Are you buying a new home? Selling? Moving? How has the housing market changed with the rising interest rates?
Is this a good time to sit out the uncertainty and rent for a while?
In Episode 30, Natalie Picha, Glenn Royal, and Jason Strzyzewski talk with special guests Brittany Waterman and Ashley Graves of Steel Door Realty.
And stay tuned for a quick market update to close out this episode.
Experience the difference of working with a firm that empowers your life—a firm that focuses on what matters most—you.
Whether you are beginning your financial journey now or have already taken steps toward your ultimate life goals, we are here to guide you.
https://podcasts.apple.com/us/podcast/rhp-market-talk/id1538051530
Are you buying a new home? Selling? Moving? How has the housing market changed with the rising interest rates?
Is this a good time to sit out the uncertainty and rent for a while?
In Episode 30, Natalie Picha, Glenn Royal, and Jason Strzyzewski talk with special guests Brittany Waterman and Ashley Graves of Steel Door Realty.
And stay tuned for a quick market update to close out this episode.
Experience the difference of working with a firm that empowers your life—a firm that focuses on what matters most—you.
Whether you are beginning your financial journey now or have already taken steps toward your ultimate life goals, we are here to guide you.
https://podcasts.apple.com/us/podcast/rhp-market-talk/id1538051530
Welcome to the RHP Market Talk podcast, Episode 30, recorded here in Houston, Texas, by RHP Wealth Management, an Independent financial services and investment advisory firm. I'm Natalie Picha, a founding partner. Together here with our founding partner, Glenn Royal, and also our investment analyst, Jason Strzyzewski. And today's part two of our conversation on the state of real estate. And if real estate's not your game, that's okay. Please stick around until the end, where we're gonna be talking about the state of markets considering the recent banking crisis, the debt ceiling fight, and another quarter-point interest rate hike, and what the effects have been on the market today. I'm excited to say that we've got special guests from Steel Door Realty, Brittany Waterman, and Ashley Graves. Thank you, Brittany and Ashley, for joining us today. Thank you for inviting us; super excited to have this conversation. For our listeners out there, if you are just picking up on this podcast, please jump back to last month's episode, where we talked to Curtis Willeford about the state of the commercial real estate market. Today, we're going to be talking about the state of the residential real estate market, what the effects of covid have been, and now interest rate hikes, and where we go from here. So I'd like to tell you a little bit about Brittany and Ashley before we get started. Brittany is a native Houstonian with a big love of all things Texas. She graduated from the University of Houston with a focus in Houston and restaurant management. She began her career in real estate in 2010 and formed her own firm, Steel Door Realty, with her partner in 2019. She has not looked back since and has loved serving the community as a residential realtor in Houston and surrounding areas. They have grown to a 20-all-woman brokerage with offices in the Houston Heights and Hallettsville, covering many areas in Texas. Brittany is a proud alum of leadership, Houston Class'37. She's an active committeeman with the Houston Livestock Show and Rodeo Calf Scramble Committee and is involved with the Junior League and other nonprofits in the community. Brittany and her husband, Kelly, have two children that keep them busy, and you'll often find them exploring the many parks and museums Houston has to offer. Ashley is a sixth- generation Texan and a graduate of Texas A&M University. Ashley has worked as a realtor in the Greater Houston area since 2005, and she joined the Steel Door Realty team in March of 2022. Ashley currently serves on the Nassau Bay City Council as well. She's a board member of the Harris County Mayors Council Association, the Bay Area Transportation Partnership, the League City Regional Chamber, and the Community Association for Nassau Bay Enhancement. She's a graduate of the Texas Realtors Leadership Program, and she also dabbles in commercial acting. And when she's not showing houses or advising clients, you can find her enjoying time with her two kids and probably eating cheese. Check out her social media, where she shares a little bit about cheese and has a newsletter in that she provides guidance through the mayhem and glory of the ever-changing real estate market. You guys are busy! That's what I can say.
Brittany Waterman:Yes, for sure.
Natalie Picha:So, in all the busyness that you have in your personal lives, tell us a little bit about the busyness you have in your professional lives. And if still Door Realty started in 2019. You've been around this pandemic just a little bit, haven't you?
Brittany Waterman:Yes. I think starting a company a year before the pandemic hit was interesting, to say the least. It's also pregnant at the time, so that was another whole run of emotions. But, you know, COVID definitely scared us, and, you know, you start a business, and you think you have to take this big halt. We were very lucky to be considered essential business, and we were able to keep working at that time. And, um, as some of you may have noticed in the Houston area, at least Covid created a big boom for real estate. So it's actually a really good time. In hindsight, to start a company.
