Transcript of How Real Estate is Reacting to the Election, Interest Rates, the NAR Lawsuit and Climate Change

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Open your account in just two minutes at chime. Com/mnn. That's CHIME. Com/mnn. Chime. Feels like progress. Banking services and debit card provided by the Bancorp Bank NA or Stride Bank NA. Members FDIC. Spotme eligibility requirements and overdraft limits apply. Boots are available to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to chime. Com/disclosures for details. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Real estate is affected by a bunch of different economic factors: interest rates, supply and demand, inflation, but it's also affected by elections. Of course, the market will be impacted by the policies put in place by whoever is our next President. And I did a whole episode about Harris's platform on real estate and Trump's platform on real estate, which I've linked in the show notes in case you've missed it. But there's one particular policy proposal that is so hotly debated, which is Trump's plan to make housing more affordable by deporting undocumented immigrants. Of course, there are ethical and human rights implications to mass deportation. And this, of course, is an immigration issue as much as it is an economic issue.

And immigration is not so much partisan as it just is deeply inflammatory. So today, I'm going to be focusing on the economic impact of that policy, Should it be put into effect?

And joining me to talk it through is John Grouman.

John has been in the show twice before, so he needs no introduction, but I will give him one anyway. John is a real estate agent extraordinaire in California and a super smart expert in the industry. And we do get into what policy would make housing more affordable, but that is not all. We also do a vibe check on the housing market as a whole, talk about how climate disaster has affected real estate. And John tells me which buzzy real estate tips online are true and which ones are the gazey. John Graumann, welcome back to Money Rehab.

Thank you. So we have to start by giving an overall real estate vibe check. What is going on? I love talking to you. You're super on the pulse of all things real estate. You break it down in a really easy way, which is our jam, as you know. So is it a buyer or seller's market? I know that's a very simplistic question, but if you had to pick.

I don't know that I could pick because it's such... I don't know I can make that generalization across so many different markets, across such a large country. I would say that in general, though, the housing market is just stuck in neutral at the moment. We've seen the first rate cut, which is great. The fever broke, right? At least like that part's behind us. It hasn't really had any meaningful impact on mortgage interest rates. It hasn't offered that affordability that people are looking for to be able to start coming off the sidelines and re-engaging. Mostly, it's just this palpable sense of hesitation and uncertainty in face of the upcoming election. That's the big thing, is that Most people just don't want to make big life decisions in the face of uncertainty. And this election has created so much uncertainty in all the markets, capital markets, housing markets, and so forth, that everyone right now is just taking this, I just want to wait and see approach. And that has a bolted in a pretty stagnant market.

We saw the Fed cut rates. Yeah. So we're now targeting 4.75 to 5%, but the mortgage rate is still 6.7%. So for anyone who doesn't understand the relationship between the Fed funds rate and mortgage rates. Can you please explain?

Yes, it's pretty simple. So when the Fed lowers rates, what they're lowering is or when they change rates, what they're changing is the federal fund rate. That is essentially the overnight rate at which banks can loan money to and from one another. It does not have a direct correlation to mortgage rates unless we're talking about a second mortgage like a home equity line of credit, which is directly tied to the prime index, which is tied to what the Fed does. But mortgage interest rates are going to be based on much broader economic policies like inflation and the demand for bonds. So we haven't really seen much of an impact on mortgage rates. They are certainly lower today than they were, say, a year ago, but they haven't gotten into that zone where I think people are going to really be motivated to start to reengage. To me, That needs to have a five handle on it. And while some mortgages are now starting to be priced in the high fives-Really? Yeah. No, I'm definitely seeing that, particularly on the arms, seven-year arms, 10-year arms, not so much on the 30-year fixed. But we are starting to see rates in the low sixes, high fives.

It's not enough, again, especially in the face of an upcoming election, to get people off the sidelines yet. But we're finally going in the right direction. I think by all accounts, we could argue that we are at the bottom of the J-curve and on our way towards an ascent. It's just a question of how long it's going to take us to get there.

Okay, so to be clear, arms or adjustable rate mortgages more closely follow what the Fed does, what J-Pau does.

No. Arms are adjustable rate mortgages that are tied to certain indexes like the Libor index. That operates separately from the prime index. The prime index is tied directly to what the Fed does. If you have a home equity line of credit and the Fed lowers their rates by a quarter of a %, next month, your mortgage statement will reflect that quarter of a %. Arms are going to be tied to, again, perhaps like the Libor index, and it's going to be fixed for whatever that period of time is. If you have a seven-year arm, it means it's fixed for seven years, but amortized over 30. At the end of that seven-year period, it will adjust to wherever that index is, plus whatever margin the bank establishes, which is generally around two and a quarter or two and a half %. So for those people that locked in arms a few years ago, that perhaps may have been a little bit short-sighted and not locking in longer, they could potentially have a rude awakening What's going on here when it adjusts.

