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Darren Blumquist is the VP of Market Economics at auction.com. He is an expert in real estate market trends and provides valuable insights into the state of the economy and real estate investing.
Darren Blumquist joins host Josh Cantwell to discuss the current state of the economy and real estate investing. They highlight some key statistics, including the lowest affordability for single-family home purchases since 1985, the lowest inventory ever recorded, and rising home prices. They also discuss the challenges faced by home builders due to the high cost of construction materials. Darren emphasizes the need for a correction in home prices to address the affordability issue. They also touch on the potential risks of a recession and the impact of buyer behavior on the auction.com platform.
Key Takeaways with Daren Blomquist
1. Affordability for single-family home purchases is at its lowest level since 1985.
2. Inventory is at its lowest point ever, with a 40% decline since 2017.
3. Home prices have been rising due to the lack of supply.
4. The cost of construction materials is making it difficult for builders to deliver new homes and apartments.
5. The Federal Reserve’s policies are pushing the market towards a breaking point.
6. Home prices may need to drop, interest rates may need to decrease, or incomes may need to rise to address the affordability issue.
7. The risk of a recession is high, with the yield curve inverted and other potential triggers.
8. Buyer behavior on the auction.com platform has become more conservative, with a focus on adding value through renovations.
Daren Blomquist Tweetables
“..One possible solution to the affordability crisis and lack of inventory is for banks and the government to create a separate product specifically for developers and builders. This would allow for more construction and delivery of new homes and apartments, providing much-needed relief to the market. ..”
“..As investors, it’s crucial to focus on adding value to properties through renovations and improvements, rather than relying solely on market-driven appreciation. By being resourceful and strategic, investors can generate higher returns and mitigate risks. The distressed market provides opportunities for value creation..”
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Josh Cantwell: Welcome to the Accelerated Investor Podcast with Josh Cantwell. If you’re looking to retire early with forever passive income, you’re in the right place. This podcast is the go to destination for real estate investors, both active and passive, and multifamily apartment investors, both new intermediate and advanced. Now sit back, listen, learn, and accelerate your business, your life, and your investing with the Accelerated Investor podcast.
Josh Cantwell: So we’re going to have Darren contribute a few things to this call here in a moment. I want to start, though, Darren, with a couple of things that I just was reading. In the past 24 to 48 hours, I spent some time looking at stats from Nar, FHFA, FHA, Fannie Mae, freddie Mac, and the Mortgage Bankers Association. So here’s some things that I’ve read. I’m going to just spit these off and then I’d love to hear some of your feedback. So, number one, affordability in the United States for single family home purchases is the lowest since 1985.
Josh Cantwell: That’s according to the National Association of Realtors. So I’m 47 years old. That was 38 years ago. A homo filler ability is the lowest in my pretty much lifetime. Number two, inventory today is about 1.13 million units. It’s the lowest ever by some different tracking platforms. To put that in perspective, there were 1.9 million units for sale in 2017. So that’s a 40% decline in inventory. Number three, prices are up to a national average of about $400,000.
Josh Cantwell: And prices actually went up the last three months in a row because there’s just no supply at all. Also, we have more households today, about 128,000,000, compared to about 112,000,000 back in 2010. So over the last 13 years, household formation has increased about 13%, or about 1% per year. So we have more households, we have no inventory. Affordability is killing everyone. Prices have been resilient staying high.
Josh Cantwell: And yet for home builders, for people that deliver inventory, whether it’s multifamily, whether it’s apartments, whether it’s single family homes, the cost to build is skyrocketing. So we can’t build new homes, we can’t build new apartments, because the cost of debt, the cost of lumber, the cost of everything to build is so expensive. So these are some of the stats and things that I’ve just read about you, Darren, provide tremendous amount of stats and KPIs around the marketplace. So welcome back to Accelerated real estate investor. Darren, what’s your thoughts on some of the things going on in the market?
Daren Blomquist: Well, yeah, first of all, thanks, Josh, for having me. It’s always great to be know. I think we’re in a market where something needs to break.
Josh Cantwell: Yeah.
