Latest / Real Investor Radio Podcast / Ep21 | Part 2 with Melody Wright - Overbuilding, Shifting Demographics

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Ep21 | Part 2 with Melody Wright - Overbuilding, Shifting Demographics · Real Investor Radio Podcast

• Craig Fuhr (00:04.645) Well, hey, welcome back to Real Investor Radio. It's Craig Fuhr and Jack BeVier. We are here today again with Melody Wright. Melody is a long-time veteran of the banking and financial services industry and we just spent the entire last episode. If you haven't had a chance to check it out, be sure to check out episode 20 and then come back to this one. But we're having just sort of a lively discussion on. You know where we are right now in the residential single family and multifamily space, Melody has done a tremendous amount of research really for the past couple of years, right? Melanie on where the market is, but not only that, she also jumped in her car and went out and traveled to several key markets around the country. And you're also now tracking 70 markets around the country. Is that what you said? Seven zero. Melody (00:42.693) Yeah. Melody (00:54.498) Yes, that's correct. Craig Fuhr (00:56.113) All right, so let's just jump back into the discussion here where we left off on the last one was, we talked briefly about sort of this financial shell game that you've seen some of the builders around the country playing. And in terms of contracts, permits, land, and how they're sort of accounting for all of that, maybe you could jump into that quickly. And then I know Jack has a bunch of questions as well. Melody (01:21.89) Yeah, so it's kind of, you know, Jack was like, surely these guys know better. And I have the same sentiment. But I think one thing I wanted to mention, you know, when I did call people in the industry, a technology platform that tracks new, new build inventory and others, I kept asking them about the local private builders and they didn't have any answer for that. So, you know, a huge fan of Zaleman, as you know, and mentioned Jack. But they don't, those builders don't respond to those surveys. Zonda doesn't track many of those builders. And so I think probably what a lot of the nationals are missing is that local inventory that's being built up. And because of the delays in permit recording and things like that happened during COVID, as well as we're seeing lawsuits on permits, I think there are probably some... more examples than we even know of things being built without the right permits. I think I think that there was just a everybody kind of and something you said on the last show, Craig, that where are all these people coming from? I think a lot of these cities thought every single California and every single New Yorker was moving to their city and they built that way. And then you had these narratives of, oh, there's 300 people moving here a day. Well, when was that? When was that? Craig Fuhr (02:43.335) Mm-hmm. Melody (02:51.686) Oh, well, that data is two years old. It's like our Florida, everybody's like, everybody's moving to Florida. Okay, go look at the census data. Since World War II, it's the same trend. In fact, the last three years are lower than trend. Because everybody's always moving to Florida. I think what's happened is we're in a data dungeon and all of the things that we have relied on to kind of tell us, and by the way, they didn't work so well last time, right, Craig? I mean. you know, all the things I remember writing out seven, eight, nine, thinking things were going to get better based on what all the housing experts were telling me based on the data based on permits, like, um, we thought everything was going to get better. You know, that didn't happen. And so I think that that, so you can look at it. I don't think people are necessarily doing anything intentionally wrong. But if you understand how this all works, like the systems, the technology is not there. You're not chipping every single new home. Somebody's filling out a spreadsheet that then goes up to their manager, then that goes then up to another manager, then that goes up to corporate. And so I think that what you, and I've heard this a lot from builders and people in the field. is that a project manager on a builder site knows a heck of a lot more than corporate does. And so I think that as well, people like Zillman, when she goes somewhere like Austin or Phoenix, she gets picked up at the airport, they take her to her meeting, they show her the sites they wanna show her, right? She's not getting out and just driving around on her own. And if you drive out in Phoenix, which you probably know, Craig, you can't see anything on the highway. It's just the big walls. And so you don't know, you gotta go behind the wall. And when you go behind the wall, you're like, holy mother of God. Like Round Rock, Texas is a suburb of Austin where they were gonna build a big Amazon facility. That got canceled. I've never seen anything like this in my life. You go a block and it'd be another new build, a block, another new build. Then you turn right and it'd be seven or eight more sites. Craig Fuhr (04:42.009) You gotta go behind the wall. Melody (05:07.938) all and he would ask the people locally okay well what