Why Home Prices Aren’t Falling Even as Buyers Disappear | Jim Righeimer

What's happening with the housing market right now? Are the prices coming down? A lot of home builders are offering different kinds of interest buy-downs, discounts for new homes. Is this going to impact this housing market and is the housing market and the verge of coming down significantly? Our guest today is Jim Rickheimer, who's a developer that develops lots for home builders. He's gonna tell us what he's seeing on the ground and what the home builders are doing right now and how this could impact the housing costs going forward. We have a very unusual marketplace that throughout the country, you have a bunch of homeowners that just refuse to sell their house. Even to the point of if they're going to move because their interest rate's so low, they'll rent out their house because they're never gonna be able to borrow money that cheap. And so they'll rent the house out. I'm Siamak, this is Market Insider. Jim, it's great to have you on, welcome. Great to be here again. You're a developer and you have a view into the housing market that not many people do, you prepare lots for big builders, home builders. Can you tell us what you see in the housing market right now? A lot of people do what I do. It became more popular as home builders became public companies over the years. My company, we buy large parcels of land, we get them entitled for lots for homes, and then we build what's called the horizontal structures. We put the streets, the roads, the sewers, the pipes, all that kind of stuff in. We put the schools, you know, the school sites, the parks and all that. And then we sell lots to the public home builders. And there's a big chunk of the public home builders that don't wanna be quote unquote in the real estate business. They wanna be in the manufacturing business of manufacturing homes. So they don't wanna get caught up in getting entitlements, getting something approved that could take six months or four years. They wanna know when they buy a piece of property, it's already entitled, the streets and roads are already in and they can start building so many houses and they can tell Wall Street, we're gonna deliver this many houses this quarter because they know that number. But if they were doing real estate where they're buying large parcels and trying to get them entitled, it doesn't match up with what Wall Street wants to see. And what's happening with the home builders right now? Because the housing market, there's a lot of confusion in the housing market. It's very interesting what home builders have been doing to get through this whole issue of the higher interest rate. So you have a couple of things happening. One is you have these low interest rates that we had on the twos and the threes, interest rates on houses, which when a person looks to move and they gotta go to a 6% interest rate, it just makes no sense. So we have a very unusual marketplace that throughout the country, you have a bunch of homeowners that just refuse to sell their house. Even to the point of if they're going to move because their interest rate's so low, they'll rent out their house because they're never gonna be able to borrow money that cheap. And so they'll rent the house out. So what happens is you don't have a lot of housing, existing housing on the market. But what happens is prices push up because there's less available to buy, even though you've got, quote unquote, higher interest rates than normal. Now, again, these interest rates are in the 6% range. I've been in this business a long time. 6% was not what we had over the years that I've been in this business. It's considered actually pretty low. But when the rates got down to three, 6% is twice as high. And what happens when interest rates went down, it's not like people's payments went down. They just borrowed more money. The price of the houses went up because you had an issue of how many houses. The difference that we have going on now is that the houses sold at some good prices, some pretty elevated prices, the new homes did. And so now what you have is most, all the major home builders put together programs where they buy down the rate of your loan. And they're big enough that they can do that. So they're selling thousands of homes. They can bundle up the loans, sell them as a big package, or they buy them themselves. They actually put them on their books, the loans. And so they can go out there, yeah, I know what the number is right now, but 3% loans, 30 years, or they'll have some kind of buy-down for four or five years but a 3%, 3.5% loan, something like that. And that makes a big difference that buyers can buy. Now, those buyers that are buying those homes, if they're first-time homebuyers, that kind of works for them because they don't have a house to sell. There's some movement there, but still the economy, because of the higher rates, is still kind of slowed down a bit, or at least people are more concerned. So what happens is people just kind of slow down in buying houses. It's not necessarily interest rates anymore. It's just, how's the economy gonna be? Because cost of houses is still high. And so do you see these lots going? Are the builders selling a lot? Well, no, they've clearly moved down their sales. I mean, I remember looking at, I think it was LGI Homes, one of the top 10 builders in the country. Right during the COVID era, I think they were doing 3,500, 4,000 houses in a quarter. This last quarter, they did like 1,000. 