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Interest rates may go up. Is that cause for concern? It should it be? Not if you understand that we are trending back towards normal and normal may be boring, but boring is so exciting. When you do real estate this way over the long run. What would your life look like if you could replace all of your working income with simple and conservative?

That could do it for you. Over the last 13 years, we’ve helped thousands of clients transact over half a billion dollars in simple and conservative real estate transactions, allowing them to begin replacing their work income with real estate investment income. Each week we’ll be pulling back the curtain on the ins and outs of real time retirement based real estate transactions that will transform your financial future.

Even if you have no real estate experience, this is replace your income with. Kevin Clayson and Steve Earl. All right. Hello everybody and welcome to Replace Your Income with Kevin and Steve. What’s up man? How’s it going, Kevin? I am fantastic. This is episode 72. When you said that, that blew me away. Yeah, 72.

That’s incredible. Now, to be totally fair, if we were constantly doing an episode a week like we should, if we wanna be good little boys, uh, we might be around 80 or 90, but we’re still at 72. Yeah, that’s fantastic. That’s pretty awesome. That means. There have been 72 minimum, 72 reasons for people to not continue listening

But yet you guys still come back and we appreciate it. We’re so thankful to be with you and uh, we got a good one today. We got a good topic. You know, one of the things, Steve, that I like that we’re able to come on here and do is we’re able to talk like a current events, like what’s happening in real time.

Like what are we seeing in the market, Like what in the world is going. And so I think that that’s, I like that. And you, earlier this week you sent an article out to the entire leadership team at Dun for real estate. Oh. Before we get there though, can I tease something? Yeah. Can we talk? Yeah dude. So guys listening, You replace your income podcast listeners.

The book, our book, Steve. It’s getting real close. It is like, It is. It’s exciting getting really close. We just got back. Some cover design mockups. How did you feel about ’em? Were you feeling pretty good? Those are pretty cool. Yeah, My guy did a good job. So if you guys, I don’t know, we may send it out on social before you guys hear this episode, but if you’re listening to this episode right now, then I want you to go onto our social media and go see if you can find the post, because we want your feedback right.

This is the book that we collectively have written because Steve, if it wasn’t for Replace Your Income podcast, and if it wasn’t for you listening right now in your AirPods or in your car, this book would not be in existence. It was really us going, My goodness, there’s so much stuff that we felt like we’re extracting out of these conversations.

We have to put it into a book so it can hopefully have an impact on people. And that was a huge piece of why the book exists. So to. Out there listening. Thank you for your contribution to this book. We’re so excited for it. Yeah, it’s been a lot of fun actually, to write it. And what’s really cool, Kevin, is that it didn’t end up just being like another book about real estate and how to do real estate.

It really brought out the philosophical side of our conversations. It’s like from the podcast. Yeah. And so from that standpoint, it, it was super, super enjoyable to put this together. Yeah, it’s been a lot of fun. So we got some book cover design. It was awesome. I was so, I feel like Steve, you and I are pretty aligned most of the time, I would say, right?

Yeah. Like the vast majority of the time. So we get these mockups and I go through and I picked my favorite one immediately and I did not tell Steve what it was. I was like, I’m gonna test the theory. And so you got the email. I was like, Dude, we got the mockups. Let’s look at it. And so you go through and look at it and what you didn’t know was I was watching your reactions and I was noticing like there were some that you were staring at a little bit longer, and those were the ones that I also kind of liked.

And then you and I came to the conclusion that, well, the same conclusion that we both liked, One particular cover design better than the others, right? It was kind of, I was like, Hey, look at that. We’re on the same page, but we want your guys’ feedback. So we will post that on social. If it’s not there already, go check it out.

Give us some feedback and your thoughts. But now let’s get to today’s episode. So, Steve, tell the story a little bit of you finding this article and why you thought we should be discussing it as a leadership. Well, let me back up just for a minute. So we do a leadership retreat every six months here at Dun Free Real Estate, where we go off site with the, the seven kind of leaders of the company.

