook group, live on LinkedIn. And so we welcome you tonight. Tonight we're going to have a pretty awesome presentation from Josh Metal. Now, I've known Josh for a long time. He might be one of the longest term spirit sponsors here at the White Coat Investor that we've had. He's been with several different companies, but it's always been Josh in that time period. In fact, there was a time for a number of years when his banner was at the top of the page at White Coat Investor. And I've actually worked with him when I used to have a mortgage, I got my mortgage through him. And so he's going to be talking tonight about a pretty awesome presentation about the big question everybody has. Whether you are a real estate investor, whether you're looking to buy a home. What is the question? The question is, is this a bubble? Is it all going to blow up? Is everything going to go down in value? Right. This is the question everybody has. I'm afraid to buy now because it's gone up so much in the recent past. What's it going to do in the future? And obviously none of us have a crystal ball or super clear crystal ball. But we're going to peer into the crystal ball tonight and talk a little bit about this.

We're.

And then we'll have some Q and A afterward and you can just type your questions in whether you're watching this on YouTube or whatever. YouTube's probably the best place to watch this if you have a choice. But wherever you're watching it, you can type the questions in as we go along and we'll get to your questions at the end of the presentation. Josh, you want to start with introducing yourself a little bit and then we'll pull your slides up and go through those.

Yeah, I'd love to. And thanks, Jim. You know, I think I have been reading your site and advertising on your site for at least a decade now. So I appreciate that opportunity. It's been great to learn from you. It's been great to deal with a lot of the viewers of the White Coat investors over the years and be able to serve them and help them into their homes. So, you know, I have a little bit of an interesting background. My first job when I was 12 years old was on an apartment building and I worked 12 hour days with my grandpa that owned that Apartment building. I'm a fourth generation real estate investor, manager, owner and we still own roughly 200 units across the state of Utah today. And so when I bring that to your attention, because when I jump into one of these research programs or one of these research projects, I do it with the thinking that not only am I going to turn this into content, which I'm going to share with you and your viewers and listeners, but I'm also validating, where are we in this market cycle? Should I be buying as an investor? Should I be selling as an investor? Are rents likely to go up? Is this a good time to buy a home? I just built a home a couple of years ago and I was scared to death. And I went through a really exhaustive.

Research.

On every single dynamic and force I could think of in real estate and mortgage and finance. And I came away with such a clear picture of where I thought the real estate market was going. I actually wrote an article and the title of the article, I think it was 2018 Jim, was why this Bubble Might not be a bubble. 11 fact driven reasons why the Real Estate Market Could Go Higher From Here. And I actually did that research project because I was about to build my home and I was scared to death I was going to make a mistake and I was going to outstretch myself right at the time where there was going to be a real estate recession. So I feel that pain and I feel that anxiety that people have with the real estate market. My purpose for this presentation is to share everything I've learned as I try to make a decision on buying my next property, which I'm in the process of contracting a medical office building right now. And a lot of the factors that affect residential real estate also affect commercial real estate. So I have a 30 year background of working on, in and around apartment buildings and real estate investing. For the last 22 years, I've been a mortgage lender. We started serving physicians about 12 years ago and that's almost exclusively what we do, is serve medical professionals. So it gives me a very interesting vantage point from an investor, from someone who's researching what's going on in the market and then somebody who sees a lot of loan applications. I hope in this presentation to share everything that I've learned and then we encourage you to ask questions. So as Jim alluded to, if you add your comments, we'll have time in the end to, to, to share those and answer those questions. All right, Jim, I am going to move the stream yard over and I'm going to Share my screen. And Jim, I encourage you to jump in here if you have questions. You're such an incredible teacher. If you have something to add, I would encourage you to do that at any time. All right, Perfect. All right, so as Jim said, the question is, are we in a housing bubble? Is housing overvalued? And I'm going to go through a bunch of data points on my opinion and what I'm seeing in the housing market. But the simple answer, the question, is housing overvalued today? My answer is yes. And the reason I'll tell you that is. You know, I mentioned three years ago, I started building my home. And between 2018 and the end of 2021, my realtor says that my home value doubled. I couldn't buy my house today. It's so expensive. I wouldn't spend that much money. So in my eyes, when I say, is housing overvalued? Well, I wouldn't pay what my Realtor says I could sell my home for. So I have to come to the conclusion that, yes, in some areas of the country, housing is overvalued. The question isn't, is housing overvalued? The question is, as Jim said, is it going to go up or is it going to go down from here? Are we in a bubble and am I going to be in a negative equity situation in the next few years? And so that's what I hope to get to today. When we talk about housing values, Jim, the first thing I think about is where does this inflation come from? What's going on where housing prices have. The most recent case Shiller Home Price Index showed that the country was up 20% nationwide. Utah up 33%. Idaho up 34%. These are unsustainable and insane amounts of real estate appreciation. The question is, why? What's causing that? And one of my favorite economists, Milton Friedman, he has this quote about inflation. He says inflation is always and everywhere a monetary phenomenon in the sense that it meaning inflation, is and can be produced only by a more rapid increase in the quantity of money than in output. And if you apply that definition to what's happening right now in the US the reason that home prices are going up so fast starts to make sense. See, this is US Money supply. This is the total number of dollars in circulation in the United States. And you can see it took from 1959 all the way over to 2001 to get to $5 trillion in money circulation. So that took, what, 42 years? But to get from $5 trillion to $10 trillion to double the money supply in the United States only took from 2001 to, let's call it 2011. So it took 10 years. And then if we look from 2011ish, maybe 2012, where it hit 10 trillion, it only took from 2012 to 2018 to double or to get another 5 trillion. And today US money supply is at 22.4 trillion. So you can see that the amount of dollars in circulation has gone parabolic. So that, and if we reflect back on Milton Friedman's definition, inflation is and can only be produced by a more rapid increase in the quantity of money. Well, that's a pretty rapid increase in the quantity of money than in output. Well, in this case, output team is housing supply. And that's the number of homes that homebuilders are bringing to the market. So we'll see in this same period of time, while going back to 1959, let's start there. The average number of homes that were being built in the United states was about 1.6 million. You know, there were high years where we hit over 2.4 million. There were low years where we hit 900,000. But the average was right about 1.6 million homes being built going back to 1959. This is the output, the number of homes being built. Then we had the Great Recession. The builders overbuilt. We got up to almost 2.4 million homes being built. And then we had this crash. And in the last 13 years, the output of housing supply, new homes being brought to market has been drastically reduced. And under that 1.6 million per year average. So we have money supply over the last 10 years that went up 150%. And we have the number of homes being built by about half what the. Not quite half, but down about 30% below what the average is going back over the last, over the last, let's see, that would be 60 years. And so you can see this as a result, you can see here, Jim, this is the. These are active homes across the United States for sale. And this breaks it down by year, starting in January over here. And December 31st would be over here. And this just shows us the number of homes on the market in 2019. Started the year just under a million homes for sale. In the summer months, inventory always swells because people want to sell their homes. During the summer months, inventory got to almost $1.2 million home, 1.2 million homes for sale. And then ended the year down below just above 900,000 homes for sale. But what's interesting about this if we look back to 2019 over the last four years, 2019, we started with about a million homes on the market in the United States. 2020, we started with about 900,000 homes for sale in the United States. 2021, we started with just under 700,000. And if we fast forward today, we can see that the total number of homes for sale in the entire United States of America, a country with 330 million citizens, we only have 474,000 homes for sale. So we have a drastic reduction in inventory. We have home builders who have built about 4 million too few homes. And we have massive money printing in the form of our money supply. And so if we add on top of that, and I'll pause here if you have any questions after I get through this, through this slide. Jim, I'd love to hear any thoughts or questions you have or any of the audience have brought forth. But the other thing that we need to think about is the demand side of the equation. Because the last two slides showed the supply side of the equation. The number of homes that home builders are building, the number of active listings on the mls, on the multiple listing services across the country. That's the supply side of the equation. Let's look at the demand side of the equation. So this is birth rates going back to 1928. And it shows that in the silent generation, this cohort had 47 million and birth rates were between 2 and 3 million per year. Baby boomers, huge cohort, 76 million. And the birth rates jumped from 3 million north of 4 million per year. And then we had my generation, Gen X, 55 million of us. And you see the birth rates came down to almost just over 3 million a year. And now we have the millennials and then eventually here, Gen Z. But what's interesting about this is if we know the average age of a first time home buyer is 33 years old, then we can see that in 2006 we were in a demographic hole. We were in a pullback in demographics because of Roe vs. Wade, that legalized abortion. You had all types of advancements in terms of birth control that were happening at that time. We had a hangover from the baby boomer generation and we just had this demographic trough. And these Gen Xers, myself included, were in a lower demographic period. And we turned 33 years old, the age of the average first time home buyer. Right, in 2006. So in 2006 we had a huge amount of oversupply. We'll talk about that a little bit later as why that happened. We had a demographic trough. Today, if we look at it from a demand side of the equation, again, we're back up to this birth rate of about 4 million per year. And that birth rate continues from where we are today. These people are now 33 years old and the birth rate is about or a little above 4 million per year. So the question that I have, and then I'll pause for any input you have here, Jim, is what happens when you get money supply that increases by 150% in 10 years while homebuilders build 4 million too few homes and 66 million millennials enter the first time homebuyer market.