Ashley Graves:Natalie, I'll speak to our busy time outside of the office, but really real estate is about making sure that you can trust the person that you're taking this journey with. And I think that, especially in Steel Door Realty and Britney, they've been great guidance on making sure that we're all getting out there and whether it's through, actively being on the board of a chamber or just finding that special niche where you enjoy volunteering. I know we have a lot of events at our office, and that really speaks volumes to being able to connect with the people around us and be involved in a way that we know not only what's going on in our communities but we know what's going on with our clients and we can address their needs easier once we're in a real estate transaction with them.
Natalie Picha:Right. So I think that's kind of where I'd love to see this conversation go because we've been talking about the post-pandemic world now. I feel like that's everybody's conversation. And I hate just to be redundant, but we had...when we were getting ready for this podcast last week...some great conversation around behavioral changes like we've seen in the markets, right? People's behavior during Covid changed dramatically. I mean, some people stayed home and traded options. And meme stocks. I mean, you know, for you guys, what was that like? I mean, it was a boom for real estate. But you guys were telling me about the behavior changes and what people were people did differently.
Brittany Waterman:Yeah. Their needs changed. I mean, they all of a sudden went to be working from home. So whether you had small children or you were there by yourself, you still wanted that space that you could make your own for an office. And people got really tired of the four walls around them, even if they had the space. So it was kind of a double whammy from all angles. People wanted outdoor space. If you were already kind of in a townhome or a condo-style, their needs just changed overnight.
Ashley Graves:Yeah. I will also say one of the things that I thought was very interesting is we had been headed for so long into this larger McMansion style of living. And right as we were coming back into I think the average had reached about 2200 square feet, we started moving into like smaller housing again. I predict that that's going to hit a hard pause, because the need for a home office is now just part of the deal. Sometimes you need two home offices. Whereas before, we were trending towards this open concept was everything. The more open, the better. And of course, that's changing. And so some of these older homes that were built in this area around the sixties, you're finding more desire for those because they have a traditional layout that may include a formal dining or a formal living. Where people that are double income working from home can now get creative with this space and utilize it more. So, it's also interesting and not only the needs that people have that are changing, but the appeal of different housing styles is kind of coming back online as we see people moving away from this wide, wide open concept a little bit.
Natalie Picha:So, what has it done to inventory? We've basically had, especially in the state of Texas, we've just not had the inventory which has kept the market pretty resilient, even with the interest rate hikes. What did you guys see right around that early 2020? And then, what are you seeing now?
Ashley Graves:I think what was still on the market when the pandemic hit, kind of gradually just dissipated. And what we've seen ever since then is not just a shortage in the Texas market or even the Houston market, but nationwide, we're at the largest residential inventory shortage that we've seen in a really, really long time. I don't even know if they know if it was numbered before this, but it's at an all-time low. I believe and so that just shows you where we're at as far as a couple of things. Um, people are holding onto their homes longer. The tenure now for Texans is eight years in a home versus seven. So we're bumping up a year. There are several reasons for that. People, refinanced during covid interest rates were still low. A lot of people use that money to invest in their homes and finally do that remodel they wanted. So they want to stay in there a little bit longer, and they're happy. And, Glenn, I think you hit on a good point when we were prepping for this. Just trading up that interest rate sounds frightening. And if you've gone through all the trouble of now a refi. And now a remodel, and you've gotten to a place where you want to stay, you want to stay there and enjoy that 2.8% interest rate. And so when someone says, Hey, do you want to sell your house? You're just not as likely to be willing to do so.
Glenn Royal:Yeah. I'd like to ask a little bit about how long do you think that trade lasts. Because if I go back to 2008...Brittany and I were talking about this a little earlier, you saw the collapse in home prices values that got whacked, uh, and it kept people in their homes. And we're a mobile society in the United States. We need to go to Ohio for work. We go there, Florida or Texas or wherever. That's one of our benefits as a country. But now I'm back kind of in that same spot where, because of the cost of the loan. Or the remodel that you just discussed, how long do you think this lasts that people were going to just hang on to that three-handle mortgage until needs change. Past that eight years or something along that line?
Brittany Waterman:I think a lot of what we see in our market trends just takes some time. Like hurricanes happen, and people are afraid of flooded areas. They move on because time has happened, and we forget real fast. We're already seeing that people are forgetting really fast that the interest rates are high. But I also think that a lot of that has to do with messaging. And understanding that like it's not going to get better anytime soon. So you either rent or stay where you're at. And the cost of waiting, we can talk about inflation and all the appreciation that's happening with that. So the cost of waiting, if you really want to put the dollar for dollar down on paper. Get what you want. Right. Can't put, you know, price on happiness. It sounds corny, but it's true. Like, don't sit somewhere for a financial reason when actually, if you really plan it all out, the appreciation cost is the same. So...
Glenn Royal:So people will move on from this fairly quickly.
Brittany Waterman:We're already seeing it. So we can talk about that in a little bit, but we're seeing that already.