And we talk about, uh, goals and objectives and different things that are coming up and our feelings. We talk about our feelings. Well, you do. Yeah. I mean we And we listen to you. Yeah. And I appreciate that. I know there’s a lot of tears. Shed, You guys are such a crush, such a support team. Every time we get together he cri.

And so one of the things that we really focused on this last time in last December was we took a look at the future, right? And we tried to come up. What are all the shifts in the market that we can anticipate so that we can come up with ideas and solutions and shifts as to how we need to help our clients through the changing market?

Because the market is just changing so quickly, and it was a really effective and really important exercise because as the market has done what we kind of thought it might do, we’ve already had solutions and ideas and things in place that has allowed us to kind of move quickly and adapt as a company.

And so I recently came across this article from Fannie Mae, um, and Freddie Mac that discussed ongoing shifts in the market, what they think is gonna happen in terms of volume of homes being sold, interest rates, whether we’re gonna see a recession, Is it gonna be a crazy recession? Is it gonna be a mild recession?

and it was a really good article. And the reason why I put a lot more kind of credibility towards this particular article, cuz I, I do do a lot of reading and I read a lot of different articles, but this one came out from economists, from Fannie Mae. Yeah. And I put a lot of weight in what they say. So it wasn’t just opinion of somebody, it was like Exactly.

It was, it was really based in some really good data and information. So I really felt like as a team, we needed to review this and be aware of what they were kind of coming up with. They’re kind of taking a, a pretty good, hard stance in, in what they think is gonna happen over the next 24 months or so.

Yeah. Well, and by the way, I think this is so critical. So Steve is a great leader. Like if you guys have read, I told him this years ago and I can’t remember if I mentioned it on the podcast, but there’s an amazing book called From Good to Great and In Good to Great. It talks about something they call a Level five leader, right?

I don’t remember all the characteristics of a level five. But I remember when I read those characteristics even a decade ago, I went, This is Steve, 100%. And Steve is an amazing leader for us and for our company. And this is part of the reason why now in my world, how we market, how we share the message of done for you real estate.

It’s something that I’m constantly thinking about because I know that we can change our messaging. Based on what the market’s doing, because our principles are solid right now. Here’s what I mean by this, and this is why I think you also brought it up to the team. We are not a reactionary company from the standpoint of, oh, no interest rates went up.

Everybody’s like running around with their hair on fire, right? Like, that’s not what we do. Or, Oh, no, you know, prices. Are increasing too high or they may be decreasing. We’ve never been a company that’s like, Oh my goodness, hair on fire. What are we gonna do? Reaction, reaction, reaction. We, and this is why we wrote micro wins, civilians.

It’s why we’ve written the book. It’s because there is a core set of foundational principles. The principles that we espouse and talk about on this podcast, that is what we hang onto, right? They are principles. Now, one of those principles, as you very well know if you’re listening, is we go hit real estate singles.

And we do it consistently over time. And another principle that we talk all about, we’ve said it a billion times on this podcast, is there’s never a bad time to buy, right? You should always be looking to. Because those are our principles, because we’re operating from a frame of reference of, of a historical perspective of all the ups and the downs in the market.

When something like this happens, an article like this happens, Fannie Mae or Freddie Mac announced something, or we see what’s happening in the market or with interest rates, like we’re very on top of understanding interest rates are going up. You know, we, we communicate that with our lending team or they communicate that with us literally daily, whatever may come.

We are not concerned, at least not concerned from the standpoint of, Oh no, we’re in real estate. What the heck are we doing? We didn’t feel it during the market crash, you know, during the mortgage crisis oh 8, 0 9, We’re not feeling it now. And the reason for that is the principle based approach that we take to real estate, and I love that we’re not a reactionary company, but what I love about all of that, the reason I went on this tangent, is you as a leader, Knowing that these are our principles said, Okay, so this article came out.

Now there may be other companies or other people that read that article and they went, Oh no, they’re chicken little out here. The sky is falling. What are we gonna do? We say, Okay, let’s look ahead and this is what we did at our leadership retreat. This is what we’re doing now. How do we constantly evolve?

