January 21, 2022
Joe Fairless

JF2698: Best Tips on Housing Forecasts with Kathy Fettke


 

We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the second Best Ever Conference at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, Kathy Fettke—Co-CEO of Real Wealth Network, Host of the Real Wealth Show, and author of Retire Rich with Rentals—shares what to really look for when forecasting the real estate market.

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TRANSCRIPTION

Joe Fairless: Welcome to another special episode of The Best Real Estate Investing Advice Ever Show where we are sharing the top sessions from the Best Ever Conference 2021. This year, the Best Ever Conference is back in person, February 24th through 26th. Come join us in Denver, Colorado. You’ll hear all the new keynote speakers, you’ll meet some new business partners, you’ll learn some insights from the presentations and from the people you meet, that you can apply to your business today. Here is an example of a session from last year that is still relevant today and will be beneficial for you.

Kathy Fettke: I’m going to be giving my 2021 housing market update. I usually do this for an hour, so I’m going to fly through it. I’m going to be focused mainly on one to four-unit buildings. But it’s important, if you’re in apartments, to understand what the one to four units are doing, because it could affect your business.

Again, I’m going to go through this, and a quick disclaimer – do not rely on this information. These are my ideas and how I forecast. I’m not an economist, I am an investor, and I interview a lot of people in the Real Wealth Show and get their information from economists that have studied it.

But my background is I did work at ABC7, I got my degree from San Francisco State in broadcasting, and I was in the news. I tell you that because it’s important to understand that a lot of times the headlines we see are not exactly the full story. Headlines are meant to gather eyeballs, so that new stations can sell advertising. I know that from the inside and I think it’s just really important to understand that.

But when I married that hunky guy that you can see there, Rich Fettke, in ’97, we bought that white house the same year we were married; we had two kids, and we came out with his book, Extreme Success. Everything was amazing, we felt like we hit the pinnacle. It was right in 2002, after he was on his book tour traveling around on all kinds of national news, he was diagnosed with melanoma. They thought it had spread and the doctor told Rich that they thought he had maybe six months to live, at best. So our world came just crashing down overnight; I refused to believe it, but at the same time, I wanted to make sure that I could take over the finances. I had quit my job in the news, because I didn’t want to be chasing fires and murderers with two little children at home, I just wanted to be home with them. Rich was doing great with his coaching and speaking career that I could do that, until this moment. I wanted to take over the finances, so that he could enjoy his life and get better, just in case the doctor was right. He was wrong; Rich is as healthy as can be today. But at the time, we really didn’t know. And we blew through our savings, we blew through our 10% in investing, our 10% for emergencies… It just wasn’t enough for the medical bills and him taking the time off.

So this is what brought us into being real estate investors. It’s important to remember that sometimes the worst things in life wake us up and have us do something we would never do normally. So we had bought this big house, we had this massive overhead, and all of a sudden, Rich really wasn’t working, and I was trying to start a new career after being a stay-at-home mom. So we just started renting out rooms; we rented out the bottom of the house. We turned the left part into an in-law suite. It was kind of already an in-law suite, but we rented that out through Craigslist. On the right, we turned the little office into a little studio, and in the back, we created another studio. We turned our home into a fourplex. That basically had us there living for free. That’s when I learned about passive income.

Also, from my broadcast career, I had a show in San Francisco on KSFO called The Edge, but I changed it to the Real Wealth Show, because I thought, how do I do more of this? How do I create more passive income so that we can raise our children, that Rich can spend the time that he wants, doing the things he wants to do? We really got very aware that our time is limited; money is not, but our time is limited, and how do we make the most out of it?

On the Real Wealth Show, I just started interviewing people that could tell me how they’re creating passive income. Because it was a big station, I was on in San Francisco, I was able to have people like Robert Kiyosaki on. It’s from him that I started to learn about market cycles. It was right around 2005, he had come on the show, and he had made so much money in California in that year and the year before – I mean prices practically doubled in a few years. He said he was selling everything, he knew that those loans were going to reset, and he was 1031 exchanging into Dallas.

We’re going to talk about, during this presentation, why he advised me then and why the same fundamentals are in place today, and work, even through downturns.

So Rich and I jumped on a plane, we were like, “If it’s good enough for Kiyosaki, it’s good enough for us.” We bought five of these properties that you can see there in Rockwall, Texas, for between $120,000 and $140,000. They rented for $1,400 or so each. At the time, we could do no money down loans, it was crazy. And it totally makes sense. It was like, “Ah, we could never do something like that in California, buy a $120,000 house like that and rent it for $1,200 to $1,300.” So it just made sense. We got good property management in place.

