🤝 Bye 2022, hello (buying opportunities) 2023

Good Morning and Happy Friday. This is the Shake 🤝: The 5-minute weekly newsletter that keeps it as real as these headlines about real estate companies 👇

Here’s what we've got for you this week:

• The Drunk Housing Market

• Commercial Corner 🏢: Office Extravaganza

• Creative Finance Cafe ☕️: Reverse Amortization

• Are There Too Many Realtors?

MARKET RADAR

THE DRUNK HOUSING MARKET 

Not every cocktail 🍸 is made equal. Sure, there are the same ingredients in each one but it's really up to the heavy hand of the bartender (aka the Fed) to see just how strong a drink will taste. Well, in the case of the US housing market, let’s say there’s a toxic cocktail being served, and some local markets are starting to feel tipsy.

There's a blend of factors that led to the second half of 2022 being pretty historic for the US housing market. Tightening monetary policy, widening mortgage rates, and increasing supply of new housing have led to transaction volumes freezing and prices starting to decline.

What’s interesting is how spread out these declines are across the country. Places like Chicago, Cleveland, Atlanta & parts of the east coast like New York & Miami have seen home prices decline less than 2%. While San Francisco, Seattle, San Diego, & LA, however, have price declines in the 7%-10% range on average.

Some markets are holding down their JP cocktail pretty well... for now.

Many are saying that tight local inventory levels are the reason why some markets are holding strong. Sure, existing home supply is still at a measly 3.3 months but what’s odd is that new home supply is up dramatically to 8.6 months - making it the largest gap between the two in recorded history. There are reports stating that new home sale cancellations were happening at a rate of 20% towards the end of 2022, meaning supply will only be increasing for the foreseeable future.

Along with that, the pace of sales volume for existing homes is down by 40% from 7 million to 4.2 million. At that speed, it’s easy to see why people are declaring that the housing market is frozen (and/or drunk).

As long as the Fed keeps tightening, the housing market will continue to be under pressure. For now, it seems like the first half of 2023 will be very much like the second half of 2022.

COMMERCIAL CORNER 🏢

OFFICE EXTRAVAGANZA

What do FTX, Twitter, and JP Morgan have in common? They’ve all made headlines for commercial office space this week, and rightfully so.

FTX

Let’s start with the most talked about company of late 2022, FTX. If somehow you haven’t heard about what happened, we’re happy to give you the TL;DR: Drugged-out tech founder with crazy hair commits Bernie Madoff-ish level of fraud with a cryptocurrency exchange causing $8 billion dollars to vanish into thin air. Honestly surprised the journal didn’t use that headline.

When FTX filed for Chapter 11 bankruptcy protection they requested the court to abandon the five leases they had signed in Chicago, San Francisco, Washington DC, and Miami (2 in Brickell). Though we don’t know the exact combination of the square footage on the 5 leases, all signs point to it equaling more than 40,000 SF of space.

FTX’s tenant reps who already collected their commission

FTX wrote in its request that the firm “determined that there is no longer a need for the leases going forward as these premises are no longer being utilized by the debtors.” (uhhh, ya think?). This story is ongoing… while SBF is now out on bail playing league of legends at home.

Twitter

The popcorn should be perpetually ready at this point for the latest story about Twitter and Elon. This time, Twitter is getting sued by Columbia Property Trust, which owns the office that Twitter was leasing in San Francisco. Twitter currently owes $136,260 in unpaid rent at this location, and also is withholding rent in offices around the world. They lease over 800,000 square feet of office in their 1355 Market St headquarters, and 25 offices around the world.

When Musk bought Twitter in October, he was beyond verbal about cutting costs. It’ll be interesting to see how this situation with their leases plays out amongst the other cost-cutting tactics such as layoffs, not paying overdue travel bills, or even auctioning off designer furniture in the office.