Because we always know what’s a good time to buy, but it’s just how we treat the market, what we’re looking. You know what? Maybe even what markets we’re expanding into or where we go, these are all pieces of the pie. So I love that you said, team, let’s look at this article and let’s talk about it. And so what we’re gonna do is we’re gonna have the discussion with you guys.

We are gonna go through this article, kind of paragraph by paragraph. We’ll read it, Steve and I will discuss, We’ll see how far we can get. But I think that this is really good stuff to be able to talk about and to focus on. So any words on that, Steve, as I pull this article up? Yeah, no, let’s just jump right into.

So the article is titled Modest Recession Iden 2023. Fannie Mae Economists Predict. Okay, so it’s Fannie Mae, economist. This is not just, you know, uh, Joe Economist sitting on the corner, you know, with the big goal trying to tell you what he thinks is gonna happen in the market. Okay, well, and one of the important things we remember as well, sometimes.

There are economists who are part of like these, you know, private companies that have a little bit of an, an agenda, right? So Fannie Mae really doesn’t have an agenda other than to make people aware of what they truly believe is gonna happen. Yes. Right. And, and I think that that’s important and that’s one of the reasons why I felt I put a little bit more, you know, emphasis on this article.

No, it’s good. Okay. So here’s how it. Home sales now expected to decline by 7.4% this year, and by 9.7% in 2023. A dramatic adjustment from March when Fannie may forecast a 4.1 decrease in home sales this year and 2.7 decrease in 2023. Let me run that back. So Fannie Mae is revising and saying we expect a total 7.4% decrease this year, and a 9.7% decrease in 23.

That means that Fannie Mae revised their forecast from a 4.1% decrease to a 7.4% decrease this year, and from a 2.7. Decrease in 2023 to a 9.7, decrease in 2023. So let’s talk about that. To start with C, why are we talking about the potential of a home sale decline or percentage decrease of homes being for sale?

Yeah, I, I think one of the things that kind of pushed them, like when you think about that just from March, like their numbers changed dramatically and I think it’s. They came to the conclusion that, that we may see a mild recession in 2023. And what that does is it, it puts a lot of downward pressure in terms of like what people are willing and able to do in terms of purchasing new properties.

And as we’ll read in the article, we’re gonna read some reasons why they think that that fewer homes will be bought and sold in the coming months. And a big part of that is the fact that. The market has responded to the Fed’s increase in their rate more dramatically than what they expected, more than what Fannie Mae actually expected.

And so rates went up more quickly than projected just based on what the Fed has done. And so rates going up has put downward pressure on people’s ability to purchase homes. They’re getting priced up, meaning rising prices and higher interest rates mean higher payments for investors. What that means is lower cash flow, so fewer investors are jumping into the market because of that cash flow consideration.

And that’s something that we’ll address here in a few minutes as well, because although that is an issue, most definitely, it should not be a, a massive indicator that you should not be buying real estate. Yeah. You’re talking about investors and, and let’s talk about, you know, primary resident owners as well, right?

Yeah. From that standpoint, just their ability to afford, right? Yep. So, LTV and debt to income ratios and so on, that does curtail a person’s ability, you know, to actually purchase a primary residence even. Right, Right. Yeah. Upward mobility, it’s not really necessarily a thing that maybe everybody’s considering right now, because look, you maybe have a bunch of equity in your home that’s grown, but now if you sell that home, that home that maybe you have at a very low interest.

Now, if you sell that home, you’re gonna use all the equity, but you’re gonna have to go get a more expensive home. And now that more expensive home is gonna be at a higher interest rate. So it’s having an impact on whether or not people are buying and selling their own primary residences. So now sellers are a little bit deterred from maybe selling.

Buyers are a little bit deterred from buying. So you look at all of that. Now, here’s the thing, Steve. It’s not unlikely that we will see a recession simply. I mean, we know that in the first quarter this year, there is the beginning of a recession, right? A recession’s just multiple months where GDP and overall economic growth is not happening.

