46. HOME SERIES 2 OF 8 – CHARACTERISTICS OF HOMES PURCHASED

Home Series 2 of 8

Adrian   00:02

Hello future millionaires and welcome back to the get rich slow Podcast. I’m one of your hosts Adrian Shermer, joined by Lance Johnson and Rob Delavan. Good morning, gentlemen.

Rob Delavan   00:10

Good morning.

Lance Johnson   00:12

Good morning.

Adrian   00:13

Today we are going to be moving into part two of an eight part series on the characteristics of home buyers and sellers. Today’s focus is the characteristics of homes purchase themselves and we’re going to start things off with a great success story. I know last week, we talked about being one of 29 steal no small feat. Rob, I know that you and your team were one of 14 just recently, right?

Rob Delavan   00:39

Yes, we were one of 14 offers and we were able to secure the property for the client. So, we’re closing this week, I think on that one also. Yeah, definitely a success story and we can workshop that in another episode, but it was a lot of fun.

Adrian   00:57

Yeah, I want to keep going into that. But again, that’s a whole episode on strategy. We’ve done a little bit on that, but we’re gonna continue to revisit that as the market continues to change and that strategy needs to change if you want to have an accepted offer.

Rob Delavan   01:12

So upcoming events, one that we’d like to highlight is an ROI financial and Delavan Realty. What are we calling it? I believe it was movie madness, something to that effect, April 16 so we’re hosting past clients, current clients and to a Pixar movie, I believe it’s called something rather there’s a little girl in it that turns into a panda when she gets upset. So, I’m sure it’s going to be very cute and I’m sure it’ll be just as much of a tear jerker as Toy Story was way back in the day. So, turning red, for promoting our websites, just wanted to make sure everything’s listed down below. We have ROI-FA.com. For ROI financial, we have Delavan-realty.com and we have directorsmortgage.com for Adrian’s profile there and that’ll all be in the notes down below. So, this is going to be a fun one here. So, characteristics of home purchased in 2021. We’re going to be discussing the National Association of realtors report that comes out at the end of every year and summarizing the previous year that report…

Adrian   02:46

[Inaudible 02:46]

Rob Delavan   02:52

Exactly and the idea is this year over year comparison and it actually goes back for decades. This was their, I want to say this was their 40th year that they’ve released this, which is pretty cool. We’re gonna have a link to this. Specifically today we’re going to be talking about characteristics of homes purchased, it is on page eight of this report and we’re gonna go through get some comments from you gentlemen on this, as well as we have a few questions ready to go. Okay, so the first piece that we have here is I want to run through some of these guys. So, are these specific points, so just go ahead and comment on them as we go and tell me to hold up when you guys find interesting things here. So, 15% of buyers purchased a new home and 85% of buyers purchase a previously owned home in comparison, in 1989, 29% of buyers purchased a brand-new home. So, we’re obviously half that. Building is expensive and they’re not making any more land. That’s my biggest comment on that.

Adrian   04:13

Yeah, they keep making people though, something’s got to give.

Rob Delavan   04:19

Good point

Lance Johnson   04:21

So there is whole another episode, right there…

Adrian   04:25

Finances of making people

Rob Delavan   04:26

I think that’s gonna be a lot of comments on this. So, I’ll keep moving. Most recent buyers who purchased new homes, were looking to avoid renovations and problems with plumbing, or electricity at 36%. Buyers who purchase previously on homes were most often considering better overall value at 38%. Electricity and plumbing are problems, nobody likes to…

Adrian   04:53

Scary problems, you can burn them down or you can ruin a house pretty quickly with water. It’s the reason that I bought new just a year ago that definitely drove my bias as well was the developments that have progressed. Look at plumbing, we’ve gone from copper pipes to the plastic and we’ve got a lot more efficiencies to, there’s a lot more focused on efficiencies with new builds and people are environmentally conscious. They want their Tesla chargers in their house and they want to have a furnace that burns at 97%, 98% efficiency. So, it makes sense and, honestly, I mean, at least in my shopping, I didn’t find that much of a bias and expense either. old houses still sell for good money based on bedroom count based on square footage, chunk of land that you get. It’s kind of interesting how small of an impact it is to be new versus old. One of the major differences obviously, there was some of the other expenses, insurance was really cheap on my house taxes were really high. You know you’ve really got to map out the whole picture to decide for you.

