Latest / Real Investor Radio Podcast / Episode 18 | What does the future look like for investors?
Transcript
- Craig Fuhr (00:03.83) Well, hey everybody. Welcome to Real Investor Radio. I'm Craig Fuhr with Jack BeVier. Jack, good to see you today. Jack BeVier (00:09.999) Absolutely. Good morning. Craig Fuhr (00:11.822) I believe we are up to episode 1-8-18. How about that? Jack BeVier (00:16.778) Great, they're flying by, lots of great stuff going on. So excited to keep this going. Craig Fuhr (00:22.198) Yeah, I gotta be honest man. I've been getting some feedback from the folks that have been listening. It's been positive. I don't know if whether or not they're just friends and they're being kind. I always tell people, hey, look, give it to me straight. Don't sugarcoat it. Just tell the truth. And everybody's been super cool, man. I think folks really enjoyed two or three episodes ago we did the episodes with Logan Mohtashami from HousingWire. It was a lot of great information. We're gonna kind of touch on some of that today a little bit and then our last two episodes were with Franklin Cruz down in Florida, an old friend of mine who's now building some really cool affordable housing, which I personally believe is going to be the guiding topic in housing over the next 10 or so years with just sort of the. changing demographics of the country in terms of home buyers and people who are coming into the United States right now. That's going to be a massive affordability issue. So Franklin is sort of at the forefront of all of that. I'd urge everybody to go back and take a look at those episodes and then maybe look up what he's doing down in Florida. It's pretty inspiring. He's building some smaller houses that have a lot of character and it was really cool to talk to him. Jack BeVier (01:36.614) Yeah, absolutely. He's, uh, you know, obviously a consummate entrepreneur, and it's amazing how he's kind of shifted from wholesaling and renovating into the new construction side of things and doing some larger land development deals. Uh, you know, we're, we're seeing that shift among a lot of our borrowers as well, especially in those affordable markets. So, um, yeah, I thought, I thought Franklin's experience was, you know, very salient for what the, what the opportunities are right now in what is otherwise a more challenging environment. Craig Fuhr (02:06.038) Yeah, he and I come from very similar backgrounds and sort of started off as all things real estate, you know, wholesaling, rehabbing, landlording. Franklin got into sort of the guru space for a while and really just decided to teach himself from the ground up how to be a developer. And he's learning it as he goes and making every mistake to his credit. You know, but He keeps on persevering and he's doing quite well. So everybody take a look at those episodes. I believe that was episodes 16 and 17 and a lively discussion. I hope to have him back on soon. So Jack, what, tell me, like give me the 60,000 foot, you know, synopsis of just sentiment. You know, I'm talking with a lot of guys around the country right now, and I'm finding that there's a little frustration. Sort of a, you know, hey, where's this all going? How's it all gonna shake out? Maybe a little tiny, little bit of fear mixed in. You know, you talk to guys every single day out there, man. What's your feeling? You know, give me the paragraph view there. Jack BeVier (03:18.63) Yeah. So I think that, you know, over the past couple of weeks, we try to get these episodes out very timely to keep, you know, because the market is changing in real time and we're all running our businesses and making changes in business decisions in real time. And I think that the, you know, the most recent couple of weeks have led to some real pessimism as inflation has continued to be stubborn jobs have continued, but at the same time the jobs market is continued to be strong. which leads Wall Street to think, and the banks to think that the Fed is going to keep rates higher for longer. Higher for longer has been what you've heard in the news for the past couple of weeks constantly. And as a real estate investor, higher for longer is a very frustrating idea because the deals that we've all been doing for the past 12 months at this point. A lot of the assumptions there were based off of, Hey, we're coming into the worst of it right now. And you know, within a 12 month period, we're going to get to the other side. Let's do this refinance right now, even though I'm not a fan of the rate, even though I know I'm not going to make much money after I make that mortgage payment, because in a year or two, maybe on the outside three, I'll be able to refinance and rates are going to get lower and I'll be able to refinance and then there'll be cashflow there. So Let's keep kind of keep things moving forward. And, um, you know, and there's going to, and we are going to be able to turn these into profitable deals. Well, hire for longer means that you're going to be working for free, right? Working for the bank for longer. And no one likes that idea. Um, mortgage rates have also as a result of that same sentiment, uh, you know, now we're at highs now they're in the, in the, you know, consumer resi rates are in the, in the sevens. Um, Craig Fuhr (04:58.859) Mm-hmm. Craig Fuhr (05:12.694) Checked it out today right before the podcast and we're at, you know, here we are in October, mid-October as a recording today and it's 7.71-ish today. Jack BeVier (05:25.202) There's a humongous number for residential consumer lending. That's like, you know, very difficult from an affordability point of view. Uh, and if, and as a result of DSCR loans that investors are getting and the, and the loans that the very few banks that are doing lending, but they're putting out there in the eights. Um, and so, you know, when you're borrowing money in the eights. adding or finding, we're finding 10 caps. How many 10 caps are you finding in decent areas, you know, in strong, in strong markets where you want to own real estate for the longterm? Not, not too many. So yeah, so it's a, that, that's been very challenging. And so with residential consumer rates where they are and kind of the spring, you know, we're back to school and going into the winter, I think that there's now some concern as to what housing