JP Morgan

On the other hand, there are some large companies that are actually paying their office leases, such as JPMorgan. CEO Jamie Dimond has pushed back hard on fully-remote work, saying that it both suppresses spontaneous idea generation 🤔 and diversity in the workplace. The firm is only allowing 10% of its employees to work from home full time, and 40% are approved to split time between home and office.

Back in my office days, spontaneous idea generation meant coming up with the most creative way to watch The Masters without getting caught. Good times...

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CREATIVE FINANCE CAFE ☕️

REVERSE AMORTIZATION

Oh, how the tables have turned. Sellers have gone full circle from ruling out any offers that have inspection contingencies to now accepting offers with little to no money down in order to close deals. Smell that? It's the smell of buying opportunities.

Rather than getting a traditional loan at current interest rates, savvy buyers are tapping into creative financing strategies like seller financing, subject to, or assumable mortgages to tailor terms to their needs. Typically these options get ruled out in a hot sellers’ market but the game has changed, and sellers are now considering these offers.

In this segment of CFC, we're serving up a unique tactic used in seller finance negotiation. This one is called Reverse Amortization (RA). The idea behind this is to flip the amortization schedule and get the principal paid down first instead of interest. Why?

Well, most loans start with large interest payments and small principal paydown in the first 5-10 years, leaving you with little equity. This makes it risky when a seller wants to finance the property at a high-interest rate combined with a balloon note after 5 or 10 years (🎈= the full loan amount comes due).

If you are hit with that combo, use the RA as a counter to essentially cut that interest rate in half. The nifty part about it is that the monthly payment remains exactly the same to the seller, so they don’t see any change in monthly cash flow. Also, if the loan was to go full term (say 15 or 30 years), the amount of interest paid would be the exact same. But wait, it gets better! The best part is that you are paying down way more principal starting on month one to help build equity for the balloon payment.

Check out our Reverse Amortization Calculator  to see an example of a $1MM loan being paid back at 6% interest with Reverse vs Normal Amortization (NA).

Let’s say there’s a 5-year balloon note - after 60 months, a RA schedule will leave you with $740,260 due while a NA schedule will leave you with $930,543 due. Now that’s a creative way to save a few bucks! Keep this ace in your back pocket next time you’re negotiating a seller finance deal.

ARE THERE TOO MANY REALTORS?

“Let me tell you a tale…” said 2008 while leaning back in its chair and looking off into the distance.

Chances are your mom’s best friend (or your mom herself) is a realtor. Your neighbor is a realtor. Your ex from high school (and college) are realtors… and you must be thinking “there must be enough business to go around for all of them right?”

Hard to disagree with Trent on this one as 1.6 Million Realtors are currently registered with the National Association of Realtors. That’s over 200,000 more than the bubble in 2007.

Nothing better than looming statistics...

We all know that we’re in a real estate shift. Unfortunately, like with most markets, when things are good, we see a stampede of people who want to get involved. Everyone and their mother (again possibly literally?) saw how well realtors were doing since 2020 and decided to throw their hat in the ring and get licensed.

The problem here is that no one stopped to ask themselves why the profession had proven to be so fruitful to so many people over the last 2 years. It sure seems like a domino effect - doesn’t it, Mr. Realtor?

It’s no one's fault in particular that this happened. Let’s face it, earning a real estate license has a relatively low barrier to entry, and because of that many people decided that they’d try their hands at getting into the business. What many didn’t realize, however, was that we were in one of the least sustainable markets of all time due to:

• Historically low interest rates. Who knows if we’ll ever see rates touch 2.65% again.

• Supply of existing homes for sale was low. COVID killed the Spring 2020 market and sellers’ fears spiraled from there.

• The cost to build was through the roof. Land, lumber, and labor all were soaring sky-high, pushing deadlines back and also hurting supply.

• More buyers than ever. Enter 72 Million millennials in “prime time for household formation” per Key Bank.

Expect to see a major shift of professionals leaving the real estate industry in the coming months (none of you reading this of course) — all signs point to less competition.

Done deal 🤝 We hope you enjoyed this week's edition.

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