Daren Blomquist: And the Fed is, with their policies, is pushing something to break. I mean, it’s not that they’re intentionally, necessarily maliciously trying to break the housing market, but the outcomes of what they’re doing is creating this kind of frozen marketplace that needs to be melted or broken or something for things to loosen up and start moving forward. And so I think in my mind, a lot of people will say, well, just lower interest rates and the housing market will rev back up again.
Daren Blomquist: And that is probably true, at least in the short term, but it won’t solve the to me, the underlying problem is that prices, both for homes and for the underlying materials to build homes, to your point, have gotten too high, have gotten inflated and relative to incomes. And so that’s really the inflation issue that the Fed is trying to tackle. And I actually think they’re right in trying to tackle that. That’s the longer term issue that needs to be addressed. And unfortunately, that’s going to take some pain probably for that to be completely tamed here over the next couple of years.
Josh Cantwell: Yeah. You know what I think about Darren? It’s oddly. I have friends that live in Canada, I have friends that live in Israel. And they’ve always said that they invest in the US. Because you can’t get any yield in Europe, in the Eurozone, in Israel. You can’t get any yield in Canada because prices are so high relative to rent. So you buy a property to rent, you can’t get enough yield to make it worth buying as a rental property.
Josh Cantwell: Are we approaching the same situation here in the US where right now the affordability, the expense to purchase home, a second home investment properties or even your own personal residence getting so expensive? And one of the stats that we’ve seen lately is that rents peaked in the summer of 2022 and have slowly started to taper off. And then that’s a national average. Obviously, we know real estate is very regional, very local, but home prices keep going up and now rents are stagnating.
Josh Cantwell: Meaning the yield or the rate of return on rental property on a national basis is going to top mean are we becoming Canada and mean? What’s happening there?
Daren Blomquist: Yeah, I think that’s a great point. I mean, there’s a lot of countries out there that don’t have the kind of real estate market that creates as much opportunity as the US has historically had. And that’s been a hallmark of our market that I think has been awesome, has been great. There’s opportunity for folks to get into it and build wealth. Whereas some of those countries, probably the ones that you mentioned and others in Europe, home ownership is very low.
Daren Blomquist: Most people are renters and the real estate ownership is really in the hands of a few who can actually afford those higher asset mean. I think we could be heading in that think. I think part of what the Fed is doing, the consequence will be that we correct from that pathway. And the most obvious, at least in my mind, the most obvious path out of that is that prices do go down. And I know we actually did see prices go down earlier this year depending on even if you look at the Nar numbers nationally, we did have a slight correction in early 2023 and then you have bigger corrections in prices in some markets.
Daren Blomquist: That was the beginning of that. But then the market has prefounded to your point and we’re seeing prices going back up again despite these lofty mortgage rates, which maybe historically are not super high but compared to what we’ve been through over the last decade, these feel like atrociously high mortgage rates. And so I think the natural path out of this is for prices to correct but it’s easier said than done when you’re in this market, where we’ve been in this low interest rate market for so long that there’s so many people who have a low interest rate and so that’s locking up supply as well. So there’s a lot of factors but I think at some point it would seem that something’s got to break and when I say break, I mean that basically is some kind of correction and most naturally in home prices.
Daren Blomquist: I saw something the other day, there’s some good analysis from Mark Zandy over at Moody’s is in order for affordability, you mentioned affordability to get back to reasonable levels, what we’d expect is normal levels. You either have to have interest rates drop, I think to 5.5%, which actually maybe is not too unattainable or you have home prices drop by 22% or you have incomes raised by 28%. Now you could have obviously some combination of those three but if it was just one of those three, interest rates would have to come down to five and a half percent.
Daren Blomquist: Or if it was just home prices, home prices would have to come down by 22%. Or if it was just incomes, incomes would have to go up by 28%. I think that’s probably the unlikeliest of the three, is that we’ll all of a sudden see incomes rise by 28%. But I think it’s some combination of those three. I think you’ll need to see home prices drop some, maybe not 22% interest rates eventually, if we do enter recession, that will give a pathway to lower interest rates and then incomes is a whole nother conversation but two of the.
