Welcome to The Accelerated Investor Podcast with Josh Cantwell, if you love entrepreneurship and investing in real estate then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1,000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss in his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals, he actually does them and so do his listeners and students. Now sit back, listen, learn, and accelerate your business, your life, and you’re investing with The Accelerated Investor Podcast.
Josh: So hey, welcome back to Accelerated Investor Josh Cantwell here with you as always and I am so excited and honored to be with you inside of your headphones, inside of your smartphone, inside of your computer, wherever we’re coming to you from. And thank you so much for all of you who have been sharing our episodes on social media and sharing them with your crowds and giving us feedback and comments. I really appreciate all of that and we’ve been really, I think hitting home with a lot of the topics we’ve discussed around praising private money, around finding and flipping deals around investing in commercial apartments and syndications as well as some of the solo casts about some personal experiences that we’ve had and really, really excited about that. Today I bring you a special guest. His name is Daren Blomquist. He is a vice president of market economics at Auction.com.
Josh: I’m sure all of you have either been on Auction.com or bought properties off of Auction.com. It’s a huge brand in our industry and I’ve known Daren now for going on five years, speaks at a number of our live events and training events and really helps us understand through all of the data that they aggregate, helps us understand what’s going on in the market. So I’m in particularly excited to have Daren on today to talk a little bit more about the state of the market, real estate trends, what’s going on with foreclosure activity, what’s going on with home prices, what’s going on with a potential recession interest rates. Daren’s just a wealth of knowledge and, and so Daren Blomquist, thanks so much for being on. We appreciate you being here.
Daren: Thanks for having me. Great to be here.
Josh: Fantastic. So Daren. Let me just, again, have you introduce yourself to the audience? What does it mean when you say that you’re the vice president of market economics and for those people that maybe have been sleeping under a rock for the past five or 10 years. Just tell us a little bit more about Auction.com.
Daren: Sure. Yeah. Vice president of market economics is, I have to argue is probably the, the most fun job at Auction.com. It’s, other people might argue with me, but I get to do what I love, which is look at data and great stories out of that data. Tell the stories of that data, tell that to internal, there’s a lot of internal customers we care about. Our business is trends actually counter cyclical as you might imagine with the market. And so that’s, you know, it’s something we’re looking at how the market affects our business. I take the data and tell stories to external audiences as well, like today and I love to do that as well. So it really, it’s taking market level data and applying it to our business and then applying it to the businesses of our clients.
Daren: And we have two clients. This is getting into what Austin.com does. It’s, we’re a marketplace for selling for closed properties and we’re actually selling properties on our platform. We run two types of auctions. We run the courthouse foreclosure auctions, which actually now in Ohio are online and more States are going online. But most of those are actually physical locations. You have to go to the auction bid on the properties there, but we are the platform that markets those properties. And then we are also in many cases driving the auctions and about 50% of the auctions across the country.
Daren: So we sold and then the other type of auction we do is the REO auction or the bank owned auction properties that go back to the bank and the bank wants to sell those. We’re selling those and most of those are online so you can actually bid online and buy properties across the country through our platform. We sold between, I don’t know the exact number off the top of my head. I should know this between 50,000 and 60,000 properties last year through auctions. So we’re moving a lot of properties. And so yeah, part of my job is also communicating to both the buyers and the sellers of those properties. The sellers mostly are the banks and then the buyers are real estate investors primarily. Different stripes. And what’s happening in the market matters to both of those constituents as well?
Josh: Yeah. So let’s talk about that. Um, know you’re going to be delivering this presentation. Many times you are on a lot of major news, outlets, you’re on a lot of stages, a lot of podcasts talking about this data. Obviously you have the sellers, the banks who are wanting to know, and then the buyers, the real estate investors primarily. And some owner occupants want to know. So I feel privileged to kind of deliver and help bring this out to my market. And what we’re really trying to understand is what is the state of the market? What are the trends? Are we looking at a super hard crash? Are we looking at a small slow correction? What’s going on with the economy? Maybe a political year coming up in a new election. All these kinds of things affect the political markets, the financial markets, the real estate markets, and with all the data that you’re able to see and pull together, you have some significant insight that a lot of the people don’t have.
Josh: So you’re in a amazing seat, I think, to deliver this information to help people understand, which would have been nice if 10, 15 years ago we had the same kind of data that was being aggregated. These, these tools just didn’t exist. So it’s awesome to see them this time around. And so let’s talk a little bit about the market. Let’s just walk us through the slides. We’re going to record both me ,you and the slides for our audience. If you catch this on iTunes and you’re only hearing the audio version, make sure you also check this out in YouTube and see the video version because we do have some slides that we’re sharing on this particular interview with Daren. So first slide here, right. Of the economy, rattle and home. I like that little U2 reference, right?
Daren: Yeah. Good. I thought that was pretty obvious, but I’m glad you caught it.
Josh: Yeah, a big U2 fan man for sure. So tell us what’s going on with unemployment and the treasury.