Ashley Graves:Absolutely. I think Brittany and I were discussing this yesterday. And once that interest rate spike hit, there was just a real hard pause. And it was, you know, all across the board. I mean, you know, obviously the refis stopped, and the mortgage brokers were coming out to shake our hands and drop off cookies. And, we all just looked around and went, oh gosh, this is happening. And we knew it was coming right for a long time, but it was finally here. But I do believe into this real estate quote unquote season as we go into the spring and the summer, we're finally getting out of a couple of things. We're getting out of that shock of that spike. And we're getting used to this rate. We know it's going to be here. And we're also getting past the pandemic a little bit. And like you mentioned, Glenn, like people do have to move. They have to sell their house; they want to take a different job; they want to downsize; they want to find that dream home. You know, there's various reasons for moving, and a lot of those are more important than where that interest rates are at.
Natalie Picha:Are we still in a world where people are at bidding wars for homes? Is cash the only thing that talks, or, you know, we've had a banking crisis recently, is it getting harder to obtain financing? What's that looking like?
Brittany Waterman:I think on the financing side, other than the higher interest rates, so needing a little bit more income to qualify, I haven't seen a crackdown on requirements or any changes in like what they would've required before other than your debt to income. And does that make sense with the new interest rate? And we did see some issues, especially in the new construction world where folks were under contract in the, you know, the three and a half percent rate. And when the hike went up, the home wasn't completed yet. The rate hadn't been actually locked; they were just pre-approved at that rate. So when it went up to five and a half or six, they no longer could afford that home. And so we did have a lot of terminations in that. That window when kind of the sweet spot of that. And I think that's ended because we've been sitting at this rate for long enough now. But, so, to answer your question, are we seeing bidding wars, and is credit tightening? Bidding wars have come back out. So we definitely saw that halt, like Ashley said, from September-ish to early January. And then, once everyone started to realize that this isn't changing, it's not going to get any better. I would say the last month and a half, at least from my perspective, we've been seeing the multiple offers situations again. And it doesn't have to be cash; money still talks in a sense of if it's a close number. An offer, cash is going to win. But there are so many terms in a contract that can help you still finance a home and win out on other cash buyers. And often, cash buyers are looking for a deal. And a seller; if this is their home, it's their livelihood, and they still want to make a good return on it. So if they have to wait 20 more days and take a small risk that that financing might fall through and they go back to that cash buyer in 20 days. They're willing to take that risk. So we can still get good qualified home buyers under contract without full cash.
Natalie Picha:That's interesting. And, just as a reminder to our listeners, because I know we have listeners that are all over the country. We are in the Houston area. Yes. And so Steel Door covers the Gulf Coast going south. So you know, we're in Seabrook, I live in Seabrook, and I'm way behind the average here because I've lived in my house for 25 years. Maybe I'm not supposed to admit that.
Ashley Graves:It's time to move now. It's time to move; we're here for you.
Natalie Picha:I need an upgrade. You know, but they cover all the way down...really, probably into Galveston County and then all the way up into Houston. And then I'm really intrigued for, again, for our listeners that are outside of the state of Texas; if you don't know this, the hill country of Texas has become a pretty hot spot. Yes.
Brittany Waterman:Especially during Covid because of that remote learning. Everyone wanted that. They just moved out. They didn't want the second home; they just moved out there. There was no return to normalcy at that point.
Natalie Picha:Because you can just work from anywhere. Is that still, is that still the case? Because I'm hearing that the numbers are going back up like 60% of the workforce is back in the office again.
Ashley Graves:Yeah, I think the, uh, I think the big boom, that was the whole Zoom town phenomenon is kind of, you know, coming, coming back online a little bit and calming down. Um, I don't think it was quite the, the utopia that people thought it was going to be, that you could go to these small towns and buy up all the real estate and just everybody was zooming and you know, just live a whole different life. You know, people still want to be in the city. And I will say one thing about Houston, and we are very spread out as a representative. Yes. Representing, uh, communities all over. Um, you mentioned the bidding wars. That's the one thing about Houston. You could have a phenomenon going on in the Woodlands where everything's a bidding war while Seabrook is, we're asking for, you know, 10,000 back and sellers contributions with every contract. Like the difference can be vast, and that's why it's important to have experts in every area that know what's going on in that particular community at the time. And also to take advantage of these dips. You know, when that interest rate did go up, and a lot of sellers were like, oh my gosh, I missed this massive selling frenzy that was early 2022. Like we'd never seen to just have its roller coaster the other way, just so dramatically, sellers were nervous, they got really scared. They're like, I'm never going to be able to sell. And so I think for me the clients I had, I was able to shift and say, okay, let's use this to our advantage. And, k nowing that t he seller's no longer in the driver's seat, let's go ahead and pull this in f or the buyer a little bit. And that's just the art of negotiation, and that's just being smart about where the market is and knowing what you can, right? What you can use to leverage your client and their either ability to buy more or less or get the best deal they want and stay in line with their goals.
Natalie Picha:And I think what I'm hearing, which is just refreshing, is, you know, in the media, we've got our ear to the ground around here all the time, is that life goes on.