Rob Delavan   05:59

Yeah, new homes, it does make life easier.

Adrian   06:05

Yeah, you can get some value too. You can get some sweat equity, if you buy a house. That’s, I mean, I wouldn’t want to buy into a plumbing problem unless I really knew what I was doing or an electrical issue and that’s like a whole can of worms to unravel. But I don’t know if it’s got Formica countertops and linoleum floors and you feel crafty, then you might be able to build some sweat equity in a property or if you know the right people. Work is kind of hard to come by right now. I know, Rob, you’ve run into this a few times with clients, right? We’re trying to book out stuff after a purchase and it takes what months longer than it has before, a lot of these labor jobs are well booked. So, yeah, it’s a good save money, but be ready to sit, you know, hurry up and wait for the right contractor to come in and finish off that job.

Rob Delavan   06:52

In 1981, compared to 2021, 76% of homes were detached single family homes in 81 and 82% are now. So, that hasn’t changed much the single-family home continues to be the most popular type of home across the country. Only townhomes are row homes at 7%. So, of course, you have the traditional big cities of New York, San Francisco, so forth, where everything’s attached, but most of the country prefers not to share walls.

Adrian   07:31

We’re Americans, we want our freedom, and everybody wants their own piece of the pie.

Lance Johnson   07:36

Everybody wants to own that front lawn

Rob Delavan   07:38

Yes, exactly, despite what you may hear, as people saying, oh, they don’t want that anymore and density is what the drive is right? Folks are still doing it and at a higher percent than 81. So, an interesting thing, senior related housing held steady this year 14% was 16% of buyers typically purchasing condos and 7% purchasing that townhouse or row house. So, senior housing 14% You’re looking at like single levels type properties, or ones with accommodation and then of course, we got the condos and and townhomes and so forth. Not a huge change there but 14% that’s an interesting correlation with the aging population and so forth. Again, a whole another episode on baby boomers and different demographic…

Adrian   08:37

You hang on to that house or do you…? I mean, I love we’ve helped a few people in and out of the elderly communities. I think they’re awesome. They’re, like you’re saying single family homes, there’s so much more usable. I mean, my grandmother right now can’t even use the top floor of her home and she just wants to stay there though. So, there is some credit to being where you’re comfortable but these homes are well set up for the purpose.

Rob Delavan   09:07

So, the most people moved within or on average about 15 miles away from their previous home or rental and convenience to friends and family was the second most important factor in influencing neighborhood choice after quality of the neighborhood. This surpassed convenience to job and affordability which were more important last year, Lance I’m sure you probably have some thoughts on that especially as the pandemic has been digested.

Lance Johnson   09:44

Say the question again…

Rob Delavan   09:45

Well, so the convenience to job and affordability were the most important thing and 2020 and the convenience to friends and family along with quality of neighborhood were the number one and two for 2021. So, there’s definitely been a change convenience job is becoming less important and affordability is becoming less important versus friends and family and neighborhood quality is becoming more important.

Lance Johnson   10:13

Well, we kind of saw that in 09, 10, 11 when the market took a downward turn is densification people, the way they’re dealing with healthcare, because healthcare is getting more and more expensive, long term care is and even as you’re seeing, like, in the Portland area, we’re getting [Inaudible 10:41]. So, people will be more inclined to look for a house where they can have that ability to take care of their, you know, their parents and have another choice other than paying 6, 7, 8,000, $9,000 a month and elderly care. There’s just choices and so if you can have a house that has multiple dwelling, so there’s independence, but then you’re close enough to take care of or hire part time. It’s just it’s an interesting trend that’s been happening since 08, 09, 2010 and now when people are working from home, they’ll go to vacation places and work. So, there’s a whole shift of being close to a city where people were working or a subdivision where there’s, we have Nike built these beautiful places to bring in, but like, they’re just now starting to go back to working and when they’re working, they’re not doing five days in the office. They’re doing three days, one week, two days another week. So, now, the quality of home is changing for us. Whereas we were seeing densification and multiple dwellings on one land, we’re seeing a difference now.

Rob Delavan   12:13

Yeah, that’s a really interesting, it’s like the second year hangover from the pandemic.