I talked about it on the show – suddenly, we had lots of people calling saying, “Who did you use? How did you do it? We want to learn.” We thought, “Okay, there’s really a need to understand this.” That’s when we created Real Wealth Network, which is alive and well today. We have 54,000 members now and we still help people buy in emerging markets.

But how do we know what’s an emerging market and how do we know what’s coming? Well, after finding out that we could sell at the peak as we did in California, and buy at the beginning of an emerging market, and that our investors who did that did not even feel the recession, the biggest housing recession in history, and that then we could come in and buy foreclosures and help fix up neighborhoods that had been hammered by the recession, I started to get interviewed. I got to actually debate, as I was saying earlier, I got to debate Robert Shiller on Fox News, because in 2012 he thought and said it was a terrible time to invest. I’m like, “This is an amazing time to invest. It’s the best time ever, it’s the bottom of the market, and things are only going to go up.” By the end, he actually agreed. That led to a lot more interviews, and it led to me to doing more forecasting, which is what I’ve been doing.

So let’s talk about the fundamentals, what to really look for when forecasting. So many times we look at days on market, we look at pending sales, and cancellations, and price increases or decreases… But those are things that happen after the fact. We have to be able to forecast those things before they happen. So what do we look at? At Real Wealth, we look at, for sure, demographics. Where are people moving and where are they slated to move for over the next 10 years? Because really, if you’re a buy and hold investor, you need to know that. Where are people going?

Then we also need to know where the jobs are going, because that’s going to attract the people. And supply versus demand – where is there more supply and more demand? We want to be in places that have less supply of housing and more demand, because of course, you’re going to have what everybody wants, and that’s generally going to drive rents up and prices up.

Then the biggest thing that we look at now is fiscal stimulus. This is not really probably anything people really learn in economics school. I didn’t take economics, but I’ve been learning it for the last 15 to 20 years that we’ve been investing. Fiscal stimulus is a game-changer, and it’s a manipulated market, but we’ve got to understand it so that we can be on the right side of the manipulation. Honestly, that’s the truth.

So going to these metrics – let’s look at population. The US population is growing with a net gain of one person every… What does that say? 26 seconds. That’s amazing. You can see here, this is a chart going way back; I love looking at these kinds of charts… You can see a massive population in the US. This is not true for places like Japan and Europe, that are actually declining. They’re not having enough babies; we are having babies. Now with the Biden administration, there’s probably going to be increased immigration, so this is population growth. And guess what? People need housing. But when you really dive in and look at the demographics of this massive population, you can see here that blue section is the Gen Z. Those are the young people, up to my daughter’s age, up to 21. Well, what are those 21-year-olds doing? I’m in San Diego right now in a hotel room, you could probably tell, and she’s living with friends, renting; because at 21, that’s generally what people do. They’re in college or getting out of college, and they’re renting. We have a large population of future renters. That’s important for us to understand.

Break: [00:08:59][00:10:37]

Kathy Fettke: Then you look at the yellow, those are the millennials. There were a lot of talks that millennials weren’t going to be buying. That is not true, they are buying; they’re the biggest home buyer today. I’m going to show you on the next graph – Gen Z, and they kind of got hit hardest by the last housing recession. So a lot of people are now just getting back into it. Then we’ve got the red, the baby boomers; there was a lot of belief that they’re going to either move into condos downtown, or downsize… We’re not seeing that happening; they’re staying put. So that’s a huge population that is not releasing the homes that they’re in. That’s really tying up a lot of the inventory.

Now, a lot of you may have seen Harry Dent’s spending wave. This basically shows that at age 26 – that’s again, the typical age that people are renting. And then 31 is the typical first-time homebuyer age. 41 is the move-up buyer age, because people are having kids and they need more space, and then age 45, 46 to 51, these are the biggest spending years, because you’re sending kids to college, you’re buying lots of potato chips, birthday parties, all this stuff. Then it starts to taper off, as people in that baby boomer generation start to buy these vacation homes, they’re going on cruises, and they’re doing different things are spending differently.

When you overlay Harry Dent’s spending wave over the demographics, you can see this little arrow, the blue arrow there – that is the largest group of the millennials. We already know the millennials are the largest generation today, but the largest segment of the millennials is age 28. It’s that little lump on that yellow section that is now 28 years old.