So GDP is down. I think I heard like 1.4% or something like that, right? So if that continues, we’re gonna see a. Now when, whenever we hear recession, I think that sometimes the media makes us super duper scared. Like, Oh, no recession, everybody’s gonna die. Listen, the reality is we get to look at the economics and see what’s kind of happening, and then react and respond.

To it. We know that this is coming, so we’re going, Okay, what impact does it have on you as a real estate investor? So we know that home sales are gonna go down, so let so for home sales are gonna go down. We know that doesn’t necessarily mean that demand is gonna take it dive. There’s still high demand and there’s still a shortage of supply.

But home sales are gonna decline a percentage. So let’s go on with the article. Economists at Fannie Mae have dramatically downgraded their home sales forecast for this year and next saying they expect a quote, modest recession in the second half of next year in the face of fed tightening and the Warren Ukraine.

In their latest forecast Tuesday, Fannie Mae economists said the projected downturn is not expected to resemble the severity or duration of the great recession. I think that’s a really important point. We’re gonna circle back to it. Let me finish the paragraph, but that higher mortgage rates are likely to cause home sales to decline by that 7.4% this year in 9.7 in 2023.

So we’ve been saying this, Steve and I say it, if you’ve talked to me on the phone and we’ve talked about what’s going on in the economy, we’ve talked about. Even though we’re gonna see a recession, this is not like the great recession, right? This is a very different scenario than what we saw during the Great Recession.

Oh 8, 0 9, okay. This is not a bunch of really bad subprime loans and people not being able to qualify to do homes. There is still high demand. You have to be exceptionally well qualified. There is still a shortage of supply. There’s all the things we’ve been talking about, but that’s interesting that that’s one of the things.

So Fannie Mae’s saying, Look, we’re gonna have a modest recess. But it’s not gonna be like the great recession. Okay. And let me just read one paragraph further down, Kevin. Yep. That kind of describes like why it won’t be as severe, like you’re just describing. Says, From a housing market perspective, factors weighing against a severe downturn include stronger mortgage credit quality, a far less leveraged residential real estate and mortgage finance system, and a better equipped mortgage servicer and public policy appra.

As well as ongoing housing supply constraints relative to demographic demand for housing. There you go. Those are all things that are weighing against like a crazy, like massive recession like we had in 2017, 2009. Yeah, that’s exactly right. So it is a different world and a different scenario than it was, and I think that, see that’s really important and I just wanna point this out because we’ll continue with the article.

There is a massive opportunity cost to deciding to sit on the sideline and wait and not do real estate. A lot of the phone calls I’m getting from people right now are not people saying, Hey, I wanna just go like crush it with cash flow right now. Look, this is a Replace Your Income podcast. Real estate over time will assist with income replacement, but you have to understand that a principle based approach to purchase worthy properties and hitting real estate singles means that there will be real estate cycles and there’s gonna be times of high cash flow.

There’s gonna be times of high equity, there’s gonna be times of lower cash flow, there’s gonna be times of lower equity growth. But the overall long run picture of simple. Single family residential real estate investment is what we talk about on this show. It always works over the long run, but there will be ups and downs.

There will be dips and so what’s the opportunity cost of sitting on the sideline and going, I’m worried about the recession. I’m worried about interest rates. I’m worried about all of these things. And opportunity cost. I don’t think, Have we talked much about our, I don’t think we’ve talked much about, just a little bit the concept of opportunity.

Here on the podcast, and for those of you that are unfamiliar with the general concept, opportunity costs is simply when you don’t take an opportunity, there is a cost associated with that. A lot of times we think if I don’t take action on a thing, I can just sit back and I’m trying to avoid the pain, right?

That’s why we sit back. I wanna avoid the pain, I wanna avoid the potential downturn, but there is a cost to. No matter what, sometimes the opportunity cost of choosing not to act is greater than the risk of acting. Okay? So I’ll say that again. Sometimes the opportunity cost of choosing not to act is greater than the risk of acting.

So lemme give you an example. This is, I, I had a phone call with somebody the other day, Steve, and here’s what they said. They said, Oh man, you. I really wanna get in Kev, I really wanna do real estate right now, but I’m just worried about the interest rates, right? The interest rates are just higher. We’re around a 6% now on a 20% down.