25%. Yeah, now that number was extremely high when it was 35 to 4,000. They normally did about 2,000 houses a quarter, and I'm just speaking off the cuff. But you just get a magnitude of, it's down. So then what'll happen is you're down to 1,000 houses a quarter, 4,000 a year. Then it's a matter of how much inventory of land do they have or lots do they have? How many lots did they buy from me? How many did they negotiate to buy from me? And that's kind of where the dance goes in my business, where a builder will want to take as many lots as they need for as long as they need it, and they basically want me to be the bank. Go build all these lots, Jim. When we need it, we're gonna take 12. Yeah, we'll take 12 a quarter, every quarter. And after a while, it's like, you're a multi-billion dollar company. I got kids at home. I can't be your bank. But that's the kind of negotiating strength they had, that if I want to do some transactions, I have to go ahead and say, I'll do that. And the most part, because we're a small development company that has most of our own financing in-house, we just kind of say, you know what? We'll get properties entitled. We'll get them ready through this long, arduous process to get approved to build on the property, but we're really not gonna build until the market picks up. We'll have builders say to us all the time, Jim, we love that project. When are you gonna start building? I go, when you're gonna give me a contract to take 100 lots and a big enough deposit that I know you're not gonna walk away. So in a sense, we are hearing there's a shortage of housing. Right. But from your perspective, these developers, these builders, home builders are not building. Is it because they don't have demand? Okay, well, two things. Remember, when it comes to the transactions of selling houses, the new home market for years and years and years was about 10% of the market. 90% of the market was resale homes. Kind of like 10%, give or take. In the last, you know, five, six years, the home build, the new homes are like 30% of the market. Now again, there's less houses being sold, so obviously that same number would be a higher percentage, but it's like 30% of the market is what the new home builders are bringing in. When you talk about housing, the first thing you have to look at is what's the demand equation? How do we have a situation where we're, quote unquote, so short housing? So in California, everybody knows, anecdotally or whatever, the state does everything it can to not build houses. They can say whatever they wanna say, but in the end, you're gonna have situations where when you wanna redevelop areas, say in the L.A.'s, the Orange County's, the San Francisco's, where the community will say, we don't want any more houses, so they won't allow it. So that's not in my backyard kind of thing, which slows it down. But you also have, if you go out to the Central Valley, and if you just said, we're gonna go take 1,000 acres and build 5,000 homes, the environmental process to get through that thing, well, first off, it would never happen because there are people that will fight you, and they can drag you through court so long. As a developer, how long can you get the seller to tie up the property, or you have an option to buy it, or how long can you go paying cash for the property and borrowing money? I mean, it just basically, you get in a situation where it doesn't make any sense to kind of move forward. The problem that we've had in the last, probably like six years, is that the first thing you have to understand is the housing ladder. The housing ladder is as old as time, and it basically is, you have little apartments, studios, people move into it, or even lower than that, you're renting rooms in people's houses. When you make a little bit more money, you get your own apartment, maybe you get married, you get a nicer apartment, or maybe you go out to the suburbs and you buy a house, and there's kind of a housing ladder that happens in here. And what you have to understand is, is that whether you build million-dollar homes or lower-priced apartments, a unit is a unit, okay? And this is what people confuse all the time. So they'll say, well, we want you to build more affordable housing. People like myself would argue, more housing's more housing. Doesn't matter what price point I bring it in at, because in the end, if we bring in a bunch of million-dollar houses, the price of a million-dollar house is gonna go down. It just does, because there's more supply than's needed at a certain price point. And so in this housing ladder, no matter where people are coming in at, if more people come into a certain area, it's gonna put pressure on housing, you're not gonna have enough. The thing that nobody wants to talk about during this whole thing, because people wanna stay out of the politics, is you can't have a time when half a million to up to, I think, two million in the last year before Trump came on, two million people were mailed social security cards that were allowed because of asylum, whatever, to come here into the country. And they're here, quote-unquote, legally now, because they got their asylum, so they're waiting for a process, could be four or five years away, they're given a social security number, and they take up housing. There's no way you can all of a sudden have six, seven, eight, whatever the number is, and I'm not trying to argue the number, but whatever the number is, you can't have six, seven, eight million people come in the country and wonder where they're gonna live. They're not living on the street. This is not a homeless issue. The homeless issue is a whole nother issue. I mean, we made homeless sound like somehow they just got kicked out of their house and they're homeless. Homeless issues are usually mental health issues, drugs, alcohol, all sorts of, you know, a lot of problems that people