Josh Mettle speaks with T.J McLelland with Fitness Realty to talk about the real estate MENTAL RECESSION fueled by the MEDIA’S AGENDA to capture your attention.
TJ McLelland: Hey, everybody. Welcome to another awesome chat. Me, TJ [McLelland 00:00:06], Fitness Realty, broker here, and my counterpart, Josh Metal here from NEO Home Loans, killing it with information. So when we combine our forces, this is just a powerhouse.
Josh Mettle: Unstoppable.
TJ McLelland: Unstoppable. Today we’re bringing you some crazy stuff, the verge of a recession. Oh. Ah! Ah!
Josh Mettle: The sky is falling!
TJ McLelland: Right. Okay. People are talking about a verge of a recession, right? Josh is going to show us some phenomenal numbers, graphs. You can’t lie about statistics. You can show them in a way that maybe propels an agenda, but we’re looking at statistics for the raw figures. And Josh is going to enlighten us about the Utah market and the nation’s market as a whole, which will be really awesome.
TJ McLelland: So Josh, I’m excited to be here with you. Every morning that we get together and talk, it just seems like we crush it and have a good time and I just love hanging out with you. So I appreciate where we’re going, and let’s see what we can put together today.
Josh Mettle: Cool. Well, thanks man, I appreciate the kind introduction and we always have a blast going back and forth. I think the catalyst for this whole call was the negative spin on media. And as you know, my group does loans in all 50 states. So I get to talk to people from New York to San Diego. And part of what I’ve been hearing this over the winter is a little bit of the sky is falling. There’s a ton of negative news because the reality is negative news and fear … If a news program can elicit the fight or flight kind of response, they have your undivided attention and then they can serve you up whatever they want in terms of commercials. So that’s part of the agenda, to capture you emotionally as much as humanly possible, and that’s well known in media and it’s an epidemic. It’s everywhere.
Josh Mettle: So what we’re going to do today is we’re going to look at a few of the headlines that the media have become great marketers. They know how to spin just enough to capture your attention, get the fight or flight fear thing going in your head. The thing that’s so hard to discern if you don’t really pause and dive in is part of what they’re saying is true. It’s just that it’s not the full picture because the full picture isn’t really as scary, isn’t really going to capture as many eyeballs.
TJ McLelland: Right.
Josh: So let’s jump in to an article that you alluded to that I wrote last week and I’m going to share my screen really quickly here.
Josh: Okay. Tell me if you can see the screen that says real estate has entered a mental recession.
TJ: Yep. I can see it.
Josh: So this is an article, and we’ll link to these full articles if you want to read it, but this is an article out of Market Watch saying that cash out mortgage refis are back. Will homes become ATMs again?
Josh: You put that on top of the record appreciation we’ve had over the last few years and the immediate response that goes through my mind is bubble. Are we in another bubble? Maybe I should pause and put off the buying for a couple more months or years.
Josh: Now here’s where we go a little deeper in this article. And it is true that they’re starting to see an increase in refinances. But here’s what’s really interesting: They’re talking about, as a percentage of all refinances, cash outs are up. Up to 81% and the last time it was this high was right before the crash. But what they failed to mention is this: The cumulative amount of cash out from this 81% refinance is only $38 billion.
Josh: Before the crash, it was $321 billion.
Josh: So now think about this: Refinances are down because we’re coming out of a 3% and 4% interest rate environment and through the end of last year, rates had gone up all the way to 5%. Now they’ve gone back down a little bit. But as a percentage of overall mortgage volume, refinances are way down. The only people refinancing are people who need to pull cash out.
Josh: So yes, 81% of refinances are cash out, but they’re only pulling out 1/10 of the amount of cash that they pulled out before the recession.
Josh: Before the mortgage meltdown. So that’s the story they’re not telling. THey’re telling you the 81% of loans are cash out. They’re not telling you that it’s only 1/10 of the amount of mortgages. Crazy, right?