Ah, I just dunno. When I said, Hey, you know what, man, it would be awesome if we still had investment rates in the three and four percents, wouldn’t it? Wouldn’t that be awesome? And he said, Yeah, ke, that would be awesome. And I said, You know what? They may not get there. Again, I don’t. We may have passed that time of those super low interest rates.

So if that’s the case, then I took the conversation further. I said, So let’s say that you wish that we could have had a lower interest rate, couple percent lower. What impact would that have had on your monthly payment right now? Right. And I did the math. It was gonna be like a couple hundred dollars difference maybe on the high end, right?

I think it was like a hundred and something dollar differe. Of what it would be today versus what it would have been on the same purchase price at a lower interest rate. And I said, Now, but here’s the thing. What is the projected equity forecast on this home? So even though you guys sales will be declining, it does not mean that we’re gonna necessarily see an equity reversal.

There may be some equity reversal, there may be some downturn in some of these big coastal markets that got wildly inflated really, really quickly. But in most of the markets where we invest, if you look at all the projections and you look at all the predictions, they’re generally not assuming. That we’re gonna see an equity growth reversal, right, where we’re gonna see a backslide.

So I said, even if you’re gonna get equity growth over the next year, and over next year, you are trading in the potential of that equity growth because you’re scared about the interest rate. So maybe you’re paying a even a couple hundred dollars more a month than you want to. However, what are you gaining on the back end?

If you take a look at tax benefits, you take a look at principle paydown. You take a look at overall equity increase and potential cash flow. What you’re trading is possibly tens of thousands of dollars of potential growth over time in a piece of property because you’re worried about paying a couple hundred dollars more a month and a lower cash flow, you’re going, Okay, if I’m only cash flowing a hundred dollars a month, well I don’t wanna do this.

I need to be cash flowing $500 a month. Okay, fine. You can totally sit and. But trading that additional $400 a month cash flow, or $5,000 a month in cash flow, if you’re saying, I’m willing to write, it’s effectively you writing a check for that $5,000 worth of cash flow saying, I don’t want to, I would rather pay.

And wait, then actually pay a little bit more and gain, right? That’s kind of the concept. So when we talked about that, he was like, Oh man, that really makes a lot of sense. And he said, Oh man, so I’m missing out. And by the way, rent increases. Steve, I don’t know if you’ve look, you’ve probably looked at the projections.

You look at and you know, we use a, a really awesome software that aggregates a bunch of data. And all of our markets are predicted today as we record this podcast to see more than double. 10 to 17% rent increases over the next three years, which means that even though you’re paying a little bit more, even though interest is a little bit higher, if rents will catch up over time, your cash flow’s gonna increase over time cuz you’re locking in your interest on a property at a higher interest rate than maybe you want to.

But what’s the opportunity cost of not doing it? It’s the potential equity, growth and tax benefit, and somebody else funding your investment account by paying down your principle and the potential of future cash flow as well as today cash. So Kevin, I think your description of opportunity costs is spot on.

The other thing that I think that prospective real estate investors are facing right now is the sense of remorse that they didn’t get in when they, while the interest rates were so low, right? In business. There’s something called a sunk cost where you go and you spend a bunch of money on something and then you realize that, Oh, dangit, it’s like, this didn’t do what I thought it was gonna do for me.

And sometimes people will keep throwing good money after bad. Yeah. Right. And they kind of keep going, hoping that they can catch up, so to speak. Bottom line is, I don’t think we’re gonna see interest rates in the, in the three percentages again for Yeah. Right. A long, long time. A long, long time. Yeah. And so it’s kinda like this is what I would call a sunk cost.

Hey, maybe you missed out on it, but that doesn’t mean that the opportunity to move forward. Isn’t still good and that’s where opportunity cost comes in. It’s like totally don’t get the double whammy of of having sunk cost and lost opportunity cost. Right? That is double wha just, just realize that hey, that opportunity, that the opportunity of getting those low interest rates, if you didn’t have the opportunity to take advantage of them, it’s a sunk cost.