But adjustable rates follow more closely or more quickly to what the Fed does than fixed rate. Fixed rate follow more closely to the 10-year treasury, for instance. And you did an awesome video about this. We reshared it. For anyone who does not know, always, how is that correlation? Because they're all affected, by the way. It's just a matter of timing. Correct. So what the Fed does affects Libor, affects overnight interest rates, all of that stuff. And then it trickles down eventually to adjustable rate, then fixed rate after that. So it flows, but it flows slower.

It flows slower, and there isn't a direct lineage of it. There's also other different factors, again, like the demand for treasury bonds and so forth, which is not really a part of that equation, but factors in. Look, it's obviously not black or white. It would be awesome if it were, but it's a little bit more nuanced than that. The main point is that just relative to where inflation currently sits and where the economy sits, we haven't seen that huge adjustment in rates yet. And the reality is we may not. We're not going back to the days of 3 and 4% interest rates. That was an anomaly tied to a global pandemic. But it would be great if we could get rates to settle somewhere in the low to mid fives for a sustainable period that people could adjust to that new norm and feel like they were motivated and encouraged to get back into the market. And also, I said that almost as it only pertains to buyers, it pertains to sellers equally as much. Sellers that feel like they have these golden handcuffs that are tying them to these 2 and 3 % interest rates but want to make a move, either they want more space or they got a job relocation or whatever it may be, the leap from three to five or five and a half is a lot more palatable in a leap from 3 % to 7 %.

They're squatting on their own houses. Get out of there, guys.

It's been a real challenge in terms of freeing up inventory.

But generally, if you're starting to get into the home buying market and you want to get a sense of where mortgage rates are going to be, you can look at the 10-year treasury.

You can follow the treasury as an indicator for sure. But in terms of actually understanding how that equates and correlates to mortgage rates, reach out to your local mortgage broker. That's the simplest way to do it.

Well, the Fed is meeting again in November. How excited are you?

It's like Christmas morning.

We're expecting another rate cut.

Potentially. We'll see. What do you think? I don't know. Again, there's There's so much uncertainty right now. The jobs report in September, which was a favorable report, doesn't lend towards faster rate cuts. It actually shows that perhaps the economy is more stable and we don't need to cut rates as quickly. So it'll be interesting to see what they do. Ultimately, we're going to need, I think, several rate cuts in our rear view before we really get to the point where the market starts humming again. My hope is that that all coincides with as we ramp our way into the spring selling season, which is It's always the most optimal time of the year. And we have that ramp where if you look at it and go, this could really line up very well here, where we have time for a few more rate cuts, and all of that ramps at the same time with the spring selling season. The market is really poised to take off.Let's.

Go.let's.

Go.

But if you are targeting five-ish %, or that's your hopes and dreams for five-ish % stable mortgage rates, the Fed funds rate would have to be in the threes, likely.

Well, again, we just established it's not directly correlated. I think that while before, I'm sure that there's various different graphs that you can show wherein you can look at what the correlation has been between the Fed fund rate and mortgage interest rates, I think what we're experiencing right now coming out of this historically high inflationary period is going to differentiate a little bit from that.

For sure.

Basically, what's priced in is that banks take profit.

That sucks. There's some other things factored in, but to get to five, we would probably need more cuts.

Yes, I think that's right.

And you're hoping that will happen, or how do you think that's going to fit the market in?

I think that... Look, the Fed came out at, what was it, I guess, the end of last year and said they were anticipating anywhere between four to six cuts this year. And we just saw the first cut. So I know that they've talked about potentially reducing the federal funds rate by two percentage points next year. That would be tremendous if that happens. But we've seen in the past that it may veer off from that course, and I just don't know. Again, my feeling is that the housing market, the capital markets, they all benefit from, obviously, lower interest rates. And I think that those markets are chomping at the bit and so poised to take off. I think that I'm very... Let me put it this way. I'm uncertain of what the next 60 to 90 days might look like. I'm very bullish on what the next 6 to 9 months are going to look like.

I think the first cut is the deepest. Okay, how so? J-pau. Is that an Alanis Morse's song?

I think it is.

I think J. Powell is listening to that song. I think, yeah, they overshot with the 50 basis points, and we'll probably go back to a little bit 25 bits.