TJ: That is really crazy. I have a quick question because the cash out refinance … I’ve heard that several times. What would another version of a refinance be for? I’ve never actually pondered that other than get a rate change.
Josh: Yeah. Thank you for [crosstalk 00:05:32].
TJ: [crosstalk 00:05:32] graph makes sense, but what are the other options people would have done a refinance for, I suppose?
Josh: Thank you for asking that question. Yeah, so really there’s three reasons to refinance: I got in my loan at a higher interest rate and now rates are down and I just want to reduce the rate. Along with that is when I got into my loan, there was mortgage insurance and all I’m trying to do is refinance to get rid of my mortgage insurance. Those are called rate and term refinances, meaning all that you’re adjusting is your interest rate and the term of the loan. You’re not pulling any cash out.
TJ: Got you.
Josh: The other reason could be to shorten the term. And these things might coincide. Let’s say that you were at a 5% FHA loan with mortgage insurance and I could take you to a 3.5% 15 year fixed with no mortgage insurance. Well, you could cut the distance on your loan from 25 years down to 15 years and your payment might only go up a couple hundred bucks, if anything, because you’re reducing the mortgage insurance and reducing the rate. That’s all called rate and term. It’s really just putting yourself in a better situation.
TJ: Got you.
Josh: Other scenario is on top of that, I’ve also decided that I want to pull out 20 grand because I took on student loans at a 7% interest rate, why wouldn’t I roll that into my 3.5% mortgage? Does that make sense?
TJ: Yeah. Yeah. Okay.
Josh: So the interest rate reduction loans are down because we’re coming out of a historically low interest rate period. But cash out refinances are up, but only as a percentage of the total market share or total mortgage volume as a dollar amount, drastically lower. And here’s the other cool thing about this visual, TJ: Look from 2000 to 2007. You’re talking about $26 billion, 50, 60, 70, 80, 100s, $321 billion pulled out. Well, look at from 2010 all the way over to 2008. Almost a decade. We’ve never returned to the cash out amounts that we saw in 2001, 2002, 2003, 2004, 2005, 2006. SO not only is it down this year to $38 billion, but dude, look at the last 10 years. It’s just not even close to true that Americans are using their homes as ATMs again, as the headline claims. You know how most people read articles? Scrolling on the headlines on their phone and they read the headlines, they’re like, “Oh, fear, panic, ATMs, shouldn’t buy a house.”
Josh: The reality is totally different, bro.
TJ: Right. If I was scrolling through KSL or something and saw that headline, I would have been like, whelp, I’m out of a job now.
Josh: Totally. Yeah, that’s right. The bubble is eminent. All right. Let’s go onto the next one.
Josh: This one’s great. Consumer Debt Hits $4 Trillions. I hit in red here, Americans are diving deeper and deeper into the red. How do you just feel when you read that?
TJ: Oh, that makes me just kind of panic. Like, oh, crap.
Josh: It makes me feel like I’m wearing my son’s underwear. Everything tightens up just a little bit.
TJ: Yeah. So true. Yeah. That definitely fits.
Josh: I’ve got like some little Superman, Batman underwear going right now. Everything’s tight.
Josh: But the thing is this: It’s true. There’s nothing in that headline that isn’t true. But as you said in the open, it is written in a fashion to drive an agenda and if you’re scrolling through your phone and don’t dive deeper, you’re just going to feel the fear and not understand the reality. So check this out. This will blow your mind. I’m going to build to a conclusion, so just bear with me.
TJ: Nice. Sweet.
Josh: This is from the US Census Bureau. This is median household income in the United States since 1985. Do you notice a trend?
TJ: Definitely going up.
Josh: It’s going up. Okay, cool. All right. Now below that is household wealth in the United States.
Josh: Do we notice a trend?
TJ: Yeah. That’s huge.