about this site? Oh I didn't know that there's another site over there. Yeah because even people that you drive the same commute every day right and you think oh that's just my that's my neighborhood that's my one thing. Well go five blocks over and it's the same story but nobody is seeing that larger story and it's kind of due to the fact that we look at data. I can tell you right now, Google knows how many people live in Austin, but the federal government doesn't. Why is that? Because that's the other thing, I really tried to get a sense of population demographic move. I mean, I was tearing through, since it's trying to figure this out, but what you realize is nobody knows. I mean, like, and everybody has a different view, but go ahead, Greg. Or Greg. Craig Fuhr (05:58.981) No, please, Jack, jump in. I can see Jack's head has been here. Jack BeVier (06:00.206) Well, let's do, yeah. Let's, let's talk about the demographic side of things because we do continue to have growing household formation. Immigration is down. So the election could have a lot to do with, with that idea. But when you, when you have growing household formation, I guess, trying to tie two ideas together, like. Melody (06:02.361) I know, I can tell. Jack BeVier (06:25.458) You think that they're, they're overbuilding and they're just going to keep overbuilding and get it to a point where we're not, where that growing household formation is not going to be able to absorb that inventory. Because of even despite price point, I guess that's where I'm struggling a little bit is that like, whenever, whenever one household moves and you know, one person sells a household, they have to go somewhere, whether it's. For sale inventory or for rent inventory. I agree, but. Melody (06:35.823) Yeah, I- Jack BeVier (06:52.434) I still, my understanding, I guess my understanding, you know, big, big caveat there, right, is that we are still forming households at a rate that exceeds the number of houses that are being built. It may be an uncomfortable reshuffling, uh, in order to fill those houses. But you know, when, when you want to put a ring on it, you know, you're not, you're getting out of the basement. And if that means that you're, you know, moving to the exurbs of Phoenix. uh, you know, that's what you got to do. No, like no, like what, why isn't household formation going to absorb this given that the one is higher than given that household formations higher than permits. Melody (07:28.919) Yeah. Melody (07:35.038) Well, so a couple of things. One, I would go that Harvard study from January is fantastic. It graphically represents how much household formation we actually pulled for during COVID and looking at what that demand is going to be in the future. And it's going to be muted. But I think that what everybody is not talking about are the 15 million vacant homes as well that are going to come. I mean. The uncomfortable thing about our demographics is we're not having babies the way we used to and We are we are looking more like Japan every day Meaning that you know we have this massive boomer population that I mean it's sad but unfortunately You know they will move on and you know what's happening? So it's all From pure numbers game. I still would say we overbuilt Jack But before I even get there, let's say that these boomers try to leave these homes to their kids. Well, they can't even afford them right now because of the property taxes and insurance are more than what most of us would consider a healthy mortgage payment at the moment. And so they won't, yeah. Jack BeVier (08:51.598) I do completely. I've had that concern for a long time. The whole Florida migration, everyone's like, everyone's coming here, the low taxes, the politics are right. And people are like, I'm like, what happens in 20 years when everybody who's 65 today or 70 today is just, like you said, unfortunately dead? Who's going to live in them then? Because the next generation isn't as big as that generation was. And so like, Craig Fuhr (08:56.518) Yeah. Melody (09:19.25) Correct. Jack BeVier (09:20.47) So I do, so I completely subscribe to the, the million dollar Florida house, maybe screwed, you know, five to 10 years from now, but I'm struggling connecting that to how I should be freaking, you know, why I should be freaking out over the, or why I should be making different business decisions over the next 12 months. Melody (09:41.726) Yeah, so I think you'd have to see it. Like, so nothing, so everything that's being built out there is the million dollar home. Even the ones that are saying they're going for 400 to 500,000, you can talk to local realtors in Florida right now and people are expecting more like 800, 900,000 for them. And so it's the expectation issue. So when you look at these builders, you look at their building, their balance sheets. you quickly understand that everyone, they don't see this misalignment that you and I are talking about. They think that there are enough people to afford these $400,000 homes. And they're just simply are not, because number one, they're not just 400,000 when you think about the cost to carry, especially somewhere like Florida with the insurance and taxes. And car insurance, second highest in the country. I