I agree with that. I think it'll be more measured, which it should have been from the beginning, right? If we look at the reverse of this and how quickly interest rates climbed, it was the fastest and highest spike in history in such a short period of time. Why weren't they raising them a quarter per quarter? Just We gradually ease our way into that. The reality is I think that they got greedy, things were too good for too long, and then they had to make more of a drastic correction. And that's just the world that we live in right now, is drastic extremes as the pendulum swings from one side to the other. But it's not good for markets.

Agreed. We'll ease in, we'll ease out. We get so freaked out and hot and bothered around the bedtime.

Hold on to your wallets. Money Rehab will be right back. I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full-time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high-quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest friendly.

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So, John, last time you were on, we talked a lot about the looming at that point, NAR lawsuit. You explained it then, but since you were last year, it happened. So how has that affected the market and buyer's relationships with brokers, seller's relationships with brokers?

Those are both great questions, and I think it's first important to just distinguish the difference between those two questions because they're two entirely separate issues. So it hasn't really affected the market because it's not meant to affect the market. These are internal policy changes that relate to the the way we, as real estate agents, operate within our industry, not how it's going to affect home values and home prices and the housing market in general. So that's one point. In terms of how it's affected the real estate industry, I think it's just new territory for everybody. I think everybody is really just in a place where they're trying to figure out, is this the new world order or is this just business as usual? Ultimately, what it really is, is a more circuitous route to the same destination. In most instances, I'm finding that it is still the seller that is paying the commission to both sides. It's just structured a little bit differently today. So the simplest way to explain this is that as a result of the NAR settlement, there were a couple of specific policy changes that went into effect. One of them is that agents are no longer allowed to advertise the commission that is being offered to the cooperating broker, i.

E, the buyer's agent, via the MLS, which is somewhat ironic because that was one of the reasons the MLS was initially established, was actually to have a place to hold that information. It's no longer allowed to be there. It does not mean that commissions can't still be offered there. It just can't be advertised. The reason why they implemented that was to try to guard against something called steering, because there was an argument made during the court case that some agents, some bad actors, let's say, in middle America, were steering their clients towards listings that were offering higher commissions. Now, that doesn't really play in a market like LA, where I live and work, because it's about matchmaking. I'm I've never once ever even thought about directing a client to a listing that's offering more commission and that somehow I was going to make that the right house for them. It's about finding the right house for them, and then the commission is dealt with separately.

I mean, you're very convincing, but I don't think you're going to be that convincing to make somebody want to buy a house.

That's not my job. That's not right for them. That's not my job. My job is to never try to sell someone on what should or shouldn't feel like the right home for them. That's a personal decision that they have to come to on their own. My job is to help negotiate the best deal for them, to help be a steward that guides them through this very foreign process. But let me put this way. I've taught clients out of buying many more homes than I've ever attempted to talk a client into buying. A lot of times it's like, trust me, this isn't the right house for you. There will be others. But I've never said, You have to buy this. That's just not- But that's never driven by one percentage point of commission. No. So there's a lot of faults with these new policies. One of them is it is now somewhat, I I guess, counterproductively, created a different steering, where now agents are going to call the listing agent and say, Are you offering a commission on this listing? And if the listing agent says no, oftentimes the buyer's agent is going to say, Well, I'm not going to show this property then.

So while they implemented this new policy to try to guard against steering, it simply created a different steering, perhaps a worse kind. The second policy change that I would say is most significant is that buyers are now required to enter into a a buyer agency agreement with their broker. While before, buyers could go out there using whomever they want, they now need to have an established agreement with their agent, with their broker, and that agreement needs to state specifically how much that buyer's agent is going to make. The nonsensical part of this is that you're sitting down with a client, a buyer, to enter into this agreement and establish how much you're going to make before you've identified a property and determine whether or not that property is offering a commission. So Again, there's a lot about this that, in my opinion, does not make sense. I don't think it was particularly well thought out. But what will happen is I'm sitting down with you. Okay, we're going to go look for a house. We're going to agree that my commission can be up to this amount because within the agreement, you can make less, but you can never make more.

So I have to set what the maximum amount is that I can make. Then we go out looking, and it might take a week, it might take a month, it might take years. And then we identify the property, determine whether or not they're offering a commission or a portion of the commission and who's paying it. It all gets thrown into the pot now. That was like a big word sandwich I just threw at you. It was a lot of information, but that's the gist of it. We have to stop a few more times along the way, dot a couple more I's, cross a couple more T's. Ultimately, we're getting to the same place. There's just so much misinformation. There's so many misnoms still out there that my approach to this right now is educate, don't defend. There's a lot of fear, but that fear can be alleviated with facts. So it's just a matter of explaining to people. I sit down with people and I go, I heard commissions are now negotiable. Commissions have always been negotiable. That's not new. It's just that you read the sensationalized headline of an article but didn't go a little bit deeper.