So you point out all these factors, right? Low supply, rising demand. One of the most important ones, and I suspect you're going to be getting into this later, is the fact that interest rates have been rock bottom low. And what that does is it allows people to basically afford to finance, maybe not buy, but afford to finance a more expensive home. And so, I mean, if interest rates the last few years have been 8% instead of 2 or 3%, people wouldn't have been able to buy as much home as they could. And that certainly also pushed the price of homes upward in the last few years. And so I think you put all that together, you know, high demand, low supply, low interest rates shouldn't be a huge surprise to see going on in lots of markets. What's been happening in Salt Lake now, Salt Lake is one of the hottest markets in the country right now, Salt Lake in Boise. But you can't find a place to rent in Salt Lake right now. Forget buying. You're gonna put in 10 offers. The home goes on the market, there's 10 offers the next day, and not one of them is for below the asking price. So it's just been nuts the last year or two here. And we're starting to wonder if we're gonna turn into the Bay Area. As far as housing prices go, everything bought in the last decade has at least doubled, if not more. So it's been pretty wild to watch. I feel fortunate in that I've been in my home and able to sit on the sidelines and watch this phenomenon and not had to wrestle with this question each year of whether now is the right time to buy or not. But let's go ahead and continue on. Josh?

Yeah, Jim, to your point, that was a really excellent point I talked about earlier. That money supply is now up to $22.4 trillion. That's number of dollars in circulation in the entire US monetary system. Nine trillion of that has been printed by the Federal reserve. And that 9 trillion, a lot of it, Jim, to your point, went towards buying mortgage backed securities, pushing down the rate of interest as you mentioned, and went towards buying US treasury bills pushing down the rate of interest. So this is one of the levers that the Federal Reserve pulls, is it? It artificially buys the mortgage and treasury market to push down interest rates with the desired outcome of stimulating the economy. And as you said, that's exactly what's happened. Now all of a sudden, a $500,000 home at a 2.5% interest rate over 30 years, that's attainable. The question is when, when the punch bowl is removed and as interest rates go up, what kind of impact is that going to have on, on housing demand? And we will touch on that a little bit as well as the question that we put in your, your survey on, on your Facebook page, Jim, which was what happens to housing values in a recession? Because we've got an inverted yield curve. We have what's going on in China with all the shutdowns, we've got all of the disruption with Russia and Ukraine. I mean, good lord, there are a lot of risk factors out there. So we want to talk about what happens in recessions as well. All right, I'll go back to sharing my screen. Feel free to throw any questions or comments at me.

Yeah, that's a good point. Make sure you put any comments in. We'll get to Q and A at the end. If you got a question, put it in the comments.