mean, it's just... it's gone so far from affordable at this point. And so when you, in the permit story, let's start there again. I don't, what I think is absent is truly looking at the permits in detail. And I did something in one of my sub stacks called Down and Dirty with a map. But I think that we still don't even have the correct understanding of how many permits, how much inventory is actually out there being built. And we've lost our city planners who, you know, previously might have been the people that would understand that we have too much inventory in certain places. And so and then on top of that, the multifamily and the bill to rent and these vacant homes. So. Jack BeVier (11:20.994) Does the bill to rent scare you? I would like, I always take comfort in the bill to rent because of the affordability. Like you can, you know, because they, you know, because they are $300,000 houses, not $800,000 houses. I worry less about that segment. Melody (11:34.158) Well, but they're asking. So for instance, let's take Sevierville, Tennessee, okay? Where there's 8,000 short-term rentals in a tiny little county, you know, in Appalachia. And they built these built to rent sites to theoretically house the serfs, I guess, so that they could work, you know, for these. But you go on realtor.com for rent and they're trying to rent these things for $2,000, $3,000 a month. And this is everywhere. So, you know. Craig Fuhr (11:54.734) Love it. Jack BeVier (12:03.318) Yeah, I hear that. Yeah. Melody (12:03.55) Yes, do I have scrapers that can get data, but I look. I look in these places and you look at what's for rent out there and you're laughing. Where I am in Johnson City, Tennessee right now, they went out, they built $800,000 homes. Then they're trying to pivot them to rental thinking they're going to get $4,000 in rent. This is on all the sites. You see it everywhere. Every one of these cities. So there is a misunderstanding still in the market of what they can get for rent. And they have built so much built to rent, not really thinking about total housing stocks. So, you know. Craig Fuhr (12:40.761) Yeah, I think it's just it's this jack this blue sky mentality that I feel like, you know, the builders that melody is talking about. They're already pregnant. You know, they bought the land at a certain price, their cost are at a certain price, they've got a performer that's saying they're going to, you know, hit this mark. Same with landlords, you know, We know a lot of landlords. Jack lends to landlords all over the country. And the mentality that I see is, I'm charging $2,200 a month for this place that five years ago was getting 1,300 for. And that's gonna last forever mentality. And we're already seeing rents coming down in places like Sevierville and other key markets around the country. You've got affordability right now is at an all time low in terms, I think I read the other day that housing costs just in mortgage PIT is around 40% right now for most people, which is higher than it's ever been in our history. And the question is, how does that last? How do you how does how do we keep that up? And so, especially as rates are rising, and the economy begins to cool or I'm sorry, we have inflation, I should say. So You know, that's the tail that I see. That's the big thing that I feel as I'm looking at the market. And, you know, so go Jack. Jack BeVier (14:13.09) So what's the, so then what's the move, right? Like you, clearly you hate builder stocks, that's easy, but like beyond, beyond shorting builder stocks, you know, what, so what do we do about it, you know? Craig Fuhr (14:16.679) Yeah, that's. Craig Fuhr (14:27.781) Yeah, like, that's a great question, melody. One of the things that we that we love to do on the show here is, you know, break it down for the guy who's out there trying to do some investing and you know, building a portfolio or, you know, that's the people who listen to this show. So let's break it down rubber meets the road for those folks. Melody (14:44.642) Yeah, and I have to tell you guys really quickly, I'm so sorry, but I forgot to plug in my laptop. I need to do that real quick before you lose me. I'm so sorry. One second. Okay, one second. Craig Fuhr (14:52.205) Oh yeah, go ahead. That's all right. We're easy people here. Jack BeVier (14:52.278) No, it's okay. Craig Fuhr (15:08.165) What's so funny? Check. Jack BeVier (15:12.13) Jamie's down at the city steps. Melody (15:14.758) Sorry about that, guys. Craig Fuhr (15:15.165) Uh, yeah. She- she bye. Jack BeVier (15:16.046) It's usually Brian, usually, you know, bald Brian down there. And then I step in every time now and again, and Jamie's covering for me because I'm doing this because Brian's out. So like, you know. Craig Fuhr (15:28.539) So Jack, they go to basically the courthouse steps. Is it still daily, Jack? Every day? Jack BeVier (15:34.442) Yeah, it's only a couple of days a week though. Craig Fuhr (15:36.861) for just trying to find deals on foreclosure houses. Jack BeVier (15:38.39) Foreclosures, yeah, buying foreclosures, yeah. Melody (15:39.298) Yeah, yeah. Yeah. So what's the play? That's I mean, yeah. Yeah, no, I think that's one of the plays, right. And to me, the biggest play is understanding where the