Brendan: Welcome back to another episode of Real Estate Investing, unscripted. I am your co-host, Brendan Bennett, VP of Sales at Fund That Flip, and with me is your other co-host, David Duggan, regional sales director at Fund That Flip. David, What's up man?

David: Lots of good things. Brendan. Feeling good over here. exciting episode last week with Matt Rodak, our ceo, he kind of formally handed over the reigns to us, to, to butcher up this podcast as best we can and get some good guests on here. So, really good conversation last week. Excited about where things are headed.

Brendan: yeah. Responsibility on us, right? We gotta carry the torch. Last week we talked a little bit about, the economy at large, kind of ironically, you know, you and I don't really claim to be economists by any stretch of the imagination. So I think, the, the guests that we're gonna bring in here shortly, all too well timed, talk about all things marker related.

So, David, if you want, we can just jump right in. Let's get the guests intro and get 'em on here.

David: Let's do it. I will gladly do the honors here. So today we have Nik Sches from Zonda. Quick intro on Zonda. Zonda is a multifaceted data provider and advisor firm. Most of their typical clients are general master home builders as well as private equity providers. Quick intro on Nik, Nicholas Scoolis is the manager of Housing Economics for Zonda.

As a part of the economics department, Nik constructs data analysis models for Zonda, works on custom research projects and presents nationally on housing and economic trends. Nik is also the lead architect for Zonda Suite of indexes, including the new home pending sales index and the new home lot supply index.

Nik's work has been featured in the Wall Street Journal, CNBC, CBS News, and the Bloomberg Terminal. hope I didn't butcher that too much, but I think that's, that's quite a bit of credentials there. So we are ecstatic to have Nik on and excited to talk to you.

Nik: Yeah. Thanks for having me, guys. Happy to.

Brendan: Yeah, man. Before we get in, like too far into, you know, a lot of people are hopefully tuning in to hear from a credible source like yourself on the economy at large, new construction. where interest rates are moving. What is the Fed gonna do? What are you guys predicting?

Before we do that, we just kinda like to peel the layers of the onion back on Nik and like, you know, how'd you get into Zonda? Did you know you wanted to be an economist when you were like five years old? Like, what does that story look like? Bring us to speed.

Nik: Yeah, so,  I actually knew I was interested in economics for a very long time. I don't know, just the logical rational side of me has always kind of prevailed. I've always kind of applied over analysis in my personal life and my friends like to make fun of me for it a little bit. But, that's kind of led me to economics.

I majored in international economics or international business with a focus in economics. After college I worked for a commercial real estate data firm. And then after that I've been at Zonda now for over four years, almost five, and working on the economics team with our chief economist Ali Wolf, and we do a lot of really cool things.

Brendan: Very cool man. Tell us a little bit more about Zonda. So I know like when you and I did our our pre-meeting, we talked a little bit about some of your guys as different clients that you work with and who the target market is. So like, what's the secret sauce at Zonda? Right? There's a ton of different, economic space companies, data providers out there.

So like what, what attracted you to Zonda and what does Zonda offer that's a little bit unique to their clients? Just to set the stage for the listeners. 

Nik: like the real bread and butter is just our, our size and scope of our data collection we're by far, the largest in the new home space. Wide margins. We actually survey and collect monthly and quarterly over about 60, 65% of the national new home market. Um, for comparison, when the census does their releases on monthly new home sales, it's approximately less than 10% of the market they're surveying.

So we're, our coverage is actually about six times. What the census is publishing and the national new home sales number is obviously very credible. So our scope of research is really vast, and we have data that no one else in our industry can really match on the private side at least.

And then, um, we have really strong advisory firm. We have local experts across the country. I work nationally mostly, but we do have, consultants placed all across the country and they've been in those markets for many, many years and know them extremely well. So we get the quantitative side of our research as well as qualitative input, and it makes us the best of what we do.

David: So, so Nik. Just dive a little bit deeper into that if, if you could, Right. I don't know if you're allowed to, to touch on the secret sauce too much, but I'm curious to like, where are you actually pulling the data from? How are you compiling the data? you know, more on maybe a granular level if you could. 

Nik: Yeah, it's multifaceted. We have a research team that specifically either is collecting data from builders themselves or we're also scraping off of deeds data. But obviously deeds are lagged about two to three months. So what a research team does is they can collect data in almost real time.