Daren: Yeah. And just to frame this conversation for folks who are listening and watching and to know where we’re going, I’m going to start out very broadly and then narrow down at the end of this. What we’re going to be talking about is the best markets using data, best markets for flipping opportunities, best markets for buy and hold opportunities. But we’re starting out abroad with the economy. And you know, the question we get more and more from folks, a lot of folks we talked to is, is there another recession coming? And what we’re looking at in this slide is just kind of two very basic, indicators of a recession. Unemployment and the yield spread, which you may have, which is a little bit more of a wonky indicator, but it’s been getting a lot of news lately because it is one of the most reliable indicators of a recession going back, into the early 1900s.
Daren: And so that particular indicator that the spread between the 10 year treasury bond yield and the three month treasury bond yield has inverted. Meaning that it’s actually now you get a fair rate on the three a month, then you do the 10 year. And so that it’s a very kind of technical thing. But it has inverted and every time it inverts, historically we see a recession within the next 18 months. And so we’ve seen that invert over the last couple of months, actually three months. And so that’s an indicator. That’s the rattle in the economy is rattling. In that sense, it’s like you’re in your car and you’re humming along, you hear this rattle. And you’re like, is that serious or is that, you know, just something rattling.
Daren: Because when we look at unemployment rate and actually many other indicators, unemployment rate as a proxy for many other indicators, the economy seems to be doing pretty good. And unemployment is very low. We haven’t yet seen that spike, any spike in unemployment, unemployment often is, you know, it’s going to spike during a recession. As you can see in the slide it did during the recession. So we have a little bit of conflicting data going on, but if you believe the bat spread, then we will be seeing a recession in the next 18 months. There will be a recession, like the last one. But a recession none the less is what, what that would indicate.
Josh: Yeah. And I think the word recession is for a lot of people a bad word, but let’s be, and we all know our economy is cyclical. We all know there’s four stages and we all know that in an average cycle, a recession happens. I believe about every 5.7 years. We’ve now been on a 10 year bull run, because the last recession was so bad. We were so far down that we had a lot of room to grow up. And things are in our favor. I mean a lot of institutional money, a lot of capital, very business savvy president who people tend to get with you, whether you like them or not. People tend to get business-wise some confidence knowing that he’s very pro-business, very anti-regulation. I don’t care what side of the aisle you’re on, that’s what he stands for.
Josh: And so that permeates throughout the markets, which has probably extended this, this bull run even further. But a lot of that stuff is wearing off, you know, it’s just natural cycle. So it’s natural for us to be in a recession. And the interesting thing that I read, Daren, which maybe you’re going to talk about this, is that I think out of the last five recessions that I studied in three out of the last five property values actually still went up. They didn’t go up by a lot, but they went up. So just a recession doesn’t mean housing crash. So let’s make sure that we, let’s make sure we keep that in context.
Daren: Very good distinction. Yeah.
Josh: Yeah. So under the next slide then.
Daren: Yeah. And this is some more economic indicators that just again, you see some that are starting to trend the most serious one is that that yield spread that is flagging a recession. Some of the other ones that we look at are starting to, I wouldn’t put them in the red and you will go to a simple dashboard here, but I put them kind of yellow and that’s consumer sentiment has started to trend downward a bit. The manufacturing index is below 50, which means it’s manufacturing, it’s contracting. And historically that’s been an indicator every session as well. The 30 year rate, a mortgage rate is more just like it, that’s an important piece of a metric for the economy as a whole, but obviously also for the housing market.
Daren: And one of the things you just said, I think is absolutely true is the picture I get we’re in right now, and mortgage rates are contributing to that in specifically the fed trying to influence mortgage rates is that, you know, we’re in this extremely long recovery, historically long recovery. We’re building this bridge, we just keep building it. We’re starting to run out of material to keep building the bridge and we’re kind of just building each step as we go. But the recovery is extending, I think lowering interest rates is another way to keep extending this recovery or expansion. And, but there is a point where it seems like it’s of we’re going to run out of building material to keep that going.
Josh: Yeah. I like the analogy. I like the analogy a lot. So awesome. Just tell me, Daren, if I should bump to the next slide.
Daren: Yeah, go ahead. Yeah. So, and this is just summarizing the last two slides. You know, we’re actually doing as for our business because recession, we’ve grown in this expansion environment as a company because we’re graining market share bit a recession’s also going to matter to our business because it’s going to bring more inflow and that’s going to apply to real estate investors as well is there’s a give and take with the recession.
Daren: There is more inventory is going to be more inventory, but you’re going to be in a market that may be a little bit more scary. It doesn’t mean home prices are going to fall 30%, like you said, like I did last time. But home price appreciation may slow down, you will have to adjust. And anyways, so we have, this dash is very simple dashboard to try to help us keep track of things. Only one of these five recession indicators is red, two are green and two are yellow. So we’re, you know, we’re mostly humming along. There’s a few rattles in the engine of the housing market.
Josh: So, even though the manufacturing index is going down, it’s not necessarily in the red and recession area. The yield curve as an indicator manufacturing index and consumer sentiment is sort of in the middle, if you will. And unemployment and foreclosure starts are in the green, meaning that they’re not, there’s not any significant red flags there. Unemployment’s down for closure starts are still pretty normal, pretty low, relative to last year and relative to historic norms. So when all these things are more all red or red and yellow, I think, you know, we’ll be knowing even more and we’ll be doing this interview again in three months. You know, at the end of Q three months, even be doing it in a cup in a couple of months here and we’ll see what that looks like at the end of.