You gotta kind of, you take that loss and you move forward, you get rid of that remorse and you realize that hey, there’s still a massively great opportunity in real. Even during the short window of continued double digit growth and even when the market corrects and pricing goes back to normal. Where maybe even at what Fannie Mae is telling us in this article that will, Should we jump into Yeah.

Let, yeah, let’s jump back to that because it’s gonna kinda share with us what, what they’re predicting in terms of appreciation, growth. What they don’t predict is a massive drop in value. Yeah. They just simply are predicting a slowdown in the increase in value to go back to more historic type appreciation levels.

So you, you read the paragraph, We skipped a couple, but you read the p. From a housing market perspective, factors weighing against a severe downturn include, and it talked about the stronger mortgage credit quality, talked about the far less leveraged residential real estate and mortgage finance system, and a better equipped mortgage servicer and public policy apparatus.

That’s the, You read that paragraph, right? Yeah. Yeah. So let’s go on. We’re gonna go to the next paragraph, which says, But rising mortgage rates don’t. B well for already tight housing inventories in mini. Forecasters at the mortgage Giant said. Then it goes on and says, quote, households with a 3% 30 year fixed rate mortgage are unlikely to give that up in favor of a mortgage closer to 5%, and we expect this so-called lock in effect to weigh on home sales.

Fannie Mae, Chief Economist Doug Duncan, said in a statement he continue. Moreover, if mortgage rates remain relatively elevated, we expect the added affordability constraint to price out some would be first time home buyers and contribute to the slowing of demand. Shortages of existing homes have builders working overtime to complete new houses.

That’s really important. By the way, shortages. Of existing homes, there is still a shortage of existing homes. We still have several years of shortage, so builders are still going. Oh, okay. Even though there, there may be less the, the home sales, we may see those somewhat declined cuz we got higher interest rates.

We got maybe less interested. Party builders are still working overtime to complete new houses and Fannie Mae still sees new home. Growing by 2.3% this year to 788,000 homes, even with sales of existing homes projected to drop by 8.6% to 5.6 million. And so Kevin, the thing that’s important to remember here is the actual cost to build homes is continuing to rise.

And it’s not just because of supply and demand, it’s the fact. Materials are continuing to increase. Yep. And labor is continued to increase. We got a shortage. Yeah. And so all of that is still happening, which will continue to put upward pressure on home prices. And so again, just, you know, to reiterate, Fannie Mae is not predicting a drop in price.

They’re just, they’re predicting a slowdown in price. Uh, increase. That’s right. Okay. So we’re gonna. Again talking about this lock in effect, but the lock in effect of rising mortgage rates and worsening affordability quote will eventually weigh on new home sales as well. Fannie Mae Economist said of their prediction that sales of new homes will drop by 8% and 2023 to 725,000.

Goes on. The most recent reading of Home Builders sentiment showed continued strong current expectation for sales, but the index fell sharply for the six month outlook. While the level was still elevated indicating good market conditions. The change was one of the largest in series history. Okay, so guys, all we’re saying is that the environment that we’re in, we just have to understand it and we have to understand, and here’s this one thing I think about sometimes.

If there’s less people selling, okay, but there’s still high demand. But now we’ve lowered supply. This will still have an upward pressure, as you mentioned, on pricing, on rents, on really everything simply because there’s less supply. But it doesn’t mean that demand has necessarily diminish. Across the board and ke, why are fewer people selling?

Fewer people are selling because they’re going, Okay, well if I sell, I’m gonna have to go get a new mortgage. Right? They don’t wanna get a new mortgage at a higher percentage rate. They’re not selling because they’re saying, Okay, if I sell, I’m gonna make a bunch of equity, but I may have to sink that into now a more expensive home.

So they’re transferring equity, and if they’re going to a more expensive home with a higher interest rate, even though there’s moving their equity from one property to another. They may be looking at it and saying, Oh, well it’s gonna just cost me more across the board. So as a result, they may not wanna do that.