Brittany Waterman:Absolutely.
Natalie Picha:Life goes on. We are going to get through, we went, we got through a pandemic, we're now on the other side, we're going to get through an interest rate hike. There's always gonna be something. But out to Glenn's point, people move, buy houses, and sell houses. I mean, it's life.
Ashley Graves:Yeah. I think one of the favorite things I heard from a chief economist for Greater Houston Partnership, Patrick Jankowski; we're all fans of him around here, I'm sure. And I, I don't ever miss his economic outlook. But we were chatting one time after the presentation he gave, and I was like, gosh, what do you really think is going to happen with these interest rates? And, you know, he knows the numbers like nobody. And, we just had... and Glenn, He's almost as good as Glenn...and we just kind of, you know, had a moment where he said, I said, what do you tell people about these raising interest rates in real estate? And he said, I tell them if they like the house and they like the area, buy it. Yeah. Yeah. And it was so refreshing to hear that from somebody who was a very numbers-driven person, to recognize that in residential real estate, there's so much more to it.
Natalie Picha:Well, and I like to pull it back in all of our podcasts and say, okay, you can find, you can find media outlets if you want to...that the sky is falling. And it's not. I'm not to say there are not a lot of bad things going on, it's just that we as human beings manage our way through things. Even when it's tough and even when it's hard and life keeps going. That's it. That's and markets keep going. And cycles still are cycles.
Brittany Waterman:It's a very good point. I also think to touch back on your commercial podcast last week...or last Yeah, last month.
Natalie Picha:Yeah, last month.
Brittany Waterman:Commercials are just such a different world. It is number driven. It is very focused, and it, you know, you have to make the decisions based off of that. But again, we were joking yesterday when we were preparing; we're therapists. That's our probably our first job in this is being a therapist to your family when you're looking for a house. So it pulls to your hearts strings. The numbers, you know, don't matter as much. Our parents buy... you know my parents bought at 12, 13% interest, and they didn't bat an eye. Glenn and I were just talking about that. So to be here and, you know, we're looking at over the 20 to 30-year interest rate chart the other day too. This is normal. This is completely normal.
Glenn Royal:I saw the 40-year average of a 30-year mortgage is 5.7%. And so we're a little bit higher than that. Higher, we know the Fed is fighting rates. They're going to start dropping probably next year. We can see it come back down to that average.
Ashley Graves:Absolutely.
Glenn Royal:So that'll be good. Absolutely. I'm excited about that.
Ashley Graves:We are too.
Glenn Royal:I'm sure. I'm sure. And I do want to give you both a shout-out for representing me last December in purchasing a home. You used your talents very well i n negotiating a very favorable rate f or me. It worked out great, and t hen the representation, b ut s till does, i s fantastic. So thank you both for that.
Ashley Graves:Well, thank you for trusting us. Trusting us. Yes.
Natalie Picha:V ery g ood. And I, you know, it's something we haven't, we didn't talk about at the beginning was we didn't, w e, w e've kind of been talking about single f amily homes here. R ight. I think, for the most part. Give us a little bit of an overview of kind of the different types of markets a nd what you're seeing. Does it matter? I think you were talking about the open concept, the older homes, and that kind of thing. But are people going to apartments because the interest rates are higher? Are we looking at condos, like multi-family? Where are we? Y eah. Multi-family v ersus a re
Glenn Royal:Do they still do that?
Brittany Waterman:They're still there. Yeah.
Ashley Graves:I cautioned anyone in Houston not to just go willy-nilly into the flipper market. Yeah. It's a real game here, and you have to know what you're doing, and you have to be able to do it right. To really find the win. There are some people that can pull that off, but anybody just coming in thinking that it's going to be an easy win. Is probably going to have some tough lessons learned.
Glenn Royal:Cheap money can cover the sins of a miss step.
Brittany Waterman:I can see it, and you can see it when you walk into it. True.
Ashley Graves:As far as people making changes, I actually have spoken with some clients that have unfortunately had some insurance rate hikes and some, appraisal issues where the home has gotten to the point where between the taxes and insurance increase, they feel they're too stretched, too thin, and instead of looking to downsize or move into something less expensive, they're thinking about renting for the next couple years just to see where this goes and to see what works for their family. So that's definitely an option. The flip side of that is I have clients that are taking advantage of older homes. Even with the secondary home or investment property rates being, you know, somewhere between seven and seven and a half, just depending on the day you can find the right house to have a good rental property in this area, depending on the flood insurance and the homeowner's insurance and tax rate, especially in some of these older neighborhoods where you're not looking at any muds and then creating investment properties there simply because the predictions on the rental market are that rates are going to continue to go up in that market, especially when you're looking at a single-family home rental. And even we see it in apartment rentals.