Daren: The key one of the manufacturing, if you know, for people who are looking specifically at the data is when it hits 45, that’s when you tend to see a recession. It’s at 49 so we’re in the yellow.
Josh: Got it. Yeah. Annual home price appreciation, interesting thing, is it continues to appreciate. Which is a great thing. I mean, if you’re getting a 3% or a 5% return on your real estate appreciation across the country on average, and you have things like depreciation and you have things like principal pay down with your real estate investments, it’s still an amazing, amazing opportunity. It’s not like it was in 2012 or it was north of 10%, 15%, but frankly, we don’t even want that longterm. If we could have somewhere in the 3% range would make me happy, just slow, steady growth. So help me understand what is the tapped home equity what does that mean and how do we interpret this slide?
Daren: Yeah, definitely related to home price appreciation. It’s a great stat that I got from Black Knight Financial Services. They track a lot of great stuff on the housing market and, I have a typo there. It’s not capital home equity. It’s tappable, I’m sorry. Tappable home equity. And so they’re calculating, it’s roughly any equity more than 20% equity in a property they consider tappable. And so you do see there’s a strong correlation that’s been trending up. There was this hiccup.
Daren: That’s why the headline there is hiccup in 2018 we saw both home price appreciation and that tappable home equity draw and the housing there was, you know, people were starting to get a little bit scared on the housing market I think in 2018 on price appreciation slow down. Actually very close to zero. It didn’t go negative, but it was at least by this data which is not the NAR data. This is from Adam Data Solutions, my former company. It got very close to zero. Anyway, so we saw this, this kind of a little bit of a scary moment in 2018 but I think largely due to interest rates and probably some other factors. Things have picked back up in the housing market in terms of home price appreciation.
Josh: I was going to ask you what was the event and was there an event that happened around that time that, you know, that…
Daren: Yeah, I mean, mortgage rates jumped up above 4% and then up about 4.5% in mid around mid 2018 and that’s when we thought, I mean this is an extremely interest rate sensitive market. It has been for some time and we see that if you go back there, you know, it’s hard to read these slides but you see a similar dip back in 2014, a recovery. And if we charted mortgage rates along this, we’d see mortgage rates spiked as well back in late 2013, 2014 that caused a little bit of a slowdown in that home price appreciation as well.
Josh: Got it. Got it. But yes, still going up at this time and we expect mortgage rates to probably stay low. The fed, I imagine it is, if anything going to cut rates again.
Daren: And they did just yesterday actually, so yeah.
Josh: Right. And it’ll probably happen again. I mean, I imagine the next time they meet, I wouldn’t be surprised if they can continue, continue to cut to kind of keep things chugging along. So that’s part of what the fed is there for. This is an interesting slide. So household and nonprofit net worth and real estate net worth growing and growing and growing. It’s pretty amazing to see. Tell us a little bit more about this. What are we looking at here?
Daren: Yeah. And actually this doesn’t, there is newer data than when I created this slide just recently that came out that went up again in the second quarter of 2019, to a new record high. Again, you do see that hiccup. I mean, I think it’s very interesting to see that drop in net worth and I believe it’s mostly caused by not all. Some of it was the stock market for sure. Some of it was caused by real estate net worth there in 2018, but we’ve jumped back up with the stock market going back up as well as home prices and equity going back up. And so this, you know, again, I see that we are in a little bit, things could shift fairly quickly. But we’re continuing, you know, we found more material to keep building that bridge. And so it’s the building has started again after a little bit of a slow down.
Josh: Got it. Yeah. Interesting. So, let’s see, what are we looking at here for closure screen views? Is this specifically from the website, Auction.com?
Daren: It is. Yeah. So this is our data, which you know, I mentioned in addition to the market data, I mean we have our own marketplace here with selling 60,000 properties a year. It’s incredibly rich data. We have access to within specifically this more niche distressed marketplace. But what we’re showing here is that I found this very high correlation between screen views on our mobile app and existing home sales and…
Josh: Really how about that?
Daren: And specifically on what we call super Tuesday. And there’s a few states, most notably Texas and Georgia that have just foreclosure auctions once a month on the first Tuesday of the month. And so there’s a lot of attention being paid on that Tuesday. And when we, to the degree that we see a spike in mobile app views on that first Tuesday of the month compared to the Monday, we see a similar trend in a correlated trend in home, existing home sales.
Daren: And that’s released about that data is a released by the NAR about, at least 30 days later, if not more.
Daren: So we see, when and so when we actually, I did this analysis back in mid August after we saw a jump the black line, a pretty good jump in our August and I’ve actually added September here, but we saw a good jump in our August mobile app views on super Tuesday. And so I went out of the limit at that point to a certain extent because of this strong correlation and said, I think we’re going to see really strong home sales in August from the NTR and low and behold, just yesterday Ashley and Eric came out with their August numbers, which showed a 17 month high in home sales. So another, an even bigger jump in September. So I’m expecting, you know, the housing market had got a shot in the arm and so we’re going to see strong existing home sales again in September from the NAR when they released that in mid October.
