America's Home Builders are Crashing!

It's been homebuilders, some of the biggest players in the space, names like Toll Brothers, Lennar, Pulte, they've been floored not just today but lately because as interest rates go up, the stocks go down and many are tracking for the worst month, it's March of 2020. So check this out right here, this is something I've been watching like a hawk and it's the homebuilders are rolling over, they're really taking a hit, they're taking loss after loss and as an agent, I find this very interesting. Down squarely due to higher mortgage rates this month after a pretty volatile year, we're back at the highs with the 30-year fixed well over 7%. Expectations last year were that rates would be in the low sixes headed toward a five-handle and that is just no longer anywhere in the prediction. As a result, the home construction ETF ITB is down close to 17% month-to-date, on pace for its worst month since March of 2020, of course the start of the pandemic. Builders have been buying down mortgage rates but it's really hitting their margins now. The cost of money is really starting to get hammered and as we see these properties sitting longer and longer and longer and I'm seeing incentive after incentive being sent to agents, I get them in my email all day long. These builders are trying to offload massive amounts of inventory. Now I think it's kind of interesting because politicians' sole idea for the last six months is to increase inventory, increase inventory, build, build, build, but the cost of money is expensive. They don't build themselves and you've got to be able to finance them. Most of these builders run off financing, even some of the largest ones. The mom-and-pop builders, the smaller builders, they have to have financing, builders loans, they have to be able to finance all the materials and their subcontractors and all this and this is expensive and for the last, you know, I don't know how long, a year or so when all these politicians were campaigning, they were saying that they had this magic wand, but we didn't know what the taxes were going to be like, we didn't know what the Federal Reserve was going to do and Federal Reserves runs the rates. They are the ones that make the market with their rates and as we've seen as interest rates have gone down a little bit, mortgage rates, they seem to have a mind of their own and they're kind of going up creating a very weird situation here and I think we're at an inflection point and we're starting to see it. All that said, when you look on the existing home side, we just got the read on pending home sales in November up 2.2 percent month-to-month and up 6.9 percent from November of last year. That's the fourth straight month of gains. Now this count is based on signed contracts, so it's people out shopping in November when the average on the 30-year fix spent much of the month over 7 percent before coming down in the last week of that month. The Realtors Chief Economist claims consumers are now used to higher rates. So Brian, that means seven is the new five. Seven is the new five. I love the new math. Seven percent. We were hoping that end of the new year we'd be in the fives and the sixes. We're not there. We're nowhere close. It doesn't look like we're going to get there and the Fed has said they're only going to do two more rate decreases and even the stock market is starting to freak out as we've seen the last four or five days have been down as of right now. It's fantastic, especially when it comes to interest rates. Diana, speaking of housing, we hear that home flippers are having a hard time. I mean, they had, I don't want to say free money for a couple of years, but it seemed a really easy gig, but it's gotten a lot harder the last number of months. When you're buying down rates, that's how a lot of these home builders actually make money is through their own internal mortgage companies. And when they're trying to make a margin on a house and then they're trying to, you know, just like cars, the payment, the loan they give you through their internal system is how they make more money. And when you're buying down that rate, that rate is how they make money. They're just taking an upfront amount. Yeah, big surprise because of mortgage rates. Look, both home flips and flipping profits took a dive in the third quarter of this year, according to a new report from Adam Data. A flip, of course, is defined as a home bought and sold in the same 12 month period. So in Q3, 7.2 percent of home sales were flips. That's down from 7.6 percent in Q2. But the returns showed a much bigger drop. Flips had an average 28.7 percent return on investment. That's before additional expenses down from 31.2 percent in Q2. That ended six straight quarters of increases in that metric. So it's a real turn in the market. And that profit margin was roughly half, half of the peak profits hit in 2016. And remember, these numbers are about a month or so behind. Real estate numbers are really slow. So what are we seeing here? We're seeing election time, buying, thinking mortgage rates are going to go down more than we know now, that uncertainty of who is going to be president, what taxes are going to be like, what capital gains are going to be like, what a 1031 exchange is going to be like. And some of these being bought right now are investors. But in December, there was a ton of incentives for real estate agents to bring buyers to these new bills, which tells me they're trying to clear their books off these these these Santa like sales for for homebuilders. That's what a lot of that is. This is where higher mortgage rates come in. That profit margin is within the range that could easily be wiped out by carrying costs like the higher rates, as well as higher renovation expenses and property taxes. So in real cash, gross profits fell to about seventy thousand dollars. That's before renovation and carrying costs down five thousand dollars in the second quarter and down ten thousand dollars from the highs reached two years ago. We also saw in the November closed sales report from the realtors that the investor share of sales fell to just 13 percent from 18 percent in November of last year. That's both flippers and people who are buying a home to perhaps rent it out. 1031 exchange, because when