Natalie Picha:It just goes back to inventory. There are not enough places to live,
Ashley Graves:Which is interesting. I, you know, I don't mean to be disrespectful to anybody that lost a loved one during covid, but it seems kind of counterintuitive. But again, we know that we're growing and, um, we know that when you stop all of this construction, you really have to come back at it hard. And we've had a lot of great starts for a long time, but with this interest rate hike that's putting a pause and with inflation adding to that, and you have the cost of building material skyrocketing, you have a pause with a lot of these starts. And so I think that this, unfortunately, this lack of inventory, so to speak, will be something that we'll continue to struggle with for the foreseeable future.
Jason Strzyzewski :Yeah. And that's at the core of this issue with many things right now. So, you know, the good news is, at least from our front, we see, a lot of the production costs and operating conditions, you know, lumber, supply-demand and all that. And overall, commodities really kind of cheapening out. But a lot of these new home builders, like I said from our front, what we're seeing, they're trying to preserve some of those margins. All those hits that they took from these inflationary pressures. Do you anticipate them trying to ramp things up at all? What is being done to kind of attack the inventory issue, or do they just kind of hang out because it's profitable and it works, and it's a good balance?
Ashley Graves:So far, I'm pleasantly surprised at how many new developments I'm hearing about. I mean, even with these struggles, you know, they tend to be on the outer skirts of the greater Houston area. Uh, not so much interiorly that I'm seeing too much revamping right now unless that's more of what's happening. There's more cons. Commercial sector. Right. Or a mixed- use where you have, uh, some mix of retail or, uh, corporate rental space as well as living apartments. Yeah. Apartments or condos. So that's an interesting thing as well. But there are large swaths of land still being bought up. You hear about it all the time. And so you know that it's coming down the line. I just don't think it's as fast and as secure as we need to really solve this problem quickly. But I'm afraid we're one hurricane away from all of this progress reversing itself too. And so that can be, that can be tricky as well, but you do hear about it down the line, especially Brittany, and I hear often, you know, these, these larger developments happening. If I can touch on the trend real quick, sorry, I don't mean to just keep going here, of course. But one of the most fascinating things that I think is happening, and I know a couple of different companies that are doing this in different ways. You have a lot of, uh, Asian investors coming in, buying up large areas, um, and, and building out single-family developments that are strictly for rentals for rental purposes, only, which is going to change the rental market in a lot of ways depending on the area. And then you have people that are going in and basically using, for lack of a better term, FEMA trailers or manufactured homes on a much, much smaller scale and creating these little communities that are smaller kind of one-bedroom homes that provide a lower price point of rent and you kind of utilities and amenities for some of our workers that are in these big box store chain kind of income levels. Right. So if you have a target in a Home Depot and a Kroger in these collective areas for those people to find affordable living, which is another issue that we're dealing with. Yeah. It's very challenging. And so those are popping up in areas where it makes sense that is about, you know, 10 to 12 miles away from these big box retail centers and allow for affordable housing in those areas. And those are solid rentals as well.
Jason Strzyzewski :Sue. It's pretty encouraging to see, at least like anecdotally in the Houston area, a lot of these apartment complexes, they're starting to have that kind of income-capped housing for essential workers and you're seeing a little bit more of that. So a good thing to see so you're not just total stick in the eye and renting until forever. You know.
Brittany Waterman:The city is definitely doing a lot of incentives, offering a lot of incentives to builders in order to offer affordable housing for a fair wage and just to get it kind of in. It's not necessarily all apartments. Yes. It's, well, for the apartment complexes, but it's not all super low-income. It's for the fair wage and just to kind of cap it for to have that good quality of living.
Glenn Royal:Hey, so the Texas leg is in session; we know that hide your children, right? Yeah,
Brittany Waterman:They're almost done
Glenn Royal:So there are a couple of bills. The Senate has a bill out to increase the homestead exemption amount, and the House has a competing bid to cap it. The amount of the home can go up each year to 5%. I don't know which one's going to work, but are you hearing complaints from your clients about property taxes and looking for property tax relief?
Brittany Waterman:I've never gotten more reach outs, calls, texts, and emails to help with just comps to bring their properties down. And the rates this year were just astronomical. The increase in the values was astronomical. So I think this has been a big year for us as the tax man help and just providing comps to pull this down.
Ashley Graves:I will second that. I've got a lot of requests for comps or help in, fighting, the tax bill, so to speak. But I will say one thing that I think may be a flip to this is that there's an advantage to having equity in your home. And while these interest rates are high, and maybe we're not at a place where we can take that out, it's a good feeling knowing that you can sell and not be underwater. Where we hear a lot of these markets across the country experience this problem. And this is something Brittany and I talked about when we were addressing the issue of when does the bubble hit the Houston market. Yeah. And one of the things we were chatting about yesterday is how we're insulated from that kind of bubble burst in various ways. You have so much diversity when it comes to businesses in Houston. Now we're not just oil and gas; we're oil and gas, we're medical, we're technical, we're the space race, all of these great things and that does help in addition to our property tax structure as well as some of what were the other things that we were talking about that were helping the market? Just the de-escalation.