Adrian   12:22

Yeah, the reality that it’s going to be long term is setting in, we’re seeing the shrinkage of offices, right? Bit of commercial space shrinking, people moving their offices completely out and just keeping a core staff that they need to have it on Office and I think it’s a great thing, I’m sure we’re going to realize the problems, we’re already seeing a bit of it, right, like certain small towns that didn’t have industry before are being inundated because they have natural beauty or they’ve got you know, cheap housing. So, there’s a crunch that’s happening in some of these rural areas and there’s obvious downsides, but I think there’s also obvious upsides of just, maybe it’s alright, if some of that urban sprawl gets spread around a little bit instead of being jammed so hard and cities?

Lance Johnson   13:07

Well, I think the jamming of the cities is do the fact that you’re trying to cut down that commute and then economies of scale and light rail but now with the ability to work remotely. What I’m hoping and what I think will end up happening is economies supply and demand will be created. So, go into that ghost town that was dissolved. You could go put up Google or something or have a group that has a hub, but the cost of living compared to Portland is now a lot less and you can revitalize some of these rural inner communities. I think that’s kind of…

Adrian   13:54

It’s an injection of money if you have a $200,000 a year tech job and make its way into a community that never would have been able to pay out salary like that, then where’s that money gonna go? A lot of it’s going to flow into that community might not be totally terrible.

Lance Johnson   14:10

I’d love to see some tax incentives to revitalize some of those companies now that you can work a lot easily remotely and so you could go to Montana, which has low property taxes, low income taxes, low estate taxes, work remotely and [Mixed Voices 14:35]

Rob Delavan   14:44

Okay, so buyers typically purchased I think this is probably no surprise and again, these are national numbers. Their homes for 100% of the asking price with 29% purchasing for more than asking price, I think that It speaks for itself. We know we’ve had a pretty hot market with in a lot of areas across the country pushing around that 20% appreciation and that typical home was purchased was 1900 square feet and it had three bedrooms and two bathrooms and the average age of the build was 1993. So, that’s one of the interesting pieces that we can look at of the average age of the home you know, back in 1981 was very different. Obviously, we’re from 40 years ago.

Adrian   15:39

So average 30 year old homes

Rob Delavan   15:43

So lots of insight into that is 1993 was definitely not a smart home and definitely not a efficient systems home, although maybe getting there better, for plumbing than it was in 1973, no lead paint or things like that but you’re still dealing with a lot of renovation…

Adrian   16:08

[Inaudible 16:10]

Rob Delavan   16:10

But a lot of cosmetic upgrades and I don’t think that’s going to change anytime soon. People want to upgrade their homes and then the last piece and this is very interesting and I know I want to unpack this from a wealth building standpoint, with Lance’s perspective there. So, most overall, buyers expected to live in their homes for a median of 12 years, while 18% that they were said that they were never moving. That’s an interesting one so one out of five basically are saying they’re never gonna visit, there’s a little bit of hubris in that because we all know that our dream home today, regardless of where we’re at in life is very different from our dream home, maybe 510 years ago and maybe very different from 510 years from now, depending on life stage, but 20%, so they’re never moving and then of course, again, 12 years being the median. So, what are you guys thoughts on that?

Lance Johnson   17:25

Well, I think there are a lot of factors there. So, first factor is, we’ve often talked about the trends of interest rates. So, the 20’s to the 1950’s 1920’s, interest rate came down and 1915 1982 is a 32 year trend upwards. So, when you look at getting out of World War Two and people bought houses, a lot of our parents and grandparents lived in the home for 30 years because interest rates are rising. So, why did they want to go buy was there enough advancements in the house that you were willing to go into a bigger home, did you really need it? You had an interest rate that was four and a half percent, interest rates went up to 18, you’re doubling and tripling your price because the home values went up the size of the value and the interest rate? It wasn’t really worth it or was it better just to stay in the home and make small renovation scenarios? You haven’t had that since 1982, the converse was 1982, you’ve got a home mortgage for 14%, 18%. Interest rates are coming down…

Adrian   18:41

Why not flip into a smaller house as your nest gets smaller? Why not?