Or someone that says the commissions can't be financed. It's like, Well, commissions can't be financed independently, but they've always been financed as part of the purchase price. That's why it's always been baked into the purchase price. So again, it's a lot of just educating at this point.

Or maybe they didn't know that they can negotiate before.

Yeah, that's probably it. Look, that was the basis of the whole case was this argument of collusion, that as an industry, we were holding the line saying, The fee is X, 3%, 2.5%, and not saying, the fee is negotiable, we charge X. That's the basis of the whole argument.

So how does that negotiation process look? You have a new client. You give them your fancy paperwork. It says... Okay. You give them your DocuSign, whatever you're giving them. How are you giving the stuff that they need to sign now because of it. That's not law, but it's part of this agreement. What is the boilerplate fee that you're putting on there?

I'm actually not allowed to say it. That's the whole point, is that if I state it in any type of public forum or anything like that, then it could be argued that, again, they made so many ridiculous arguments of collusion and so forth that all I'm, I guess, legally allowed to say now is it's negotiable. Now, I can sit down with a private client and And say, This is what my fee is. This is what I charge, which I'll just share with you. It's just a standard, like industry standard fee, no more, no less. And then we have to go approach the listing agent on each respective property and see what they're offering, which will oftentimes be tied to the merits of the offer. You make a good offer, we'll pay a commission. Can I say shit? Yeah. Great. Make a shitty offer, then perhaps they're not going to be as amenable to paying your commission.

The fees, though, are normally paid for by the seller, right? In these transactions?

Customarily, Historically, the commission has always been paid for in the past by the seller.

And so this couldn't be passed on to the home buyers now?

It could, sure. It absolutely could. So let's say that you have a homeowner, we'll call him Joe Schmo, and he's selling his house at 123 Main Street for a million dollars. And he says, You know what? I read this article the other day in...

I was listening to this amazing podcast.

I was listening to this amazing podcast, and my takeaway was, I don't have to pay commissions anymore, which, by the way, is the way a lot of people are hearing and reading this. Okay, so Mr. Seller, that's true, you're not required to pay the commission. However, let's look at what other listings are available in your market right now and whether or not they're offering a commission, because what you don't want to do is put yourself at a competitive disadvantage relative to what else is on the market. Now, if you don't want to pay the commission, that's okay. Again, that's your prerogative. But commissions have always been baked into the purchase price. So if you're not willing to pay, let's say, two and a half %, which would be $25,000 on that million dollar sale, then the offer may come in at 975 because the buyer now has to pay that fee directly to their broker. So if you're not covering it, they're going to. In other words, you pull one lever, you pull one down, the other one goes up. It's all connected. You're paying for it somehow. This all works out fine as long as everyone's rowing in the same direction.

Meaning as long as everyone understands that basic principle that it's being paid for one way or another, then it's fine. It's when a seller says, Well, I'm not paying for it, and I still want my million dollars for the house. It's like...

Look- Joe.

Joe. Come on, Joe. I mean, look, I get people want what they want. My daughter wants a pony, and that doesn't mean she's going to get one. People just need to understand the basic principles and concepts of how this has worked because there's a reason behind it. But this notion that, well, the buyers have to pay commissions now. The buyers have always paid commissions. So sellers are technically the ones that maybe distribute it, but the buyer is the The only one that comes to the table with money at the closing. So technically, it's actually the buyer that's paid it, and the buyer has been able to finance it because it's baked into the purchase price and because they're borrowing a percentage of the purchase price. So again, if people start dissecting that too much, then the levy starts to break.

Isn't it an average of about 6 % for both agents? It depends on- It's somehow, like depending on how you dice it?

Yeah, it depends on the price. Oftentimes in middle America, Where you're dealing with lower prices, it could be 6 %. In higher price point markets like Los Angeles and New York, it's sometimes generally 5 %. And once you get north of, say, $10 million, sometimes you'll see it be 4 %, 2 % each side.

And how would you advise someone having that conversation with a broker? These can feel like tough conversations. How much are you getting?

Sure.

How much do you deserve? These are weird conversations with people that you probably had passive relationships with in the past. Like, Oh, I have a guy showing me house. And it It wasn't as codified as it is now.