Brittany Waterman:We're in an international city, so there's just always something that's going to bring somebody here, whether one side of it's hurting. Right. Struggling.
Natalie Picha:Well, and to your point, I mean, there are just a lot of people that are still coming to Texas. We've still got so much industry coming here. I mean, Texas is booming.
Ashley Graves:And it's a business-friendly state. And we are grateful for that in a lot of ways, that we do have people that wanna relocate their business here. I'm sure you guys are grateful for that as well.
Natalie Picha:Yeah. Makes a difference. But to your point earlier, you were talking about other states or other cities in the country are not enjoying that same.
Glenn Royal:Yeah. The boom-bust of the pandemic is showing to be evident in other regions of the country. We're seeing, particularly out west not here in the in Houston though, which is a good sign, particularly for all of us in this room, I'm sure. Are you, are you seeing these trends? I mean, what work do you all see in relocation trends? And the other thing I'm mindful of is that in the 2008 housing crisis, there was a poor credit risk. Right? If you had a pulse and made 10,000 bucks a year, we'll give you a million-dollar mortgage. Right. But the credit quality is much better now. Absolutely. The average homeowner scores and the 700 plus range things are very different. So tell me a little bit about what you see geographically on prices. And how solid this consumer is today in the housing market.
Brittany Waterman:As far as the housing market goes, we're seeing those unique homes that are priced right go incredibly fast. Something that takes a little bit more work. It seems like people have assumed that pause on wanting to do renovations and wanting I guess they didn't have the time during covid when the people were kind of willing to be like, oh, I'm just going to re you know, redo my kitchen while I've got the time.
Glenn Royal:Well could you tell me a little bit about geography? What do you see in there? Do you agree with the pricing differentials and things like that strong...the strength of the Texas market versus the rest of the nation that continues, in your opinion?
Ashley Graves:Yeah, I would say absolutely. You know, when something is exacerbated to an extreme, you're going to see it fall back to an extreme. And, again, all of these issues, or I would say t hat the benefits that we have here kind of create a little protection from those extremes. And that has been true, I think, even with the 2008 crisis. The other thing that came out of that's great is even though they're tightening some of these lending rules and regulations, you also see lenders become very creative with products now. And so there's a lot more availability to find a niche lending product than there was back in 2008.
Glenn Royal:So ARMS are really big right now?
Ashley Graves:I actually haven't seen that many of those, surprisingly.
Brittany Waterman:Only for a minute when everything started going crazy, that was how they adjusted. I would say for the time period where we said, we mentioned that Holt from September to January, that was kind of where they were putting ARMS into use. One of the kinds of, I'll call it, gimmicky things was that the rate buy downs. And it's usually the seller doing that. So it's a two, one, or three- one. And basically, the seller is paying for an interest rate of a point buy down over that two-year or three-year term. And it's whatever that total savings were for the buyer the seller is paying. And that was like their gimmick to like help with their marketing and advertising for their home. I think we're seeing far less of that now already. Was really just this like short period of time. It was like the arms and the right buy-downs, and we're kind of trending out that already.
Glenn Royal:That's my favorite question to ask a Federal Reserve Governor, if you were going to take a mortgage out today. Would it be a fixed rate or adjustable rate?
Ashley Graves:That's a great question. It is. That's a great question. Yeah. I would agree with Brittany that, that we did see a little bit of a shift in what people were choosing for financing and hope that it would have a cost savings benefit to them. And especially with builders that need to get that inventory moving that maybe got caught up in a little bit of this, we're still seeing a little bit of that, or at least I am down in the area that I'm in that inventory just needing to get moved out. And I will tell you, if you had bought a house in January or February or March of 2022, someone else bought that same exact new build for probably tens of thousands of dollars less in November of 2022. So that was how drastic that swing was, and that was how fearful I would say that these builders were, that they wouldn't be able to move this inventory. And there's still some of that left out there. So I tell my clients, if you're looking to get a new build, you know, that comes with its own troubles, or I guess, own challenges in the sense that you typically have a much higher tax rate at that point, you know, paying for those MUDS and that infrastructure. But, you know, it can be a really nice opportunity to move into new construction.
Natalie Picha:Absolutely. Well, thank you, guys, very much. This has been very interesting. I hope that our listeners, it's not uncommon, you know...like you mentioned...your amateur therapist. We're a therapist as well.
Brittany Waterman:You definitely are.
Natalie Picha:That's a big part of what we do.
Brittany Waterman:I'm also a client of you all, so I appreciate your therapy sessions.