distress is. Because I think that there are certain markets where you could pull the Craig playbook, right, where you could go out and you'll there's going to be people needing to Craig Fuhr (15:45.329) Yeah, so let's just jump back in here. Melody (16:06.634) unload this spec inventory needing to and a lot of it and this is where okay I don't know but I think a lot of the certificates of occupancy aren't being filed because people maybe want to just pay tax on the land because they know that this isn't the market to start listing some of these homes. So there's a lot going on but I think if you know if you can get a sense if you can find Melody (16:36.786) partner to look at foreclosures, negotiate, get with the local agents. Because soon, especially in Florida, I believe that no one is gonna be able to argue about what's happening. I mean, I know people that the houses are sitting that they thought would be gone in two weeks. And so I think prices, that little strike. is about to start kind of defrosting a little bit because of super prime stress where they actually need to offload a property. They have to for various different reasons. But I think being in those markets, understanding when the tide is turning to be able to get in and take advantage. And that's understanding the credit profile and what's going on in those particular markets. Jack BeVier (17:29.326) So you have markets like the Northeast where you don't have this like crazy building, right? Are those markets just, are those markets like relatively insulated by, because of that factor? Or do you think that the contagion makes its way to even land constrained markets? Do you think that the land over building makes its way to even, you know, supply constrained markets? Melody (17:51.546) Yeah, so let me take Pittsburgh, for instance, which is not a New York City and they have more land, but I was living in Pittsburgh for the past four years and they've got the same thing, not as bad as Austin, not, but these new build sites, a lot of fever dreams. And so, but what they also have is negative demographics and they've had that for some time and that's just increasing. And so I do think... The biggest thing to look at to me is what is the demographic picture? What industry is there? Because I think this is the other thing the Northeast is going to have to contend with as well, is unless we bring back some of this manufacturing, et cetera, there's just not a ton of industry to keep these places going. And so that's the big problem in the South. In Florida, for instance. There's nothing there but serving the retirees. That's the industry of Florida. And so what can you do if you lose your work from home job, for instance, like what are you gonna do? You're gonna go wait tables. That's what you're gonna do. Are you gonna work at Publix if you're in Florida? Bagging groceries, that's it. So yeah, go ahead. But no, so I think the North, there are places, I think. Craig Fuhr (19:06.006) So keep please. Melody (19:11.83) I think that people have to pay attention to the demographics, they have to pay attention to the industry, and they have to pay attention to the access to resources. You know, Phoenix, they had to, you know, retire a whole subdivision down there because they didn't have the groundwater. I mean, you know, so I think that those are the types of things, but I do think nationally, this will be a national story. It absolutely will. There will be places that won't be as hard, hit as hard, just like last time, but it'll be a national story. Craig Fuhr (19:39.433) Go ahead, Jack. Yeah, so I was about to say, I've long been a sort of an ancillary study or of post-industrial cities. And I've wondered like, what's keeping them afloat? It's not like the same factories that our grandfathers and great grandfathers worked in that made the great middle class of America. And you wonder in places like Pittsburgh, Baltimore, where we are. Melody (19:41.97) I'm going to go ahead and close the video. Craig Fuhr (20:08.549) you know, basically the entire rust belt that used to be driven by automotive and everything related to automotive, you know, where are these people working? And how are they, you know, I can I can I afford a $450,000 house on a Walmart salary? And so those are the demographics that I think most concern me this and the and not only that, but the changing sentiment in ownership versus rental amongst, you know, sort of the Gen X, Gen Y, Gen Z crowd. Um, you know, that's, that's a big deal. Uh, that said, all of that said, what I don't see is commensurate housing for that sentiment. I see a lot of luxury rental in, in and around Baltimore, but what I don't see is, you know, uh, a three, two that somebody can rent for $1,500, you know. Jack would know better than anyone. I mean, Jack owns houses all over the city and around Maryland. And I know that Jack, you keep your eye on building starts and things and the building that's going on, especially around the city. And what I find really alarming is I just don't see the type of housing starts for that type of buyer, for that type of renter. Jack. Jack BeVier (21:33.014) The like the. So let me introduce an idea that I think that is never talked about, especially in the context