Which, again, was the whole point that was made in that case, is that it needed to be clear. There needed to be more transparency in how brokers got paid. Because buyer's agents were able to sit down with people and be like, My fee is free because the seller pays for it. And it's like, But it's not. It's not free because it's baked into the price, and therefore, the price is inflated to account for it. So again, they wanted it to be more clear. So to me, this is where you separate the men from the boys or the women from the girls is in agents' ability to articulate their unique value proposition. Now, they need to be able to really come in and justify what they charge and how they earn it. I'll just say that not all agents are created equally. I embrace this opportunity because respectfully and with all the humility in the world, I think I'm a cut above most of the agents in this industry where there's such a low bar for entry. I cosign on that. Let them know. I I welcome the opportunity to have these conversations. I think others will struggle.

Should we talk about something less complicated? Please. The election.

Oh, great. Thank you. Nice segment.

Nice set up. Let's talk about how the different candidates might affect housing. Trump is saying he wants mass deportation, and how do you think that's going to affect the housing market?

It would definitely have an impact, but maybe not in the way that people would just ordinarily think. These are people that play an instrumental part in the workforce, and that's That's where I see the biggest issue is going to be in construction, is that if there were mass deportation, what you're going to see is a massive slowdown in construction, which will likely equate to a substantial increase in labor costs because you're just going to have less labor to draw from and less affordable labor to draw from. In a housing market that's already suffering from a lack of inventory and high construction costs, that would be adding insult to injury. That would really be I like pouring gasoline on the fire. So I'm concerned in that respect. I'm also concerned in the respect of, again, many of these undocumented immigrants are not homeowners, but they're renters. And I think you could see a significant adjustment to rental values if thousands of them by the droves were deported. And I think that would be bad for landlords. But again, I don't want to get too political about it.

We'll put ethical issues with all of that aside. But there's two main things. One, that That undocumented workers are probably not living in the types of starter homes that are in such high demand right now. Correct. Is that fair? And second, the construction issue, where it's estimated that immigrants make up at least 20 % of the construction workforce in New York City alone, 63 % of construction workers are immigrants, and 40 % of those are believed to be undocumented. So if you take that out of the equation, you're going to have higher construction costs, which would likely drive up the price of housing.

A thousand %. That's exactly right. Again, it's going to slow down the construction production process and drive up the price, which is good for nobody, right? These people play a vital role in our society and in our workforce in terms of the jobs that they do. Look, they're not here to eat our dogs and cats. So I clearly have my feelings about this, and I'll just leave it there.

What policy do you think would actually make housing more affordable?

Wow. No one's asked me that question. What policy do I think would make housing more affordable?

There's a lot that's being discussed US. Trump also wants to open up federal lands, but that doesn't really apply to LA, New York. The federal government owns a huge percentage of Alaska, but 0.3% of Connecticut, for instance. Sure. There's also discussion by Vice President Harris to give a $25,000 down payment credit, which I don't know if that's going to help, because then if everybody has 25K extra to play with, do prices just go up 25K?

They might.

There's also more incentive for commercial real estate developers to build more affordable housing, more tax incentives.

There's no question that affordable housing is, I think, at the core of a lot of these conversations. And that just goes into building costs. You got a lot of developers out there, particularly in LA, and that's my market, so that's all I can really speak to intelligently, that have moved away from luxury spec homes because there's less demand and not as active of a market for it, and really move towards trying to crack the code on affordable housing. But it's a tough code to crack, going back to all the things that we just said. The cost of debt has gone up more than double from where it was a couple of years ago. The cost of labor went up, the cost of materials went up, but the cost of land or property values have more or less stabilized. So there's been no adjustment for it, which means that it's really hard for these deals to pencil. Now, the government, at least here in Los Angeles, in California, and I imagine several other markets around the country, are offering tremendous incentives to contractors and builders that are willing to do affordable housing. It's just a question of, how do you do it?

So I think what you're going to see is a pretty big shift over to modular homes. Modular homes, which always had a negative stigma and connotation of a mobile home, it's not the same. A modular home is a home that is constructed prefab.

It's like the ones you can get on Amazon now for 20K.

Let's say it's a little bit better than that. Again, there's varying versions of everything. But I have a lot of clients that have gone head first into this because if you look at it, first of all, it's a more efficient way to build a house. You don't have an inspector that's going to come out 18 different times throughout the construction process. You have an inspector that comes to the factory once, they inspect it, they sign off on it, great. Let's manufacture a thousand of them. They are fire resistant. They are wind resistant up to 180 miles an hour, so they can do much better in the face of a hurricane or a tornado. They do have their limitations. They have height limitations because if you exceed a certain height, it can't fit in the storage container that needs to ship across the world. It can't fit under a freeway overpass. These are homes that we're not going to see going up Coldwater Canyon or Benedict Canyon because it just don't fit there. But in other parts of even LA, and certainly the country, there's a real place for this, and you can fabricate them at a fraction of the cost and a fraction of the time.