Yeah. All right, so back to that story question. What happens when you have 150% increase in money supply in 10 years? Home builders build 4 million too few homes. And millennials have 66 million in their cohort followed by Gen Z with 61 million in their cohort that are now all going to be first time home buyers coming into the housing market. That is if they're not priced out of the market. Well, the answer is you get absolutely runaway home appreciation and home value. So the current aggregate home U.S. home value across all homes in the United States is now at 38.9 trillion. And what I think is really interesting about this graph and Then under the 38.9 trillion in value of the US housing market is the amount of equity. Well, of course the 26.4 trillion in equity is the difference between the aggregate home value of all the homes in the United States and the amount of mortgage indebtedness. But you've seen equity skyrocket. You've seen values skyrocket. But what I want to pay attention to is mortgage debt because I find this really super interesting and it's one of the key insights that I watch to see if this market's getting out of hand and there's too much debt driven speculation. Because more times than not it's debt driven speculation that leads to a deflation in an asset value. So we can see that in 2000, total mortgage debt in the United States was roughly 5 trillion. And between 2000 and 2006 we saw that debt go from 5 trillion to 10 trillion. That's a lot of trillion dollars in debts in six years. And there was a massive debt bubble at that time. No credit score required, no income documentation required, no assets required. If you fogged Amir or could spell your name, you were going to get a mortgage at that moment and see.

The great, what was it called? The Great Short. What was it called? The movie Great Short. Yeah, Great short. See the great details on that period of time if you didn't get the opportunity to live through it.

That is really a phenomenal movie. It's incredibly entertaining and wickedly insightful. Exactly right. So this debt bubble that grew from 5 trillion to. It looks like it got up to about 11 trillion, maybe 12 trillion in just six to eight years. That was one of the major things that caused the Great Recession when that, when that, when all those loans that weren't underwritten prudently defaulted. And we'll get more into that in just a second. That's where the bubble really came into the equation. But interestingly enough, if you look from kind of where the recession kind of ended, let's call it, let's say we came out of that around 2011. Ish. That's kind of when housing values bottomed in Utah by the way, was, was right around 2011. And if we fast forward, let's just call it from 2010 to 2022, the amount of US housing mortgage debt has only gone from, let's call it 11 trillion to 12.5 trillion. So this is really good news because what this tells us is that the increase in home values has not only been inflated, if you will, by binging on debt, the mortgage people have not gone too insane with mortgage borrowing. And, and so that begs the question, what, what would, what would be a catalyst for the Great Recession? And I think that's the question that, that we should or not. I'm sorry, what was the catalyst for the Great Recession? And then what would be a catalyst for this market to implode so let's take a look at this Housing Credit availability index. And the higher the number on this index, the more risk. And there's two different types of risk. There's mortgage product risk and then there's borrower risk. And we want to bifurcate those. And I want to explain those. The product risk was the fact that the loan was a two year fixed. They called them two 28s. A two year fixed loan followed by 28 years of adjustable. It had a three year prepayment penalty which was very, very common in this time. You could make a neg AM payment, negative amortizing. So in a normal loan your, your debt amortizes each month and it goes down. On a neg AM loan you're paying less than the accrued interest and the interest rate continues to go up. The underwriters didn't require tax returns, they didn't require that the down payment was your money. They didn't require that you were had a credit report that showed you had a willingness to repay. So there was a lot of product risk in the mortgages that were being written, especially from 99 through 2006, where this was kind of like the highest risk period. But then there's also borrower risk. Borrower risk is their debt to income ratio, how much reserves they have, their credit score, all the things that goes into the strength or weakness of a borrower. And so in this mortgage debt bubble that we had in 2006, you had borrowers taking on a lot of risk because they didn't actually make the money they needed to qualify for the loan. They didn't have any reserves, they didn't have good credit scores, they were two months out of a bankruptcy. You know, the list goes on and on. And you put, we, we put as an industry, we put people in products that had a lot of risk. Adjustable rates, prepayment penalties, negative amortization, you name it. But if you fast forward today, one of the reasons why debt has been constrained in mortgages, Jim, is because there's no product risk in any loans we're writing today. You know, you have to prove your income, you have to prove your assets, you have to prove your credit score. Most of them are 30 year fixed or fixed for at least five or 10 years. There's no prepayment penalties, there's no negative amortizations or so there's very little if any product risk. And borrowers are more solid in terms of debt to income ratios and credit scores than they ever have. When we go back to Saying what was the catalyst for the meltdown and the Great Recession? It was negligent underwriting standards, cheap and easy credit that created fake demand from investors, retail investors who went out and piled up on investment properties that they couldn't afford. Excessive product risk with adjustable rate loans, negative amortization and then what happened TEAM and this is the key differentiator in my mind between then and now. When interest rates moved higher in 2006, there was a tremendous amount of debt that had been taken out that was adjustable. And so all of a sudden those neg am periods where you could pay less than the interest on your loan, the negative amortization periods ended and all those borrowers had to start repaying principal at the same time that their interest rates adjusted higher. And many of them still were within their prepayment penalty phase and couldn't sell or refinance without massive prepayment penalties. What's different about today is if interest rates go up, it impedes new home buyers from entering the market, which will take a little bit out of the demand side of the equation. But everybody inside their loan already like me. I have a fixed rate loan for the next 10 years. I don't have to worry about interest rates going up. The fact that interest rates are going up aren't going to cause me to default. And that's the biggest difference between then and now. Jim, I'm going to pause and see if you have any questions or anything you'd add. I do see a few comments in the chat there, so thank you. I will get to those here in just a few minutes. I just want to go over a few more slides. Jim alluded to the fact that we have higher interest rates and we're going to start to talk about that. The national association of Realtors and their team of economists, they put out this research on is housing affordable or has it become unaffordable? And what their team will tell us is that in the US as a whole, medium family income is around 88,000 and the amount of qualifying income that it would require to meet acceptable debt to income ratios to qualify for the average home with an average interest rate. And I think they do run these numbers with 20% down just to be fair with how they calculate this. And this shows us that the average family still has enough income, has more than enough income to make the average mortgage payment. But this has gone down a lot. Housing was way more affordable obviously three or four years ago. And it's one of the risk factors that I'm watching very, very Closely is that housing is becoming much less affordable than it was when it was 2.5% and we didn't have 50% run ups in equity we had in the last few years. You might find this slide interesting, Jim. This is a comparison between 2022 and 2021. Median home price in 2021, about 400,000. Interest rate of 3.375, assuming a 20% down payment. Just to keep things simple, your principal and interest payment alone was 1176. So that doesn't include taxes, doesn't include insurance, it doesn't include HOA, but 1176, principal and interest. And let's just say we had household income of, of 9,000. If we take 2022, we have 18% appreciation. That was the last report between before the most recent report that says that we have 20% appreciation nationwide, $472,000 purchase price, 4.75% going interest rate. That means that payment went up by $694. That's a lot. That payment went up a lot in a year. Housing definitely became less affordable from that perspective. But we're also starting to see household income increase. And if we look at private sector wages, which is inside the personal consumption expenditure report, household private sector wages are up about 10.5%. If we look at the trend over the last six months. So I went back six months, we add household private sector wage increase, it's up about 10.5%. So wages as they increase with inflation in this scenario, yeah, their house payment went up $694, but their income, if they moved with the, with the averages also went up $945. So is housing becoming less affordable? Absolutely. But wage growth is, is housing becoming less affordable? Absolutely. But wage growth is offsetting some of that increase in, in payment. So the question then was recessions and then we're going to get to your questions.