prices are going to do over the next. Craig Fuhr (05:58.155) You tell me. Jack BeVier (06:17.634) six months or so. I think it was two weeks ago I saw that in that single week 9% of listings nationally took a price drop. Craig Fuhr (06:28.086) Don't get ahead of me. Slow it on down, let's rain it on itself. Yeah man, that's the jumping off point here for me, Jack. Just the, you and I were out the other night, had a great dinner, and we had sort of more of a, I think it was both factual and philosophical on where we find ourselves today, economically, politically, culturally, and sort of all of these cataclysmic, well, I don't. That's a tough word to use. All of these big shifts that appear to be seismic in nature, but take a long time to occur. If we look at the current interest rates, you have already said headwinds. With frankly, do you see any end in sight? I was reading an article a couple of days ago where Jamie Dimon was over in India and he was saying, look, I wouldn't be surprised if we saw Fed fund rate at 7%. sometime in the, in the, in between 23 and 24, which sent shock waves through the industry. Um, but, but laid out, uh, a pretty good discussion on why that might happen. I'd, I'd urge everybody to go to the show notes for today. I've got the link in today's show notes where you can go check out that or, or just do a Google on Jamie diamond 7%. Um, so So in terms of interest rates, Jack, we're at a Fed funds rate of 5.5% right now. That is, you know, kind of going sideways. And that really is sort of like part of the discussion that we were having the other night. Like we're sort of in this sideways market right now. It's got a lot of headwinds. It doesn't appear to be showing any signs of relief. Volumes are down. Jack BeVier (08:17.362) Yeah. Craig Fuhr (08:22.658) you know, transaction volumes are down. And so what what's up for those? Jack BeVier (08:28.271) You're just bubbling with optimism this morning. It's wonderful, you know? I mean, hey. Craig Fuhr (08:31.634) Well, it gets worse. Like, you know, so then and politically, we've got we've got a couple of candidates who appear to be bubbling to the top. One of them is can't make it can't find his way off stage. The other one's got ninety five indictments against him. You know, I think we're coming up to a very difficult election season, which then changes sort of the sentiment and mood of the country. We've got seven million plus people pouring across the southern border right now. who appear to be the world's least educated, poorest. Most of them just read a report the other day. Most of the people coming across the border right now can't even read in their own native language. They're illiterate in their own native language. And again, that's not a commentary on the people who are coming. I have no grudge against it. It's, how do you absorb all of that into an already ailing economy? How do you absorb all of that into already ailing post-industrial cities across the country? And culturally, obviously, we have some headwinds as well. And so what does all of that mean for the average investor getting back to housing? I think it sounds like I'm speaking doom and gloom here, when in fact, I think it presents tremendous opportunity going forward. All of this. You know, these changes politically, these changes culturally, these changes economically in our country, we are now a post industrial society have been for quite some time. You know, what does that all lead to? And so, you know, my outlook for the market over the coming months where, where I see opportunities, we'll get into it later. I think there's going to be downward trends in rents. that those these blue skies that we've seen in terms of rents, you know, going through the moon, that has to stop at some point. I think that there is going to be downward trends in housing prices. We're already seeing that in many markets across the United States. And I think that there's going to be a real move to affordable housing and those who can provide it, find ways to make money off of that, find the spreads in that are the ones who are going to win. That's my Craig Fuhr (10:55.154) sort of general thesis moving forward and you had differing opinions maybe a little bit more bullish than mine but yeah man. Jack BeVier (11:04.818) Well, so let me, yeah, let me ask you like, so do you think that, because I've heard this, I've heard this sentiment a lot. There's, there is a fair amount of people who, um, weren't all in or rather are bringing money from other industries or maybe even raising money and being the operator to take advantage of the opportunities that the next, you know, 12 to 24 months are going to, are, you know, that they're convinced are going to present themselves. Craig Fuhr (11:31.65) Mm-hmm. Jack BeVier (11:31.802) a lot, you know, specifically in the multifamily sector with real estate syndications that are going to be, well, that are upside down from a financing point of view. And I was talking with somebody yesterday who was, who is thinking about getting involved with a couple of guys who were looking to buy multifamily buildings, you know, looking for value add deals, particularly in the North Carolina market. based off of this thesis that there is going to be a whole bunch, like a wave of busted syndication deals and you know, just a operators that either didn't execute and or their financing gets upside down. So like walk me through, like, is that like, is that, you know, from an opportunities point of view, given all the headwinds right now, Is that the, is that where you think the low hanging fruit is right now? Like there's a lot of people right now who are like, Hey, I'm just, I'm, I'm getting into cash. I'm backing off. I'm not doing a whole lot of deals right now. Cause it's still early, but there's, but, but this is coming. There's an, a wave of opportunities that are going to be coming and everybody who's, you know, got their chips on the table right now are going to be, are going to be sorry because they don't have the cash to take advantage of those situations and. Craig Fuhr (12:30.935) Yeah. Jack BeVier (12:46.93) real money is going to be made. I think Kiyosaki was lying. It was talked, there was a quote from him a couple of days ago talking about how there's going to be a wave of opportunities and getting