#109: Recession vs Natural Disaster, Unit Sales vs Home Prices

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 your investing with The Accelerated Investor Podcast.

Hey, everybody, welcome back to the Accelerated Investor podcast. What’s going on, Josh Cantwell here. And I want to thank all of you guys for hanging out with me. Paying attention. Having a good time with us during this virus quarantine. I’m having a good time with our podcasts and sharing new information today. I’ve got a new location spending some time with you from one of my offices in my house office upstairs. Is is quiet. Wife and kids are sleeping still. It’s early in the morning. And so I’m in my other office and I’m having a good time down here by myself and spending a lot of time thinking about you guys. So thank you so much for sharing the accelerate. And that’s your podcasts and social media in lots of different places. That means so much to me that you’re listening and sharing and sharing on Instagram. Sharing on Facebook. I’ve got lots of e-mails of people listening to the podcast. See the views and the listeners are way up during this podcast, quarantine. And today, I want to talk to you about some disturbing news that I’m seeing and I want to make sure that you’re not being misled by some of the mainstream media.

Just yesterday, I saw a notice about the mortgage market, the real estate market, and how it’s all about to explode. Everything’s going to be bad. Everything’s going to be even worse than it was in 2008 because home sales units have dropped by 15 percent. It’s like, oh, my God. Home sales units have slowed down. So let’s talk about that for a quick minute, because you’re gonna see over the next couple months, just like in 2008, you’re going to see a lot of misleading data. OK. And there’s really two things to think about here and compare. One is home sales units. The other is home sale prices. OK. And so when I look at what’s going on at the market, I look at this virus thing. Everyone’s treating this basically as a natural disaster. Very short term. Basically V-shaped or U-shaped recovery because the companies were very strong. The companies are very liquid. Lots of jobs. Unemployment was at historic record lows. We were having these tariffs and kind of putting it to China.

As far as things being more expensive and people were excited that there were a lot less restrictions and regulations on business and everything was pretty much exploding. That was just a month ago. So if you look at 2008, let’s talk about 2008 and how the housing market sort of rolled in two thousand eight. Really, if you think about it, the housing market started to implode in the fall of 2006. And the fall of 2006 is when we started to see major cracks in adjustable rate mortgages going up, payments going up, people not being able to afford those mortgages. And then defaults started to increase. That happened in 2006. In early 2007, Bear Stearns was the first company to go bankrupt because of all the mortgage backed securities that they owned. Then in the fall of 2007, Lehman Brothers went bankrupt. Then over the next, basically 12 to 15 months, AIG, Fannie Mae, Freddie Mac, all these things happened. The stock market imploded, all rolled into 2008. And for most people, the recovery really didn’t begin until 2010, 2011. So think about that for a minute. It started in 2006. And the recovery didn’t start happening until 2011.

The reason why is because the financial markets, the real estate market, the mortgage market was the problem. OK. With Corona virus here in two thousand twenty, the real estate market, the finance market, the economy is not the problem. The problem is, is there’s 20 million people now on unemployment just over the last couple of weeks.

And what’s going to happen here is that as those people lose jobs, as those people don’t have income coming in, we’re going to see some more defaults. We’re definitely to see some more defaults, for sure. Matter of fact, I’ve kind of been waiting for the last 10 years to see what happens over the next 10 months, because the next 10 months there’s gonna be a lot of deals, a lot of properties on sale, a lot of apartments on sale, lot of single family homes on sale. And people that are liquid, that have access to a lot of private money like I do, we’ve raised and we currently kind of control about thirty-nine million dollars of private money. Matter of fact, we just raised three million bucks last week in the middle of this coronavirus business for a 20 million dollar apartment deal that we just closed in Mobile, Alabama. So going back to two thousand and eight, everyone talks about 2008, but the problem started in 2006 and really didn’t kind of start to course correct itself until 2011. And then really in 2016 is when our economy started to take off. Trump came into office. A lot of regulations were rolled back. A lot of people started really believing in the economy. A lot of people started getting back to work. Companies started bringing jobs back to the United States. I don’t care if your left or right you’ll love whether you liked Obama. You like Trump. I don’t care about any of that stuff. What I care about is that truly in 2016 is when there was a fundamental shift in the economics in the United States. The unemployment started to drop down significantly. OK. Regulation started to unwind significantly. Jobs started coming back to the United States significantly because of those economic policies.