Actually, Josh, let's go back that slide one second. Yeah. You got interest rates there of 3.375 a year ago and 4.75 today. Are those the average interest rates people are getting? I feel like I keep running into people that are doing better than that.

Well, the last 90 days, interest rates have gone up a percent and a half. And so if I look at The Fannie Mae 30 year average right now it's at about 4.875. And that's on average with three quarters of a point to buy down the interest rate. So that kind of really is where the market is right now.

Okay, thanks.

Yeah, unless people are paying points Which I would not recommend. We can get into that. But, but there are people out there charging big points to get to lower rates. And I, I think that's a mistake. I can, I can comment on that in a minute. Recessions. This is the question that we, you know, we put in your Facebook group, how do recessions impact home values? Because the question again is not do we think home values are overvalued? I think my home's overvalued. I wouldn't pay the price that my Realtor can sell my home for. The question that people are trying to wrap their arms around, in my opinion, is our housing values more likely to go up or down? And are we, you know, is a recession going to be something that's going to crush housing values? So this is really interesting, this comes from the Federal Reserve that if we look back over the last six recessions in 45 years, that recessionary periods are basically flat. In fact, this is the value that, this is the, the increase in, in home values. This is where the average home price started the recession. This is where the average home price ended the recession. And in five of the last six recessions over the last 45 years, you see that home values exited the recession higher than they entered the recession. The only outlier is the Great Recession. And the catalyst for that was the mortgage debt bubble caused the recession. When that, you know, when that debt bubble imploded, that caused the recession. And it was the reason why housing prices were impacted so, so negatively. Now the reason, now this is surprising to a lot of people. The reason why home values do typically well in recessions is because the lever that the Federal Reserve pulls when we go into a recession is they start reducing interest rates. They start those quantitative easing programs that buy mortgage backed securities and buy treasury bills. They manipulate long term interest rates lower, making housing more affordable in times of recession. And that brings people into the housing market. So in and of itself, a recession is not a reason to be fearful of the housing market. This is just one more slide. This comes from the census and from HUD and same kind of a thing. It just goes through recessions. And you can see the Great Recession is the kind of outlier where we saw massive decreases in home values during that recessionary period.

Now let me push back on that data for a minute, Josh, push back. Home prices are notoriously sticky in that people don't reduce them, they just don't sell, you know, or they sit on the market longer or they say, you know, the only price I can sell this at is a fire sale price. So I'm not going to sell at this price. It's a great investment, you know, so I'm going to keep it and rent it out. And maybe that causes the data to hide some of the actual decrease in value there. If it was maybe a more liquid market, maybe we'd see more volatility and more of a decrease. What do you think about that as a theory?

I think you're 100% right. I also think that people are a lot more emotional about their homes than they are their stock portfolio. And in a pullback or a point, well, let's just say there's no bidder for your home. They're going to have their kids, you know, six year old birthday that they remember in the kitchen and they're not going to, you know, they're going to be less inclined to fire sell that. So I think you're exactly right. The point that I think is important is when I look at that data is that the massive run up in debt from 5 trillion to 10 trillion in mortgage debt from 1999 to 20076 was the primary agent that propped up those housing values at that time. That is not what is happening today. Yes, mortgage indebtedness has gone up a little bit, but in the last 10 years it's only gone up about a trillion dollars while the amount of equity has gone up substantially more than that. So it's just a different set of risk factors. But certainly in a recession, the home values might not go down to your point, but you might not be able to sell your home. You might not be willing to sell your home for what somebody's going to bid. Which I think you said really well, Jim. You taught me that timing the market and it's investing in anything is you better be dang lucky. You better have the luck of the Irish. Because timing the market isn't as important as time in the market. So if I am assessing risk right now, I'm saying I think housing may very well be overvalued. And that's a risk factor that I have to bring into my calculation. Should I buy or should I rent? One of the things that helps you offset that risk is the amount of time you're going to be in the home. So if we look at appreciation over 30 years, you can see that, you know, Utah is the number one appreciation appreciating home market in the United States. We are, you know, we are blessed to live in the Rocky Mountains that has done so incredibly well with appreciation. And if you're in your home a long time, you're, you're going to do fine. The problem is, if you're going to be in your home for two or three or four or five years, I think you really need to do due diligence on that housing market that you're buying into, because the worst case scenario is you buy into a housing market at a peak price and everything in that market is going against you. People are moving out of the state, job growth isn't happening, unemployment levels going up, all those things are moving against you and you're in your home for a short period of time. So we've created, and I'll drop in this link and this is the last slide share. We created what we call the Housing Market research guide. It's five tips or steps to help you analyze this 2022 market, which definitely has more risk than any market in the last 10 years. So this five step program will allow us to create a real estate report card for you. We can do that in every zip code, every county in the country. We'll show you the number of active listings in that county and if they're going up or down, we'll show you how to research local income and employment data. Meaning are incomes going up or are incomes going down? Is the unemployment rate going up or is the unemployment rate going down? And then if those things check out for your area, we'll help you by getting a fully underwritten approval so that when you go make an offer on a home, you essentially have an approved loan, almost like a cash offer. It's not a pre approved loan. And then we can help you if you, you know, if you need help with Realtors, we can also help with that. But, but the point is taking steps one, two and three will do a lot in mitigating your risk in terms of buying into this, this housing market, which admittedly is overvalued. I will leave this as my last slide for the compliance people out there and I'll turn it over to questions or anything you want to add.