So there are real big government contracts out there that I think a lot of developers are trying to figure out, how do I crack the code in modular development? To position themselves for those contracts and to be able to actually fix the housing crisis.

You said ship across the world, so most of it's made in China.

Some. Some of it's made in China, some of it's made in other parts of, let's say, Asia. There are several factories in the United States. My understanding, and I say that very clearly so that please fact check this, but what I've heard is that they're on average, roughly about 30 % more than if you're shipping it from, let's say, Asia.

Are they nice?

Are they nice? Here's the thing. It's a shell. How much are they? It's a shell. So what it is is whatever you want it to be. It shows up in essentially the shell. If you want to put in, let's say, engineered flooring, or you want to put in wide plank French white oak, and it's a difference of $8 a square foot, that's your prerogative. If you want to-So you can soup it up? A hundred %. Yeah. If you want to go to Anne Sacks and buy your tile at $30 a square foot, or you want to go to Home Depot and buy it at $3 a square foot, what you make of it is entirely up to you. But essentially, it's just a shell.

Hold on to your wallet. Moneyrehab will be right back. And now for some more MoneyRehab.

And we're also seeing a lot of co-ownership models, just to get through this affordable housing crisis and rent-to-own models. Yep. Have you seen those increase recently?

Yeah, some.

And what do you think about them?

I think initially it may just have been a reaction to high prices. But that said, I think that it's not a short term thing. I think that these are new evolving business models that are going to create more access and affordability for people. And it's part of a new ecosystem that we're entering into. Much like the work from home model was in reaction to COVID, it's clearly something that's here to stay. So I think that between what's happening just within the real estate industry alone, what's happening within the affordability and inventory crisis, this industry is ripe for disruption. There are going to be some major moves made in the next 12 to 24 months that are really going to flip this industry on its head. And these are some of the models that are going to play a part in that.

So it's not just a temporary fix. It could be just a new alternative model that's being flushed out.

Yeah, I think it will be.

If you're buying a home with a friend, though, and your friendship blows up.

Yeah, I'll give you a I'll give you more real-world example. I personally own a home in Napa, which is my happy place, that I have a one-eighth fractional ownership in because that gives me six weeks of use out of the year. I couldn't use it more than six weeks if I wanted to. I don't have that much time. But it's a home that I'll just say I wouldn't have been able to afford on my own. But by virtue of having this fractional ownership, I'm able to have the use and enjoyment of this really amazing estate up there. And I think you'll see more models like that in the future.

So So a fancier time share.

Sure. Yes. A fancier time share. Different versions of fractional ownership that allow more accessibility to people. Okay.

Can I tell you something that's been on my mind a lot? I'm really concerned, John, about something And it doesn't sound fun and sexy, but I think is going to be a big problem, which is insurance. Home insurance during the climate crisis, especially in Florida and in California, I think they're skyrocketing. I think a lot of people can get insurance now, and they're not factoring it into the overall budget that they're going out to market with. I'm scared. You should be.

Are you? You should be legitimately scared. This is the greatest existential threat to real estate. It's not interest rates, it's not supply and demand, it's climate change. Climate change is the greatest threat to real estate, period, full stop, particularly in the coastal markets that are the luxury markets and the most expensive markets, of course. I mean, obviously, you look at just the tragedies that happened in Florida this year, which happened Every year, by the way. How long is it before one of those storms comes sweeping through Miami? Miami has been the biggest winner in the last three years of real estate in the United States. So much wealth has flocked down there. What happens when, not if, when one of those storms comes through the center of Miami and demolishes that real estate?

Yeah, these once-in-a-lifetime storms are happening every couple of years.

That's exactly right. That's exactly. They're no longer once-in-a-lifetime. And that's just, again, unfortunately, sadly, that's the new world that we live in. But But the ability to get insurance as it relates to that, which is a requirement of a loan if you're getting a mortgage, is going to be a major factor. And at some point, I have to imagine, not to suggest that the government has all the answers because they certainly don't, I imagine there's going to have to be more government interventions extension, government subsidies, more things like California Fair Plan here in California, which have their limitations and ceilings on their coverage. But there's going to have to be more things like that in the future because insurance companies that are pulling out of these markets are creating a greater monopoly for the ones that are still staying.