But you know, what that might mean is that might mean that we even see an increase in rental demand. Right. And, and one of the reasons why people are going to be willing to sell in many cases is because they just locked in like a 2.875%. That’s right. Interest rate on their house like I did. Yeah, me too.

And, and it’s like that in and of itself is an asset. And who’s gonna wanna give that up? That’s practically free money in, in one sense. And so in many cases, there is untapped equity that people would like to take advantage of, to be able to utilize, to invest in additional real estate, that kind of a thing.

And so what are some things that people can do outside of like refinancing that at a higher rate or selling their home and taking advantage of the equity, but having to go to a five, five and a half percent interest rate? Yeah. So, and here’s the other, I was talking to somebody on the, the phone the other day.

They had sold a practice and they were getting a bunch of money and, and he was like, I wanna put it into real estate. You know, we’ve thought about paying off our home, but we have our home as such a low interest. That he didn’t want to get rid of that asset, right? So for him, that was an asset. And so what you are talking about is maybe you don’t wanna go and refinance your home at five and 6% because you have a two or 3% mortgage.

But one of the things that is back and that is available, and that is a wonderful financial tool that you may wanna utilize, is a home equity line of credit. Right, because now you’re not trading in your two or 3% interest rate, but you can still leverage and utilize the equity that’s grown over the last few years through a home equity line that’s gonna have a separate interest rate attached.

That’s gonna have sort of a separate set of conditions, but it may make a lot of sense to take money out of your property with a HeLOCK, which is a second mortgage, right? So now the first mortgage stays intact. Now you add a second mortgage, which is your home equity line, and potentially, depending on what your rates are, It may make sense to pull the equity out that way and now go and invest that in additional investment properties.

Yeah, that’s exactly it, and that’s how you keep, you know, the, you know, your, your current mortgage rate kind of intact that way. So that just simply is one of the other reasons why there may be a slowdown in home sales is because so many people took advantage of the, of the low rates and locked in and created this great asset that they now have.

This next paragraph is really important though. Cause we were talking a little bit about equity growth, but, and we were saying that, okay, you know, we know that we’re gonna see equity growth, continued equity growth, but it may not be what it’s been. I don’t see, and maybe we’ll see some sort of a downturn, a massive downturn.

I think it’s pretty unlikely in terms of equity growth. Here’s what the article said it said for would be home buyers being priced out of the market. The good news is that Fannie Mae economists expect home price appreciation to make a rapid plunge. It continues, not just a rapid plunge, dot.dot, a rapid plunge back to the single digits, moderating from a record 19.8% during the first two quarters of this year to 6.5% by the first quarter of 2023.

And 3.2% by the final three months of the next year, Steve, on our performance, we’ve always used right around a 3%, uh, idea of saying, Okay, you know, rents may go up about that much because home prices in a normal market are gonna increase by single digit percentages. Yeah. And keep in mind that, that these numbers here are across the board, right?

Yes. Right. So in some states, this 19.8% was actually in the twenties. Yeah. And in, in other states. In other cities it was, it was lower than that. So when they’re talking, you know, across the board end of 2023, low single digits in many of the markets. And in fact, most of the markets that, that we are in, Kevin, that, that we invest, that we help our clients invest.

They’re probably not gonna even see that low of single digit. Right. It’s more likely it’s gonna go back to kind of historic, what we’ve seen in those certain forms. Yeah. Closer to like four to 6%. Right. Maybe in some of the markets on the low seven on the, on the, on the low side. So, and that’s typically even, even today, Kevin, like where the markets, like in Florida where we’re seeing this 20 plus percent growth on our performance, we still show like in the single digits.

Yeah. We don’t even go into the double digits. Nope, that’s right. Because we just like to stay conservative. And even at that conservative rate, Kevin, like the overall annualized return on a five year outlook is still in above 20%. Yep, that’s right. Which is, we just don’t like to go above that because it just gets crazy.

Well, and then that’s such a good point. The last part of the article just talks about kind of the end of the refi boom, and we’ve kind of already touched on some of that. But here’s, uh, cuz people just aren’t gonna refinance for all the reasons that we’ve already talked about. Now, here’s one of the things that I think about, right, in terms of opportunity cost, and in terms of making and, and paying.