into cash right now is the thing to do. I mean, is that how you see it playing out? Craig Fuhr (12:58.794) Yeah, I, yeah, that's a great question. I heard Kiyosaki say the other day, if you think I'm rich now, just wait for the next 20 to 24 to 48 months, I'm going to get really rich, which I thought was really funny. And it was along those lines, Jack, of if we hinge this whole thing on credit and the distortion that we've seen in credit over the last 20 years, where's the crisis gonna be? I think it's going to be in credit. And so, you know, you remember when we got back in the market, Um, back in, uh, I, well, I got in 2020, 2004, and I believe you were like, you came into dominion around 2007, correct? Jack. So Jack, you always like, I always like when you say, yeah, I got in right at the worst time ever, like right as everything was melting down. Right. And so, man, you know, I, I think the, the big difference between you and I, Jack, is that you're such a data, analytical, factual guy. And I go so much, you know, based on the things that I read in my gut. But my gut back then before I was like a more factual guy was this can't continue from 2004 to 2007. Every single person who was a full time investor in that market knew that it couldn't continue. We all knew it. And now that you know in retrospect when you go back all the signs were there. that the market was slowing quickly, the credit was tightening. And while I don't see what we're in these days is that same exact scenario, this isn't a subprime mortgage crisis, I think there's a reason why guys like Jamie Dimon have a trillion dollars of cash sitting on the sidelines. I think there's a reason why Berkshire Hathaway has a trillion dollars of cash sitting on the sidelines, why Apple has, you know, billions of dollars of cash sitting on the sidelines because I think they I think they know that the buying Opportunities are coming. Look I asked you the other night Do you think that Larry Fink is wrong a? Guy who has a ten trillion dollar company now, you know, do you think he's wrong? Do you think he's gonna lose? I Think the odds are low. I think these are very smart people. Do you think a guy like Ray Dalio? Craig Fuhr (15:21.724) who's really put out some stunning content over the last 12 to 14 months with regards to the changing of the world economies and the world order, do you think he's wrong? That's a question, not rhetorical. Jack BeVier (15:37.754) What do you think that I mean, so what do you think the, so you think that there's going to be like, I guess where I, where I trip up is on the mechanics of it. Like the mechanics, like for me, I'm very, I'm very literal. I'm very deep. You know me, I'm very detail oriented. So like in 2007, 2008, 2007, 2008, the mechanics of that time were that the banks were doing too much subprime, uh, you know, no doc lending. Craig Fuhr (15:52.862) Yes, yes. Jack BeVier (16:07.31) on secured by residential real estate. And then everyone realized that this, that these loans were going to go bad. So they all pulled back. They had so much of it on their balance and the loans did start to go bad. The banks, you know, they weren't, people were not paying at all. Right. It's like people didn't get foreclosed on sending in like 75% of their mortgage check, they had 10 mortgages and they lost their job and they stopped making all payments. And so the bank was just. Craig Fuhr (16:10.209) Mm-hmm. Jack BeVier (16:36.426) The bank was forced, their hand was forced and they were forced to foreclose en masse. And as they're taking back REO, as they're taking back real estate owned, as they're foreclosing on properties and going into title on those properties, they don't want to own it. It's not income producing. So they're sending it out into the market. But since all the banks had that general issue, the availability of bank capital to lend on that real, those new assets that were hit or those assets that were hitting the market It wasn't there. And so, you know, people who came in early got, you know, you were catching a falling knife buying real estate in 2007, 2008, even into 2009 as prices just continued to fall. And if you had excess cash, you kind of, you know, you spent it on, you know, before the bottom and then, you know, not until 2011 really 11 did prices bottom out. Because Wall Street cash recognized the opportunity and was buying it, but it was, Craig Fuhr (17:16.713) Mm-hmm. Jack BeVier (17:35.39) It was the assets that were hitting the market that were not financeable, not because there was anything wrong with the assets, but because there were no banks willing to lend secured by that, by those assets. And that's the, and as a result, we saw this big drop of prices, uh, of nominal prices. And I don't see that dynamic right now in the residential space. Uh, you know, the, you know, the multifamily syndications, I think that Craig Fuhr (17:58.524) Yeah. Jack BeVier (18:02.31) I think the big difference between the Great Recession and now from a logistical point of view is that also the underlying fear was that we had overbuilt. There were just empty houses in Florida for miles and that we had overbuilt inventory given household formation at that time. It might be 10 years before the market caught up with all the inventory that we'd already built. That was the prevailing dynamic. Craig Fuhr (18:30.125) Mm-hmm. Jack BeVier (18:31.842) for the while, there was like a, but there was a fundamental supply and demand like mismatch. Whereas today we, if on the residential point of view, there's still these tailwinds of household formation and under building and the, uh, and, and occupancy rates are still high. Uh, the, you know, the rent versus buy analysis now, uh, it's gotten much worse for the buyer. Craig Fuhr (19:00.209) Mm. Jack BeVier (19:00.35) But it's still not like a no brainer. It still makes sense to buy versus rent often. They're in many markets, not the West Coast, but in affordable markets. And we still have, and frankly, we have the emergence of the DSCR industry, and Wall Street's still buying that paper, the rates are high, but they'd still like to lend you the money. And those loans are... Craig Fuhr (19:08.319) in a lot of markets. Craig Fuhr (19:12.246) Yeah. Craig Fuhr (19:26.126) All right, well, let's. Jack BeVier (19:27.218) And those