of affordable housing, which is housing consumption. And I've mentioned this on a prior episode, but something that like frustrates me about the affordability, the housing affordability conversation is that everyone takes for granted. It is like that we must consume the same number of square feet today, tomorrow. Craig Fuhr (21:48.882) Mmm. Jack BeVier (22:05.318) And that like, as if there were a human right to consume a thousand square feet of housing per capita. And while, you know, when history shows us and you know, that, that was not the case we've, you know, over the past whatever it is, 80, 80 years doubled the amount of housing per capita that we consume and in other countries, they consume much less housing, frankly, in our most luxurious markets, like New York city, uh, you know, how warehouses go for, where, you know, condos go for two, $3,000, $4,000 a square foot. people are consuming less housing per square foot than folks who work at Walmart. Uh, and so I struggle a little bit, like in the, in, in the, in the context of a rising population, does the, does the market need to drop or do we just need more incomes per household and therefore more humans per household and less square foot per person and doesn't that absent a crisis that forces the issue. Doesn't the market just consume less housing per capita to balance things back out, right? We don't we won't have homeless, we'll just have roommates. And I feel like that I feel like that idea is like, I don't know, he's just never talked about. And then layering on an economy now where you lose you lose your work from you lose your work from home job, you can get another work from home job. I mean, literally half of my employees now don't live in Maryland. We hire all over the country. And it's great, you know, because I'm paying the same and I get access to a national labor market, my money goes really far in Oklahoma and Texas. And so I guess I'm like, I'm, I guess less concerned, you may take a pay cut, and you may get a roommate. But I don't think you're going to be homeless. And I'm not sure that unless Like unless we, we force sales of all these properties, I think that the, you know, I think that the operators who own this real estate that doesn't have the demand, they don't hit their pro forma is don't get me wrong. They far from the, you know, they don't get, they don't hit their pro form as their equity does not get paid. What did it expected to get paid? Maybe their equity even takes losses. But if you operate the real estate, I do think that you can, you can fill it in a rising. Jack BeVier (24:31.018) you know, in a rising population country. I don't know. I said a lot there, so feel free to pick it apart and deconstruct. Melody (24:37.871) Yeah. Craig Fuhr (24:37.913) So yeah, it was tying that up with a bow that was the sort of. basically taking a look at the way we consume housing now, sort of a philosophical question of, do we just have to go to smaller housing per capita and even bring on, I'm gonna finish my basement to turn it into an apartment, which we saw a lot of in the 70s, Jack and I have talked about that. Melody, if you were to arrive through Baltimore city in the houses that my great grandparents lived in, they were... little row houses that, you know, as they started to gain wealth, they would go out to the outer edges of the city and build these big single-family detached houses, which in the 70s all turned into apartment housing. And so the question that Jack and I have bantered a bit was, you know, these houses that we live in now that are out in the burbs, are they going to be our next apartment dwelling type houses? Right? And so that's sort of philosophical question number one. Melody (25:21.318) All right. Craig Fuhr (25:39.633) you know, well, I like to tease, I we're gonna have to edit that out because I lost the second part. But yeah, please go ahead and comment. I apologize. Melody (25:49.73) Well, the homelessness, right? But so I would say that's already increasing quite scarily in places that, you know, you wouldn't expect it like Missoula, Montana, you know, like places in Georgia. I mean, this is it's becoming I think so. I think, again, we have a bifurcated economy where. I lived in New York City in a tiny little apartment for seven years, and I left because I wanted to wash her and dry her. I didn't want to carry my laundry around anymore. So agreed. But again, now you look at somewhere like New York City, and if our economy is going to change, and AI is going to take a larger precedence, need as many people? Will that city sustain the same way? I mean, so I think these are really complicated, you know, questions we're asking and there's so many different levers that can be pulled. But I want to go to something you said, Jack, and because I want people to hear this, that I think you can still make money, but you have to be an active manager. Like you can't, I think a lot of people bought some of these to be long term rentals, not understanding what it meant to be a landlord or not understanding. you know, how involved this is. But I personally think that even with a short-term rental, you could be successful if you, you know, if you really run it well and understand your market