have. But there's also the line of where society allows that to happen. Doesn't either do anything about to help it or doesn't have, you know, kind of the carrot or the stick. You gotta have both. Just tell people, you know, you can't live on the street. And, you know, they gotta kind of help themselves move up and society has to help them move up too. But we've just gone backwards with too many people coming in. So now that there's downward pressure on that, I mean, I'm talking, again, this is anecdotal, but just talking to people like in Vegas. Tens of thousands of apartments come in available. Tens of thousands of apartments come in available because people are moving out. People are leaving the country. They're going home or they're going somewhere else. Because the immigration has changed. Immigration has changed. So some of the people are going back now. Right, that's part of it. Who else knows what else it is? Vegas is having some issues with the gaming industry. I don't understand that industry at all. But any one industry town or has a big bulk, if that changes a little bit, people lose their jobs. So now, in a sense, we heard this discussion that there's a shortage of housing, but at the same time, the inventories are going up and then the home builders are not building as much as, because you don't think they have the demand, right? They don't have the demand. I mean, trust me, you know, the old line, don't ever blame a developer to build a project if his bank will give him the money. I mean, they'll do the deal, right? But in order for the bank to give you the money, they have to see some demand. Demand is an offer from, I'm talking about the lot level, is an offer from a major home builder to say, I'll take 100 lots or 200 lots, and then we'll start construction for that. And that's because they see a demand. We get a weekly report. Most of our development is in Colorado, for our homes is in Colorado. We get a weekly report. Every Tuesday, it says every single project, every single tract, you know, whatever the name is in the different towns it's in, and it's all resorted to by town or by name of company, how many houses they sold, how many houses were sold, how many deals were canceled, so, you know, they lost that deal, and what the net number is for the week. A builder, first-time home buyers, they need to, you know, they're looking at selling four houses a month, let's say. That's kind of an average number. And now they're selling two, or now they're selling one, or now they're selling a half. They don't need any more lots. They don't need to build any more houses. Yet they'll always want to have some inventory, because when the market changes, they want to have inventory to sell, but they can't be carrying a ton of vacant houses. So they always watch that. But the prices are not going down significantly, right? That's a big- Yeah, there's two things that aren't going down. Number one, because the home builders are subsidizing the interest rate, the price point is, there's not pressure to put on the price point. So a home builder, depending on the price of the house, they'll spend $40,000 to $60,000 in buy-downs for interest. That's a lot of money. So they're discounting that from the property. They're discounting to them, but they're not discounting the sale price of the property. That's their net. What they get out of the house is $50,000 or $60,000 less. Because of how they do it with secondary parties that buy the notes and do all, I mean, I can't get into all the complications how it does it. It's different than, like, if I'm a home seller and I'm gonna sell my house for $500,000 and I give the buyer $50,000 to, you know, fix it up, their bank is gonna say no. It's not a $500,000 sale. It's a $450,000 sale. They're not gonna allow you to do that. Home builders, because they can package up loans and do all sorts of things, they have the ability to buy down rates. To do it behind the scenes, so the price stays at $500,000. So the price stays at the same because they don't want the price to go down. I mean, nobody in the neighborhood wants to say, you know, I paid $450,000 and now they're selling houses for $400,000. That is problematic, you know, for anybody, for the previous home buyers or whatever. The home builders can't really solve the problem in any amount of time like we think it's gonna get solved. The millions and millions of units that we need now, even with demand going down, which it is going down, and again, I didn't say this, but part of the demand going down is household formation. So if you get out of college, one out of college and two in college, right? Well, normally the one out of college gets an apartment. They seem to like their bedroom, you know? So guess what? They're still home. So there's no household formation. There's not an apartment they took. So between the people that are leaving the country and the people that aren't doing household formation, that's putting downward pressure. But we're still millions of housing units short across the country to get balance. And especially in the Californias, you know, the states that have such restrictions on growth. Let's say Austin, Texas, where a lot of Californians went, they liked Austin, Texas. Their sales for houses in Texas, I mean, their prices came down dramatically. You look at Florida, except for Miami South, I mean, every single major county in Florida has downward pressure on pricing and probably will continue next year because so many people, because of COVID moved to Florida, right? Because it was an open state. And then also there's the tax issue of they don't have any income tax there. And not enough houses come in the market so the prices kind