loans are still performing. And I think that's, that is an X factor, right? Like if the DSCR loans start to spot, the default rate starts to spike. But I was looking at some data that was shared by Shelter Growth Capital Partners, who's a DSCR loan buyer. And they were publishing some data from Nomura, which is a big Japanese bank that does a lot of securitizations. And it was talking about the non-QM, the non-qualified mortgage loan performance. And... In the past four months, non-QM loan delinquency rates have spiked, but primarily in the below 700 FICO category of non-QM loans. Yeah, which makes sense. Yeah. The investor loans are actually of the segments that they, that they broke out. The investor non-QM loans were actually the best performing and only had a very minor uptick in the delinquency rate. So my point being, I'm down a rabbit hole here, but my point being that Craig Fuhr (20:07.466) As you would think, you know, like that makes sense, right? Jack BeVier (20:26.666) though that product still exists. Residential real estate is still highly financeable. And I see a much more plausible mechanics of this being that to the extent that there are operators that screwed up, right? Either didn't execute their business plan and or screwed up their financing, right? Where they didn't buy an interest rate cap and so where they didn't raise enough equity they weren't able to push rents. And so when they go to refinance their three-year bridge loan this year, next year, they find themselves a little underwater. The equity is underwater, but I'm not, I'm not sure that there's going to be too many projects given all the rent increases that we have had recently where the, where the, where the debt is actually underwater. And if the debt's underwater, it's underwater by a little bit. And so to the extent that you've got an operator who's getting up in the morning and going to work and collecting what they can and operating in any kind of competent way and sending what they can to the bank, I think the bank's going to punt. I think they're going to kick the can. I think that people are so loss averse, they're so averse to losses that to the extent that they can kick the can down the road, I think that it's frankly the smart economic thing for the bank to kick the can down the road. and not line these guys up and shoot them in the back of the head and force this like you know wave of multifamily sales. So jump in baby come on come on. Craig Fuhr (21:55.798) Yeah. Craig Fuhr (22:02.542) All right, let me let me let me jump in there. Tie it up. So that was that was a lot to unpack. I'm taking notes feverishly here, going back to what you were originally talking about with the subprime, you know, that was sort of the why of it all, as we like to say back in 2007. Well, why did that happen? That's because, you know, the one of the major reasons that happened was the Community Reinvestment Act, which was pumping a trillion dollars a year into mortgages that. that the GSA's decided that they were going to box stop. And so that was a lot of mortgage money that was being created back then. And so, you know, what do we have today that's analogous to that? Heard somebody the other day saying that DSCR loans are the new subprime. So whether or not that turns out to be that way or not, I do recall back then that as the market started to shift in 2007, eight, and we could kind of see the writing on the wall. investor properties were actually still performing, you know, in defaults were still lower than most other than qualified mortgage defaults. I remember it distinctly. I think we could probably Google that right now if we really wanted to, but we won't. That said, you know, I feel like we're early in the game here in terms of the false jack. And when you let's take a look at who would be borrowing typical borrower over the last. let's say three to four years. If it's a guy like me and I've got, you know, or a guy like I was back in that 2006, seven, eight time period and I was buying some, you know, rentals around Baltimore, marginal neighborhoods, they cashflow great, but the tenants sucked. You know, I wasn't really an operator. I was just a guy with a dream to grow some rentals. How many serious operators out there in terms of the overall market of DSCR loans Jack. Let's look at the big pie and ask yourself how many guys are like me who have jobs who you know we're looking for that three to five hundred dollars a month cash flow. I get one vacancy that way that wipes out the entire year of cash flow but I don't care because I've already been spending the three to five hundred as if it would never end. Not putting aside reserves. Craig Fuhr (24:23.97) Give me, look at that pie of people who have qualified, by the way, who have qualified for the DSCR loan with a FICO score and a 1.25 multiplier. That's all it takes. You're gonna sign the paperwork because you got a FICO score. What does it take, Jack? 650? Jack BeVier (24:43.646) 680 is probably the minimum, yeah. Craig Fuhr (24:45.362) 680 credit score and a 1.25 multiplier. Is that right? Jack BeVier (24:50.002) Yeah, 1.2 and there's there are there are 1.0 loans at lower LTVs. You can get even less coverage. So I get your I get your point. Craig Fuhr (24:56.81) Alright, so wait a minute. So give me so answer my question. What do you think the pie is of like super serious operators like you at you and Fred and or guys like me back in the day? Jack BeVier (25:09.55) I don't know. I honestly don't know. I think it's a great question. Or I think that's a great question. You know, like, Hey, how many folks are real operate? How many, how many people who are active over the past three, four years, um, are, are really operators are really like studying their craft and learning and running this like a business versus, you know, Hey, I read that I'm, you know, I heard at a cocktail party that short-term rentals are the things to do. So I'm going to go buy a property at the beach and like short-term rental, the thing. Craig Fuhr (25:10.654) Yes you do. Jack BeVier (25:37.65) I agree with you. There's absolutely people of that category. Dude, I don't know what to tell you that the delinquency rate's still less than 2%. So, you know, like I'm a follower of the data. At the moment, the loans are performing. I hear what you're