and, you know, hopefully you were smart in how you chose it. But I do, you know, the whole point about, I do think homelessness will increase because if we look at numbers in aggregate, that might. confuse us, but with those Americans who can't afford a thousand dollar emergency, they are moving, they're leaving and they don't have options. And we've been doubling up quite a bit in that sector, you know, generations moving under the same roof and things like that. Jack BeVier (27:52.886) In a prior episode, Craig was trying to get me to say that DSCR loans were like the new subprime basically the new, the new liar loans, new Ninja loans. But, um, I, I refuse to, because I feel like there's an important distinction and like, I don't see, and I would be curious to get your thoughts on this. I don't see DSCR loans as those liar loans. Um, I, I do because, um, I, and I don't see speculation. Like I have not witnessed. Melody (28:02.394) They're all day. Jack BeVier (28:22.582) like speculation, like people were doing in 2004, 2005, buying a house because it was going to go up. I see, I see easier access to credit and less diligence on operational experience, which concerns me, but I don't know. It's, it's like, you know, but how do you, how can you tell when you're giving out a DSCR loan, who's going to be the good rental operator for the next 30 years and who's going to be the bad rental operator for the next I do, I do completely agree that the short-term rental underwriting that existed more prevalently now to a lesser extent using short-term rental daily rates is a problem because that's really hotel underwriting. That's really hotel really, you know, it's really, you know, hospitality business, but when, but if somebody, but if the underwrite is based off of the 12 month monthly rent and then you choose to short-term rental it that. should temper the over leveraging and should keep the amount of, you know, bad actors in check. But so from, so from, from my perspective, I don't see speculation happening right now. I see a lot of people excited. I have seen a lot of people excited to get into real estate. And certainly I don't think that all of them are going to be operators in the long term because it's a hard business. But what's your, what's your perspective on that? Do you think that there's, you think that there's speculation going on or do you think that there's speculation really on the building side and to a lesser extent in the landlord flipper side of things? How do you, how do you see all that? Melody (29:55.222) I think it's everywhere. So I think so Michael Pettis is a great, he wrote for the Carnegie Endowment, this great article about the bezel. And that's kind of just sort of the speculation that gets in the system and you don't know what's there. It's kind of like, if you think about when you, you're losing weight, you're toning up. but you know that there's still muscle in that, I mean, fat in that muscle. You know what I mean? Like it's there, but it's hard to see. And I think it's everywhere. Yeah, I think the psychology has overtaken us. And I think that... Jack BeVier (30:28.47) You think it's a psychology thing. You think it's like an ad. Melody (30:35.214) You know, I've been thinking a lot about what you're saying, Jack, because I know very responsible DSCR lenders. I know these people are good people. They've been through it before. They're conservative. But I think about them all the time because I think about their having to go off the facts that they see. And like when you're doing a bank statement loan. I've heard an originator say this, well, as long as the money comes in regularly every month, of course it goes out, but it comes in. We'll think about that for a second, how you could make that look in six months. But the Philly Fed did an excellent paper on kind of fraud. And they basically, this was recently published at the beginning of the year as well. There was a lot of interesting stuff at the beginning of the year that, That speculation didn't stop. It persisted and I can tell you I've seen it. I've been digging into some fraud cases. It was there in 2019, but it went on steroids. And I saw it even in your prime origination because FHA non-owner occupied, they all signed the affidavits that they were actually occupying those homes and they aren't. And that's starting to show its head. But the Fed basically said that a third of investor loans are typically fraud. But how do you, as a lender, how do you, how can you determine that? I mean, it is, it's impossible. You have to go for the information that's presented to you. And I think the only way is that you have to just know and reserve for the fact that a lot of this activity, just because of the nature of the game, I mean, real estate is 85% of global wealth. Like when you get that much money involved, there's going to be fraud. So I think there's more out there than we know. I think it's just starting to show its little head. You know, like I'm hearing about, cause people have just been emailing me like crazy. Like, you know, they invested in a property, the guy, it was a big rental. He was giving them income statements every month. They just found out all that's a lie. They've lost all their money. I