There's probably like a four or five week lag off real time, but it's about basically as good as it gets.We publish our new home pending sales index. Before the census releases their information for the same month by about usually two to three business days. So, the research team does a really good job and I get to benefit from it by using the 

Brendan: There you go, man. So if I'm a home builder, I could come to Zonda and access information based on the local area or areas that I'm building in help that inform how I'm, how many home starts I'm projecting, how many days on market I can anticipate. Is that, is that about right?

Like that's one use case of maybe one of your clients and it can get broader, more microas well, correct.

Nik: Well, certain data points like days on market's a little bit interesting for the new home space. The construction process and builders sell homes before they even go on market. So we do also, we have a basically inventory that's upcoming. We do quantify what we call qmi, which are homes that are built and ready to move in within, I think 90 days.

So yeah, we do segment our data like that. We do

project level tracking or subdivision level tracking. So each project in individual area is tracked. Price square footage. we track incentives, which have been really important recently because builders like to offer incentives before they try to affect their top line prices.

so yeah, sales, supply, pricing, the big three and can do it on market level, even city, state, zip code. 

David: Nik, when you say tracking incentives, are you talking about like tax abatements, you know, mortgage stipends, availability, that sort of thing? Anything that employers might offer? Is that

Nik: No, it's on the builder's side. So like what they might be doing to incentivize buyers.most commonly it's coverage of like closing costs and now, due to our interest rate environment, interest rate, buy downs. So they'll basically help you as a buyer. Maybe if the affordability isn't penciling, cuz rates are at 7%, they might say, Okay, we'll help you at a cheaper rate for a certain time period to make those payments. It's like a alternative to an arm almost. but on the builder 

David: Very. 

Brendan: That's super creative. Yeah. I haven't heard of anyone locally at least doing that yet, but I'm sure we'll see a lot more of that now with rates 7, 8, 9, you know, climbing. That's super. 

Nik: Yeah. Typically in like normal times, closing cost coverage will be a big one because builders also do have their in-house brokers. so they'll help cover costs on that end to. so people can put more money up front, because if you don't need the money for the closing costs, you can apply it elsewhere.

or also you'll see it a lot in finishes. Like maybe they'll give you discounts on appliances because they're buying 'em wholesale so they can pass the, the savings on in that way. But yeah, now because of our current environment, interest rate buy downs are becoming very.

Brendan: Hmm. 

David: Got it. That's, well first appreciate the rundown on Zonda and kind of all about what you guys do. Cause I think, um, that's fascinating to me and Brendan, and I'm sure many of our listeners wanna wanted a deeper dive there. I think one of the things that, that everybody would like to hear and. It's becoming more of a, a topic of conversation now is about home affordability, Right? And, and kind of where the market is heading with home affordability. How, the current supply and demand and interest rates are impacting affordability. Can you touch on that at all, based on what you're seeing?

Nik: I mean, honestly, we're at one of the least affordable periods in recent history. There was a brief period in the seventies where rates were really, really high, where you could say, homes were less affordable. But, it's just a combination of what the pandemic did to home prices. 30, 40, 50% year on year gains were, common all across the country.

And now with rates hovering at just below 7%, on a monthly payment basis, the market's really unaffordable. And that's what's kind of driving a lot of what we're seeing. It's because we know and we hear that demand is still out there. and demand is like the, the fundamental drivers of demand are really strong.

It's. the numbers don't pencil for a lot of people at the moment. And it's just because when you're looking at that monthly payment, at that 7% rate, prices haven't equalized enough to where the payment is at a place that is reasonable. So cash buyers have a lot of opportunity, I think. But yeah, affordability is the, the name of the game.

Brendan: Yeah, so, Nik, question on that. Right? So like I was looking at a local town home project here in Cleveland where they're, they're coming to market, they're getting ready to list for sale. Um, and like if you run the numbers based on what they're getting ready to market this property at, I think that they're looking at a 360 3 70.

outsell price point, right? At a three or 4% interest rate. Um, this also has a tax of even, right? So no, no property tax, um, included in this calculation, but like at a three or 4% rate, like we saw earlier in the year, that mortgage payment's anywhere from like 13 to 1500 a month. Now at a seven to 8% projected, you know, it's closer to a $2,100 payment per month.

So my, my question is, and like what a lot of people ask, ask me, and again, I'm not the guy to answer that question, is i, I doubt that we're gonna see it go all the way down to equilibrium of hitting that $1,300 point, right? Cause like in order that to happen, that home prices would have to cut dramatically.