Harris was saying she's going to get rid of the 1031 exchange or under 500000, which was like pretty much the market, especially if you're in California or some New York. I mean, like what a better way to kill real estate. But now we're seeing the other the Trump administration is going to have a lot of reasons to maybe go into some of these properties. And so we're since we're looking at data in the rear, we're seeing maybe a light at the end of the tunnel. But the interest rates are still the key here. If interest rates don't figure themselves out and there's not some incentive for these builders to keep taking the chance, they might just stop building. Or you'll see what we saw and what I talked about for a long time is build the rent and they'll build them and they'll rent them and they'll try to get a higher rate of return. And it may make it makes the finances work. And like the builder that that that is attached to our and the builders I know, they're just building to rent. They're doing it everywhere, doing in Texas, Arizona. And that's crazy that those properties will never come to the market. They'll go into a portfolio and then that's it. The builders have you have to incentivize them in the right way or they're just not going to do it. One, it's a massive amount of risk for for an average return. And, you know, you can't blame them. So you really got to either incentivize the wholesalers, the flippers or the builders. And those are the ones that create housing for people and they take a lot of risk. Flipping with cash is really the only way to do it because hard money has a lot of landmines. That's the time factor. Sometimes a lot of flippers, they're using somebody else's money, usually hard money, because you're unable to close the property with a modern mortgage because of usually problems with the house. That's why it's a flip roofs, electrical plumbing. So they'll get these hard money loans from investors and they'll have short windows with very high expense to them. So that's pay points up front that might be playing an elevated interest rate way above and beyond what the normal market is. So the time is a big factor. I've seen a lot of a lot of real estate investors had some friends go belly up because they couldn't turn the property fast enough till the hard money ate them up or expired. And they went bust. I had a friend not too long ago. She was doing three at one time bankrupt. Also, a little tip, never tell a contractor what type of money you're going to use, OK? Because if he knows it's hard money or a bridge loan or something with a time value on it, he's going to string you out. I'm saying the bad ones will. They will string you out, slowing down the project and then demand more money because they know you've got to come up with it or you've got to pay them or you've got to do it just to finish the deal because you don't finish the deal. You can't get it on the market. And if they're sitting on the market for four or five, six months now, well, you know, you're probably going to go bankrupt unless you pay more money. And they know this. And it gets a lot of people. It's gotten some of my friends just a little FYI. And I think if I was going to flip, I would do it all cash and not borrow the money. But well, nice for you if you have the cash. Well, I wouldn't do it because I'm a financial coward. But you get my point. Now, those people are being exposed and getting hit. We'll find out. Diana, I have a feeling not done with the story. Thank you. The thought of flipping a house right now scares me to death. And I'll tell you why. One, the market is stagnant. You don't want to hold on to a property for very long. You're incurring all kinds of costs, everything from insurance, the taxes to the homeless guy trying to live in into it, the doors getting kicked down, the air conditioners getting stolen. And when you're flipping, you're usually flipping in neighborhoods that are in that B, C category, D category. So you're going to incur some type of vandalism theft. But it's like holding a hot potato. It's a landmine. And sometimes you're going to land on some really bad ones. Flippers, I talk to all of them in my area all the time. And they were really afraid of capital gains tax, what it was going to do with the Harris administration. They were afraid that the 1031 exchange was going to go away. There was a lot of things they were scared of, and they didn't want to go into deals. And that was the sentiment on the street. Nobody wanted to do it. And when you think about the margins and you're holding a property into a falling market, as in the market was slowing down, every month it was slowing down. And I don't care what the case in Schiller is telling you, in some areas worse than others, especially in those categories where they were a little rough, because it seemed like the first time home buyer, the people you'd be selling a flip to, they were having a hard time getting qualified. And the cost and the comps, they were going up so fast that the affordability was in question. Also, it was harder to insure those houses because after you flip them, it's hard to insure those houses because the resale, especially here in Florida, the older houses are hard to get an insurance policy on. Go watch my Florida insurance videos and some of the rants I've had about the insurance problem. And you'll see everywhere that there's really some type of natural disaster exposure, insurance is getting tough, especially in flood zones. So you're having a problem. And when you're only looking at 27% margins and you got to pay a higher capital gains, you got uncertainty, you've got the expense of everything going up from contractors to just overall material costs, really hard to make money, especially if you don't know how fast you can get rid of it. Also, the whole Airbnb game has kind of like hit a wall because insurance companies don't want to really insure them at the same premium price as a single family home you live in. They want to get a premium that's cutting down the cash flow a lot of these Airbnbs. I'll have to do a video on that because the Airbnb world is getting crushed. In some places, it's not feasible anymore because the insurance cost is taking away so much of your cash flow. Property taxes going up. If you own an LLC, they're