Natalie Picha:Yeah, we definitely are a therapists. It's not unusual for clients to call and go... I think I want to sell my house, think I want to buy my house, you know, I want to, I'm going to rent my house, I'm gonna buy a second home. So this information's good, and I hope our listeners are really appreciating, you know, kind of hearing the inside scoop. But I want to shift the conversation because, in the same way, that the commercial real estate market affects the markets, the residential real estate market...and like you said, life goes on; things are moving, and people are still buying and selling. Clients are still calling us and asking us, well, what do you think about the banking crisis. And what do you think about the interest rate hike? And what about the debt ceiling fight? So I'm going to kind of shift over to Glenn for just a moment. Just to touch on a little bit about what kind of pivots we've had to make in the last, you know, few weeks or months in regards to the interest rates and, of course, the banking crisis. If you didn't get a chance to listen to our March podcast, we did a quick overview of the SVB bank failure. I think, it's something worth listening to so you understand exactly what was going on there. But we've had a few other bank failures that have happened since then. And I know we've had some clients that have asked that question. Glenn, just give us a quick overview...thoughts on banking and the stability of the US dollar and where we are now after some of those things that have happened in the last couple of months.
Glenn Royal:Sure. It's amazing how everything is related to interest rates. Everything that we're discussing here is the mortgages, everything. It's all at the end of the day; how much is money going to cost me to do anything? And that kind of the setup we have going here, the bond market's in control, it's running everything. Uh, but one of the things I thought was fascinating with the Silicon Valley Bank merger is that when Washington Mutual failed in 2008, we were talking about that, that was that banking crisis. It's, they had, uh, 19 billion and assets that there was a depositor run on. It took 14 weeks for that 19 billion to flow out the door. When SVB failed, they had 28 billion in assets leaving four hours. So I think that's a testament to how wicked these little mobile devices are in our hands where you can just do instant banking on the fly. So there are a lot of things that are related today. Technology has greased that path and just made it exceedingly quick. So I, Natalie, think the speed of the banking and how we're able to address the new things impacted SVB. You saw a little bit of bleed over into a couple of other California banks we're in that same area. And one of the things we're looking at is banks deposits have exploded in size to where we, we are looking at which community bank has the most deposits that are uninsured through the FDIC cap, so like SVB something in our neighborhood, 92% of their deposits were uninsurable. They were through that cap. So that's one of the reasons you had to run is people were fearful of not getting their money back. So there's a bunch of things being addressed right now. Look at FDIC rules, which Congress has to approve that in order to raise that cap; you're going to look at passing through some taxes, if you will, to existing banks to pay for the money that was spent. Different rules and regulations. Maybe bringing the cap, you know, it used to be a hundred billion and deposit assets required audits by the fed that got changed to 250 billion. Now that's probably going to come back. So look for more rules and regulations; a lot are tidy, and what we're worried about the impact that may affect everyone is the tightening of lending standards. So we call that a credit crunch. And if I start getting that capital tightened up, what does that do for small businesses? What does that do for the bill? Who do people get mortgages? A number of things. So right now, loan officer survey came out also some surveys of small businesses, and we're seeing that they're doing okay. The credit crunch is not that great. It's manageable at this point A as far as the market, what we're l ooking for; I know Jason a nd I are working closely on that. The biggest driver right now is still the Fed a nd interest rates, e t c etera. S ure. They just raised a core of a point last, w eek, this week, actually. Y eah. And we are we think they're probably done at this point, Natalie, they in addition to this potential credit crunch that's happening, and then I look at the roll o ff of the Fed's balance sheet, t he$9 billion portfolio they're pairing off every month that has the same effect as a rate increase t hat we don't do it a t, a t a q uarter p oint at the Fed meeting. We're getting it through the backdoor channels. So it's allowing the Fed to take a break, pause, move the sidelines, s ay inflation. It turns out we've got a CIP print tomorrow, expected 5%, I think, year over year. We've got producer prices the day after, so we'll get a lot of inflation data this w eek. T hat g ives us an idea of where the feds at. I can tell you the trend is that inflation i s rolling over. It's just not coming as fast as we would like it to be to get back toward that 2% average target. Be surprised to see that.
Jason Strzyzewski :Sure. And you know, additionally, another good sign that we're seeing the Fed's emergency funding for a lot of these regional banks was tipping up pretty high once the frenzy was going a couple of weeks ago. But that's come way down since then, you know, credit spreads; we're not seeing them blow out like they did previous months where recessionary fears were much higher. But to Glennn's point, you know, it's all inflation dependent. So tomorrow data, I mean going forward where there's a lot of camps, the market's kind of pricing, expecting some cuts, uh, towards the end of the year, we believe that's a little premature and hopeful. Um, I know Natalie used the choice word of the pivot. We don't see that happening this year, potentially next year. But once we get there, I mean the most recent earnings period, you know, we had many more beats than anticipated. And this is supposed to be the trough of all these hikes. So really, a lot of positive things moving out of this just kind of have to get used to this new normal, as we've been talking about in the real estate market, in the rates market. This is just going to be the cost of business, the cost of living going forward.