saying. It's an easy loan to qualify for. Craig Fuhr (25:43.161) Give me a kind of... Craig Fuhr (25:54.194) Hang on. I'm not asking if they're performing or not. What I'm asking you is, what do you think the percentage of serious operators who can absorb one month, two months, five months, 10 months, 12 months, I've got five, six rentals in my portfolio that are now sucking me dry for $100, $200, $500 a month because maybe the market's changed a little bit in terms of rents. Maybe the guy who I had that was paying $2,200 a month now had to go find a smaller place for $1,600 a month. What do you think the percentage of those people who have taken out DSCR loans are who could be able to absorb something like that? Jack BeVier (26:41.442) I know you're pressing me for a number here, but I honestly don't. I honestly don't, you know, I don't know. Like, you know, we're when we're originating loans, we're asking. I'm not I'm not, you know, we're asking for a FICO and a lease. So like that's what we're asking for. They've got a good FICO, you know, like so. I would say the vast majority of investor DSCR loans are to people who make who have more than a 740 FICO, because that's where pricing is the best. So you've got a strong incentive to do that. And those folks, you know. Craig Fuhr (26:58.147) So. Jack BeVier (27:08.778) have a leg up when they're bidding on properties. So, I mean, there's a lot of high credit people who have taken these loans, which is I think a significant reason as to why the loans are still performing very well. Under a. Craig Fuhr (27:21.646) But what we know about most Americans is, is that most don't have more than $1,000 in the bank to sort of take any emergency, much less a vacancy of one month, two months or three months. And we'll get in the next episode, Jack, to sort of the Airbnb and bust as they're calling it. So I urge everybody to tune in for the next episode. But, but man, I don't listen, man, I think the DSCR loan is a is a really, really cool product. Honestly, I think it's a really cool thing. One of the things I guess that bothers me about it is no income verification. No, is there, is there a job verification there? No job verification. So we're basically Jack BeVier (27:59.954) No. Well, the house is the business, right? The philosophy behind it is that the income verification is market rent determination and a lease. And the job is operate this house. That's your job. Operate this house. So, you know, and the income should be able to, and so the income to pay the loan is going to come from the operation of the real estate. It's not like we've got to, we haven't, we haven't seen really declining rents. We haven't seen. Craig Fuhr (28:17.87) Hehehehe Jack BeVier (28:30.098) Um, uh, and we haven't seen a recession right yet, right. Like, and I, I'm going to concede the idea that a recession is a total X factor here. No one's really been stressed. Like the stress level is rising, but we have not seen significant layoffs. The jobs reports are still very strong. The stock market's still up. Craig Fuhr (28:46.99) Yeah, we're currently at 3.3.8% unemployment. I mean, it's you know. Jack BeVier (28:51.962) Yeah, so the part timers that you're talking about, they haven't been stressed, right? They do still have a W-2 income, and if they get laid off, they're finding another one like right away. So in a stress-tested environment, by the way, one, are we going to have a stress-tested environment or is the Fed going to soft land this thing? So we may never find out, right? You may be right, and we never find out. Because you know, the economy just stays strong and the W-2 income makes up any shortfall for those couple months that the property goes down. I think that I think we're going to see it first in the short term rental thing. So we'll get into that in the next episode. I think that's a worthwhile conversation to dig into. I think that's probably that that'll be the tip of the spear. We see that first. Craig Fuhr (29:34.27) Mm-hmm. All right, and by the way, in that episode, I'll go through 10 markets in the country right now that have seen significant downturns in both rents, short-term rents, and revenue. So, you know, we'll talk about that in a few minutes, but let me ask you this. Why do you, getting back to sort of the Kiyosaki's and the pontificators of the world, why would a guy like that say that he's going to get You know, if you think he's rich now, he's going to get even more rich over the next 12 to 24 months. Why do you feel like he's projecting those, you know, that type of thing? What does he see? Yeah, what does he see that maybe, you know, I feel like I might be seeing it, but like, maybe you're not really tracking with it. Jack BeVier (30:13.955) why he thinks, what's he seeing? Jack BeVier (30:24.53) I think that maybe he thinks that he is like in with enough of the educators and, you know, people who are teaching people how to syndicate, that they are going to get access to those situations. Maybe he just thinks he's in the catbird seat to take advantage of that particular opportunity. And I think there's a strong argument to say that he has, right? Like Craig Fuhr (30:40.767) Mm. Jack BeVier (30:50.062) the newbie syndicator over the past five years is the one, you know, not that all of the newbie syndicators are gonna get themselves into trouble, but of everybody who gets themselves into trouble, there's gonna be a lot of them who are new, you know, newbies. So... Craig Fuhr (31:04.258) Talk more macro, not necessarily just housing. What does he see economically, et cetera? Why does JP Morgan have a trillion dollars of cash sitting on the sideline right now? Is it because they're looking at more banks, like SVP that failed, where they came swooping in like the vultures to buy up assets for pennies on the dollar? What do they see that maybe we're not talking about? Jack BeVier (31:35.278) I'm see you're asking the wrong guy, man. I think that this I think it's overblown. I think that it's going to be hard For long, but I don't think that there's going to be this like, you know blood in the streets Opportunity to like, you know, gobble up tons of stuff I think that I think that I think that the weakest operators are gonna are gonna shit the bed Because they're they realize they're just you know, they're