It we're, we're not talking about a 10%, 15% drop. We're talking about like, Pretty substantial, decrease in home price to be able to hit that $1,300 payment in, in your eyes, Like how do you view that, dynamic and, and what is, what is gonna be that kind of break even point where people are like, Hey, I know I'm not gonna get back to that $1,300 payment of affordability, um, but I'm also willing to pay a little bit more, just not quite $2100. How do you think that reconciles in the market? 

Nik: It's a pretty interesting concept, and obviously in the new home side we're a little bit different because builders have their costs and I know in, in your, in the flipping investor business that you have your costs that are put in, so you basically have these floors. But what I think is interesting, and if you look at what happened in sales specifically on the new home side, when rates in late August, early September came down, mid fives ish.

There was a spike in volume on we, we registered it, the census registered it, so there was a spike in volume at that price point, and whether that's just seeing perceived value because rates came down and then, or rates were high and then they came down. So it's like, Oh, I'm saving this off this. Whether it's that psychological point or if that is the trigger price. Ali calls it strike price, which was whatever gets the buyer to pull the trigger, I guess.

So I think you could look at that price point, maybe five and a half, and see what the affordability would have to be and what prices would have to come down to get that price point. But also, there are cash buyers.

Maybe in your market it's a little bit differently, but nationally, cash buyers are sitting on the sidelines and just kind of like sitting on the sidelines waiting for the opportunity where they just come down a little bit more, a little bit more, and maybe they can just get a, a great deal and the numbers look, different to them cuz they don't have that lending.

Brendan: Yeah. 

David: So we talked a little bit about this last week when we had our conversation with Matt. We talked about kind of this lag that we're seeing between seller's market shifting to buyer's market, right? And. When is it going to catch up? And, and when are sellers gonna have that realization of, Hey, I kind of missed the hot market, right?

I kind of missed the peak value of my property. Um, and, and kind of shift to more of an equilibrium on the, the buy side. Do you, what's your take on that, Nik? I'm curious to hear, like, do you have a timeline in mind for when that starts to settle?

Nik: So we have, a monthly survey we do with builders. And builders are saying that they think it's shifted already. But I mean, what what does that mean exactly? Because the demand fundamentals are just in their favor. It's just when, when you're thinking about new home side. they can't just sit on those homes forever.

They're not living in those homes. Those are just, they're just funneling cash out. So they need the homes to sell because of the cash flow reasons. They can't just have it sit and sit and sit, where maybe on the existing side you have someone who's living in the house and they're just like, I'll just wait.

I'll live in it. This is my home. I'm fine. So I think there's gonna be a pretty big disconnect on the existing side as and for terms of general resale. And then on the new home side. But again, I think for it, it really just comes back to what is gonna force someone to sell their home. And I think it's gonna vary from person to person, but I think that's gonna be a big prohibitive factor because so many people are locked in at sub 3% either in refinances or new mortgages.

And that's just a hurdle that's really hard to overcome. Cuz no one's really looking, Oh, I'm gonna trade my 2.6% mortgage for a 7% mortgage. It's gotta be really incentivized.

Brendan: Yeah, The interesting about what you just said, Nik, right? It's like it's, it's gonna be a mixed bag. So the buyer that was psychologically attached to the two and a half to three and a half percent interest rate, like they're gonna have to come off that a little bit, right? Cuz it's one, it was historically low and two, like it's not what is current today. Um, so like kind of a meet in the middle, of, you know, the two and a half of yester year and the 78% of today. Same thing with sellers, right? Of like, hey, that 2% rate is what drove that 360 k top line price rates are no longer there. So, you know, kind of a meet in the middle on both sides.

But again, the, you keep mentioning the, the demand fundamentals are still so strong, which I think is, you know, a pretty steadfast opinion of a lot of our investors, that we work at that fund. That flipped as well, so good, good to hear it. Coming from a source like yourself, 

Um, so Nik, switching gears a little bit. you know, right now when markets are going up and down, I think what is super popular for any media outlet is. What headline can I put out that's made the most clicks?

What, what's gonna get the most newspaper eyes, whatever medium that you consume, like this content from? Like, how do you draw the most eyeballs? And it's the most emotional headlines, right? It's like a recession is imminent, it's gonna be, you know, you know, 2008 asking all these other kind of fear driven type call to actions for people that are, are out there as, as the consumer.

So my, my question to you is like, what resources would you recommend or like what could our listeners hone in on of like, how do you go by splitting the legitimacy of a headline versus like the emotional reaction they're trying to get you to feel right. Cause in, in today's current market, it's always, it's always down, it's always doom and gloom.