Josh: Wow. And all from the correlation between the Auction.com mobile app. That’s really great. It’s a really great data to just see. It’s not a perfect indicator by any means, but to see the two overlap and how they’re performing side by side with basically a 30 day, sort of delay is really amazing. That’s great.
Daren: Yeah. I mean, I think you see this too, but real estate investors are the forefront of the housing market and so if they’re confident in the market and buying more at the foreclosure auction, it’s really good news for the overall housing market. On the other hand, if we see a pullback there, that could, that could be a leading indicator that we’re going to see more weakness in the housing market. In fact, we did see that back in some of that back in late 2018.
Josh: Yeah, I would venture a guess now to say that there’s so many people investing in real estate that are not value investing. They’re not value engineering deals. They’re just, they’re buying deals at the top of the market or they’re buying, hoping for appreciation. I hope that real estate investors learn their lesson from 2007, eight nine. But a lot of the people investing in real estate today, we’re not investing back then and they’re not aware of that. So I certainly hope that real estate investors are at the forefront of the market or some indicator of what’s going on.
Josh: I also see some real estate investors are absolute morons when it comes to what’s actually happening in the market, and they’re just buying whatever they can get their hands on. And I don’t know if we’re always the greatest indicator, Daren, of the forefront of what’s actually going on. I think there’s, you know, very skilled people for sure. You know, the conversations I’m having.
Daren: I think, you know, you make a good point and it’s, yeah, it’s not invaluable for sure. But there, you know, and they could, I think a foreclosure and investor real estate investors could be wrong, but you know, if they’re confidently wrong, then it’s probably, they’re going to know that they’re wrong before the rest of the market knows that knows their wrong, if that makes sense. But yeah, you’re right. I mean, this is a little bit you know, these are investors buy at the auction at these foreclosure actions specifically. You know, you have to come with cash and now you can get refinance later. But these are, these do tend to be more serious, experienced investors.
Josh: I agree with that. Guys that buy at the auction are often buying sight unseen, you know, they’re buying with all cash and those two factors together. You have to be pretty advanced investor with some serious, you know, some serious ability to take on risk and be comfortable with risk to do that. So yeah. Very good. So wage growth is up. People continue to make more money. People continue to have wages going up, but not quite at the same level as home prices in a lot of areas, especially like Silicon Valley, San Francisco, things like that. So tell us a little more about home price growth versus wage growth. I know it’s very important when it comes to affordability.
Daren: Yeah. This is the weakness. I would, one of the weaknesses I see in the housing market, which could be opportunity for investors as well, but just to be aware of is that the, if we go back to 2012 when the housing market bottomed out, we’ve seen 84% growth in home prices during the same time we’ve seen a 20% growth in wages. So wages actually are coming up. But there is that disconnect and to a certain point where that trend cannot continue. And I think if you go to the next slide, you alluded to this already. We’re already seeing, I would say a correction in some local markets.
Daren: Because I think it’s not because the economy is crashing or because, there’s this systemic problem with the housing market like we saw in 2007 with the lending, but simply because there needs to be a little bit of a reset and especially at the very high price markets. San Jose, I’ve seen this for several quarters now in San Francisco now, um, some of the, not all of those are higher priced markets. Hartford, Pittsburgh, Kansas City. We actually saw we can add Seattle to this list. And were we actually seen home prices not just slow down in appreciated but actually go negative in these markets we are seeing limited price corrections in some of these high priced markets where affordability has just become too much of an issue.
Josh: Yeah, it’s interesting to see, like everyone’s probably going to look at this slide and say, Oh my gosh, look at the ones in the, in the peach or the, the orange color. But what I think is interesting too is look at the ones in the darker green. I mean, you know, parts of Utah, Idaho, you know, it looks like down the Southern part of Alabama, certain parts of Jersey, obviously New York is potentially very overpriced and actually losing some value. I know Naples, Florida, which is one of my favorite places in the world was actually losing some value going backwards, but again, some of the most expensive places in the country. But then also places that are not, even if you look at, you know, even Charlotte, North Carolina looks like one of the, one of the orange peach colored dots there. And, you know, actually is that Charlotte or is that outside of Charlotte?
Daren: I don’t think it’s Charlotte.
Josh: It’s not Charlotte’s the green. Yeah. So just outside maybe one of the other parts of Carolina.
Daren: I got to figure out what that is. I don’t know off the top of my head. But yeah, you see some limited stuff, the where this is going on, but I think it’s good to be aware of and yeah, there’s, there’s both sides of the coin. There’s places that are slowing down, but there’s also places that are accelerating, you know, Idaho would be one of those and in some other markets.
Josh: Yeah, it’s interesting when I talk to investors and I appreciate the fact that they think I know everything because I don’t, but they definitely ask me my opinion often and about the softness in the market. And they’re like, I keep telling people to read real estate. It’s very regional. It’s very, very, very local. Something that’s happening in Cleveland. It’s just a completely and totally different market than something that’s going on in New Mexico or Wyoming or Florida or Georgia or California. It’s just so different. It’s impossible to, you know, it’s impossible to answer with a blanket statement. You have to look at your own regional market. And that’s, you know, some of the data that Daren’s able to bring to us, which is, which is fantastic. It’s interesting to see that there are a lot of buyers that think that their markets are overvalued.