OK. So really, you think about it, the crash started in 2006 and the true full recovery and the expansion of our economy on a really big scale didn’t happen until 2016. 2006-2016 because the economy, liquidity, mortgages or real estate was the reason why everything went bad. I invested through that. I flipped hundreds of houses through that. We raise lots of private money through that time. We held seminars. We did short sale investments, pre foreclosures. We did all that during that time. It was amazing. There was tons of people doing deals we were teaching starting in 2006. I remember in 2007 being the keynote speaker with over 650 attendees at the Home Vestors Annual Convention. OK. And that annual convention took place at the at the. What’s the big place, the Opryland Hotel in Nashville, Tennessee? OK. I mean, just a massive, massive place. Hundreds and hundreds of attendees gave two speeches over that long weekend to all the Home Vestors franchises about pre foreclosures and short sales. Now, compare that time 2006 to 2011, 2006-2016 to today. And what you’re hearing, this misinformation that you’re hearing from are already starting to come out from a lot of news channels is that home sales are down 15 percent and the mortgage market is about to implode. The real estate market is about to implode. OK. Don’t believe that garbage. Here’s why. Home sales units, the number of actual properties that are transferring. It’s all about supply and demand. Supply, demand and liquidity. OK. Those three factors: supply, demand, liquidity.

So if you have a lot of supply and not a lot of demand, OK, then prices are going to come down. OK. If you have a lot of demand, which is typically driven by liquidity, there’s a lot of money in the system. Remember, over the last couple weeks, I’ve been teaching guys that central bankers, the guys that run the Federal Reserve and the central bankers throughout the world. They make and crash markets. They make and crash markets by the amount of liquidity that they create in the system, the amount of money that’s in the system, the amount of quantitative easing, the low interest rates that creates liquidity, that gives buyers the ability to go buy properties, that increases demand, lowers supply and increases prices. So the number of home sales units is one data set to look at. But right now, everybody’s working from home. Twenty million people just got laid off. So right now, there’s not a lot of demand, but there’s also not a lot of supply. OK. There’s not a lot of demand and there’s not a lot of supply.

What has happened is that liquidity has dried up in the alternate funding space. OK. Back on March 16th, there were a lot of private equity funds or a lot of hedge funds. There were a lot of life insurance companies, crowdfunding platforms that were buying paper. They were buying debt. They were buying private money, loans, hard money loans and bridge loans. And a lot of that stuff literally dried up overnight because on the secondary market, the buyers were buying that paper. OK. The buyers buying that paper, the life insurance companies, the pension funds, they’re buying, you know, 50 million, 100 million five hundred million dollars worth of paper all at one time. They were afraid that they couldn’t what we call it, as close their trade. They couldn’t execute their trade.

And what meant what that meant was, is that they were afraid that the notes, the mortgages and the deeds that they were trying to achieve and get. The mortgages against the debt, they didn’t know if the mortgages and the deeds were being recorded because everyone’s working from home and there’s less people working at the county courthouse. They don’t know whether those mortgages and deeds are even being executed in a timely fashion. And so if you’re going to execute 50 million one hundred million five hundred million dollars worth of mortgages and you’re buying that debt on the secondary market and you’re going to put that into your portfolio in your life insurance company or your pension fund, but you’re not sure if the mortgages are executed. Wouldn’t you be a little bit afraid? Yes, you would. So you stop buying the paper. So what happened is a lot of this residential funding for 1 to 4 unit, private money, loans, hard money loans, 30 year amortization rental loans, bridge loans and multi-family literally dried up overnight, froze overnight.