How do you think prospective home buyers should be budgeting for climate risk and insurance? Because no longer if you're looking at the Zestimate or something like that, and in certain areas in particular, whatever they're estimating for insurance is much higher. Correct.

So I don't know that I have any specific advice on how to budget for it, depending on whether it's in a high fire zone, flood zone, wind zone, et cetera. I would just say, don't judge the book by its cover in terms of, Oh, I like this house, and this is what it's going to cost me based on this mortgage calculator. Dive deeper. Get in touch with an insurance broker immediately upon identifying that property and start to really flush that out and understand what those options are, what those premiums are, what the coverage is. There have been many instances, horror stories, I'm sure you've heard about, with people that have existing coverage, getting a call from State Farm saying, We've tripled your coverage, or we've denied it, we've canceled it. So it's going to be a major factor that I would just say, Try to get in front of as quickly as possible.

And if you're out in the home market, do you talk to your broker? Do you talk to the homeowner about what insurance they have or if they've had issues with it? Because I know even in parts of LA, Mandeville Canyon, Brentwood, Malibu, there are areas that are experiencing this very thing where it's hard to get or impossible to get insurance. You have to go to the state. How do you factor that in or who do you ask during the home buying process?

We constantly ask about it, but it's not as simple as you would think. Oftentimes, the thought process is, Oh, you're with State Farm? Sorry to keep picking on State Farm, but you're with them? Great. We would love to have that coverage. Just because they're insuring the current owner doesn't mean they're going to insure you, and doesn't mean they're going to insure you at the same price. So we've tried that approach, and a lot of times it's like, Yeah, no, they don't want to renew it, or it's going to be double the price. So again, what the existing homeowner has doesn't really play a factor in what you can get. You just need to get with a qualified insurance broker, which if you're working with a good agent, they should have a great referral for you. And start having those conversations with them.

Just do it sooner in the process.

That's it. You just need to understand what your options are.

Okay, now not as complicated of a topic. It's a game. Can we play a truth or trend TikTok game?

I was going to say truth or there. Okay. Truth or trend?

There's so much real estate Fagazi out there.

Fagazi? Fagazi. Wow.

Is that Yiddish or is it Italian? It's Wolf of Wall Street. Is it Fagazi? It's Fagazi, Fagazi, right? I don't know.

They say that in Wolf of Wall Street.

And so we've seen a lot of this stuff on TikTok, on Instagram reels. We just don't know if it's truth or trend and why. So we're going to ask you. Okay, ready? Yeah. If you're buying an If it's an investment property, you should buy it through an LLC. Truth or trend?

I would generally say truth, but I'd say consult with your CPA or your business manager. It should be owned in some type of an entity, whether it's a trust or an LLC, just so that you have various protections in place. But consult with your CPA on that. Okay.

Use the bur method for real estate. So that's buy, renovate, rent, refinance, repeat. Bur.

So many new terms and expressions you're using on me. As opposed to?

As opposed to buy, hold, sell.

Give me the bur again.

Buy, renovate, rent, refinance.

Buy, renovate, rent, repeat.

This is So these are people who are buying a bunch of investment properties.

I mean, that to me is somewhat self-evident. Like, buy a property where there's value add opportunities, renovate to add that value, which thus should increase your equity, and then refinance based on that equity because you'll have a lower LTV and hopefully a lower mortgage payment, or a lower interest rate and a lower mortgage payment, and then use that leverage to go buy more.

Ltv loan to value.

Yeah, that's the basics of real estate investment.

Choose a 40-year mortgage if you can get one. Truth or trend?

I'm going to say neither, but worth looking at.

Or a 15-year.

No, totally different. Okay, so mortgages, this might be a snooze fest for some people. And I only know all this, by the way, because I was a mortgage broker for eight years. That's why I can speak this language fairly fluently, is that mortgages are amortized over a certain period of time. It's generally 30 years. That's why people know of a 30-year fixed. If it's amortized It's over 40 years, it just means that the amortization period gets spread out further, and thus the payments along the way are smaller.

But there's more interest rates.

But you're absolutely paying more interest in the long run, but you have a lower payment in the short term, which is what matters to most people. Conversely, if you have a 15 year, you're paying it back in half the time. So if you're flush with cash and you can afford the significantly higher payment, great. You're going to save a tremendous amount in interest over that 15 year period. Tremendous. But your payments can be significantly higher. So whether or not you can afford it is case by case. Okay.

So speaking of your former life, a mortgage broker can help you buy a house if you have a credit situation or weird financial situation. Truth or trend.