Well, in three years, the largest percentage of the millennial group is going to be at home-buying age; that’s important for us to understand. And in some ways, COVID has accelerated that. We also, as I said, know that there’s this big wave of young people right after them. So where’s the population moving? We know there are a lot of people, but where are they living? Well, when you see the dark green on this slide, this is over the last 10 years where there’s been the most growth. And in the dark green, it’s the highest growth. Well, we know it’s Texas and Florida; but Texas is getting hit really hard. God bless you all that have properties in Texas who are living there. I hope we can know how to help you guys. Anyone who’s needing help, please let us know. But Texas and Florida are the two fastest-growing areas. Then you can also see in there, you’ve got Arizona, Nevada, Colorado, Idaho – these are the fastest-growing areas. The lighter green is also growing. The two areas that aren’t growing as quickly – you can see that Illinois is one of them. Those are things to pay attention to.

Now, over the next 10 years – this is really important for us to understand – what’s the projected change? Once again, you can see that Texas and Florida are projected to continue to grow over the next 10 years, along with other purple areas, the Carolinas and so forth. So keep your eye on these areas.

Another way for us to understand where growth is happening is by looking at U-Haul trends. That’s basically who’s getting the U-hauls and moving. U-Haul tends to be more of the, I want to say, it’s your do-it-yourselfers, so a little bit lower income. The Atlas migration trends are going to be people maybe with higher pay. But we’re going to be looking at affordable housing, that’s what we focus on at Real Wealth, because we believe it has higher cash flow. The U-Haul migration trends show that Tennessee, again, Texas, and Florida are at the top of the list of where people are moving. Ohio is on the list, too. A lot of people say people are leaving Ohio – look at this. I think that maybe in 2020 – here’s my theory on it – that people who were working from home, with their kids running around, they’re losing their minds in their little condos in downtown big cities, and they’re like, “Uh-uh, I’m moving back home. Your mom and dad or someone can watch these kids.” That may be part of what’s going on there.

Well, you look at number 50, the place where people are leaving – California, my state. Again, you can see Illinois on there, New Jersey, Massachusetts. The high-tax states, they’re just not getting it; people don’t want to be highly taxed. They’re moving to areas that are tax-friendly. Again – Florida, Texas, Tennessee; they’re going to see more and more people, the more tax-friendly it gets.

Let’s talk about 2020, the obvious. We’re getting through this pandemic, but a year ago, when we were at Best Ever last year – boy oh boy, it was the beginning of it. We didn’t know what was going on. Let’s talk about 2021 and beyond, how is this pandemic going to affect us in the future? There was so much talk about this housing crisis that was going to come… Did it? Will it? What’s really going to happen? Well, when you look at this, this tells you a lot. This is unemployment claims – a major skyrocket of it at the beginning of the pandemic, and then a recovery. Unbelievable. I use this chart from Federal Reserve because I wanted to show how unprecedented this was. When you look at all past recessions – they’re the vertical lines – we definitely had unemployment claims nothing like what we saw, nothing like an entire economy just shutting down overnight. Massive job losses. But then look what happens when you turn the switch back on. People still need food and things and clothing and all that; they still need things, whether you’re in your house or not. So we saw a pretty major recovery, very exciting.

The unemployment rate – the same thing. We were coming from historic lows – bam, COVID hit and look at the recovery. I mean, we’re back to like 2014, 2015 levels. That is phenomenal; that says a lot about our economy. We’ll talk about really why it happened. We know that a lot of the jobs were not affected at all. In fact, look at this chart, you’ll see that the finance industry was barely affected. It was just -1% from last year. And then we have some industries that are actually doing better now than they did a year ago. But we also know that leisure and hospitality got hit so hard, and that affected certain cities, certain metro areas that are more dependent on leisure and hospitality.

The hardest-hit cities you’ll see on this list – Las Vegas at the top. Las Vegas – well, we know, is very dependent on leisure and hospitality, conferences, and people just being in the same room. That ended very quickly, so a lot of job stress there. But ironically, the housing market is really strong in spite of it. It just makes no sense.

New York, second-hardest hit. But when you look at these, this is why – there was 12% jobs lost, but a huge percentage… I think it says 57%, I can’t even see it very well; 57% were in leisure and hospitality. So a massive amount of jobs lost in Las Vegas were in restaurants and things that may never come back. They probably will, they most likely will; probably when the vaccine works, and when people have really understood this, and we have herd immunity, Las Vegas is going to come right back. But it was definitely the hardest hit.

New York City, 12% job loss; very similar to Las Vegas. A very large percentage of the jobs lost were leisure and hospitality. We know that in the finance industry, it didn’t lose very many jobs, but the jobs that were lost in New York had a big enough impact because of so many in leisure and hospitality. Now there’s a lot of talk about these finance jobs moving to Florida. That’s an interesting turn.