of shoot up. Now it's becoming a more normalized market. So you're gonna see, you know, you don't have to buy the house today and pay that price. There may be another house available next week. And that's what you're seeing in Florida. So do you see a mismatch between where housing is built, you know, in certain areas we didn't build, we don't have enough inventory and certain areas we built. So like California doesn't have enough, but other states. Yeah, but as long as you continue to have barriers to entry to grow, I mean, one of the reasons, let's say Southern California has higher prices for getting great weather and all that. They built up to the ocean and they build up to the mountains and that's it. I mean, there's not like a bunch of land that's left over to go to. Now you've got to get Inland Empire farther. You got to get in the Central Valley farther to get back to having housing. So there's just a geographic restrictions. But when you go to an Austin or you go to a Dallas or you go to a Phoenix, I mean, you can always just go another mile out. It's flat ground and bring the sewer and the water pipes out to it. And it just grows. They will be able to bring on real estate a lot easier. You know, the downside of that is, is they'll go build office buildings because there's no restrictions and the towns let them do them. And there's all of a sudden no demand for office. The place goes vacant or a shopping center. Doesn't have enough tenants to keep it going. Much people complain about the restrictions on growth. If you own property and area of restrictions on growth, you're happy because the value is going up. If you're in an area that has just a lot of open free land and it's just the next mile over, well, you're going to have downward pressure on pricing, but it's better for housing. Do you think the prices right now are realistic for a place like California? Again, it's anecdotal. And I think part of it is, is that so few houses are selling because they're just not available. That's putting upward pressure on pricing to a ridiculous level. I mean, I'm seeing in Orange County what houses are selling for and it makes, I just looked at it and I say, this cannot go on. I mean, you live in areas that were middle-class communities, normal middle-class communities, maybe a little upper than middle. And the houses were a 1965, three-bedroom, four-bedroom, two-bath, L-shaped with a double-car garage. And not too long ago was, you know, $500,000, $600,000. Where in other states, I think that's a ridiculous number. And now what you're having is people go in, redo those houses, make them really sharp and nice and bathrooms, kitchens, redo them really nice, but they're selling them for $2 million. There's just not enough everyday people who can afford $2 million for a house because there's so few being sold. And this is anecdotal. I see people that I know buying that house and then I find out, yeah, the mom or the dad gave them the money to buy the house and it's kind of like getting your inheritance early type of thing. And again, these aren't super wealthy people. I mean, they're doing great, but they have access to some capital and so they'll buy it and, but there's not a lot. Now, if all of a sudden 10 or 20 of those houses came on the market, like let's say the market opened up, rates came down enough that people would start selling their houses and 10, 20 houses come on the market instead of one or two, they're not gonna get $2 million a house. When I say that it's blasphemy in the real estate industry, like it always goes up, but something's gonna happen. And I don't know what that is, but something different is gonna happen because you cannot sell 1964 houses that are, oh, they've added an addition on that. I take that back. They're 2,500 square feet now, but still selling for $2 million makes no sense. And then there is this ratio of home prices to income, which usually should be around three to four, right? And historically it's been between three to four. Now it's at five to six, right? Yeah, and remember in the seventies, if you were married and your wife worked, they didn't necessarily use her income to qualify for a house. I mean, that wasn't that long ago. I mean, you know, the seventies, but it was mostly the seventies where lenders would look at that. Oh, they could have babies and then she's not working and we don't have this income. That's what happened back then. The upside of it was they changed that so that they could use the incomes and all that. The downside of that is, and you're in an area that has no housing, it took two incomes now to go and do a house. Because once they allow, everybody got it allowed to use it, the house prices went up because you would expect it. Yeah, you have more money. You have more money coming in. For people that are looking into investing or buying a house or getting into housing, what are your thoughts? Do you have any thoughts for them? Clearly, it's got to be long-term. You're going there to be in that house because that's where you want to be and it fits for your lifestyle and your family or whatever. Do not think you're going in and out of this deal that's going to make sense because we don't know where this market's going to go in the next few years. We just don't. As a developer of lots, I'd love to tell you it's all growing great and I can't wait for these next few years. But the reality of it is, is that we really don't know. We've never done this before where existing homes have 3% interest rates on them. We've never had a situation before where during COVID, checks were just handed out to everybody. So there's a lot of things that we kind of have to, you got to pay for it. It's got