Josh: Definitely at an all time high. Look at how-
TJ: Yeah. That’s huge.
Josh: Definitely at an all time high. Look at household wealth prior to the recession, bro. We’re looking at about, let’s call it, 70 trillion in net worth. Well, look what it is today. It’s clear up around 110, and you see there was a little pullback. Right then, that little pullback at the end, that was a stock crash that happened right on Christmas Eve last year as the stock market, and hey, in many areas of the country, real estate started to recede a little bit when interest rates peaked last year. So, household wealth came down a little bit, but holy cow. If we’re barely more today in debt than we were in 2008, but we’re 30% or 40% higher in wealth, we are … From 52 to 62, we’re another 20% more in household income, and here’s the kicker, bro.
Josh: Here’s the kicker. This is household debt service payments as a percentage of disposable personal income. So, yes, there is four trillion in debt, and that is an all time high, Americans diving deeper and deeper into the red. But look at the debt service. In other words, if I had a $60,000 car debt, but my income went from $50,000 to $100,000, and the interest rate on that car debt is 0%, I can make that payment. That’s no big deal. That, in a macro sense, is what this graph shows. If you look at the percentage, debt service payments, this all debt service payments, mortgage, student loans, credit cards, cards, RVs, everything, we are the lowest in monthly or annual debt service coverage, going back to almost 1970.
TJ: Geez. Whoa.
Josh: Crazy, right?
TJ: Yeah, that is really crazy. I’ve never seen it put that way, but they don’t want you to know that.
Josh: Bro, that gets no headlines. Right?
TJ: No, no.
Josh: Household debt-
TJ: Hey, we’ve safe. That doesn’t give you anything.
Josh: Yeah. Household debt service payments, as a percentage of disposable income, at 40-year low. Two people read that article.
TJ: Right. Yeah. Yeah, me and you. Well, maybe not me. You. I’m just kidding.
Josh: The reality is when I see these articles like this, I go, huh, I wonder if I should stop buying real estate. I wonder if I should be offering different advice to clients. It just makes me curious, and then I have to dive deeper, and I have to go and try and find what does that really impact. The dollar amount, the nominal dollar amount isn’t important. What’s important is how much in debt payments are going out in proportion to Americans’ income, and that’s the piece that they missed to push an agenda.
TJ: Right. Yeah, that was huge. That was way huge. I have one kind of comment and question, if you want to scroll up to the first graph we were looking at. I was just curious. The bump and rise in … Oh, up a little bit more. Up a little bit. Yep, that one. So, the rise of the, or how much is coming out of the cashout in ’15, ’16, and ’17, do you think that was a big derivative of 3.75% APRs or better?
Josh: Totally. No brainer, right?
TJ: I was just-
Josh: If I can get a 30-year mortgage at 3.75 and pull out $100,000 or $200,000 in cash, and I can pay off my student loan debts that were at 6% or 7%, and I can put the other $100,000 into the market, that’s getting 8%, 9%, 10%, 11%, which is what the stock market’s been yielding for the last decade, that’s called a carry trade. A carry trade is what investment houses do all the time. It’s the same thing that Google and Apple does. Why does Apple have hundreds of billions of dollars worth of bonds out there, while they have 60 billion dollars in cash? Well, because they can issue a bond at 2.1% for 30 years, and then they can turn around, and they can invest it somewhere else and make a greater rate of return. That’s not risky finance. That is capitalism. If you could-
TJ: Right. That’s how people are doing it.
Josh: That is how the world works, and how wealth is gained, by having leverage, intelligent leverage. Now, if you borrow at 3.75 and you’re not able to invest in something that yields greater than 3.75, then you shouldn’t borrow the money. But if you can borrow at 3.75 and make eight, you should borrow the money all day long. You just need to know what you’re investing in.
TJ: Right. I agree. Nice.
Josh: Super good point about why the cashouts were higher in ’15, ’16, and ’17, and then ’18 you saw the cashouts go down because it was the year that we saw interest rates rise precipitously.