But I think we're all three of us and a lot of people that are listening are of the perspective. Like, there's an opportunity in every market. You just might have to adjust your strategy. You might have to change things up a little bit of how you're approaching it. So, um, how do you view what I think you call the headline effect, or, you know, you said you read an article about it, like, talk about that a little bit.

Nik: Yeah. as they say, if it bleeds, it leads. so my, my favorite is, when they'll say, Oh, it's the lowest in three months. It's like, that's not a timeframe that's suitable. But, yeah. So we've actually studied the headline effect before in, if you remember, in about four Q 18 when interest rates were rising.

Back then the market had a pretty decent slowdown for three to four months. And we actually pinpointed a date using Google Trends. When this one article came out with, I believe it was CNBC, that after that date, the search for housing slow down housing recession just skyrocketed. the headline effect is very real.

Obviously it does affect consumer confidence. but it shouldn't. It's just you have to take the time to dive into the data to either validate. discard, on the existing side, there's really good free sources in terms of housing data. Realtor and Redfin both publish a ton, an amazing ton of data for free, in their data centers.

And if you're working on the existing side and trying to get an understanding of what's happening, I definitely recommend it. Obviously, if you're working on a new home side or trying to understand how the new home supply is affecting the total housing market, you can come to us. So I think those are two very good options as far as trying to understand what is happening on a broader economic scope.

In terms of, recession, there are things that are a little bit complicated because historically, like jobs on a very good predictor, jobs will be positive until they're not. And then when they're not, you're likely at the beginning of a recession. So I would look at things like consumer spend. It's if right now consumers are still spending a lot, even if it's not in housing.

So that tells me that the money is out there. Consumers are still feeling good. Like when you see consumer spending going up and housing spending is going down, that means all that money is being transitioned to other parts of the economy. So that spending is showing demand to me. it's just not in housing right now.

And whether you wanna say housing is in a recession right now or not, I think it's probably too early to tell. It does the, I don't believe the total economy is in one, despite how 

Brendan: Yeah. And I think, David, I'll, I'll be interested to get your take on this too, but one, one of the, the main reasons I asked the question is we constantly see, and our underwriters internally are like, you know, Median home price is going down. The average, average number home starts going down, all these things.

And then when you double click into it, it's like, it's very geo-specific in a lot of areas, right? So like, it's not the entire economy at large. It's not the entire United States, it's like Austin, Texas. It's the areas that are, you know, we're super high growth during the last two to three years. They're returning back to a level that's a little bit more at equilibrium, um, a little bit quicker than a market like a Midwest market or.

You know, Southeast Carolina's market. So, um, what do you guys see from that side? Like, you know, I, I think it'd be really easy for someone to be like, Oh man, California home prices are dropping on average 30% and you just paint with a broad stroke across the whole United States. Well, you can't make informed decisions whether you're an accredited investor or whether you're someone that's an operator doing fix and flipper new construction. So can you speak to that a little bit? Cause I think that's a super interesting dynamic at play.

Nik: Something we do is we compare to 2019, as a baseline a lot cuz what 2019 was. If you can think back to a world before the pandemic, 2019 was considered a strong, steady housing market. Like it wasn't too hot, people were happy, it was growing. demand was good. Homes were selling at a good pace, prices were growing. So we compare that as a baseline a lot. And when you're looking at that, where prices are, they're so far above that level. so I think in, in normal, Prices are very sticky upwards. They don't typically come down very much, but we're in such a unique environment where prices grew so dramatically in such a short period there is room for them to come down in that sense, because just the equity gains are massive.

People aren't taking losses, they're still taking gains, even if they cut their prices 10%. And then as a geo for specific thing, there are markets that are still growing and accelerating their price appreciation year over year. our data shows across the board. We split the marketing into, three tranches, entry level move up and luxury and entry level and move up are still up double digits year over year, despite the deceleration.

And our luxury is at 9%, but it actually increased on a month over or month basis last month. So I think the way you have to think about it is product that is done right is going to. It's just you have to be offering something good, like people don't want, especially now that the market may be shifting towards a buyer side, you can't sell something like a crappy product and expect it just to fly off the shelves like you could have maybe 12 months ago.