So many people are wondering, like, why did you like Peer street and rock in Lima, one in lending home and fund that flip? Why did they all stop funding loans for real estate investors? The reason why is they couldn’t close the loans and then sell the loans on the secondary market. So when you look at these two factors, again, keep coming back in this conversation, keep coming back to home sales units versus home sale prices. The number of home sales units dropped fifteen percent. OK, I get it. There’s less people working there, but a lot of people are working from home. There’s less demand, but there’s also less supply because less people are looking for properties. That’s not as important as home sale prices. OK. So if you have a reduction in supply and a reduction in demand, that seems to continue to level out.

If you have continued a lot of supply and not a lot of demand because there’s not a lot of liquidity, OK, then prices will come down. If you think about it right now, the Fannie Mae loans, the Freddie Mac loans, V.A., HUD, those loans are abundant right now. The problem in 2008 was that those loans weren’t abundant. The banks were not liquid. The banks did not have liquidity. The Federal Reserve dried up their funding because there were so many banks that were going under. There were so many banks that were insolvent. There were banks that did not have reserves and liquidity. And because of that. Banks didn’t have money to lend. Fannie Mae, Freddie Mac, HUD, VA were lending less. The requirements for getting funding were going up and there was less funding in the market. So there’s less buyers, there’s less demand, there’s more supply. So the prices came down. T.

He good news about the market right now is that if you’re a retail buyer, if you’re a husband, wife, you know, buying your first house, buying your second house. Right now, the financing from Fannie Mae and Freddie Mac and HUD and VA is still abundant. It’s not like 2008 when that all dried up. It’s still abundant. Now, the alternate funding, OK, the alternate funding for real estate investors is definitely slowed down. But real estate investors, frankly, make up a very small percentage of the market. If you look at the overall house buying market, the number of properties that are investment properties is less than 5 or 10 percent of the whole market for real estate. 90 to 95 percent of all the properties being bought and sold are retail properties. They’re being bought and sold by people that live in them. OK. The real estate investment space of people buying distressed properties is a very, very small piece of the overall market. And so what I’ll be watching in the next two to six months is now how does the unemployment, which is obviously skyrocketing versus all the stimulus money, the paycheck protection program, the stimulus cash. You know, the disaster relief loans. How does that offset unemployment? Secondly, I’ll be looking at how quickly does the country unfreeze, how quickly do people get back to work? So like Germany is opening back, part of part of its economy. Trump is talking about there’s 20 states that could reopen their economies before May 1st because there’s not a lot of corona virus. And people can still social distance but can still get to work.

Kids need to go back to school. If kids go back to school about, hey, I’m on. I’m on a call, though. OK. Of course. That’s my boy Dominic hanging out. All right. So what we’re looking at here is if the kids can get back to school, then parents can get back to work. The economy can unfreeze. And if that all happens relatively quickly, it’s going to take two to six months for businesses to begin making investments again. OK. Oh, what’s a great interview with Mark Cuban the other day and Mark Cuban was on and said, look, the investments that I was making, the investments in my business and buying other businesses when we reopen, I’m not going to be spending all this money on day one to invest in my own company and hire people back and buy other businesses. That’s not going to happen on day one. Same thing with real estate investors. They’re not necessarily going to start buying. On day one, they’re gonna wait and see what happens. Now, guys like me, they’re are super liquid that have access to lots and lots and lots of private money. We’re ready to pounce on deals. You know, we just closed a 20 million dollar apartment deal in a week before closing. We were able to retrade the price and get the price reduced by five hundred sixty-five thousand dollars the week before closing because of the virus. So we’re able to get a better price, which made a better deal for us and for our investors. So we’ll be looking at over the next six months as a couple things. I want to leave you with this.