TJ: Right, a little pause.
Josh: Yeah, a pause. Right, which is the healthy response. Right?
Josh: If you would’ve seen that number in 2018 double or go up, then you have to think, wait a minute. As soon as rates go up, people can’t make their monthly payments. They have to borrow more out of their house. That’s not what we saw. We saw people stopping the borrow, borrowing less out of their house because interest rates were going up, and all of a sudden it wasn’t as attractive.
TJ: Right. Wow.
Josh: All right. Let’s do one more on this, and then we’ll jump to another one. All right. So, this is a poll of economists. I can’t remember how many this was, but it’s a group of Pulsenomics, Duke, NABE, and The Wall Street Journal. These are economists, business insiders, the who’s who. There’s hundreds of people that they poll for this, and they ask when will the next US recession begin. Well, the first thing that people should understand is recessions are normal. They happen every 10 years or so. It’s happened forever. Now, some recessions are worse than others. The Great Recession was obviously painful. The 2000 stock bubble in tech was obviously normal, but an economy cannot continue to expand forever it has to pause.
Josh: It’s just like an athletic athlete. You can’t just run forever. It has to pause. It has to catch up with itself. It has to weed out the over-investments that were borrowing at 3.75 but only making 2%. We gotta get rid of those companies. We have to create some more efficiencies, and then we’re ready for the next run. So, we’ve been on a run since 2008. We’re 11 years into this economic expansion, and the economists are telling us that 46% think that there’s gonna be an economic recession in 2020. I will tell you that that’s going to be good for real estate.
TJ: Oh, yeah.
Josh: I know that doesn’t make any sense, but let me show you this next slide, and then let me tell you why I think that’s gonna be good for real estate, a catalyst for real estate, not something that’s gonna drive prices down. So, the same experts that predicted this recession, here’s what they predict the home price appreciation will happen over the next five years. They all think it’s going to be positive in 2019, 2020, 2021, 2022.
Josh: If you look at the last five recessions, 1980, housing prices were up 4.5%, ’81, up 1.9%, 1990, down .9%, less than 1%.
TJ: A little squeeze.
Josh: A little squeeze. Bro, do you remember how painful the tech crash was in 2001? I mean, people were dying. Right? It was big.
Josh: Real estate up 4.8% in a year, from March to November of 2001. That was a tiny micro recession. It felt really painful. Real estate went up. The recession that was super painful was the Great Recession that we just went through because the cause of the recession was too much debt in mortgage, and too loose underwriting guidelines, and that was the epicenter of the recession. We had to shake out all those bad characters that were doing no income, no asset loans and-
TJ: Ninja loans.
Josh: Ninja loans, right? We had to squeeze that out. So, here’s why I say the recession will be good for real estate. We have still a tremendous amount of employment. We have an all time high in family earnings, and the first thing that … By the way, home ownership percentage in terms of how many people own verse rent, that’s starting to rise. All those trends are in our favor, and guess what happens when a recession starts? The Federal Reserve drops interest rates. So, we’ll see in the next two years the Federal Reserve, and we’re already seeing it, the Federal Reserve has already said, “We’re not raising rates anymore this year.” Well, why are they doing that? Because they can sense that there’s a little bit of a slowing of the economy, and they want to make sure that they don’t raise rates too high to push us into a recession as we go … If we go into recession, the way the economists are saying we will, the Fed will drop rates. That will make housing more affordable-
Josh: Federal drop rates that will make housing more affordable, not less affordable. Housing will continue to do pretty dang well, in my estimation.
Josh: Not just my estimation. That’s what the economists that are projecting the recession are saying, as well.
TJ: Nice. I love that.
TJ: It’s interesting to see that the raw stats are supporting still, such a safe environment to purchase a home. People are out there just spreading rumors. [inaudible 00:20:34] said the whole Salt Lake market is going to go crashing down. We’re going to lose 20%.