David:  Yeah, I couldn't agree with you more, Nik, I think, so I'm parked here in the Midwest, so my home base is Cleveland, Ohio, but I kind of oversee everywhere between, you know, Pittsburgh and Kansas City and, the Midwest, by and large seems to be held pretty stable as far as like home values. Maybe you see a little decline in certain neighborhoods.

To your point that the higher end homes, um, you know, you see a little drop there, but like, Normal, you know, single family home, middle class neighborhood, like that's, it really hasn't taken much of a hit at all. Um, what I see most is, is the last thing you mentioned there, like over the last two years you had people throw lipstick on a pig throwing on market and they would get 10 offers over asking.

That's going away, right? The people that are still building quality products, um, their homes are still selling. Cuz I, I think there's still a fundamental lack of housing. The Midwest and most of the country. So I, I think, it, it's pretty stable here. Now, you know, Brendan, I think you mentioned Austin, I think Nashville, right?

Some of these other markets where like, they're just building a ton. Like, I don't know, I, I won't speak on, on the condition of those markets or, or you know, what values will look like there in a year, but like, I don't feel that in the Midwest at.

Nik: Yeah, 

Brendan: Yeah, this was explained to me what you just said, Nik. This just resonated, at a recent conference I was at where they were like, if, supplies at a hundred. And demands only at 70, you're not gonna have the same issues across the entire 100. Like there, there's demand to meet 70 outta 70, right?

So like if the quality of that. Meets that 70% of demand, that 70% will kind of operate as normal in a normal market, right? It's a 30% of supply that's above that demand threshold. That's a little bit lower quality, not done as well. Lipstick on a pig. David, to your point, those are the ones that we'll see a little bit longer days on market and, you know, maybe a more steep decline in home prices. Does that resonate with, with you at all and how you guys view it at Zon?

Nik: Yeah, yeah, yeah. 100%. and circling back to the Midwest thing, I always wanted to add, because of the price point in a more affordable. The relocation buyer proposition is still really, really strong there. But places like Austin and Phoenix that may have appreciated really fast, the proposition, the value savings, maybe not as much, but when you're thinking about places like Cleveland, Cincinnati is somewhere that the data looks pretty strong for us.

I've never been there personally, but I just see the data. I'm like, Oh, that looks like it's actually doing pretty well. So, yeah, Cincinnati, Columbus, they all seem like they're, slowing off the pace it was, but that you can't use that as a barometer for normal. but still Yeah. Strong even at 7%. So, Cool.

David: I'm curious not to, I don't know that we need to go too deep into this, and I don't know that it's, you know, I hope I'm not taking a off track too much. But what do you think it, this, everything we're talking about here, what do you think that does for home ownership in general? Right? Do you think we shift more toward, Investors owning properties and, and more of a, a rental type of market?

Or do you think there's still gonna be opportunities for home buyers, maybe even young home buyers, the, you know, millennials, the, the Gen Zs to go out and buy homes at these increased interest rates versus cash buyers, Right. Like you were talking about.

Nik: Yeah, I mean if you're looking at what the big boys are doing, they're thinking it's moving towards investors owning rentals, and I mean, it's such a smart business model for them if you have the funds because you just rent it and you rent it, and then once the home value appreciates, you sell it. So you've got all your rental.

And then your home value appreciation on double it. So, and we're seeing it a lot. It's risen by maybe estimates 20% previously, maybe up to 30% investors now. And then we're just classifying investors as maybe LLCs or people who are buying homes that don't live in that home. so yeah, we're seeing a rise of it.

The big money is coming I mean, it's been in the market recently. they're still looking for opportunity. And we've heard anecdotally of an investor approaching a builder who had maybe 20 ish homes still stand, like Qi is what we call 'em, ready to move in. And they said, Well take 'em all if you discounted 20%.

So they're waiting and they're gonna take, if the opportunity comes with a numbers pencil where they can just say, We can buy this, we can get the cash flow in, they'll do it. And I think that really squeezes the, the first time homeowners.

David: Are you seeing some of your, your builder clients go more toward a build to rent model?

Nik: Yeah, I mean, but it's very market specific. It's cuz the land has to be affordable and it has to be a place that is close enough in a proximity to, the metro. It can't be too far out suburbs, even though that's kind of what's happening in Phoenix. because the target of the build to rent are the first time homeowners who can't afford to rent.

So there's some people who do that, and there's some people who do build to rent to own where you, your part of your rent goes as like a equity payment. but yeah, we're seeing a lot that's been really hot maybe the last two years. I think it will continue, but I think it's gonna be market specific.