just trying to hammer you. There's no exemptions. And then they're wanting to throw another 10%, 12% bed tax on some of these things. And in some areas, they're just outlawing them altogether. So what's the point of flipping? The whole idea was flipping was to throw it to an Airbnb that would make a higher rate of return than regular rent. And it allowed you to sell the house a little more expensive. When you're looking at those type of properties, sometimes you can get a premium if it's going to be an awesome Airbnb and the nightly is really high. I want to add into this. The NAR settlement has a little bit to do with this. Nobody wants to talk about it. The National Association of Realtors and the way they are now making buyers agents and sellers agents to work. Yes, it's really the same as it's always been, kind of. Because on the buyer's agent side, they're saying before a buyer's agent is able to work with a client, they have to have a buyer's agent agreement. And just like a couple weeks ago, in their great good idea theory, they decided to say, hmm, if you have 2.5% or 3% in the buyer's agent agreement with your client, and which in many cases, these builders will offer bonuses for real estate agents, or for a higher compensation for real estate agents to bring buyers to their property, because they know that the people that come in their door usually brought by a buyer's agent to their new builds, they're offering sometimes 3%, 4%, 5%, 6%, or for the luxury houses, they'll put a $25,000 or a $30,000 bonus on some of these properties. And it's well worth it for them because they can clear their inventory out fast by getting a lot of foot traffic. Well, NAR decides to cap that by saying, if you have 2.5% on a buyer brokerage agreement or buyer's agreement, and all of a sudden you decide to go look at a new build, you're usually you said you're going to look at these over here, normally they're offering on the seller's agents are offering, you know, 2.5%, or 2%, or 2.5, 2.75, but you got to look at a new build over here. And it's six, because they got a bonus on there, or whatever, 5%. You are not entitled to that extra above your buyer's agent agreement. And where they thought that was a good idea, because if two parties are willing to give something, they should be allowed to do that business. If the builder says, hey, buyer's agent, I want you to come into my property, I'm willing to pay you this. And we disclose it to your client, and they're cool with that. Why does NAR 1000 miles away, have to insert itself into this deal. So what you're seeing is a great problem with the incentives to sell a new build. Sometimes new builds are further out from where everything else is. Sometimes the builder just is wanting to incentivize people to come through their property. And since buyer's agents market a to a certain criteria to get those people into their property, they believe it is important for them to compensate a buyer's agent. And they do. Now, why does NAR have to insert itself into that when it's clearly transparent, and they don't want a price fixed, and they don't want to do these things that says, hey, this is price fixing, but then they limit things like that. I think that is going to have a little hurt on some of these, these new builds, you know, on these builders, because they've just decreased the amount of traffic that might go through their property. And let me tell you, some of these new builds are not built like the resale older houses. Some of these older houses built way better than these new builds. And they're trying to move these properties in a hurry. And they want traffic and they're willing to pay for it and they should be allowed to pay for it. I just don't quite understand that. Comment down below what you think. And don't just sit there and just say, I hate agents. Tell me why you hate them if you hate them. Because they serve a purpose. And let me tell you, real estate, being a real estate agent is hard and it's expensive. And if you want good guidance in a transaction, you need to hire a good agent. Because those new builders agents, the ones selling the new builds, those builders, that contract is geared for them, not to protect you, to protect them. And if you don't have somebody walking you through those contracts and trying to protect you a little bit, those builders are going to take full advantage of you. And if you don't know about your walkthroughs and your inspections and your one-year inspections and what things should look like and what type of package they were supposed to give you, but you didn't get, or what type of flooring and all the things that go in, framing, post-framing, making sure the sheetrock's not messed up, making sure there's not a chip somewhere on these countertops and they actually insulated the attic. You need to know these things because they will do everything in their power to keep you from knowing these things. You're not being represented on both sides if you're using the builders agent. I'm just going to go ahead and tell you, that's just my honest opinion. And I'm sure there's going to be some builders agents that's going to hate me for that. But you know what? I got to say it. I've seen too many people get cheated. I've seen too many properties stay open in the rain for a year and get mold all inside of them. And then they just throw them up, they seal them up, they sheetrock them up, and that mold is still in the wall. So you need to know how to inspect these things. Comment down below with what you think, right, wrong, up, down. Do you think this is the start of the wave starting to crash down? I still think we've probably got between 5% and 10% ready to go from here, downwards, just because of interest rates. And do I think it's going to crash? I haven't seen the crash elements pop up yet. But if you're going to buy a house, make sure you negotiate well. If it's a property that you think is going to have a hard time getting a premium, just negotiate 5%, 10% under, 5% under ask. Maybe negotiate in a roof or something. Have a good real estate agent that knows how to negotiate. And you can make a deal in a down market. Deals are done no matter what if it's at the right price and the right conditions. So don't forget to like and subscribe and I'll see you guys next time.