TJ: I’m like, housing doesn’t work that way.
Josh: Well, as you said TJ, Utah is an anomaly all of itself because we have one of the fastest net migration rates, which means more people being born and more people moving in than people dying and moving out.
Josh: We have a very young population age. The median age of our population is in their 20s to mid 30s, which is where people spend more money because they’re getting married, and they’re having kids. They’re spending, it’s all in that ramp up, spend, spend, spend age.
Josh: We have a young populous, and we’re growing jobs like crazy. Right?
Josh: So, home builders just can’t keep up. Supply and demand, there’s more demand than there is supply.
Josh: On top of all these factors we’re talking about on a macro scale, on a micro scale here in Utah, we’re insulated even more.
Josh: You’ve seen it, I’ve seen it. Our business is up 25% year to date as compared to last year.
Josh: We have more inquiries and more phone calls, and more leads or opportunities, than we’ve ever had.
Josh: There was definitely a pause in the fourth quarter of 2018.
Josh: It got almost to 5%. As the stock market really took a pull back in December, that all really put the ice on things.
Josh: Boom! I’m telling you, spring hit and it’s like, bam! Off to the races again.
TJ: Right. Everybody is like, woo! Let’s do this.
TJ: I totally agree.
Josh: Oh, go ahead.
TJ: I was going to say, when we’re shifting to the micro phase and just talking about Utah, there’s that link I put in the chat if you wouldn’t mind pulling that up so people can see the link.
TJ: The video is 15 minutes, we’re not going to watch it. It gives a really good synopsis of the growth in Salt Lake County and Utah County, and Utah as a whole from a city planner perspective. It’s crazy how vast the numbers, or fast we will grow just as Utah.
TJ: Exactly what you said, that net positive influx of people is incredible.
Josh: I’m sorry, man. I don’t know how to pull up the chat while I’m sharing my screen on [inaudible 00:23:03]. I think I have to unshare my screen in order to do that.
Josh: Oh, wait. Hold on. Just kidding, bro. There we go. Now we can move this into the right spot.
Josh: Operator error. Alright.
TJ : Hey, we’re all learning and growing. I love it.
TJ: Last night, when I was running our team meeting, I was broadcasting it all over YouTube, and there was a bunch of glitches. I was like, well, it’s a learning phase.
Josh Fail faster, bro. That’s the way we learn.
TJ: Right? Love it.
Josh: Yeah, so what we’ll do, TJ, because this might be a little small for folks, is we will make this available in the chat line-
Josh: -but I will … Oh. Let’s see here. Oh, yeah. This is cool. Oh, man, this is so good, by the Kem Gardner Policy Institute.
TJ : Yeah.
Josh: This is a must watch.
TJ : Yup. This video was shared to me, and after reviewing it I was like, the Salt Lake market, in general, is just so protected. Just the way the people are, our growth, how many people are coming here for jobs, the companies that are coming here.
TJ : This video doesn’t have it in there, but there’s an article out there that shows billion dollar companies, and there are four billion dollar companies in Utah, that headquarters, I believe, are here. We’re among the smallest states that have that many billion dollar companies, so it’s fun to just see.
Josh : It’s really fun to see. The projections really blow your mind.
Josh: One of the things that stuck out for me in this video is that … Is it a 40 year projection? Do you remember the year that this projection goes through?
TJ: I believe they go out to 2060, yeah. 2065, where it looks like Salt Lake County and Utah County level out in how many people are in the counties. So, Utah County will run rampant and catch up to Salt Lake County.
Josh Metal: Yeah, that’s the fastest growing county, right?
TJ : Right.
Josh : I can’t remember if it was 2060 or 2050, but the thing that I do remember is, basically, their prediction is that Ogden, Salt Lake, and Utah County will be on contiguous, never ending city, just no divide lines.