not performing. They're not they're not operating the property well enough to make their mortgage payments, they'll toss the keys to their lender and their lender is going to call another operator who isn't shitting the bed and restructure a deal and kick the can. Craig Fuhr (32:17.95) Oh, let's, you know, I'm obviously not going to get Jack to talk about, you know, how I see things, you know, on a more macro sort of why are we in two wars right now? You know, why do we have $30 trillion in debt, adding $2 trillion a year at this point? Why are we, you know, we'll be paying a trillion dollars just in interest on the debt by the end of this year. I think those are the things that really affect where the market is going and where we're going economically. Like I see more of a sovereign debt crisis coming than a, you know, hey, can I go buy a house on the corner of Baltimore and Lombard? You know, like I just think that that's what's going to be guiding a lot of the conversation over the next 12 to 24 months. And I believe you I don't think there's going to be, you know, this crazy crash depression. It's going to happen in that one cataclysmic moment. I think it's going to be a very sideways slog for a while as credit markets figure themselves out and as housing asset prices figure themselves out. Jack BeVier (33:31.238) Yeah, I hear what you're saying on the macro side. It's hard for me to, it's hard for me to, to handicap how that's going to affect the real estate market given that I'm just so bullish on how on the underlying fundamentals of, of real estate. So for example, all right, let's come in from left field. A, you know, AI is going to be, you know, the technology that probably defines the next decade. Fair to say. Craig Fuhr (33:49.28) Yeah, yeah. Craig Fuhr (33:56.994) Sure. Yep. Jack BeVier (33:59.462) Any advance in technology is deflationary by nature. You get increased productivity out of it. That keeps prices down. The existing labor is more efficient. So you don't have the labor, power from the labor side to push prices up. So any new technology is generally a deflationary thing. But AI isn't coming. for any HVAC guys or electricians. It's coming for white collar labor in cubicles, right? Like kind of like middle, upper middle class, middle class and upper middle class office workers who are now working at home, right? Like they're the ones who are going to be threatened by, displaced by or augmented, but in many cases by AI. But I don't see anybody lining up. to, I don't see, there's no, you know, the, the VOTEK schools are not full. The, you know, the trade schools do not have a line at the door and your carpenters, you know, tradesmen, roofers are, there are the labor that's going to have tremendous purchasing power. And so what, whatever the inflation rate is, I think that the cost to build a house will be above that, right? Like if, if the fed gets the economy to 2% labor while construction Craig Fuhr (35:09.492) I believe that. Jack BeVier (35:21.046) I'm sorry, 2% inflation, if CPI becomes 2%, I think that construction is going to be above that number. And so I still think that because of that dynamic, that owning hard assets, particularly real estate, should outperform your... As an inflation hedge, it'll outperform over the next 15 years because of that labor dynamic. So it could all be shit, right? But like... Craig Fuhr (35:22.786) Mm. Craig Fuhr (35:45.053) Mmm. Jack BeVier (35:48.498) But like, but, but economics are relative. So I just want to be like better than everybody else or, you know, but better than the guy, you know, than the guy next to me. And I think that the construction industry and the residential and residential housing is the, like for me, the safest place to be in this shit show that's going to be the next 15 years, which I completely agree with. Um, so, but that, so like, that's my, that's my investment thesis is that like, I like this more than. Craig Fuhr (36:12.656) Yeah. Jack BeVier (36:17.31) than everything else because man, what everything that you just described is absolutely true and incredibly difficult to handicap. Craig Fuhr (36:24.658) Okay, so good left, a good one from left field there. And it kind of brings me to the conversation of like, you know, a transforming economy. So one of the things that I love looking at is sort of, you know, I'm a blue collar kid at heart. My father worked at General Motors. You know, my grandfather was an oil guy. Like, you know, he fixed furnaces and not necessarily, he wasn't digging for oil. He was the guy that was out there fixing furnaces. And so we look at that economy over the course of the 40s, 50s, 60s, a very industrial economy, and then sort of the downturn of all of that starting in the 80s, where we decided that the American worker that worked in factories wasn't necessarily cheap enough, let's go out and find the world's cheapest labor, I think that's left us at this point of like, know, the 80s became a very consumer driven society. That's when we started to see the lower, the lowering trajectory of interest rates over time to sort of juice the economy. And one of the arguments is, is that we've run out of tools. We've run, the central banks have sort of run out of their, of their ability to shape the economy, to sort of shape monetary policy in a way that is, that can really change the trajectory and in a positive way, right? That's Dalio's what he's talking about all the time now. And so what I see is a country that is running out of steam in terms of the better part of the populace. Look, if I'm working in a cubicle and I'm a guy who lives out in the suburbs and I'm doing probably far better than my father did who you know, work to General Motors, I start to wonder to myself, am I really? You know, my dad had less debt. He had a pension. He had all of those things that made the American worker feel safe and secure. And as I look around at my friends and speak to guys who I know, I don't know that they feel that same security for themselves or for their children. Craig Fuhr (38:37.662) And I think we live in a time that maybe one of the first times in this country where a lot of guys like me, maybe not you, but maybe me, we start to say to ourselves, are we living in a time where our kids will do better than us? I don't know. And maybe that's a