David: The reason I ask, I have, some clients here in Cleveland that have actually shifted gears mid project, right? They're, they're building these town homes. The intent to sell. Last conversation I had, we are no longer selling these As we modeled it out, we're gonna rent them until, we get some equity back in them and have an opportunity to, to sell for a profit. But, you know, we're gonna ride out the storm, put some, put some renters in there. Yeah.

Nik: Great, if you have the money to do it. But yeah, um, we do a lot of build to rent advisory work on the advisory side. Not so much me specifically, but we do and have done quite a lot of it for, for just builders. Who are just interested, they'll have us model out investments for them or people who are doing it currently.

And it, yeah, it's, it's tough because like, you would like a more, more balanced supply as just like a fundamental. of way the market works. But obviously if they're taking the land and turning it into rentals, that leaves less homes to sell. But that's also good if you're a builder, you're artificially limiting supply even further. So that can drive prices, that can keep the market in your favor.

David: So, um, Nik, quick, quick background for you and, and maybe you already know this, we cycle our money, right? We, we sell our paper to various different. Loan buyers, right? And that can be in the form of institutions like hedge funds or probably traded mortgage REITs. Um, but half of our loans also go to, what we call our, our accredited investor base.

It's our retail base, right? These are individual accredited investors that buy into our loans. So, um, that's a big chunk of our audience, right? I would say 50% of our audience. Lenders, Right? They are, they're lending money on these projects through our platform or aspiring lenders. Right. So if you were in their shoes, right, the, the shoes of the accredited investor, um, where would you be looking to deploy funds?

What kind of things would you look for? What kind of things would you be keeping track of as we go through this kind of market shift?

Nik: so are you talking about like asset type or…

David: I guess both, right? Because we're a national company, so you, I mean, you can kind of pick a go on the map and, and we're probably gonna be there, um, at least east of the Mississippi. And then, um, yeah, I mean, asset class, like single family homes are bread and butter, but, but we do various different asset classes as well, so yes.

Nik: if you're, if you're talking to me about where I think the most stable recession proof area. Not recession proof, cuz nowhere is fully recession proof. But, yeah, if I, if I knew, I think areas with a large government population like Baltimore and DC have done really well historically during recession because of the opportunity and the stable job base because the government usually hires during recessions because that's just how they operate.

And they also typically, if you're dealing with veterans, offer VA loans. So those loans are. Offered at a more affordable interest rate. So you can get that demand from people who have a stable job, even in tough times, and only need to put 3% down or less and can, so you can really attract demand.

The issue with those markets though, is historically they don't have the same upside. They don't grow as much as some of the high growth markets, so it's just something you kind of have to, to weigh. And then further than that, I think long term winner. Are going to be places with like secondary and tertiary job markets because I think if there is a recession, I think employers are gonna use that to take back some.

We've been kind of in an employee empowerment era, if you want to put in quotes, where employees have been kind of able to negotiate whatever they want, and that includes work from home work. And I think employers are gonna look to take some of that back, whether that's a hybrid schedule or whatever it may be.

And so I think the areas that are traditionally more affordable, so I, I look at like Indianapolis, Minneapolis, places that have a pretty sizable job base, Raleigh, Charlotte, but are still offering relative affordability to maybe the higher cost.

Brendan: so Nik, that’s how you're approaching it as an accredited investor, right? Someone who might be logging onto our website, looking at a, a ton of different GOs, a ton of different deals. Um, to, to flip gears just a little bit, how would you look at that if you're a, you know, put yourself in the, in the shoes of. Real estate developer, a builder, Um, what kind of things are you looking at? And, and now you're going geo based, right? Like, let's say someone who's operating in a Cleveland, a Cincinnati, a Charlotte. Like what kinda things are you looking at if you were in the builder's shoes.

Nik: If I'm the builders shoes, I want to look at a way to add cash flow to the property. So something that's happening in California now is we just change zoning to allow duplexes in a lot of areas, which means gran. And the addition of a granny flat is cash flow that you can either rent out or just use it as more space.

And I think that opportunity, especially in high density areas, is really, really important because just having that additional rental income helps you close the gap on the monthly payment really significantly. And especially if rates are going to stay above 5%, 6%, that opportunity is really important and obviously it helps house people.

Brendan: I think the interesting thing is right, is like it's difficult as a landlord type investor to buy properties today at the current rates and cash flow. But even if they're getting close, right, even if they, they secure a seven to 8%, mortgage, and maybe they're not clearing the. Three to $500 a month and, and net profit per unit that, that they would target In a normal interest market, let's say it's only a hundred or 200, you're still getting the, the depreciation on your taxes.