Josh Cantwell: Things that we consistently look at, which are really extenuating circumstances, right? So you have all these potential wars, proxy wars, things going on in both Ukraine with Russia and Israel with Hamas and Iran and you start to think about, well, if there is war, significant escalation. The United States Treasury Market. The bond market is the largest market in the world. And usually there’s a flight to safety.
Josh Cantwell: And the US. Treasury’s US. Bond market has always been considered one of the safest markets in the world, backed by the full faith and credit of the United States government and, of course, all of its people, which is really the government, right? Which is us. And this whole idea that if people are seeking safety, they’re going to seek yield. The more there’s demand for those bonds, the lower the yield will go down.
Josh Cantwell: And that could create some freeness more in the marketplace where in my world of the commercial real estate world, so much is built off the ten year treasury. That’s a big deal, right? And if I look at these different dashboards that you track, it seems like every time I get on the phone with you or get on a podcast with you, I’m expecting to see more red. But these nine things you’ve been tracking for years, like foreclosure starts and home price appreciation, yield curve, 30 year mortgage rates, consumer sentiment, there’s nine of these categories.
Josh Cantwell: They’ve all just been so resilient staying in the green, which is positive, and even some of them in the yellow, which is kind of neutral. Today there’s only two that are red, which is yield curve, and the 30 year fixed rate mortgages. That there still seems like there’s so much bullishness happening in our economy. There’s all these factors. But one of the things I thought about Darren just in a real estate fantasy, I guess, is that the Federal Reserve or the banks would create some sub product where they could loan money to home builders and developers.
Josh Cantwell: At some submarket rate so that those builders and developers could create more product, more deliveries and more inventory to give the whole market some sort of relief. Now, I know that’s not going to happen, but that to me would be like the nirvana of the real estate market where the banks and the government create some sort of separate product specifically for developers, new builders, new contractors to develop more single family homes, multifamily homes, apartment complexes, to create some relief. So there was more inventory.
Josh Cantwell: Right, so all of that going into account because I just don’t know how else they could, quote, unquote, break the market.
Daren Blomquist:: Right, yeah, I think that’s the key. And I think actually, if you look at housing starts, those numbers have been decent and so there is more resilience added. We’re in this deficit over the last decade that ended in 2020, we had a deficit. And I actually think I’d have it in one of my slides of depending on whose numbers you look at, a deficit of three to 4 million housing units relative to household formation.
Daren Blomquist: And so we’re climbing out of this hole and housing starts are actually both multifamily and single family slide five there. Maybe if they continued at the same rate over the next decade and we saw household formation continue at the same rate over the next decade, which are big assumptions, of course, you would actually see a surplus of about 4.4 million there. That 4.397. But we’re still climbing out of the deficit of housing supply. And so you’re right. I mean, getting more housing supply would unlock the market. And builders actually have been new home builders, in my understanding, have been more successful in operating and selling in this high interest rate environment because they do have some more options available to them to help mitigate some of the effects of the high interest rates in terms of buy downs, mortgage rate buy downs and things like that.
Josh Cantwell: Yeah, I saw a good video the other day. If you have the option to get a seller credit right, you’d be better off getting a 5000 or a $10,000 seller credit and not applying it to your purchase price, but apply it toward buying down the rate on your loan. Right. That’s what you’re talking about.
Daren Blomquist: Exactly. Yes. Things like that that actually make that affordability maybe a little bit less challenging for the new homes. Existing homeowners don’t have those options.
Josh Cantwell: Got it. Wild.
Daren Blomquist: Yeah.
Josh Cantwell: Darren, I wanted to ask you before we get too far along about this recession risk again. One of the flashing red indicators is the yield curve inverted. It’s been inverted for a long time. It seems to get continually more inverted all the time. And now you have some of these other possible recession triggers. Things like oil prices skyrocketing, bank failures potentially happening, office buildings and commercial real estate, not necessarily apartments, but definitely in the office space, less demand and some things you’ve seen a number of operators literally giving the keys back to the banks on some major commercial real estate assets.