Jim? Sure. I'm going to put that link on the bottom. People ought to be able to see that if they want to download that, get a little more information about it. You know the classic line I give to people, and this one's evergreen. It's timeless, right? As I tell people, when your professional situation and your personal situation are stable and seem like they're going to be stable for the next five years, that's the time to buy a home. And the reason why is 5 years works. On average, there are times when you do awesome in one year. If you had bought in Salt Lake a year ago, you did awesome. Over the last year, even after paying 15% to get in and get out of the house, you still did awesome because the appreciation was so much. But on average, you need your home to appreciate about 15% while you're in it in order to break even, because that's what the transaction costs are. And so that just takes time. At 5% a year, it's three years. At 3% a year, it's five years. But there are times when it can take longer than five years. We were just out on a spring break trip in D.C. and went down to my old stomping ground down in Hampton, Hampton, Virginia, and we bought a house there in 2006. It did not work out well. In 2010, I could not sell it for any price at which I was not willing to own it as a fantastic rental property. In fact, we ended up selling it after nine years, still at a loss. So that can happen, you know, I mean, time heals all wounds in real estate, but sometimes it's a lot longer than you want it to be before time heals your wounds. And so, you know, we kind of knew going in that it was probably a little bit Bubblicious. And so we deliberately bought a place that wasn't very expensive. So the actual dollar total of the money we lost is not that much money, especially these days. But as a percentage, it was pretty significant, even after nine years. So you got to be careful. You ought to take Josh up on this offer and run the numbers in the area that you're going to that you're considering buying in, and at least go in with your eyes wide open, because so many people coming out of med school, coming out of residency, they've got this burning desire to buy a home no matter what. They've been convinced that this is the American dream. You must buy a home. And I just ask people to step back, think about it, run the numbers, how long you really going to be there? And be smart about your purchase so you don't end up regretting. All right, let's take some questions here. We got a few in here. I think we kind of covered this one. Let me pull down this one I've got here. And let's talk about Teresa's question here. She's asking, what can we do now? If we're in the process of purchasing a home and are planning on staying in it for a few years, what would you say to Teresa, Josh, the.

First thing I would do is I would go through the first three steps of that home buying guideline. It's going to show you an incredible amount of insight. It's going to provide you an incredible amount of insight as it relates to population growth, the number of homes being built in your area, what the real estate market has done over the last 10, 15 years, what the forecast is, that it that where we think it'll go. And this data, actually we get this data from Black Knight, which is one of the best analysis real estate analysis tools out there. We show the amount of listings and inventory if that inventory is going up or down. So my, you know, my biggest advice, I guess, if I was just to sum that up, is don't go in blind. If you have concerns, do the research, go through the research guide. We're happy to answer any questions for you as well. And research the area you're buying in. Because as Jim, Jim, I think you told me in a previous conversation we had that the economy where you bought that home was kind of contracting. People were moving out, unemployment level was going up, wages were going down. Those were data points you probably didn't have at that point.

Yeah, it might be interesting here. Let me actually Zillow the property and see what Zillow thinks it's worth today. It's probably not all that much more than what I bought it for. And that was again almost 15 years ago. And even with the recent run up, pulling it up here on the Internet, it's saying it's worth 181 now. I paid 138 for it in 2006. So that's not all that much appreciation given the last few years. And it's all shown up in the last three or four years, I assure you.

And Jim, to that point, the reason why Utah has been the number one appreciating real estate market over the last 30 years is because it's been the number one net migration state in the country. The population growth last year was 1.67%. The national average was 0.01%. So we're growing as a state 17 times as fast as the national average. And that's one of those indicators that you'll get in that research guide that shows you your population growth as compared to other states. And that's insightful. If people are moving to your state, low unemployment and wages are going up, that's a, that's a safety net under you for your real estate investment.

Yeah, for sure. There are other safety Nets that you can control though. Here, for example, what's the big risk? Right? The big risk is your property falls in value and you lose money. And maybe you can't sell because you can't bring any cash to the table. Well, there's a few things you can do about that, right? You can put more money down when you buy it. You can also pay off that mortgage more. And what that does is it provides you safety in the event you need to get out. If you put a 20% down payment down and it drops 20% in value, you can still walk away. That's not the case if you put 2% down. You know, you got to bring some money to the table at that point. So there are some things you can do once you're in it that can help with that. It's not going to help your home value any unless you do some, you know, low cost renovations, improvements to the home, that sort of a thing. But it will at least help you in the event that you need to get out and move and take that equity somewhere else.

Great.

Alright, so let me take that one down. Let's pull up another question. You guys can ask any questions you like here. We're going to try to focus our questions on, you know, mortgages and real estate and housing and that sort of stuff. But you can ask anything you want. If we run out of questions, we'll start answering questions on other topics. All right, here's one. Will this be recorded? Yes, this is going to be recorded. It'll be posted on YouTube and in the Facebook group. Okay, here's another one here. How will the increase in rate affect the market? Well, this of course is assuming that rates do increase. But we talked a little bit about this. Well, how would you sum this up? To answer this in a few sentences.

Josh, it's going to make housing less affordable, which is going to be a restriction on the amount of demand of first time home buyers specifically. So that will slow down demand. The challenge is that supply is already so constrained and the birth rate, which is now becoming first time homebuyers, is 4 million a year and we're only building 1.6 million homes a year. So even if we take a lot of those people out, it's going to slow appreciation and we need appreciation to slow. But I don't think that because of the supply demand imbalance there, I don't think that we'll go into negative equity in most areas of the country, some areas potentially, but it's definitely going to slow the rate of Appreciation.

Yeah. Trees don't go to the sky. It can't grow 30% every year.

That's right.

Not indefinitely. Okay, here's another one here. Let's talk about. Can you expand on the advantages of a fully underwritten pre approval? And while you're at it, why don't you explain the difference between pre approval and pre qualified? Says cash is king in the market. We're shopping in, in Charleston. So any competitive leg up is something we would like to consider.