mean, there's just, and so we're at that part of the cycle where Craig Fuhr (32:25.426) Yeah. Melody (32:50.15) we're just starting to learn about the fraud. And I think it's more pervasive than most realize. Jack BeVier (32:57.73) Do you think, do you think this is going to be so like, you know, the course of the next like 12 or whatever, six to 18 months, do you think that we're going to have like a freak out? And if so, at one point, where do you think it's going to be like a slow slide into just a slow slide, you know, just like war of attrition. And then people are just going to like fall, you know, every week, another one, they just quietly fall away until the market is, you know, noticeably different, materially different at 12 months from now. Um, where do you think that there's going to be like a shock or like a, or like a freak out moment that like, where the psychology shifts, you know, where people get scared. Craig Fuhr (33:36.126) Can I add to that question? And so is it going to be sector specific? Is it going to be a banking meltdown that then sort of precipitates the commercial market, the real estate market? Will it be the commercial real estate market? Maybe office that brings down sort of evaluation on everything. So yeah, love to hear your thoughts on that. Melody (33:58.926) Yeah, so I study what people call the Euro dollar market a lot, and it's kind of the shadow banking. And so what I'm sensing right now is we're gearing up for a credit event. It could originate from somewhere like China with somebody like Country Garden or Evergrande. If we have a credit event, I think things will accelerate much faster. And this could... And I say, and I'm going to say the opposite in just a second, but I say that, you know, no one should think that prices can't come down as fast as they went up. Like that there's no law of physics that says that won't happen. Right. Now I say that, but if we don't have some kind of credit event or, you know, an exogenous event, um, and if we, you know, go to war, like so many different things could happen here to change this, but if nothing changes from just this moment, We don't have net reduction in employment and we just stay on the same path. I still think we are going to reach trouble. Everybody's gonna know it by Q2, the end of Q2 of next year. We've got big tax season in California coming up here in November and December. I've already heard borrowers very concerned about that. But I think we will have, and so like next year, nothing changes. probably about a 5% national reduction in prices is kind of my view, but then in 25, that's probably when we're going to have, deal more, probably around 12 to 15% with a couple of more years of around that 5% price drops before we bottom out completely. That's if nothing changes from today, period. Jack BeVier (35:44.642) So you're calling like a 20, 25% national reduction, which means in certain geographies, that's going to be more right. Cause like, you think it's those, you think it's those overbuilding sunbelt, you know, the, the repeat of 2006, you know, let off by Maricopa County followed by Miami Dade, like Craig Fuhr (35:44.945) Got it. Melody (35:51.546) heck of a lot more. Yep. Craig Fuhr (35:54.944) And that is. Melody (36:06.214) You know, I think, well, I don't know. I think Maricopa, I think Miami-Dade, and then, you know, I think what's this county, Austin, but what's their county? It's like, I can't remember the name of the county. But anyway, I think those three, they're going to be in a tough. Craig Fuhr (36:16.346) Austin Melody (36:22.706) competition to see who's gonna win here. And the thing about Texas that I would say is very different from everywhere else, those other two states, is that they are a non-judicial foreclosure market, which you probably know, Jack. And they are, them and Georgia are the fastest in the country, Super Tuesday, right? So I think things could get real disorderly there quickly, especially with unpaid property tax. And... And so, you know, we were talking about where's the opportunity. If it were me, I'd be out scouring every single unpaid tax bill out there in Austin, Texas, and some of these neighborhoods because you can go negotiate and say, listen, I'll take your, I'll pay your lien. Go, you know, like whatever. So, because I think there actually are investors that desperate right now. But yeah, it could be a very slow. horrible slog and then we have an election year next year and nobody is going to want to, you know, everybody's screaming about affordable housing. I personally, and this is kind of my crazy wild theory, is I believe the government will probably help subsidize some of the builder write downs if they promise to turn those to affordable housing. And so a lot of those $400,000 neighborhoods will probably start looking like $250,000 neighborhoods are $1,200 to $1,300 of rent neighborhoods. And so I think that could be something we see next year as these politicians get harassed by their constituents who are screaming that they can't find an affordable place to live. Craig Fuhr (37:55.897) When did the large office holders start to re-asset class their stuff in the residential? Melody (38:02.938) Yeah, well, and I think they're already trying