Josh Cantwell: Of course, the government shut down. We didn’t have a speaker in the House up until a few days ago. There’s all these and so this recession risk probability index, I believe, if I’m reading this right, is like the second highest in the last 50 years. Right. So tell me how to interpret this.
Daren Blomquist: Yeah, that’s right. I mean, this is a derivative of the yield curve that the Federal Reserve Bank of New York creates that says this is the likelihood of a recession based on that yield curve. And, yeah, that 71% for May of 2024. It looks out. Twelve months in advance is the highest since back in the 1980s. Now, you can’t really see it clearly on the chart because this goes back so far, but that recession risk has actually ticked down a little bit in the last few months.
Daren Blomquist: So if you look for August of 2024 now, which we’re out to, that’s down to more like 65% risk, but we still have May 2024 in front of us. That is that high risk, super high risk of recession, depending on the news of the day. The GDP numbers came out today and they looked really good for the third quarter. You have all of a sudden people say, no, the Fed is actually going to accomplish a soft landing out of this. We’re not going to have a recession.
Daren Blomquist: And it’s possible that’s happened a couple of times in the last 50 years, but this is still the best predictor of a recession that I’ve seen.
Josh Cantwell: And maybe we’re just making up too big of a deal. Maybe we’re making too big of a deal out of the word recession. I mean, our economy has been incredibly resilient. There’s a lot of jobs that were before 2016 when Trump made that big push towards bringing businesses back to the US. Which that has successfully happened. And people have thought maybe the big reason why the economy is so resilient is because there are more jobs in the US.
Josh Cantwell: And people are able to find a job if they want one, people are working if they want to. And so because of that, we’ve been more resilient than we otherwise would have if those jobs weren’t overseas. I think that’s something we can debate. But the economy has been incredibly resilient for the past, really four years, three and a half years since the Pandemic hit, and then everything that’s happened after that, when you’ve raised rates from literally zero to really high interest rates really fast, the highest increase in history, yet the economy doesn’t seem to want to slow down. And like you said, GDP still remains strong in the third quarter. It’s just wild.
Josh Cantwell: Let’s get back, though, to Darren, to real estate in the time that we have left and talk a little bit about what you’re seeing on your platform, specifically auction.com. And again, for all of our listeners, go to auction.com not only to read Darren’s news releases, which you can email@example.com slash in the news, but also to bid on properties. Look for properties, investment properties, flips and rentals on their platform.
Josh Cantwell: Check out auction.com. But tell us about some of the biding activity that you’re seeing in this potential, what you call double dip. What does that double dip mean exactly, in your mind, and what does the data tell you?
Daren Blomquist: Yeah, it’s simply just a double dip in home prices. And we saw our buyers on our platform are usually thinking, they’re always thinking six to twelve months in advance because the properties they buy are highly distressed and so they’re going to renovate them, take some time to renovate them, and then either resell them or rent them back out in the market in about six to twelve months. And so the green line is a metric we look at, which is the winning bid at our auctions relative to the after repair value of the homes.
Daren Blomquist: And over the past few years, we’ve seen that leading home price appreciation. The blue line is home price appreciation from the National Association of Realtors. And so that’s just rebounded earlier this year, and that predicted this rebound in home prices that you mentioned at the top of the show that we’re seeing, but we’re already seeing over the last few months, that metric go back down, which could signal a double dip in home prices. I don’t think we’re past the home price pain at this point. Some people would argue that we are, but that’s what our buyers are telling us.
Josh Cantwell: So that dip happened, right? It went below 55% winning bid compared to after repaired value. And then you saw the home price appreciation line following that roughly in looks like about a six month or so lag. And then as you saw people willing to pay more for properties on your platform, home price appreciation started to go back up to the positive. And then now you’re starting to see here in the summer of 2023, the turn back down, not negative, but slowing down and the percentage going back down of what people are willing to pay because buyers can be so nimble, right? We can adjust if we see a rise in interest rates, we can change our asking price tomorrow versus the existing inventory, and a seller is going to be less willing to change so much fast because they just thought, oh my gosh, prices were just at this price three months ago. I want that price.