Lance Johnson   18:44

When interest rates come down, your wealth went up, your income went up and you only had to go up one and a half times your monthly payment to get into almost twice the home as interest rates came down. So, here we are now 2020, interest rates can be going up, will they go up other than this manipulation of simulating the economy, are we going to see a trend like we did in 1950 to 1982 and will those 18%, over 12 years, 12 years goes to 15 or 20 because nobody wants to give up that 2.5% interest rate? And people had bigger homes and now you’re seeing tiny homes and all these shows and so material things don’t mean as much and so are you seeing a different trend where smaller homes, interest rates already exist, why are they going to, I think we’re back to 1950 at some point in time, potentially and I think you’re going to see that number of 12 years, which is based on the last 30 or 40 years is going to trend differently.

Rob Delavan   20:05

Yeah, it’ll be interesting to see. I like the crystal ball but history does repeat itself, especially when you look at what actually drives the markets, interest rates drive markets harder than actual prices do because people pay on a monthly basis and that interest rate changes that monthly payment. It’ll be interesting to see also, if what wins life change versus the financial change and sure which one drives more? Oh, I need a bigger house but oh, my interest rate is so low so how did then people finance that? How do they do big renovation? So it’s definitely going to be some cross winds, what we’ve experienced the last couple of decades…

Adrian   20:50

[Mixed Voices 20:51] upgrading and their payment would be exactly the same because they had so much equity and to be a down payment. From that first home, we had a few clients, right, that had six figure equity and maybe three to five years. That was their starter home and then that became between the lower interest rate that they were able to get at that time and the fact that they had a larger piece of equity in that next house, we’re about at the same place but you’re right, I mean, Lance is 100% right. Now those people are going to be kind of stuck and if you’re older generation, you want to downsize. If you’ve got cash, you’ve got equity in your house and you’re just going to buy that new one cash, because what’s left in your big house and what you’re going to sell it for is enough to get that townhome, it’s not a problem for you but a lot of people are still pretty leveraged. For one reason or another, maybe they’ve got you know, the rest of their money tied up in investments and yeah, again, if you’re at two and a half, or even three and a half percent and rates end up trending, continuing into the fours or fives, it’s gonna be an expensive lunch to switch over to a smaller home. So, I think we’re gonna slow things down.

Lance Johnson   21:59

I think there are some different behaviors that take place. So, less likely have somebody sells that home, keeping that 2.5% leverage. I mean, when you think about it, it doesn’t make sense to sell a home, give up a 2.5% interest rate to go into another home that’s bigger, whatever, more land and take a four and a half. So, what you might see is, somebody might not sell that home, but they would end up renting that home. The cash flow from the rent funds, the new home and they keep it and they build wealth that way. I think you end up seeing stuff like that I think you’re going to with Airbnb and all…

Adrian   22:46

That’s a great point

Lance Johnson   22:48

If you have a good location and a good view then people want to visit

Adrian   22:53

And you got the cheapest business loan ever, I mean, who lends 2.5% of businesses, right? Nobody

Lance Johnson   23:00

I just think what ends up happening is, is cheap debt investments and interest rate trends. You you come to strategies that are like water, water finds the least path of resistance to get to its lowest spot, I think in real estate evolves, where people are less likely to sell, like 1950. But in 1950, they didn’t have Airbnb, they didn’t have the internet and I think they just accumulate some good interest rates, don’t get rid of them, but then rent them and then move on to the next smaller home. In other locations because of internet, you don’t have to be tied to the city that the Nikes in or Columbia or Intel, you could be in the Bahamas and do your work if you really wanted to.

Adrian   23:52

Yeah, I’ve got a web developer friend right now who’s in Hawaii for a stint of six or eight months depending on how lucky he is with rentals and I mean, it’s really not having any negative impact on his work, probably a positive one. Honestly, he still seemed to be a bit more chipper. So, I get I get more out of workers if they were in tropical paradise, maybe.

Rob Delavan   24:17

Okay, so, thank you, gentlemen. Just to wrap this up, there are some serious trends here. This was probably a little bit more prognostication as I anticipated, but it’s fun to look at this stuff and see and look ahead and see if we can’t predict some of the things that are going to affect where things go so 2020, we’ll do the same thing in 2022.

Adrian   24:47

Yeah, look forward to watching this episode in four or five years and see exactly how right or wrong we were.

Rob Delavan   24:53

So please stay tuned for the next episode in this eight part series. We will be learning about the home search process and the statistics that came out through the 2021 report until then appreciate you guys for listening and we’ll see you next time.