I would say that meeting with a mortgage broker early in the home buying process is critical because what they're going to do is they're going to take this very blurry picture and help bring it into focus. One of the things they'll do is they're going to look at your credit. So if your credit is, I think, to use your very technical term, then yes, they should hopefully have a credit repair specialist that they can refer you to. It can be dicey in terms of what they can actually do, how quickly they can improve it. And there's no guarantee. There's three different credit bureaus. And if you pay off this line or pay down that line, how much it affects your credit, they don't know until they rerun it. So if you have things that need to be fixed up in your credit, yes, a mortgage broker by proxy can put you in touch with someone that could potentially help you with it.

And their fees are paid for by the providers.

The mortgage broker's fee? Generally. Generally, there's a commission that's paid or a percentage of that loan that then gets paid to them. But you can also buy down the rate where perhaps you pay more to get a lower interest rate, but then maybe they have to charge you a point. So it's like anything. There's levers. If it's 6 % with their compensation being paid for by the bank, maybe you can get it down to 5.75, but then you have to pay a point.

Take out a heel lock and use it to put a down payment on your next house.

That's just a question of leverage. And that goes back to, again, your very technical term of bur. I can't account it for all the Rs there. Where The whole principle in real estate investing is to, again, buy something, create value, add equity, increase your loan-to-value position, and then leverage that to go buy more. You could apply that same principle to a heelock. I would say, be careful, you don't want to get in over your head, and most lenders won't allow you to do that anymore anyways, meaning that they keep the LTV requirements very low or rather, very high on the heloqs so that they don't allow you to be able to over-leverage on them. But yes, borrowing against to go buy more, I would say reward favors the bold.

And so does tragedy.

Oh, so does tragedy. Yup.

Buy a foreclosed home.

Buy a foreclosed home? Yeah. These questions are so much more nuanced than truth or trend. Okay, fine. First of all, to buy a foreclosed home, either the Court steps or at auction, you have to have cash. So unless you have a big pile of cash to use. If you need to get a mortgage, you're not buying that foreclosed home. You're not getting that savings. You're not realizing that savings or discount. What will happen is they'll try to sell it, again, either the Court steps or at auction.

The actual court steps?

Well, I mean, not technically outside, but they'll try. There will be a court date set, a sale date, and you can either buy it there or you can buy it at auction, and potentially you could realize a significant savings in doing so. You're buying it non-contingent. You have no opportunity to inspect the house, look under the hood, kick the tires. You're paying all cash. Few people can play that game. If they're unable to sell it there, then they hire a broker and they try to sell it at whatever the market value is to try to recoup whatever their losses are on it.

A two, one buy-down is a great way to make your mortgage more affordable when you buy. Yeah, that's truth. As you know, how do we end our episodes? You could do this by now. Fuck, I totally forgot.

I remember this. Okay, John, as you know, I end all my episodes by asking For one tip, listeners can take straight to the bank. Yeah. Can you share one thing people can do to help navigate this crazy real estate market? Oh, boy. I probably have given you the same answer, I think, a few times, if you've asked me the same question, which I don't remember, don't go it alone. I think as I'm saying, I'm having some deja vu, so I may have given the same answer. Don't go it alone. You're not meant to be a real estate expert. That's why I exist. That's why I have a job. So please don't take it away from me. It's the reason that financial advisors have a job. I keep tabs on my investment portfolio. I don't manage it. I know what I know, I know what I don't know. These are challenging times. They're uncertain times. And I think, as I said before, all real estate agents are not created equally. There's about 1.3 million in the United States right now, which just as an interesting stat, there's about 900,000 listings available for sale. So there's more real estate agents in this country than there are.

Wait, say that again. There are roughly about 900,000 homes available for sale relative to 1.3 million agents in the United States. There are more agents in this country than there are active listings available. And that's up significantly. We were down at around 400,000 active listings a year ago. We saw a 70, 75 % drop off from what we had experienced previously, but that drop off was from an anomaly, which was COVID times. What we really need to be doing is fairly comparing it to the 2019 market, not the 2021 market. But that's a whole nother story, and that's not answering your question. So yeah, I think it's really important. Actually, I'll give you one other stat as it relates to this because it does tie in. 50 % of all agents sold one house or less last year. 70 % sold five houses or less last year. Align yourself with someone that's a true professional in what they do in everything, real estate, investment, whatever, because that's who you need to help steward you through this process.

Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your moneyquestions, moneyrehab@moneynewsnetwork. Com, to potentially We have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make. I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full-time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high-quality local co-hosts with Airbnb experience that can take care of your home and your guests.

Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at airbnb. Com/host.