You're still getting the mortgage pay down from your tenant, and eventually when rates go back down, you have an opportunity to now cash flow more. Right? Because, you know, if, if rates level off next year, the following year down. Let's say a low, normal of 5%, you now can shave off maybe a hundred bucks, 200 bucks off of your mortgage payment.

So I think, um, yeah, that, that's key, Nik, that, that's a really good point of trying to find, I, if you're a buy and hold investor, or if you're trying to create value in a home for a buy and hold investor, you know, run, run the numbers on the cash flow and how does a cash flow look? And even if you're not getting rich in the short term off cash flow, think about your five year plan, you know, how much money do you will you make in that 

Nik: Yeah, something the big investor recently just told us when we were working on a project is be patient. Not every deal is the right deal, but there are the right deals out there. And so just look for the opportunities that make sense. Cause like you said, even if you're losing money on a monthly basis, if you're investing in a quality.

and there is just, there is a systemic housing shortage right now, even if the, the number's close enough that you can make it work long term. And then as the market turns in 20 24, 20 25, the prices start appreciating again on a strong growth rate. Then

you're in, you're in the green then, and then as you said, you can refi and then get your monthly payment low.

And you do can take that cash flow or you can flip it and get, your capital.

Brendan: Yeah, exactly. so Nik, we wanna, we wanna round off the, the interview here with, with, the grand finale. Probably what people skip the first 30 minutes for probably gonna be in our, our, our tagline when we market it. what is your in Zands? Market predictions for 2023. And you, you can blank canvas, go wherever you want with that question. But give us your prediction. 

Nik: You guys are going with Headline effect?

Um, so yeah, our house view is that the market will, will kind of midpoint 2023, late 2023 will probably enter a recessionary environment with job losses. And the extent of that will be driven by how long rate hikes continue to go up. My personal view is that they're gonna keep going up because they reacted too slowly. And as a result, I think they're just, the, the view of the current sitting fed is that they'll do anything to stop inflation and their only tool is interest rate, rate hikes as a fed, there's obviously, other parts of the government who can do different things, but as a fed, they're operating insularly, and that's what they're gonna do.

And that will likely lead us to a recessionary environment. So from there, I think it's probably. A shorter recession than, the Great Recession was obviously the issue of the Great Recession was the slog and how long it took to turn around and hit bottom. we're kind of looking at a late 2023 recession.

Start late, mid, late 2024 recession end, so that would see interest rates may peaking mid 2023 being cut, cut, cut, cut maybe till late 2024. So that would be about six or seven. Of cuts, which would probably put us around maybe high fours, low fives, and an environment to grow again because of housing demand. 

David: So to be clear, a quick question. You, you are thinking we haven't technically entered the recessionary period yet. We're there.

Nik: No, I think you can make the argument for housing. I don't necessarily think. would, because the levels are still historically pretty strong. We're about 29, 20 18, 20 19 levels on the new home side. That's enough sales to keep the market going. so no, I would say no on housing, definitely no on economy.

I think we still need to see consumer spending come down. We'll see jobs go when they go, but the hiring is still way too strong. general investment is still too strong. But I think if you're looking at the tea leaves, obviously the, the winds have changed, but the economy is still strong.

Brendan: Yeah. Nik, if you wouldn't mind. So, um, again, the, the word recession, depending on who you are and you know, what audience member, you know, what, what they do with their nine to five, what they're investing, um, could have different emotional implications. Just like we talked about. You mentioned the headline effect, right?

What, what opportunities exist during a recession that don't exist in a normal market period? So like, what can people that are listening get excited about? Cause like, you know, recession isn't always bad, right? Like, you have to kind of hit that low point to then go on, um, go on a tear from like a market growth and population growth and job growth perspective.

So, what kind of things can people get excited about in the event that we do hit that recessionary period late

Nik: Yeah, if, if you're well positioned and you have the cash on hand or the lending available to you, the opportunities are endless. If you look at how many companies that are currently, absolutely massive, were formed out of that. If you look at on the real estate side, there's a real estate today provider called Co-Star.