to do that. And then vice versa, I mean, you've got short-term rental trying to be commercial. There's some crazy stuff going on, but I think the commercial real estate crisis is way worse than most are even talking about. I think that everybody makes this assumption class A is gonna be fine. In Pittsburgh, where I lived, I lived next door to a 20 building class A office complex that was empty, completely empty, because there's no reason for it anymore. Craig Fuhr (38:32.72) Mm-hmm. Melody (38:33.286) And so I think that it's way worse. I don't think this is about work from home. I believe that we overbuilt before that. You know, you go down to Dallas, they've got two huge high rises going up and they're at 40 to 50% occupancy right now. So like we overbuilt even prior to work from home, even when we brought everybody back in, there would still be too much office space. We have to re align. The problem is there's nobody out there talking about solutions right now. And so this is gonna be way more painful than it should be because if you could get people together to talk about, okay, how can we repurpose this? What can we do? How can we make this a great community? Nobody's having those conversations because most people are just worried about their loan, their property, their, so. Um, the commercial aspect could be a real drag on the banks and the overall economy as we have to actually acknowledge those write downs and no multifamily has the most CNBS that's kind of, you know, uh, needs to be refinanced coming through this month. And so like there's, there's a lot happening. But I think that, you know, we will not escape commercial, but people sure are by doing these deals kind of behind the scenes and not talking about them a lot. But it's going to be a very rocky 12 to 18 months in my opinion. Sorry. Craig Fuhr (40:02.537) So you mentioned the 70 markets that you track. Can you give us any bright spots in those markets? Melody (40:12.538) Yeah, the minute I say them, they'll no longer be bright spots, right? Cause everybody will move there. Um, but you know, Ohio, Cleveland, you know, uh, those areas actually are. And, and they do to me, uh, if we are going to near shore or bring things back, you know, somewhere like Ohio makes a lot of sense, uh, because you can do manufacturing there and there's access to water and there's plenty of farmland and, um, but yeah, like that. Craig Fuhr (40:41.613) generally okay political climate. Melody (40:43.774) generally okay you know and so I think that's where you're seeing decent your home prices haven't gone crazy you're seeing transactions you know the median I think transaction in Cleveland was around per redfin was around a hundred and thirty thousand or a hundred fifty thousand last month so it tells you that like there's still a market there you know transacting in a Craig Fuhr (41:04.041) Mm-hmm. Melody (41:13.598) because I do know investors have seen Ohio as well. But honestly, where I am in Tennessee, I don't even want to say that out loud either. You've got structural issues here, a lot of poverty, no industry, but you do have affordability. So if you're able to, you can afford and not Melody (41:41.678) you would need a work from home job to afford a decent house here, but still the tax situation is much better. Craig Fuhr (41:48.905) Sure. Jack, anything? Jack BeVier (41:52.106) No, I'm good. Give me a lot to think about today, Melody. I appreciate it. Melody (41:54.618) I can tell, sorry. But yeah, no, and you guys too, this has been a great, you know, I always love hearing the other side too and just kind of understanding where I'm missing something. And so this has been a great conversation. Craig Fuhr (42:10.629) Yeah, we really appreciate it. Melody, why don't you go ahead and tell people where they can find you on your sub stack and online. Melody (42:16.302) Sure. Okay, so on X Twitter, I'm M3 underscore Melody, M-E-L-O-D-Y, M3 Melody substack, M3 underscore Melody YouTube, and then you can also find me on LinkedIn at Melody Wright, W-R-I-G-H-T. Craig Fuhr (42:33.809) Yeah, I would encourage everybody if you want to hear more, uh, what melody is, uh, writing about or talking about via YouTube on, uh, channels such as this, just search for melody, right? Housing. And you'll find everything. Your substats, uh, stuff is really fantastic. Melody, it just can encourage you enough to just keep up the, uh, the writing. Cause I just really enjoy your stuff. Um, man, if there's anything that we can do to help you out in the future, if there's, if, uh, Melody (42:59.079) Thank you. Craig Fuhr (43:03.601) could have you back on the show. That'd be fantastic. And if you find anybody in your travels who would like to come on our show, please feel free to refer them over. Yes, it's been a real been a real pleasure. Thank you for taking the time Melody (43:05.51) Definitely. Yeah. Melody (43:13.33) Absolutely. Melody (43:18.414) Yeah, no, thank you so much for having me. It's been a great conversation with both of you. So thank you so much. Jack BeVier (43:18.67) Absolutely. Jack BeVier (43:23.403) Absolutely, thank you. Craig Fuhr (43:23.897) Alright guys thanks for tuning in that's real investor radio episode 21. We'll talk to you again soon.