Now, here’s a list of the least affected cities. When you go to the very, very bottom, you’ll see Salt Lake City and Indianapolis, barely affected by this pandemic. Isn’t that fascinating? Let’s talk about why. In Salt Lake, there were only 2.5% of jobs lost in 2020, but many, many jobs were added. Salt Lake City is one of the cities that has actually more jobs than last year at this time. It’s incredible.

Indianapolis, 3.9% job loss. It’s a very stable market, it’s one of the reasons we’ve been investing there at Real Wealth, and helping other investors buy in Indianapolis, because it’s so stable; because we called it recession-proof, and bam, it proved itself true. Only a tiny percentage of jobs lost were in leisure and hospitality. A lot of people don’t understand or don’t know that Indianapolis has very strong biotech, and was very much at the forefront of some of the solutions for the Coronavirus. Also, FedEx has a huge hub there, they bought an old airport and they have a huge hub. Of course, FedEx was very, very busy during this time when people were at home. So that city really did well during this particular recession.

I can tell you from firsthand experience that we bought a bunch of lands at Real Wealth, we syndicated land and developed it… And boy, when you buy land, you’d better be good at forecasting, because it takes forever to get a development off the ground. So we bought some land in Park City with a builder out there, and came out with the first phase. Can you imagine? We came out with the first phase in 2020, in March. We were freaking out like, “Oh my gosh. What bad timing. We’re never ever going to sell these homes.” Well, guess what? Phase one sold out, because as soon as the shock of the Coronavirus was over, and people started to realize that we could manage this thing, and that people wanted to be buying, and interest rates were so low – boy, it just was a quick turnaround and this project sold out. We haven’t even broken ground on phase two.

Havens like Dallas and Atlanta lost some jobs, but they’re growing as well because what we learned during this pandemic is that there are certain areas that are very, very business-friendly. Even when there’s pressure to shut down, these are the areas that did not completely, so they continue to grow.

As a result, we have a GDP that continues to grow. You can see from this graph that over time, our GDP has just been on a rocket ship. It has gone up. And what we went through was kind of a blip in that, but it sure looks like a V-shaped recovery to me.

Alright, and wages – look at that, wages continue to rise, even during one of the craziest recessions we’ve ever seen. We saw in March, of course, amd everyone freaked out, and the market crashed for a minute, and boy, some smart investors jumped in and bought stocks, and made a bunch of money in the last year. Look at that, complete recovery; a checkmark recovery in the stock market. Just unprecedented, unbelievable. Existing home sales – same thing. Look at that recovery, it’s a checkmark. When you look at the Case Shiller price index, you see the whole blip, and then whoop! We saw prices go down a bit, of course, during the great housing recession, and they went up, up, up, up, and then continued to accelerate last year.

Break: [00:21:04][00:24:00]

Kathy Fettke: Why? Why would this happen during a pandemic? Then the Fed now predicting, there was a lot of talks of are we in an L-shaped or a K shape — what kind of recovery are we in? Well, the Federal Reserve is saying they increased growth to 4.2% expected for next year. That’s pretty good. By 2023, the Fed expects that the jobless rate will fall back to where it was, around 3.7%. So that is good news coming from the Federal Reserve. Remember, they monitor the economy, so they kind of get what they want, because they can control it by just printing more money or lowering interest rates. Printing money is exactly what they did. You can see from this chart, printing money has become very common. It didn’t use to be; ever since 1971 when we got off the gold standard, our politicians said “Free money; let’s just keep giving away stuff so we can stay in business, and get reelected.” That’s my personal thoughts on it.

But look at what happened in just one year. Massive money printing, a massive increase in the money supply; this is what caused this checkmark recovery. Money. When you throw in trillions of dollars into an economy, there will be an impact. Generally, that impact is higher stocks, higher real estate values. That is what we saw. The Fed announced in March – and I know you all know this – unlimited QE, and so much of that money went to our industry. It went to buying mortgage-backed security, so that banks would continue to lend, at a time when it was terrifying to lend. But the Fed came in and did unlimited, this is unprecedented, to keep mortgages going. What does that say about what the government and what the Federal Reserve thinks about real estate? They want it to work. And with it, buying those mortgage-backed securities kept rates low; all-time, historic lows. That, of course, is what has driven so many people into buying.

I’m close to my time here, but this is really what we’re looking at – demand, demand, demand. You look at demand, its job growth, we’re seeing it in some areas, population growth, we just talked about it; affordability, debt, interest rates, and so forth, loan options, price to rent ratios, desirability, and tax incentives. And then fear; in this case, COVID fear has driven people into buying a house; they just want to have a space of their own. And because interest rates are so low, when you look at these checkmarks, you can see that really, for many people, prices were back to 2018 levels because of these interest rates. You could have bought a $260,000 home back then, you could buy a $317,000 home right now, for the same payment. That is why people are buying and that’s why prices are going up.