Josh: I know that, you know, the sellers still have the advantage because there’s just not a lot of inventories. There’s not a lot to pick from. So sellers continue to jack their prices up, which makes buyers feel like their areas is overvalued. And obviously you have a huge portion of the population that lives in California and New York, and those places are probably, are overvalued because they’re attracting in price. So it’s interesting to see so many people feeling like they’re overvalued. But I guess it depends on whose temperature you’re taking, right.
Josh: If so much of the population is in the Northeast with, you know, Philadelphia and Baltimore and New York, New Jersey, all so many people live right there in that corridor of the country. If those, if that group of people says, yeah, I feel like my homes are overpriced, well there’s a lot of people that live there and that could, that could sway your opinion. So, but great information.
Daren: Yeah, I mean this is our, this is a survey we did of our buyers. Again, with this thesis that I have that are our buyers. You know, investors in general are a great barometer of the housing market and leading the housing market, even though they may not also always do so perfectly, but yeah, they’re one and four now. I mean, the headline there is, is of course more, that was the interesting thing to me, but there’s still the majority, three out of four buyers think the market’s doing fine. And in fact, 37%, the biggest chunk bank that their market is fundamentally sound with solid growth.
Daren: And so I would say, yeah, you do have this element of there is some, we’re not as iron clad of a housing market upswing as we were maybe a few years ago. But things are for the most part, things are plodding along steadily. And that, I mean, it actually encourages me to see that most people think it’s we’re going to see single digit home price growth and steady. That home prices are going to continue to be appreciating at double digits. And so if investors, as long as investors have a good handle on that, they can make the right decisions about what they’re investing in.
Josh: Yeah. It’s interesting to see only 7% feel like prices are going to stay flat or declining.
Daren: Even like, so yeah, you have 24% that, that say it’s overvalued, but only 7% say that actually is going to translate into flat or declining prices. Even though you may think your market’s overvalued but doesn’t mean it’s going to crash.
Josh: Right. Yeah. You bet. Delinquency, right? So delinquencies are at big time lows. I mean a lot of people are paying their mortgages. We’ve learned our lesson from 10 years ago. Any cracks in the armor here regarding potential future foreclosures in delinquencies.
Daren: The only crack I would say, and it’s a small crack are fissure is the FHA loans. They are going up and this is from the mortgage bankers association. I don’t think I put that on there, but their latest report did show, well first of all, those early stage delinquencies, people who are late 30 days, which is not extremely serious, but those, that delinquency rates up 17 basis points from a year ago. So we see that tick up. And then FHA specifically is where we saw 52 basis point increase in those early stage delinquencies.
Daren: So just some signs and that’s not too much of a surprise because FHA really has been one of the most risky loans in town, when you departure of subprime many years ago. And so it’s not extremely risky, but those loans tend to be a little bit more risky. And we’ve seen the DTIs going up, debt to income ratio is going up on those loans in recent years. And so this isn’t a total surprise, but the big picture, the big news is we’re not seeing that spike in delinquency rates.
Josh: Yeah. Not yet. We’ll see. We’ll see. Yeah. That’s, yeah, that’s good. That’s good to see. And yes, I mean, people can put down very little money with FHA and the more FHA allows them to borrow, people feel like, well I can borrow 40%, I can borrow 42%, I can borrow 45%. I got about a 48% 50% of my income. And of course, you know, most people will just go with what they’re allowed to borrow, not thinking very much about how it actually impacts their budget. And then they get bit down the road when there’s a, you know, loss of a job or you know, some sort of pinch in their income. So really, really interesting to see. Foreclosure starts by Metro. This is interesting. So is this the, am I reading this right in the orange and the red? Foreclosure starts or up and in the blues, the foreclosure starts are down?
Daren: That’s right. Yeah. It’s for the first half of 2019. And yeah, I’d be surprised of this. There’s now the increase, this is increase, you know, in many cases we’re coming off of record, low levels of foreclosure starts. So the fact the increase in itself doesn’t put us in necessarily dangerous territory, but it does show that we’re seeing a change in the trajectory of foreclosure starts. Now a lot of that, I think in the South, in Texas, there and in Florida is actually a ripple effect from the hurricanes. In 2017. It’s taken it’s toll. So I think that’s part of it now.
Daren: I mean, some of the stuff in Florida, I’m not sure if we could continue to keep tying that back, but I think a lot of that is tied to the hurricanes and, and honestly, right in the environment we’re in with a strong economy, strong housing market, one of the biggest risk factors is natural disasters that can cause housing distress. You know, it’s going to typically be more short lived. But it’s still, you know, there’s still people who get in trouble because of those natural disasters hitting and you have homes that are damaged as well. It’s not financial distress and that creates this, you know, a situation where people may be more motivated to just walk away from their mortgage.
Josh: Yeah. It’s interesting to see so much stuff in the South. You know, and, and you can’t blame the hurricanes forever, but that is a very natural explanation, right. And otherwise most of the foreclosures starts are down in most other parts of the country, you know, especially the big parts, California, New York, Texas, areas like that.