Yeah, and that brings up another question, Nick, that is all of these cash buyer programs out there that, you know, I can comment on. So the highest level of qualification you can get is a full underwritten approval. That means income, assets, your new employment contract, if you're relocating and starting a new job, credit report, everything that has to do with you as a borrower and your ability to qualify for that loan program have been reviewed by an underwriter and approved. Now, the only due diligence that needs to be done is the appraisal, the title report, the legal disclosures, the home insurance. And. And you're, you know, you're done with the process. So when we position that to listing agents, we tell the buyer's agent and the client allow us to put you through the full underwriting process. And then when you go to make an offer, let me get on the phone, let me text and call the listing agent and walk them through why your offer is as. As good as cash. And on many clients, you know, we'll. We'll walk through what's called an appraisal gap strategy, where we'll say, hey, if you're in a bidding war and you decide to bid over the ask price and the appraisal comes in low, here's what it would look like, here's the additional cash that you'd need to bring in, and we validate those assets. And oftentimes we'll tell the listing agent they're fully pre underwritten. Nick's good as gold. He can qualify. Here's the underwritten signed approval. We've already gone over an appraisal gap strategy as X number of dollars. Like this is literally as good as a cash offer and maybe better because cash offers are just worried about return on investment. Many of them are investors where Nick is actually moving his family in and there's an emotional connection to this home. So, you know, we do a lot to try to sell the buyer to the listing agent that it's a bulletproof deal and the fully underwritten approval is the next best thing to Cash, Nick.

All right, and maybe you covered this, but just more, more clearly, what is pre qualified? What does that mean? What's the difference between that and pre approval?

Yeah, usually, and some lenders use these interchangeably, but usually the pre qual is just, you know, you filled something out online, you entered in a couple of data points and they get you a pre qualification. The pre approval is usually that you've uploaded some documents, they validated your income and a loan officer says, hey, it looks like you're going to qualify. But the loan officer isn't the gatekeeper. The gatekeeper is the underwriter. So if you want to take that to the next level, you have the underwriter do a full underwriting approval. And realtors know that if you have an underwritten signed approval, there's very, very little that can go wrong at that point.

All right, let's talk about this one. Here's a question about physician loans. Can you go over the pros and cons of a physician loan?

Yeah, certainly. So, you know, the first thing that is a pro and a con, I suppose is that financing is generally available to 100% loan to value up to a million dol. Well, that's great. But as Jim mentioned, also if the market pulls back, that leaves you with very little margin for error, especially if you're going to sell the house in under five years. So you know, we certainly recommend if somebody's going to use 100% financing vehicle that they should have liquidity, they should have post closing reserves and we strongly encourage them to, you know, build their investments or pay down the mortgage over the next five or so years to build that equity. Now homeowners have been blessed in the last couple of years. They didn't need to pay down their mortgage. They were seeing 10, 15, 20, 30% appreciation and that kind of saved their butt. But we can't bank on that. If you're going to use that vehicle to get into a home, you should make sure you have some liquidity outside of the mortgage or pay the mortgage off quickly. The other thing that is interesting about a physician loan is if you're a resident or you're a fellow or on some sort of a constrained temporary income that we can in some instances exclude student loan debt, we exclude that from your debt to income ratio. That's especially true if you're in deferment or forbearance or some sort of a grace period. So that can be helpful for some. And if you're self employed or 1099 independent contractor, typically physician loan programs will not require a two year history of being 10, 99 or self employed. That's, that's big for many, many people. And then the other benefit is if you're taking a new job and moving your family across the country, if you want to buy the home before you have your first paycheck stub in hand, we can use your offer letter or employment contract to qualify for the loan in terms of income before you even start your first day on the job. So there's some, there's multitude of advantages there. The other thing is there's no, there's typically no mortgage insurance on most physician loan programs. So that can save you a little bit. The downside, the other downside could be maybe you don't get quite as good of an interest rate if you put 20 or 30% down, but you know, it's still usually a competitive rate. And the fact that you don't have mortgage insurance usually makes it a pretty good deal.

All right, let me pull that one down. And here's the deal with physician loans, right? If you got a better use for your money than a down payment, don't put the down payment down, you put the money elsewhere, right? That might be paying down an 8% student loan. It might be maxing out a backdoor Roth IRA or a 401k or whatever. So when a lot of stocks are buying homes, they got a lot of competing uses for their money. You know, that year you come out of residency, you got about eight great things to do with your money, and a down payment is only one of them. So if you decide that's not the priority, that's a reasonable thing to do. But just keep in mind that you got to be building wealth somewhere to make up for that. In the event, especially that the market goes south on you and you gotta leave soon, still make sure that job likes you and you like the job before you buy. Even if you're using a physician loan, that's the big gamble really, in the move across the country. It's not so much whether you're buying with a physician loan or whether you're buying with a conventional loan. It's more of are you going to get there and hate it and want to move in four months? Because there's no way you're going to get appreciation in four months to make up for the cost of getting in and out of a home.

Great point.

All right, what do you think of single family homes as an investment? I'm thinking location specific. Your thoughts? What do you think, Josh? What do you think about single family homes?

If you can find cash flow, go for it. I found myself as the owner of 56 homes in 2006 when the great Recession hit. It actually didn't hit Utah to like 2008, 2009 in terms of home values. And everybody around me was offering up their home to the mortgage company and short sailing and you know, they were saying, hey, you know, it's going to be 14 or 20 years before we ever get back the appreciation in these homes. You're an idiot. Why are you paying your mortgage? And I'm so glad that I did. But in retrospect, the only reason that I kept those houses because I had positive cash flow on all of them. It wasn't a ton of positive cash flow, but I was 2, 3, 4, 500 bucks a month positive on those properties. So if you can find a property in a location like Alabama or Georgia or South Carolina or Florida, not Miami, where you can find a property where you can put a 20 or 25% down payment and you can get a cash flow, hey, look, one out of three homes isn't selling to investors nowadays and they're selling in cash. These are hedge funds, venture capital firms, these are Wall street money coming into single family rentals because they think inflation's going to potentially continue and rents are going to continue to go up and they're going, hey, I can get a 6% return, cash on cash, plus potential appreciation on a single family rental. I'll take that over a 10 year treasury at 2% all day long. So to answer your question, David, as long as you can do it and you have cash flow and you're not just banking on appreciation, I think it's a decent plan. We also created a real estate investor guide to validate areas and to determine if it's a good place to invest in single families. I can add that link as well.

Yeah, we'll throw that link up when you guys get it in. Okay. So two ways to think about single family homes. One's as an asset class, right? Wall street likes this asset class. Traditionally, single family homes have not been owned by big REITs, big investment funds, but that's not so much the case anymore. In the last two or three years, there's been a lot more interest in it. And the percentage started small, but it's doubled or tripled the number of the percentage of single family homes owned by these investment entities. So there's a lot of space to grow there still as investment. But that's very different from buying A single family home reit. As buying one single family home down the street as your investment, there's obviously a ton of risk there due to there not being any diversification of that property. If you're putting all your money into one property, there's a lot of risk there. And so every single property is an individual investment. You got to do your due diligence on it. One across the street might do fine while yours does poorly. One across town might do fine while yours does poorly. Your whole town might do terribly compared to the town down the street. So you gotta do a lot of due diligence when we're talking about buying individual properties and investing directly there. All right, here we go. Another question. This one has vacant land or land used for recreational use, such as lakefront property or hunting land, followed similar appreciation over the last few years. What are your thoughts on the future value course of these properties? Any thoughts on those, Josh?