little pontificatory, but getting back to sort of AI and where we are in terms of economically in a very large macro sense, I wonder what the economic drivers will be that gets the person who's working at Walmart, the person who graduated college with a four-year liberal arts degree that isn't worth a paper that it's written on, which is really the vast majority of degrees these days. How are these people going to buy a house? How are they gonna come out to the burbs and buy my $800,000 house, Jack, when they're making 40 grand a year at Walmart or as a barista somewhere? And so I think that we are creating a land of serfs that we're going to live in this time where interest rates are high, asset prices are high, people have no savings. And I just don't understand how houses like mine will be sold in the future. Jack BeVier (39:58.646) I think houses like yours are going to be owned by the HVAC guy who's running a crew and the white collar, the, the go to college, get a white collar job is going to be devalued significantly. Right. Like we're, we are externalizing intelligence, right? You, you, you don't, it doesn't matter if you memorized. Yeah. We're outsourcing intelligence. Craig Fuhr (40:16.386) Oh yeah. We're outsourcing intelligence. Like we've outsourced all the manufacturing jobs. Now we're going to outsource intelligence. Jack BeVier (40:25.55) Exactly, exactly. And as a result, what, but, but it's still an economy of humans. And so like the thing, the thing that you can't outsource to intelligence is, is the services, right? We become a services economy. You can't outsource the human to human interaction and people will pay a premium. And so the, I think the economy is going to start paying more and more for those who provide real services, not this like, you know, college intelligence thing, which is now outsourceable on your phone, on your device. And so I could see a real shift down from a relative basis in terms of white collar industries, white collar driven industries and white collar wages, an increase, a significant increase in blue collar wages, not just the minimum wage service worker who can also get outsourced, but the skilled labor that can't get automated, that that labor has power now and they're gonna demand it and we're gonna pay it. And I think that that's what the future is gonna be where people who are excellent at services, who are excellent at the human to human interaction is gonna... Craig Fuhr (41:38.914) welders, electricians, plumbers, carpenters, yeah. Sure. Jack BeVier (41:43.002) Waitresses, like I think that, you know, any real human-to-human interaction is going to trade at a premium to what we have witnessed for the past 50 years, as that has like, it was devalued for, or it was just not valued for a very long time. And I think that on a relative basis, it's going to have its day. So I think that there's going to be a big reshuffling. I think there's going to be a big reshuffling. I don't think it's all going to fall off a cliff, but I do think there's going to be a significant reshuffle. Craig Fuhr (42:12.95) Yeah, I think the only fly in the ointment in terms of that is Jack, is skilled labor takes some sort of generally an apprenticeship. You don't have to have skilled labor to be a waitress. I get the human to human contact, but Lord knows I've walked into restaurants of late where we've got the robots now that are serving food. So I wonder how long the waitresses have. So. that said skilled labor like my dad, who was a pipe fitter, that took an apprenticeship of five years. And so, yeah, there is, you know, call it college for skilled labor. One of the things that is the fly in the ointment there for me is we've got a lot of unskilled labor coming into the country right now, who's going to be part of that pipeline. And those people, by their very nature, will ask for less. in terms of income. And if you don't think that that's one of the reasons why the industry is bringing in that labor right now, I think that would be short-sighted. When the lowest income of people come into the country, it only hurts the lowest income of people. It hurts, the statistics are real. It hurts more, the biggest impact that bringing all of the least educated... pours people in right now has the bigger impact on blacks and Hispanics. It's a known fact. And so, you know, my hope is that you're right, is that there will be an explosion of blue collared skilled labor in this country and those people will get their day. I don't think that that's going to happen overnight. And I don't think you do either, but I still am dubious as to whether or not there'll be enough of them. to buy houses like mine and the millions of houses like it that are around the suburbs of this country. So, yeah, go ahead. Jack BeVier (44:16.102) Yeah, I was gonna say, I think that there could be also, I think there's also probably going to be a reshuffling away from higher square footage houses, which has been the case for the past, probably 30, probably 40 years at least. Probably the whole actually history, probably the past hundred years. Because of the NIMBYism of zoning, builders had a strong incentive to build the biggest house possible given the lot size. That's how they made the most money. But when you have affordability now becoming that constraint, and I think, you know, there'll be relatively more weakness in the $800,000 price point versus the $350,000 price point. We're already seeing that builders are starting new on new permits. They're building smaller houses than they were a year ago because, because of that affordability issue. Um, so I think that, you know, yeah, I think the 6,000 square foot house. Craig Fuhr (45:06.018) Absolutely. Jack BeVier (45:14.338) is not going to retain its price per square foot the way a 2000 square foot house is going to. But for a long time, one of the things that I always like, I roll my eyes, affordability is a big issue, right? And it's the most popular issue right now. But I roll my eyes a little bit because no one ever talks about consumption of housing. If you look at a graph, I wish I had it handy, but if you look at a graph of the housing per capita, square footage of housing consumption per capita over the past 100 years, we're consuming more than twice what we were less than 100 years ago, 75 years