Josh It’s going to be a lot like the Seattle, Bellevue, Tacoma. Man, if you watch what’s happened with Tacoma real estate, and Bellevue, and Seattle, Washington real estate over the last 20 years, it’s been hyperbolic. It has just been explosive.
TJ: Oh, yeah.
Josh Metal: What they’re saying is … I guess, what we’re saying is, if you have economic expansion like that, that is the fertilizer for real estate. Not only do we have these macro conditions that are pretty darn good, the micro conditions over the long term are spectacular, probably one of the best in the entire country.
TJ: Yeah. I totally agree. Awesome.
Josh: Bro, we have another hour of content, but we’re out of time.
Josh: Let’s save the next article for our next time together. Is that cool?
TJ : Yeah, oh yeah. Let’s do it.
Josh: Great, brother. This was great. Any closing thoughts, or anything you want to add to wrap?
TJ : Yeah.
TJ : I always like to just take the opportunity to thank you and Colin for working the backend, and putting in that support with us both. I know he does a lot of stuff for you, but every time that I work with you and Colin, it’s just a pleasure. I always appreciate your time and your comments, and appreciate Colin and what he does, as well. I thank you guys.
TJ : The tips … Not tips, but the ideas and things that we talk about when we’re together are so helpful. To anybody that watches, if you’re outside of Utah looking for an opportunity to get some real estate in Utah, it’s huge. For people that are in Utah, and watching KSL and being fearful about pulling the trigger because they’re renting for $2000, or $2500, when we can find them a great home, and you can get them a good rate and a good payment. They can start leveraging into their dream home, or a cash producing house with a mother-in-law basement or something like that. There’s so much opportunity.
TJ: Always have fun. I appreciate your time. I’ll just give you a couple minutes, or, take some time for some closing thoughts, too.
Josh: Yeah, thanks, man.
Josh: I guess, my closing thoughts are, first of all, thanks for helping me get this word out. It frustrates me the way the media spins things for an agenda. It’s cool to have someone like you to be able to rap with, and be able to get this stuff out. Thank you very much for that, appreciate you.
Josh: The other thing I’ll say is I think there are still people on the sideline that are fearful. Hopefully this enlightens them a bit that maybe they’re only seeing one side of the coin. The other thing I would add to that is, there are some amazing loan programs out that will help you finance 100% of the property price, 97% of the property price, 95% of the property price, and they have no monthly mortgage insurance.
Josh: I talked to a client just yesterday and they said, “Josh, I am saving up for my 20% down.”
Josh: I said, okay, cool. Let’s break down the numbers. After taxes, after everything else you’re doing and your debts, how much are you saving a month?
Josh : He’s like, “Oh, I’m saving $1700.”
Josh : I’m like, okay. By 2030, you’re going to have 20% down. What’s the reason for that? Who have you that information, where did you get that from?
Josh: “Well, my dad told me never to pay mortgage insurance”.
Josh: I’m like, bro, super good advice. Your dad had the best intentions for you.
TJ : Right.
Josh : But, I can do 100% loan with no mortgage insurance right now. Your payment only goes up $250 a month. Then, you can take that $1700 a month that you were saving and you can put it into your house. You can renovate it, you can build it up. You can sell that one and buy a duplex. You can sell that one, and you can move up.
Josh : By 2030, you’re going to have an empire.
TJ: Right. Take over the world.
Josh : Yeah.
Josh: By the way, as you’re doing that, you’ll potentially have some deductions on interest and some other things. Or, you can continue to save that $1700, hope you don’t get bored along the way and make a bad decision with some other investment.
Josh Metal: I would just say, there are some incredible options out there with no mortgage insurance, very little money down. If you’re sitting on the sidelines thinking you can’t qualify, or you have some conceived notion in your head, let’s chat it out.
TJ: Dude, I really appreciate it. Thank you so much.
Josh: My pleasure, brother. Great to be with you today.