We’ll be looking at the comparison between how many people are unemployed versushow many are receiving stimulus money? And when the economy starts to unlock itself, how many kids are going back to school? How many people are going back to work? And how many people can reestablish themselves over the next 60 to 90 days so that they’re not falling behind on their mortgage? They’re not maybe, they’re not buying a lot of new properties. But there’s not as many defaults. There’s gonna be more defaults for sure. There’s gonna be less competition in the market for sure, because there’s less liquidity for real estate investors. So there’s people that have access to private money like I do. They’re going to be ready to pounce on deals. It’s a big, big, big deal. OK. And so that’s what we’re looking at. And if there is a tremendous amount of new supply that hits the market because there’s a bunch of foreclosures and there’s less demand because of people are not working, people are laid off, people are losing their homes or losing their apartments, they can’t pay the rent, can’t pay the mortgage. People don’t have the the safety that they used to have. Well, there’s going to be less demand in the market. OK. Less demand in the market means that prices could come down a little bit.

But remember, 30 days ago, there was the least amount of supply in the real estate market that there had been in over 30 years, the least amount of supply. There was no supply in the market. That’s why prices kept coming up. That’s why people were, you know, in bidding wars. People were going after properties because there was and there was bidding wars and competition. There was no supply. So those are some of the things that we’re looking at. Couple of things I’ll leave you with this. Don’t worry about home sale units that are transferring. That’s obviously going to be way off over the next six months because there’s less supply, but there’s also less demand. So there’s going to be less units transferring. What really matters is the number of the home sale prices and how prices will be impacted by loss of jobs versus stimulus. Loss of jobs versus paycheck protection program. Loss of jobs versus liquidity. How much liquidity is there? How fast are these crowdfunding platforms come back online? How fast are these? You know, pension funds and institutional buyers start buying paper again. How fast is that institutional private money and hard money unfreeze?

OK. And this is why I’ve been telling people for over a year, if you are liquid in the upcoming recession, you’re going be able to buy assets at a discount because so many investors rely on funding from institutional private lenders, institutional hard money lenders, banks to fund their deals. OK. Over forty five percent of all of the investment transactions are funded with institutional funding. Fifty five percent of deals are paid for with cash. So if you’re one of those cash buyers, half of the market. Forty five percent of the investors just left the market because they were relying on institutional private money. Institutional hard money. They were reliant on alternate funding or banks to do their deals. Guys like me, hopefully guys like you who are not reliant on that funding to buy apartments and buy our rental portfolios and flip properties if you’re liquid and you have access to private capital. Guess what? You are absolutely sitting in the driver’s seat.

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.

 

You’re going to hear a lot of doom and gloom on the news, and you’re also going to hear some misleading terms that are used incorrectly. Don’t believe that garbage because it doesn’t look at the economy as a whole. I compare today’s economy to the crash of 2008, and explain why liquidity has slowed down right now.

Home sale units are not the same thing as home sale prices, and we just need to get that out of the way. This is a misleading way to talk about the “mortgage crisis” that news outlets are falsely pushing. The difference between these two units of measurement matter because they reflect different parts of the economy.

I’ve been teaching you guys that central bankers are the ones that make and crash markets by the amount of liquidity they create in the system. There’s not a lot of demand or supply right now as 20 million people have been laid off, but the liquidity has also been affected. I explain where the liquidity went.

These are the areas that I’m going to keep my eye on:

  • Unemployment, and how that’s impacted by the government.
  • How quickly can people get back to work?
  • How many kids are going back to school?

Remember though that thirty days ago, there was the least amount of supply in the real estate market that there had been in over thirty years. This was pushing up prices. But now, that’s all changed.

I’ve also been telling you for over a year to get more liquid. Guys like me, and hopefully guys like you, that don’t have to rely on institutional funding to buy our rental portfolios are absolutely going to be in the driver’s seat.

What’s Inside:

  • Remember that home sale units are about supply, demand and liquidity.
  • Right now the financing for Fannie Mae, Freddie Mac, VA and HUD loans is abundant.
  • The key factors that I’ll be looking at to determine where the economy is headed.
  • This Coronavirus situation is more like a natural disaster than the 2008 crash.

Mentioned in this episode​

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