Daren: Yup. I mean, the one surprise I’m seeing that’s definitely not related to the hurricanes is the Pacific Northwest, Seattle and Portland and even Denver, which arguably, you know over the last few years would be some of the hottest housing markets in the country. We’re seeing some increases there and I mentioned earlier Seattle, with it’s slowing or decreasing home prices, there some weaknesses there. And I think it may be related to that affordability issue again. Again, coming off of very low levels, it’s not a tidal wave of foreclosures, but we are seeing some increases there.
Josh: Yeah. What I like to see is, is Cleveland in the green on this slide, right where home price appreciation is still up and Cleveland and the blue here where foreclosures are down. So just, you know, if you’re hoping for a crack so you can invest in buying at a lower price that’s not helping you. But if you own a portfolio and you’re looking for a market that has pretty rock solid fundamentals Cleveland looks pretty good at this point, so stay, stay out of my market. All my listeners don’t invest, don’t invest.
Daren: Actually, not to steal my thunder, but you’re going to be really happy in a couple of slides. I did not plan this intentionally, but Cleveland comes up a top of a couple of good lists. But anyway, we’ll talk about that.
Josh: Yes. Where do people like to buy distress buyers, right? A lot of people in the South, I find that to be true on my podcast and talking to my subscribers, we’ve got about 150,000, 160,000 subscribers on our email marketing list who are following us on Facebook. I try to talk to as many of them as I can and I consistently hear people saying, I invest in the Midwest and the South, the Midwest and the South, which is interesting to hear from your people that you surveyed that the, you know, the South is so popular.
Daren: Yeah. Same thing, man, South is top Midwest is next. And that’s where we see more inventory from the, you know, from the previous slide, we’re starting to see some more inventory for closures and particularly in the South up at some pockets in the Midwest. But, you know, I think the other side of that coin is the returns are available and still in the South and the Midwest more than the Western Northeast,
Josh: I mean the same property that’s in the West is maybe two or three times as expensive as something in the South, right. So it just doesn’t cash flow the same way. In cap rates on commercial buildings are just so much lower than the West to far West then the South. That’s fantastic. And it’s good to see here. Same thing, like we’re investing a lot in the Midwest. We’ve got apartment buildings in the South, we’ve got apartment buildings in, you know, in different parts of Georgia. We’ve got apartment buildings in different parts of Oklahoma. We’ve got some investments, we’re looking at self storage in Florida and we’ve got obviously a ton of lending that we do in the Midwest, which is good to see.
Josh: Are you ready to automate and explode your real estate investing? So preferred investing strategy. This is interesting again through your survey that you did. I love this. Love this survey to see what are people doing with their investing strategy. So tell us more about what you’ve learned.
Daren: Yeah, not surprisingly, we saw for our buyers, the biggest chunk were rehabbing fix and flipping to owner occupants 40%. It actually been, you know, a lot of our buyer basis has been involved in that just because of the nature of our properties. However, I was so much surprised to see that 36%, it wasn’t too far behind. We’re looking as at a rental as their most preferred investing strategy. And I mean I’d be curious to see you hear from you if you’re seeing a shift toward rental or maybe that’s already a trend that you’ve been seeing. What are you seeing in that area?
Josh: Well, there’s a lot of investors doing both right. Rehab to rent, rehab to sell. I definitely have seen some softening, what feels like softening in the market on the higher end, you know, properties that are rehabbed and a great new product is brought to the market and it’s under, in my market, under $250,000, you know, $300,000 or less, really under that $250 mark, those properties are flying off the market. I sold a property last month in one day, it was under contract in less than 24 hours.
Josh: And you know, that’s common in Florida. It’s common in California. It’s not common in Ohio, but it’s becoming more common. But my own businesses, we’ve begun to pivot. We still do a lot of fix and flip lending. But much more than 50% of the loans we make now are really to investors looking to buy and hold because we look at that for us as recession proof because the loans are out for a very short time.
Josh: The rehab is not as extensive and they have a built in exit strategy to refinance. And a lot more investors are doing that as well. They figure, you know, they’d like to get checks every month and have equity then get paid one time through a flip. So we’re definitely seeing more and more and more of the loans that we make and the investors that we talk to doing buy and hold, buy and hold, buy and hold because you know, they want to preserve the equity they have and hold on for the longterm. So I wouldn’t be surprised if you’d ran this survey again in three months or six months that you’d probably see more of a green section and that be the majority of the people who are a larger percentage of people doing buy and hold.
Daren: Yeah. Yeah. I wouldn’t be surprised either, just anecdotally. The other piece of this slide is just, you know, that’s probably to let our sellers know, to be honest, that our buyers are adding value to the properties. We don’t see, you know, maybe five years ago when you just had this market that was inefficient, I would call it inefficient at the foreclosure auction because very few people knew about it. And I have this arbitrage going on where people would just buy and then sell the next day without adding a lot of value. Most of our buyers are adding, at least they’re saying they’re adding, and I believe it. Yeah, at least 84%, if you add up the blue and the green there, I believe that’s the, the right number are putting it back into the property at least 10% above and beyond what they purchased it for into adding value back into the property.