If I am paying more money for a home than I want to, and a higher interest rate than I want to, The question is, is it still going to make me more than what I’m paying? If you take a look at the next few years between equity. Uh, potential cash flow, which may be low for the next one to two years, but then as rent increases continue to go up, but you’re still locked in at an interest rate and at a solid, you know, purchase price on a home, your cash flow will start to increase again.

But if you just look at tax benefits and, and depreciation, right, that come with tax and principle pay down, principal pay down, and potential cash flow. And equity growth, and you take a look and say, What is this property gonna produce for me? The reality is, Steve, if you look at a 10 year projection, it’s probably still gonna beat the stock market unless you are a day trader and you’re just, you know, watching the peaks and valleys and you could just beat the market 10 times outta 10.

If you are just kind of a sit, hold and wait kind of person, there’s gonna be market volatility. It may come up. It’s been a real long bull market. You team that with inflation, and we’ve seen some market decreases in the not fairly recently. And so if the property is still gonna make you more, then it’s gonna cost you.

Isn’t that a worthwhile transaction? And that’s what you have to be thinking about right now. Yes, interest rates are higher. Yes, purchase prices are higher, but guess what? You can still make more than you’re going to spend, which still makes it a really positive investment if you utilize the kind of behavior that we talk about with hitting real estate singles, and we talk about with how you replace your income over time, where we’re not reactionary, where we’re not selling.

When Chicken Little’s telling us that the sky is falling over the long run, this investment becomes powerful. Well, Kevin, I I just, I just have to point out again, even though we’re kind of, you know, beating this horse a little bit, is that. Price increases, drop back to normal historic levels. Like, that’s the word I want to, to really emphasize is we’re just going back to normal.

And normal is a winning strategy all day long in the real estate arena. Yep. Of real estate investing and so, It’s actually a good thing. Like we’ve seen this craziness that’s been going on. I’m actually kinda looking forward to seeing a little bit more normal because it’s just more healthy. Yep. Right.

For everybody. Yep. Uh, in involved. And so it’s kind of a relieving thought to me. It’s like, Hey, this is great. We get to get back to a little bit of normalcy in the market and, uh, the powers that be are making some good decisions that as much as we don’t like to see interest rates go up. It’s a needed element right now just to slow things down to cool, to cool things down just a little bit to get back to this normalcy, um, to where things become a little bit more predictable again, where we’re not like in this area of, it’s like, holy cow, this is just something that we haven’t ever seen before.

Yep. And so it, it’s actually in, in my estimation, to a large degree, it’s kind. Alleviating. Oh yeah. The Yes. So normal is boring, but boring is so exciting. It’s so good. boring is so awesome when it comes to real estate and. With all of the stuff that we talked about, if we were to summarize, Okay, so home sales may go down.

Is that cause for concern? It shouldn’t be. Interest rates may go up. Is that cause for concern? It should it be? Not if you understand that we are trending back towards normal and normal may be boring, but boring is so exciting when you do real estate this way over the long run. So that’s what we wanted to share with you guys today.

We want to give you a feel for what’s going on in the. What’s happening in real time, you know, from very credible sources. And then give you our spin and our take cuz it’s something we think about and we talk about, we talk about as a leadership team, we talk about Steve and I as we’re just kind of looking at the world and, you know, it hasn’t, it hasn’t curved our enthusiasm whatsoever for continuing to invest and allocate capital towards real estate.

Because even if we’re trending towards normal, and if that trend, if we trend towards normal, if that feels like a bit of a down. Boy, we can’t wait for normal. We love normal. Normal is boring, but boring is so exciting when you do real estate this way. So that’s all we have for you today, Steve. Any last words before we sign off?

No last words today. I think we said it all. All right. Thanks so much everybody. We’ll talk to you real soon. Have a good one. Thanks so much for listening to replace Your Income with Kevin and Steve. Do you wanna connect? And other income replacement rangers out to obliterate the status quo and experience real retirement with income replacement through real estate type done for you Real Estate USA in your Facebook search bar.

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