Yeah, I mean, it's not necessarily my niche, so I don't know it as well as I know residential and even some commercial stuff. Stuff. But I will tell you that I live in Park City and the flight to more rural communities, Montana, Idaho, some areas of Utah, has been absolutely astronomical. So my guess is there's still money going in that direction. But I like things that have cash flow. I like to control real estate that pays me a check every single month, and that check is more than my mortgage. So I want to control as many of those as possible. If I own a piece of land, I've got potential water right issues. I've got taxes, I've got all kinds of other issues, and I don't have any cash flow. Unless you can figure out a way to lease your land to farmers. And then I'm all for it.

Yeah, that's the issue. It's a speculative investment. It's like Bitcoin that way. Right. It might go up in value, might go down in value, but there's no cash flow. There's no earnings, there's no rents, there's no interest being paid on it. And so you're basically banking on somebody else paying you more for it down the road. And it takes a pretty good crystal ball to know whether a given property is going to appreciate. There are certainly some areas. If I had empty land sitting here in the Salt Lake Valley right now, I consider that a pretty good investment. We're land constrained and people are moving here like crazy. But that might not be the case on some rural hunting property in Arkansas. All right, what are your thoughts on Of a mobile built home, the average cost of minority is $150,000, as opposed to a single family home where the average cost is $450,000.

It's a great question. Typically, mobile homes don't appreciate at the same levels as what's called a stiff built home or what we think of as a, you know, a single family home. So I think that your upside for appreciation is likely less. However, you're talking about a $300,000 lower purchase price and potentially a 300,000 less mortgage. So the question would be if you went that option and now let's say you had an extra thousand bucks or 1,500 bucks a month and you invested that difference in an investment account over the next five to 10 years, you could probably more than make up for the lack of appreciation you might get with a mobile home. But I would invest that savings, I guess would be my advice.

Yeah, I'm surprised you use the word appreciation and mobile home in the same sentence. The traditional teaching on mobile home is that they don't appreciate, they depreciate. And part of it, you're kind of stuck on the property and what happens is the person leasing the property to you because you often don't own, the land that the mobile home's on is charging you more and more rent every year for it. And so mobile home is a place to be careful. I view it as being pretty similar to renting, more so than buying. I wouldn't expect a lot of appreciation out of mobile homes. I don't think they're terrible investments. If you're buying a mobile home park and leasing to all these people with mobile homes, that's not necessarily a bad investment. But I'm not sure that's where I would want to live unless this were, you know, a fairly temporary kind of situation. You know, you're living there during residency or something, you know, you decide you wanted to try this instead of renting. You know, I think that's reasonable thing to do, but I don't know that I would make that my long term home. I think there are very few doctors, very few people that follow the white coat investor that want to be in a mobile home long term.

Well, and to clarify my statement, I was assuming you were buying the land underneath it. If you're not buying the land underneath it for 150,000, not a chance. Run, don't walk, just save your money and rent. But sometimes people get a nice piece of land with a mobile home on it and the land might do the appreciation for you.

Yeah. The land's likely to appreciate. It's the mobile home that's not. All right, this one from Roberto. In hot markets where there appears to be disconnect between the median household income and the home prices to the point that many people are priced out Salt Lake City, do you have any insight as to how long such a situation can last for?

I would say longer than any of us can imagine. Unfortunately, sometimes these things, these markets go on for a very long time. And that's why I say that what you just pointed out, Roberto, is a very real risk factor. And I would follow the. I would go through that five step process that I illustrated to really research that market and see if it's an expanding economy and expanding demographics or if it's a contracting demographics and economy. I think that about half of the people who work at Neo Home Loans live in California. They rent in California and they buy investment properties in Alabama, Louisiana, Florida, and so they're real estate investors. They just don't own the home that they're in. And that might be the right decision for a lot of people in high cost of living areas right now.

Yeah. All right. Yeah. Just look at the Bay Area. I mean, I don't. I think the average person in the Bay Area has been priced out buying a home for a long, long time. And, and that hasn't caused home prices to go down.

Yeah.

All right. All right, here we go. Is it better to buy a more expensive home now or a cheaper house now? From what Josh outlined, the high home prices are likely not coming down due to the monetary policy that has caused inflation. But it's unclear if the prices will stagnate or keep going up. And I think this will depend on future monetary policy. What's the better strategy in buying? Buy big or be cautious. And then a second question about investing in rental properties at this time, which got cut off. You want to take a stab at that one, Josh?

Sure.

Big house, little house, expensive house, cheap house.

Yeah. I mean, I think it depends where you are in your career. If you are maxed out in your retirement and all your debt's gone and you're rolling, and like Jim said, you love your job, you're going to be there more than five years and you have excess capital. After you check all the boxes in terms of your financial plan, then I don't think you're going to buy in many areas of the country. I don't think you're going to buy that big house cheaper in five years. I think it's Going to be more expensive. But if you don't have your financial house in order and all those boxes checked, then I'd say make the conservative decision, buy the cheaper house, fix all, you know, get all those things rolling, and then in five years, sell that house and move up to the bigger house. You're going to have a big bunch of equity if the marketing, if the market continue strong.