Josh: Yeah. I’m not surprised to see it’s even 20%. I mean, when we look at just deals that we do for buying a property for let’s say a 100, 150, we’re easily putting in $20,000 $30,000 grand, which is know more than 20% of the purchase price to stabilize it, updated kitchens, baths, roofs, HVAC. So I would be in that 20% or more of the purchase price on almost every deal. I do, we’ve got some guys that are doing more turnkey rentals or what we call prehabs. Where they’re buying properties and they’re putting in lesser amounts, but then they’re flipping them to other investors.
Josh: Those other investors are then finishing off the rehab and then keeping it as a rental. So they might fall in that, you know, 10% to 20% of the purchase price or even less than 10%. But if it’s a flip going back on the left side and the in the blue category, the rehab to flip, I would bet most of those people are doing at least 20%, if not 30, 40% of their purchase price because they’re trying to sell to owner occupants who want a finished product.
Josh: They want a really nice product. And the guys more doing rentals and they’re buying to rent. Then obviously those rehab budgets are, are much less. And so on these two slides, Daren, let’s talk about Cleveland. How awesome is it? How awesome?
Daren: Here’s what we’ve been waiting for the whole time. But we, yeah. Just to set the stage for this. This is based on our own data of looking at a cohort of about 9,000 properties that were sold at foreclosure auction in the second of 2018. And the reason we went back a year is because we wanted to see what happened to those properties after they repurchase and, and you know, where they flipped or where they held onto as rentals. So this first slide we’re looking at of those 9,000, the ones that were held onto as rentals and then, and we don’t know for sure, but we know because they haven’t been flipped by definition, they haven’t been resold within a year. Most likely they’re being held as rentals. And that’s about, just you know, about 44% of those 9,000 and have not been reasonable.
Daren: So they’re being held as rentals. And then we were able to match that up with data from a company called Collateral Analytics, which has for each property has an estimated rental amount, rental rate for that property based on surrounding rental rates. And so we’re able to calculate rental returns off of that. And for the, and so this is very, you know, property specific. It’s not by zip code. It saying for those properties. It’s specifically solely auction. And people have held on to if they’re renting them out at the estimated rental value that those properties have the here’s the return they’re getting.
Daren: So basically we see, yes, Detroit is at the top. And then Cleveland, I mean, we’re talking about, and these are gross annual rental yields, not taking out expenses, but in Cleveland talking about, and yeah, I mean if a 38% gross rental yield, now again, that’s not taking out costs of rehab that you would’ve added onto the, it’s based on the purchase price of the property.
Daren: We don’t know how much was spent on rehab. It’s obviously not taking out other expenses that go with that. So, I want to caveat that as much as I can, but it’s, you know, we’re seeing some very strong double digit potential returns on rentals in places like Cleveland and Baltimore, Rockford, Illinois, Detroit, not surprising, probably not too surprisingly to high price markets where you’re buying at a higher price point. Even at the foreclosure auction, like Los Angeles, Brooklyn, Washington, DC, Phoenix. But I actually was a little surprised, but Phoenix and Las Vegas have been become much tougher markets to get as good a rental returns in as some of those Midwestern, Southeast markets.
Josh: Yeah. People are buying properties or investors buying and just the nature of the market, they’ve got to spend more. And people who are renting, you know, have a fixed income a lot of times and they’re living off a certain salary or w2 wage and they can only spend X amount of dollars in the rent rate just can’t keep up again and go back to the affordability conversation. And yeah, the investors that appear to be behaving irrationally in some of those markets like LA and parts of Florida and in Arizona is again, all about, in my opinion, it’s all about speculation. It’s all about hoping that prices continue to go up. So they’re willing to take a very low cap rate or a very low return in exchange for appreciation.
Josh: And just knowing that also in those areas, especially of certain parts of Texas or certain parts of Arizona where there’s tremendous amount of job growth and so they’re in the path of progress, eh, because there’s so many jobs coming and companies coming and there’s not enough inventory they’re willing to buy and just hold in the hopes of a return. And the job growth tends to support that. There’s going to need to be more units, there’s going to need to be more housing, more apartments. And prices will continue to go up. And a lot of those areas until the point where like nobody can afford them, then they just can’t go up anymore.
Daren: Yeah. Yeah. I think that’s a great, yeah, great answer to that kind of question I’ve posed there. So yeah. Good stuff.
Josh: Yeah. And then the lastly, but not least, flipping markets. And then Daren, as we wrap up again, tell our audience a little bit more about some of the information and some of the different services and resources and tools that Auction.com provides and we’ll drive some traffic and some viewers back to the website and some of the tools and the newsrooms and some of those things that you have. But again, tell us a little bit more about flip markets.
Daren: Sure. Yeah. And I mean, hopefully somewhat implicit in these last two slides is this is these are all actual purchases made on our platform where people are getting great deals and getting great returns. And so yeah, this is real life and real life data that you can get and represent real life opportunities you can get on auction.com. But yeah, with the flip, same cohort of those 9,000 properties. But then we looked at the 56% that actually did resale, within a year. And, you know, and this, these are where the best returns. Again, gross returns. We don’t know how much was spent on rehab and all of that and holding costs, but we do know, here’s what they bought it for on the Auction.com platform and here’s what they sold it for by cross referencing with public record data.