ago. Craig Fuhr (45:45.954) Good. Craig Fuhr (45:55.298) Mm-hmm. Craig Fuhr (46:03.086) So we're building houses, we're building houses twice the size that we were 100 years ago, at least. Jack BeVier (46:08.914) and still putting a four-person family into it. We used to come, I don't know if the number is off the top of my head, but today we consume a thousand square feet per person on average, whereas 75 years ago we only consumed 500 square feet. Well, so like the solution to affordability is consume less, right? Like just have a roommate or don't have a 200 square foot bedroom. or don't have a finished basement, like, and you can afford that. Like so and, and consuming housing is not like, consume the square footage of housing that we consume is not like a human right. Right. Like in, in New York, rich people live in thousand square, very, very rich people live in, you know, thousand square foot condos. And in Hong Kong, people consume like far less. real estate than we do. It's not because, and they don't hate themselves, right? There's not an incredibly high suicide rate because their consumption of housing is lower. We get used to it. We get used to consuming less, right? It's just a tastes thing. And so I think affordability is very important, but in that conversation and the policy conversation, it's like consuming less as a third rail. you know, if we don't, if you don't, you know, you know how, you know, consume 2000. Yeah, consume 2000 calories instead of 4000 calories. And guess what your food costs will go down in half. I that's a hyperbolic thing. Like, I know cheap food and all that stuff. But, but I roll my eyes a little bit on like, you know, as if we're gonna have this wave of homelessness, no, we're just gonna have roommates, like, but yeah, we could have roommates and no one, no, no one really wants to bunk up. But Craig Fuhr (47:34.254) How dare you? Craig Fuhr (47:43.147) I love, I love. Craig Fuhr (47:55.946) You know, I think you and I talked about this with like, you know, if we look at the, just take a look at Baltimore. You know, if you take a look at Baltimore, really any post-industrial city on the East Coast especially, or in the Rust Belt, every city looks the same. It starts off with tiny row houses, then it goes to row houses with porch fronts, they're slightly larger, then it goes to even bigger ones. And then you start to get out into the outer edges where you've got the single family detached houses that were probably built in the... 40s and 50s, you know, and then they get even bigger and bigger. And what did all of those houses become in the 70s when inflation went to the moon, when oil costs shot up, every single one of those houses became apartments. Man, you go into look around your beltway around your city, man, like all of those houses just outside of the inner city proper turned into apartments in the 70s. And the Jack BeVier (48:40.716) That's a good point. Craig Fuhr (48:55.066) 70s to mid 70s and probably into the early 80s. And it's flippers like us that went in and turned them all back into big houses for people because that's what people want these days. And I look at the neighborhoods that I live in and guys who I know live in right now. And I ask myself, when will those things start to look like the outer edges of the city? Because, you know, and frankly, if you listen to a guy like Eric Adams up in New York last week, or a couple of weeks ago, Jack BeVier (49:14.355) Mm-hmm. Craig Fuhr (49:20.982) did a press conference where he's like, hey, if you got extra space in your house, why not turn it into a place for all of these illegal aliens that I'm sorry, migrants that had that need a place to live. Yeah, that's common. That would be, that would be the Craig fear prediction of the podcast right there. That, that I believe is, is the thing, thing that's coming over the next 10 to 15 years. Yeah. We're going to end it with that. Jack BeVier (49:44.047) There we go. All right. We've covered a lot of topics today and gone far afield on a number of things. But I think we're all just trying to figure out how this is all going to fit together. I think that the combination of the higher interest rates for longer is not welcome news to real estate investors right now. We're still concerned about like, are we going into a recession over the course of the next six months? Craig Fuhr (49:52.033) Yeah. Jack BeVier (50:11.25) What impact is that going to have on housing prices in a high interest rate, you know, high mortgage rate environment? I I'm, I'm concerned about the softness over of potential softness of housing prices over the next six months as a flipper. And, and then, yeah, we now we're going to throw a second proxy war, potential proxy war into the, into the equation right now. It's a dip. Yeah. It's a difficult, uh, it's a difficult environment to say the least to Craig Fuhr (50:33.771) Maybe not proxy either. Jack BeVier (50:40.63) make business decisions because there's anything but clarity as to what the next 12 months is going to look like right now. Craig Fuhr (50:48.358) Yeah, man, I appreciate the summary because it's spot on, Jack. And I, you know, one of the things I really love is to hear from folks, you know, if you find a place in the comments to leave a comment on your thoughts, if you want to shoot an email to Jack or me, I'm at Craig@craigfuhr.com. Jack, what is yours again? Jack BeVier (51:06.898) from jack@thedominiongroup.com. Yeah, that'd be fun. I'd love that. Yeah, that'd be a lot of fun. Craig Fuhr (51:10.966) Yeah, love to hear from you. You know, this thing that we're doing right now is something that we enjoy doing. We did it just a couple of nights ago and we could go in any different number of directions. But I honestly, Jack, I still maintain that there's always opportunity, especially in crisis. And so we've seen it time and time again. And I think that folks just need to keep their eyes peeled on. sort of the tea leaves and making sure that you're reading them as properly as you can and then take advantage where you can. So I want to thank everybody for taking the time to listen to this one. Great discussion, Jack. Thank you. All right, we'll see you guys on the next one. This is Real Investor Radio. We'll talk to you soon. Jack BeVier (51:49.286) Absolutely, always fun.