Glenn Royal:Yeah. And look, if rates start to calm down, which inflation pressures would drive that, I'm looking at earnings, uh, this year flat, roughly. We're looking at$221 on S&P earnings. I'm looking for an increase of 11.4% in earnings next year, followed by 9.8 the year after. To Jason's point, this is the trough and cycle. We were looking for this quarter to be down, and it's all about earnings, right? It's all about inflation and earnings at the end of the day. So I have; I was looking for down 8% coming in the first quarter of this year. It's down 3.8 half of that next quarter is to be, is expected to be down 7%, third quarter's basically flat. And then I have an 8% gain in the fourth quarter.
Natalie Picha:So what that tells me is that Fed Powell...you think Fed Powell accomplished what he was hoping, and we're going to get a soft landing, no recession?
Glenn Royal:So Goldman Sachs, I'm kind of in that camp, and if we do have a recession, it's more of an earning space recession. Not a hard recession. It's a light touch and go, and off we resume. But Goldman Sachs just reduced their recession odds from 35% down to 25%. Historically, we always keep 15% on the table just as a hedge. Right? But those things are starting to come down. So I think the big change that you're seeing us with the portfolios is in this environment; this is more of a stock pickers market. This is more strategic investing. It's not beta... We just go in for the broad market and a rising tide lifts all boats. Put your stock pickers hat on, and you ought to have a pretty good market in the next six months.
Natalie Picha:Good. So that just leads me to your thoughts about tech in the last couple of few months and what you've seen. Right.
Glenn Royal:We are long tech out the wazoo. That's a technical term in Wall Street.
Jason Strzyzewski :It's absolutely justified. You know, you had top five, six names of the S&P composition, those FANG names providing most of the year's return. You look at the most recent earnings period, their size is able to insulate them through all these pressures, through all this restructuring, even all the job cuts. They showed up, and they performed and I don't see them slowing down anytime soon. Yeah. And we're
Glenn Royal:We're talking the mega caps, the Apples, and the Microsoft types of the world.
Natalie Picha:Yeah. Speaking of that, with interest rates being what they are and savings accounts and things like that, I found it interesting that Apple's coming out with their own savings account now.
Glenn Royal:Yeah. And we hear about that. So everybody has let...one of the reasons to hit the banks is we all let the bank checking account deposit because it was paying us one 10th of a percent. I went, well, the money market is paying me almost five. I'll go over there. So just this wall of money well so if I get a deposit that wants, says, money out of the bank, they don't have the cash anymore; it's over in the money market fund. So they have to sell their investment portfolio bonds, which were underwater, and that created this tsunami that we're in right now. But I'm actually, again, I'm kind of optimistic in here. I'm a contrarian; I admit that. But when I see that record amounts of cash in the money market funds, that's fire power. That's a dry powder that's ready to come into this market. And what'll drive it is that old thing in Wall Street called FOMO. Fear of missing out. Alright.
Jason Strzyzewski :And not so long ago, we were there in 2021. 2020.
Natalie Picha:Exactly. It hadn't been that long
Jason Strzyzewski :Buy the dip. I mean, that was people's only option. Obviously, we're in a different rate world. So that is not as, not nearly as justified. But, you know, FOMO, that that could definitely kick-off. You've got short covering. You've got a number of things that could really just catapult.
Glenn Royal:Earnings. Yeah.
Jason Strzyzewski :Earnings. Earnings.
Natalie Picha:Well, and to your point from earlier about the technology, just really making things go really fast. Would you say, if you look back, I know that we've had a pandemic, right? That changes everything, but you're talking about really, really compressed business cycles. That happened super fast. Is that just the normal world now?
Glenn Royal:I hope not. That's.. excuse me. Well, tennis shoes are on all the time. It probably is though, to your point, every, the speed of information, a nd we spoke with t his class of students recently at First Baptist Church, a nd my big trade for all o f them advice was don't find a career where AI can replace you. You know, you w ant t o manage the data, you don't w ant to let the data manage you, you'll be gone. So yeah, it's all moving a t the speed of light. You have to have the tools to understand it. And that's why y ou have Jason and I.
Jason Strzyzewski:Aren't we all data at the end of the day anyways?
Glenn Royal:Facebook thinks we are.
Natalie Picha:Well, a special thank you to Steel Door Real Realty to Brittany and Ashley for joining us today. As always, a thank you to Glenn and Jason. If you guys could see our conference room table right now, you just see paper spread out all over the place. So we just want a kind of give you some insight into what we're thinking. Lots of notes and lots of prep go into us having this conversation. So thank you to everybody. To our listeners, we certainly appreciate you subscribing to RHP Market Talk. Please leave us a review and follow us on LinkedIn and Facebook. And if you have any questions or would like to discuss today's topics, please feel free to contact us through our website at royalharborpartners.com. At RHP, we're passionate about planning for your financial future. Through our one-on-one conversations, we can help you navigate your personal wealth management and investment journey. How different will your life look with the right advice?
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