Plus, credit card debt is down 14%, because many people took their stimulus checks and paid off their debt, or they just weren’t spending as much, because they’re home. A lot of people were saving right up, and that created the down payments they needed to buy housing. That’s driven such demand, while not creating a lot of new housing, so we have short supply across the nation, and again, that is driving prices up. Record low inventory. What’s affecting that? Well, there’s just not enough new inventory and the cost to build is so high. Lumber went up 60% this year; well, the builders like me, we’re going to pass that on to the buyer. We’re almost doubling our Park City properties right now, because there’s nothing else on the market, and we’re so lucky to be the ones who have the inventory. That’s the sweet spot is if you have the inventory.

Regulations make it tough to build. And available land. It took us 10 years to get the Park City properties going. Really, timing was very good for us. Natural disasters can affect supply; you’ve got places like in California where a lot of properties burned down, so there’s more demand, of course, for properties.

Let’s go to the next slide. Alright, so a slow pace of new construction, because builders are being cautious, they want to make sure that they could sell the inventory. As a result, there are very few ready lots available, and new inventory is very low, and not as affecting demand.

So the housing forecast for Fannie Mae is that interest rates will remain low for the next couple of years. That means they’ll probably be more demand, more sales, and more increase. There’s this question – will there be foreclosures from all the forbearances? Lots of headline news out there about all these millions of people that were going to go into foreclosure. Well, what wasn’t discussed in that is that 2.3 million of them got their forbearance extended, and they will probably get a loan modification and just have to pay those missed payments at the end of their loan. They’re not going to get foreclosed on. 2.3 million of those people that signed up for the forbearance found out they didn’t really need it. But they did it anyway, just because why not? It didn’t really affect you negatively, and you could just pay it later. That’s part of what went to the savings rate. 500,000 were just paid off or sold, so we’re really down to about 80,000. It’s not going to be a huge flood of foreclosures, much to the chagrin of investors.

But what about commercial real estate? We thought that people were going to be leaving apartments and moving into single-family homes, and we just have not seen the effect on cap rates. Maybe a little bit in retail and office, but not as much as was predicted because things are bouncing back. In fact, some offices need more space because they need to have their employees come back, but they need them to be separated. A lot of things we didn’t expect. We really are so lucky and not lucky at the same time that the Fed was willing to bail out the economy.

These are some markets, this is just off the presses from Mueller. You may already be doing a presentation here… But there are some markets to be cautious of that may be in hyper supply to keep an eye on, but in general, housing is in great demand. Again, the Fannie Mae forecast is that we’re going to not see a recession, we’re going to see continued growth. It’s good news.

So what are the risks? Well, the risks are what everybody’s talking about. There are consequences to printing so much money. You just can’t do that. There are no freebies. So what we have is massive debt; debt to GDP is increasing. But it’s not as bad as some other countries, it’s not unbearable yet. But what it does mean is we could see stagflation, which means that maybe not robust economic growth, but prices increasing anyway, which is what we’ve seen in housing. They’ve gone up double-digit last year, but wages didn’t. So what this means most likely is that the divide will continue to grow, the middle class will be more challenged, the wealthy and those who have assets that inflate and those who don’t. If you’re a renter, you’re going to see your rents go up. If you’re an owner, you’re going to see probably your rents go up. So which side do you want to be on? We really believe at Real Wealth, it is imperative that people acquire assets that will be on the side of inflation; otherwise, you’re going to be stuck just paying more for things, rather than getting more income from those things.

So that’s why at Real Wealth we are just on a mission to help people acquire real estate, even if it’s you getting into your first property, one to four units, get 10 of them, get as many as you can max out your Fannie Mae loans, you can get 10 of them, be in the right markets where you can still cash flow, where there’s growth expected, where a lot of people from New York and New Jersey high tax markets are moving, so that that big New York money is moving into areas that haven’t been affordable historically, but probably won’t be much longer. We’re going to see prices go up in certain areas. On our website, we have a list of those cities at realwealthnetwork.com, you can find out more about it if you go there.

Joe Fairless: Well, I hope you gained some useful insights and actionable advice from this previous Best Ever Conference session. Remember, if you’re looking to scale your investing in 2022, we look forward to seeing you in Denver. Get 15% off right now with code BEC15 at besteverconference.com. That is code BEC15 for 15% off at besteverconference.com.

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