Yeah, I think there's a point that needs to be made here. A house is an investment, right? When you own your house, it's an investment that pays dividends. Those dividends are saved rent. You're no longer paying rent, and that's what you save. You know, whether the house is pay off or not, that's what you're saving. But it is also a consumption item, right? You put money into a house that you don't expect to get out. You know, when you do a renovation, you do an upgrade, even a kitchen or a bathroom, you're only getting 60 or 70% of the value out of that. And so a lot of owning a home is a consumption item. And the more home you own, the more you are consuming. If you cannot afford to consume that much money as your housing, you should not buy a big huge home. Just you're essentially buying it on speculation that it's going to go up in value. And I think that's a bad idea. When you start speculating like that, all of a sudden you don't get the appreciation or it falls in value. And now you're struggling with the cash flow to take care of it. And you got to replace the roof instead of it being an 8000 DOL roof is now a $28,000 roof. And you know, all these other things that go along with having a more expensive home. So buy the home that you need, the home you can afford that's going to meet your needs for at least five years. Don't go crazy buying a McMansion. You know, just because you think home prices are going to keep going up the way they have been in the past. There is certainly no guarantee that that is going to happen. All right, let's take this one about turnkey real estate investments. What do you think about turnkey, Josh? Somebody taking a lot of the pain out of it, but still are a direct real estate investor, and you still get a control when it's sold and the tax consequences of that. But theoretically, you don't have to buy it, you don't have to find the tenant, you don't have to manage it, and you don't have to sell it.

You know way more about that than I do, Jim. So I'm going to default to you. The only experience I have of anything similar is for the the first time in my 22 years of investing in real estate. Last year we bought a medical office building in St. George, Utah. I found a manager and leasing agent that handles absolutely everything. He's incredible. And all I get is a monthly P and L statement and a copy of the bank account showing the ins and outs. And it's performing wonderfully. So I love that because that's the least amount of work I've ever put into a real estate property that I own. But I don't know anything about real estate syndicates. I just. If I'm going to invest in real estate, it's in the stuff that I control. If I'm not, I'm going to put it in other investment opportunities.

Yeah, that's what we're talking about here, though. This is a property that you own and control. You're just not doing any of the work. You basically outsourced everything on it. And this can be a good option, especially if your market sucks, if you're in this dumpy town that you don't think anything's ever going to appreciate in. I generally like real estate investments to be close to me. If I'm directly investing, I want to be able to drive by and check it out and take care of little ditzel things myself rather than calling somebody in to do it. I've owned rental property in Virginia while living in Utah. I didn't like that experience. But if you decide to go down this route, if you decide to invest in real estate in another state and you want to own it directly, you don't want to be in a real estate fund, you don't want to be in a syndication. Turnkey is not a bad way to go. But remember, you're not just vetting the property now, you are also vetting the turnkey company.

That's right.

Right. Because when they go, something happens to them now you're out of luck. All you have is this property and you don't have a manager and you don't have an exit plan and you got all these other issues with it. So remember to vet both when you're considering a turnkey opportunity.

It's all team at that point, right?

Very much so.

Management and the maintenance and all the things that that person can connect you with in that location.

Yeah. Okay, so let's put this one up. Condo versus townhome. Versus, you know, a freestanding home with, with its own four walls. What do you think for the long.

Term, Josh, Historically, single family homes has appreciated at a higher rate than condos or townhomes. However, currently I don't believe that's true because people are being pushed down into condos and townhomes because they can't afford homes. So that, that, you know, as we showed that slide with millennials and Gen Z becoming first time homeowners, you know, how does a first time home buyer afford a $500,000 $600,000 house? They're going to be pushed into condos. So historically, the answer has been higher appreciation with single family. Although condos and townhomes are doing pretty well. I will tell you that there's the two worst real estate investments I ever made in my life were both condos, and both of the hoas ended up in litigation. So I'm personally not an investor in condos.

Yeah, I'm not a huge fan of condos or townhomes either. That place I own in Virginia was a townhome. Didn't go awesomely. But part of what you're getting when you buy a condo or a townhome, to a lesser extent a townhome, but you're still getting it, is you're buying a community. And so it really matters who the other neighbors are. It really matters who the people running the HOA are. And so you've got to make sure you're vetting all that too, and not just the unit itself.

And by the way, that might change from the day you buy it to the day you sell it. You know, when I bought a condo up here in Park City, the owners and the managers and the developers were the most wonderful people. They had this grand vision. It was fantastic. And then five years later, they were gone. And the people who took it over were tyrants. And it was a miserable experience. So there's no monopoly on who can be that HOA board. So there's a lot of extra risk there.

Yeah, I don't think a condo is a bad. If you want to buy a second home, like a ski condo, and you want someone to take care of all the exterior stuff, so you just have to show up and you don't have to shovel the driveway and mow the lawn and do maintenance on it, I don't think that's a bad way to go as an investment. It wouldn't be my first choice. All right, here's another question on investments. This one. Now they want to talk about syndications Josh, commercial versus residential. So commercial, I guess we're talking about retail, we're talking about industrial, we're talking about self storage, we're talking about farmland versus residential, which I guess is single family homes and usually multifamily. I think residential is easier to understand. That's what I like about residential. I also like the fact that people need a place to live. Some of the worst investments the last couple of years have been office syndications, because guess what, everybody's working from home now. And so there's some unique risks in commercial real estate investing that you've got to be aware of. And so I've done some commercial. Most of my syndications, most of them are via funds, not necessarily individual syndications have been residential. And that's kind of what I prefer. But if you want to get into another niche, people certainly make money in industrial and self storage and retail and office, et cetera. So it's about knowing your niche and being comfortable with it. And there's something to be said for diversifying into other niches. All right, I think we've come to the end of our questions, at least all questions that aren't about Bitcoin, which, no, I still don't own any Bitcoin yet. But thanks for that question. Here's a link you can use to download a real estate market research guide that Josh and his folks have put together. So check that out if you're interested in that. And I think we probably ought to cut this off. We're well over an hour now. Josh, I want to be respectful of your time as well and as well as those watching. I think we've had between 50 and 60 at times watching us today and 10 times that number watch it later as it's recorded. But thanks for your time coming on here and providing us with this information. And also thank you for sponsoring our Facebook group. You know, it's not always the easiest place to sponsor. You know, anytime you get 60 or 70,000 people in there, there's always going to be a few knuckleheads giving you a hard time, no matter what you do. But we appreciate you doing that and the service you've been giving to white coat investors.

It's an honor. Appreciate it and love your group and love to help in any way we can. So thanks for having me tonight.

Okay. And the best place to go to get more information about Neo Home loans is what www.neohomeloans.com or what's the URL.

That'Ll get you to the general Neo site? But if you're looking for specifically medical professional physician loans, I would go to the www.medicalprofessionalhomeloans.com. so it's essentially that what you have on the screen, just not the research guide.

Awesome. Well, thanks so much for your time. We'll end the broadcast here. Thanks everybody for your attention tonight.

Thanks everybody. Have a good evening. The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.