Josh Cantwell: Buyer is like, no, interest rates are up. I can only offer X amount. Right? Or I see the future value of these homes to be less because interest rates are going up. So they could be much more nimble. Darren, I want to wrap up here with slide 15. You mentioned that you’re seeing a lot of change in buyer behavior on the auction.com platform and the amount of profit that people are willing profit that they’re getting and the amount of purchase price relative to after repaired value is constantly changing.
Josh Cantwell: You’ve been tracking this since 2018. And even prior to that, what kind of behavior activity has changed? What are buyers that are buying your homes on your platform? How are they reacting? What does the data tell you about what they’re willing to pay for a property and maybe taking some chips off the table or taking less risk?
Daren Blomquist: Yeah, the baseline is about other than the 2018 liar, it’s about 2018 outlier. Sorry, is that relative to after repair value, our buyers are typically paying basically 35% to 40% below that after repair value on average. That’s the reverse of that 60% to 65% there that you’re seeing on the left that’s ticked down a little bit. They’re being more conservative overall in 2023, which reflects what we just talked about.
Daren Blomquist: And that’s partially because their returns on the right hand side, in 2022, their returns dropped pretty precipitously because of the drop in home price appreciation that we saw in late 2022. So our buyers respond, as you say, they’re nimble. When they see that their properties that they’re flipping are having trouble selling and they’re having to maybe lower prices, then on the acquisition side, they start changing their behavior.
Daren Blomquist: But I think one of the takeaways too here is that the distressed market is a little bit more insulated from the retail market in that you have that cushion, built in cushion because of the distress condition of the properties. That’s not quite as reliant. It is sensitive somewhat to home price appreciation, but it is not completely reliant. You can still add value to a property through renovation, even if it’s not gaining value through the market.
Daren Blomquist: And so even when that dropped in 2022, we’re still seeing a lot higher returns on, and these are gross returns on the properties our buyers purchased and then flipped at 49%. That’s still a pretty decent return, even though it did drop.
Josh Cantwell: Yeah, I love what you said there, and we’ll kind of wrap up with that is that as an investor, you have to find ways to add value. Could be construction value, a nicer kitchen, a nicer bathroom, a new roof, new windows, new siding, new flooring, those types of things where you’re not waiting on organic or market driven increases in value, where you can actually be a resourceful smart investor. Find properties whether it’s single family or multifamily or apartments that you can buy at a discount and then force the value through those value, add improvements, capital improvements, and make a better product.
Josh Cantwell: And then if you get appreciation on top of that, that’s market driven. That’s a bonus. Right? I think the risk is that so many people have bought properties and just hoped for market appreciation and didn’t get it, and now they’re getting bit by that. So, Darren, I’m super happy that you mentioned that here at the tail end of our show, because that’s really, as investors, the way that we make money.
Josh Cantwell: It’s based off of our effort, time, resourcefulness tools, research and buying at a discount and buying in a cash flow, stable market instead of hoping for the boom and then possibly getting the bust when it’s market driven economics. So, Darren, fantastic stuff today. Thanks for jumping on the show. As always, guys, don’t forget to follow Darren on LinkedIn. He’s very active there and all the different social media platforms. And also make sure you visit auction.com to find your next investment property.
Josh Cantwell: And look at Slash in the News to follow a lot of Darren’s news media researches, reports, and all of his press releases. Check out auction.com slash in the news. Darren, thanks so much for joining us today.
Daren Blomquist:: Awesome. Thank you, Josh. Have a great one.
Josh Cantwell: Well, guys, there you have it. I really enjoyed that episode with Liz. Man, being responsible to others is such a motivator. Giving to others, I feel so good about myself, right? Such and such a good place when I give to others. Number three, making a new decision. I remember when I was diagnosed with cancer and came out of my hospital bed and had an opportunity to restart my life, I had to relearn how to eat, I was not going to go back and redo my life the way I had been doing it, so making that decision. And then finally, as Caleb and I mentioned, don’t quit.
Guys, listen, everybody can do this business. Everybody can be successful. Everybody can be a multimillionaire with real estate. Keep getting your education, keep listening to podcasts like this. But most of all, go execute, raise capital, make offers. Don’t quit. We’ll see you next time on Accelerated Investor.