to be worked through the system. And so it's slowly being worked through the system. I can tell you for the last couple of years, in my side of the industry, everybody's like, oh, by next year it's going to be better, by next year. So now we're saying, oh, 26 is going to be better. It might be marginally better for the amount of houses, but it's still going to be a small amount because we've got a lot of 3% loans that need to kind of trade in the marketplace. And we need more sellers that want to sell jump into the marketplace. And if that happens, it's going to put downward pressure on prices. It just is. Do you see, is it going to be different for different markets? Like you're in Colorado, you're also in California and you have access to different markets. Yeah, it's definitely, and I traveled the country and I talked to a lot of different people in the industry. So yeah, it's not going to be the same everywhere, but if you're in any place, kind of what you hit on it to say, what percentage of people's income can they put towards housing? And the number is completely unbalanced. It makes no sense. You have to look at what's doing the upward pressure. And I mean, the other upward pressure we have in real estate is a lot of legal foreign people coming to our country because it's a great place to live in America. And a lot of them come here with real money. You know, they can afford to buy these expensive homes and do, again, put pressure on it. Another issue that we had in some of the areas like say Palm Springs and those areas, you had a lot of neighborhoods that houses were converted to Airbnb, where instead of renting your house out by the month and it's considered a housing unit, you rented it out by the week and it's really a hotel room. And so you've really kind of hurt that. The amount of housing that's available for people to live in month to month just got taken off. That is because interest rates aren't low anymore. That model is kind of dying. So those houses are coming on the market. So in some ways I see there being downward pressure, but downward pressure will be good. At some point it'll balance and downward pressure will be good because people can afford to buy houses and live the normal American dream of having a homeowner having a house. Are the home builders benefiting from higher housing prices or the costs of building has gone up? How much of the inflation factor is going into the cost of building the houses? I can just tell you again, anecdotally, but looking at transactions that I've been involved in or very close to, that when projects were sent back out to rebid, prices came down. So when everything was going crazy, your subcontractors, your plumbers, whatever, they were getting hit for their costs going up, getting electrical gear from outside the country being shipped in here. Those prices were going up. So now those prices have all kind of come down. The subcontractors aren't as busy as they were before. So they have to be more aggressive in their bidding. They're pushing the prices down. So it's helping out. But for the home builders, what home builders really want is volume. They just want to sell more homes and make whatever chunk they make on that home. They don't really want to look at it says I make a lot more money this way or less money that way. I'm not saying it doesn't matter. It matters. But it's more of how do I get volume? I've got this project here has, and remember, we're talking to major home builders build a 50 to 100,000 homes a year, okay? They need volume to get those houses sold. They have a whole track of homes in the neighborhood to get sold. They're not trying to make the last dollar out of a house. In fact, you can argue that a lot of times some of the best buys are buying from the home builder because they have to sell 100 houses. So what's the value of a house when there's 100 available? It's less. Once that last house is sold, now you want to move in the neighborhood. Well, there's not that many sellers. So based on your total experience in this space, how much has the cost of building gone down compared to the heights? I wouldn't say that it's gone down a massive amount in any way, but what I would say that the upward pressure or the fear factor's gone. So you'd kind of look at deals just projecting that we're gonna build it a year from now and you're gonna put more cost increases in it so then I have to hit a certain price for the house. That's gone down. I couldn't tell you the actual number, but I know of transactions that were falling apart that once they rebid it, all of a sudden the deal made sense again and the home builders and the land developers struck a deal and we'll start building lots. Do you have any tips for our audience, for people that are looking to buy these new homes, how they go about negotiating? I would just say it's not COVID anymore. There's not a big storm of people that are there to buy the house. Unless you're in an area where there's nothing available, take your time. Go see product, go see houses, go see what things they're selling for. Push for a better deal. In the end, builders don't wanna stay, they don't live in all the vacant houses. They're sitting there vacant. They're gonna sell the house at whatever that market price is. But there's nothing wrong with asking and pushing it down and finding out how much room there really is in that price. Nothing wrong with that at all. Jim Rickheimer, developer, was great to have you on. Great to be here. Let us know your thoughts. Do you think the housing prices should come down significantly from here? Or do you think they're gonna stay at this levels? You can always comment. I'm Siamak, this is Marketing Insider.