They were formed in 2000, the late 2000s. And then in 2008, they had so much cash on hand, they just bought up everyone who was struggling and then formed this huge mega corporation. and I think if you look at that in any form of business, the opportunities are there. Like if you have the cash, like I said, those investors that have the big cash are looking at these builders right now and saying, we're gonna get a discount home, we'll pay you all cash. We'll just take 'em off your hands, and I think you can apply that on any scale if you have the funds available to do so.

David: Along those. And I want to add some context here so you know, I'm not hitting the panic button. I think what we're talking about it now, we talked about it on, on the previous episode, you, you can make money in any real estate market, right? I think people over the past couple of years, especially people that entered the real estate investing or building market over the last couple of years have gotten condition to one type of market and it's was the most insane real estate market this country's ever seen.

Right? So, um, talked about the recessionary. As far as expectations of where you might see interest rates come this time next year, 2023, where you might see the inflation rate. Um, like what, what sort of sticker shock are these people gonna get when they, when they look at an interest rate, whether it's, you know, a 30 year mortgage or maybe something that's, a little moral along the lines of what we do on, on the hard money side.

If you can speak.

Nik: definitely not a hard money expert, but the interesting thing with interest rates is that they don't follow direct correlation with the federal funds rate. it's more of the tenure. So if you look at what the tenure is doing, you'll know what the 30 year is gonna do the following week. So they just generally, the federal funds great goes up the interest. Generally gow up. I don't know how much higher they're gonna go than 7%. I would hope they don't reach eight. Hopefully topping at seven and a half. but interest rates are historically hard to predict. They're extremely volatile.

Especially recently, I've never seen anything like it where they're going up and down 25, 50 basis points in two week period. That's crazy. but so hopefully we're topping at about seven and a half and then we come down pretty. Once the rates start cutting, which I think we will, it's just we have to get there first.

Brendan: What do you think that new normal will be? Right? It's like do you, do you expect we get down to like two and a half three, like we saw like wishful think in 2021, or do you think it levels off like that four or five range that we saw.

Nik: If, if we're at 2.6 again, something terrible has happened because the result of 2.6 was we had a slow recovery. So rates were already pretty low, right? Because 2008 was such an anomaly, and then we amplified it with a pandemic and obviously with the pandemic response, it's hard to really fault because no one had any idea what was happening.

So obviously they cut rates as fast as they could because things looked really bad for two months. So if we're at 2.6%, something terrible has happened. I would, I would, if I was making a guess. Mid fours would be probably where we bought 'em out at. Maybe, maybe in the high threes. But yeah, 2.6 I don't think is ever happening unless we switch to 40 year mortgages, which you never see.

David: Interesting. Well, what I think what we're hearing from you, Nik, is. It's not the end of the world. This is a recessionary cycle that happens in any economy, right? And there's ways to make money in it. do your homework, do your research, get the necessary data and make informed decisions on how you're gonna pivot your 

Nik: Yeah. Stay patient. The opportunities will present themselves.

Brendan: Nik, appreciate all the, the insights on that. I think, um, you know, during, during this time, we wanna give as much information as possible, let people form their own, own decisions. And I think, your company and, and you as an individual, you're providing a lot of that data for them to use as a resource to be able to form those opinions.

So I think, um, to David's point, that's what you gotta do, right? You. Know your strategy, have a plan, and change a plan as you get new information that that comes in. But other than that, you know, it's, it's business as normal

David: been a pleasure having you on Nik. you know, we get asked for our opinions all the time. Brendan and I and, and all the other people here at Fund that Flip, cuz we're in the day-to-day, but they're just that opinions. Right. And, and yeah, sure we have some facts sometimes, but we spew opinions a lot.

So it's nice to have somebody that has. The, the data and the concrete facts that go along with the housing market. So, um, thank you for your time, man. We appreciate you.

Nik: Yeah. Thanks so much for having me.

Brendan: Cool. And Nik, just before we sign off, where can people get in touch with you if they wanna reach out? Whether it's for Zonda stuff or you know, real estate investing in general. Um, where can people find you and Zon?

Nik: Yeah. Zon. Just Zonda home. And, if anybody has any questions specifically on new home space or economics, you can definitely email me. My email is first initial and Last name Scoolis, Zondahome.com.

Brendan: Perfect. 

David: Awesome. Thank you all for tuning in with us today. looking forward to having many more top of the line guests on the show, in the coming weeks here that focus on different topics and. just current market conditions, so, you know, should be some really good, good content for everybody. Be sure to check out fundthatflip.com, follow us on social media and, for real estate investing unscripted.

I'm David Duggan and for Brendan Bennett, we are signing off.

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