Daren: And you know, Cleveland ends up at the top of this list as well. And I was going to try to pull the numbers here, but the, you know, along with Montgomery, Alabama, Camden, New Jersey again is also on both lists and Rockford. These are markets. Now, there may be trends that you have to be cautious in these markets, but in terms of just on paper, the returns that are potentially available are, you know, are very good. So, yeah, it looks like in Cleveland they basically the, the purchase, the sale, the resale of the property was 52% of what the purchase price. That was one of the top ones.
Daren: And, yeah, again, you know, you have actually some of the similar ones that are lower on the list, is that for flip returns as well for some of the same reasons. But again, it doesn’t mean those markets, like you said, I think you said, it doesn’t mean those markets are bad places to invest necessarily. But depending on your goals as an investor and what you’re expecting, they’re not going to give that quick shot of return that you might see. And in markets like Cleveland and other places in the Midwest and South.
Josh: And I think we’ve got to take that into something into account, which like you said, the amount of rehab is not calculated. You can’t possibly know that. So understanding that that’s not included. And also understanding that some of the markets like Montgomery, Camden, Cleveland, Rockford, you know, these are older, you know, Midwestern rust belt towns where generally we do have to spend a fair amount of money in rehab because the houses are outdated, a lot of deferred maintenance, things like that.
Josh: So I love the fact that the returns look the biggest there. But let’s, you know, let’s keep that in perspective when it comes to how much money we have to invest. So still making money for sure, but it’s not like you just buy a property, put it right back on the market, flip it and sell it for a huge profit without doing anything to it. So really, really important. So, but what I like about it is rental yields are good, Daren, the flip yields are good. The Indians are in the hunt for the playoffs. The Brown’s actually won a game if we still had LeBron like if things would be really good in Cleveland, we still had LeBron.
Daren: Yeah, yeah. Cleveland is doing well these days. So.
Josh: It is. it is. We’re having a good time with it. So Daren tell us a little bit more about any other tools or resources that are available on the Auction.com platform. You know, anything else that we can get and pass along to our audience.
Daren: Yeah, absolutely. I mean a lot of this stuff I presented here and similar kind of market analysis, if you go to Auction.com/InTheNews, you’ll find articles and heat maps like this that we’re updating weekly with hopefully great insight onto what’s going on in the market to help you and your, it will help your viewers or your listeners make good decisions. And then of course, the platform itself, I mean it’s, you can go in and search properties, that are available for auction right now, you can, on the ones those REO auctions I mentioned. You can bid in real time on those.
Daren: We have some of these are, there online auctions, but they’re live events where the sellers are actually basically on the line at the same time and responding. And so it’s, we try, we do our best to really break down the walls between buyers and sellers so that transaction can happen quickly, efficiently, and in the best interest of both parties. But anyway, that’s more philosophical. I would just encourage you to go and to go and check out and search in their areas for the opportunities that are available in their markets.
Josh: Fantastic. Daren, thanks so much for all this insight. This is always so valuable for me personally. I know I’ve gotten lots of amazing feedback over the years on our interviews with you, so thanks again for taking time out of your day present this good luck with your talk next week with some of the similar information that took us about 45 minutes, by the way. So good luck getting that into 15 minutes. All right Daren. Well thanks again so much. Yeah, I appreciate your time buddy.
Daren: Thank you, Josh. You have a great,
Josh: All right, sounds good. And for all of our listeners of the Accelerated Investor podcast, thanks so much for being with us. If you enjoyed this episode, as always, share it like it, review it, search Daren out on Facebook, become friends with him, follow the information that he puts out on Auction.com. Thanks so much for being here. Really appreciate you. Have a fantastic rest of your day.
You’ve been listening to Josh Cantwell and the Accelerated Investor Podcast. Leave a comment on our iTunes channel and let us know what you want to learn next, or who you’d like Josh to interview. While you’re there, give us some five star rating and make sure to subscribe so you can be the first to hear new episodes. Follow Josh Cantwell and his companies, the Strategic Real Estate Coach and Freeland Ventures on all social media platforms now and stay up to date on new training and investment opportunities to start your journey toward the lifestyle you’ve always dreamed of. Apply for coaching at JoshCantwellCoaching.com.
If there’s one thing you can count on to change daily, hourly, and even minute by minute… it’s the economy. As a real estate investor, the economic conditions of our nation have a huge impact on your business – and should shape your investing strategies.
It’s been a few months since we checked in with Daren Blomquist, VP of Market Economics at Auction.com. In this podcast, Josh catches up with Daren to discuss how economic trends have changed and how these changes have impacted the housing market.
One of the best ways to ensure success in real estate investing is to continuously educate yourself. By learning more about the economic and housing market trends, you can make more informed decisions for your business, and ultimately create a more profitable strategy for investing.
- How Auction.com helps its clients apply market level data to their businesses
- Daren’s insight on whether a recession is in the near future, based on economic data
- How the manufacturing index and the unemployment rate impact the housing market
- How the recent Fed Funds Rate cuts will influence real estate
- Current housing affordability and delinquency statistics
- Trends in investing strategies around the nation