Tailwind Talks
Tailwind Talks is a podcast for high-performing professionals who want to build serious real estate portfolios without leaving their careers. Hosted by an airline and military pilot turned investor, it dives into actionable strategies for scaling your real estate portfolio while balancing the demands of a full-time job.
Tailwind Talks
The Housing Market is Broken – And It's Still Going Up
Ever wonder why housing prices keep climbing despite 7% interest rates and affordability at a 40-year low? You're not alone. The housing market continues to confound conventional wisdom, with properties selling well above asking price even as monthly mortgage payments have skyrocketed 90% since 2020.
The mystery deepens when you consider that most people's wages haven't increased by even 5% during the same period. This fundamental disconnect between income and housing costs is reshaping the real estate landscape, particularly in previously affordable Midwestern markets like Milwaukee, where prices have jumped 7-20% year-over-year as buyers flee expensive coastal cities.
At the heart of this contradiction lies a perfect storm of factors: critically low inventory (30-40% below pre-pandemic levels), virtually non-existent new construction of starter homes, and what I call "the machine" - the entire lending and real estate apparatus that benefits from ever-increasing prices. From banks earning more interest on larger loans to municipalities collecting higher property taxes, the system is structured to push prices upward.
Many hopeful buyers compare today's market to 2008, anticipating a similar crash. However, the differences are striking: today's homeowners have substantial equity, lending standards remain tight, and there's no wave of foreclosures on the horizon. While some cooling may eventually occur, any price adjustments will likely happen gradually over years, not months or weeks.
For investors and buyers alike, this reality demands strategic thinking. My approach focuses on affordable single-family homes and duplexes that represent entry points for many buyers - properties where demand should remain strong regardless of market fluctuations. For those waiting on the sidelines, consider that increasing your purchasing power might be more realistic than waiting for prices to dramatically fall.
Whether you're invested in real estate or searching for your next home, understanding these market dynamics is crucial. What's happening in your local market? Share your experiences and let's continue this important conversation.
What's up everybody. My name is Cole. I'm a part-time real estate investor, a full-time legacy airline pilot and a part-time military instructor pilot. Today I'm gonna talk about how in the world our price is still going up. We've got interest rates at 7%, we've got affordability for houses at a 40-year all-time low and we've got endless articles about how the market's gonna crash and we're gonna have a Today, literally talking to one of my buddies who's a full-time flipper in Milwaukee, a house just sold for $81,000 over asking.
Speaker 0:It wasn't a custom build, it wasn't anything fancy, it was just a regular old ranch out in the Milwaukee area and it closed $81,000 over asking. I couldn't believe it. I hadn't seen that in a while. I know that the market was still hot, but it is apparently scorching hot in Milwaukee and I'm going to talk about how could that possibly be. In the market that we're in, the monthly mortgage payment is up 90% since COVID. I mean that to me was insane 90% increase in the monthly mortgage payment. And let me tell you, what didn't go up is people's wages. Barely anybody's wages probably went up 90%. Most people's wages probably didn't even go up 5% since 2020. I mean, there's been a massive shift in the market as far as affordability goes, and that kind of goes in line with my thesis that a lot of these really cheap properties in places like Milwaukee are going to go through the roof here in the next couple of years because everyone's getting pushed down to the next lower tier for what they're buying and it's going to inflate prices. So that's just a quick example of the kind of a snapshot of affordability. But then we've also got 30-year mortgages that are seven to seven and a quarter is really about what I've been seeing on average and that destroys affordability. If you look back, everybody talks about man. I should have bought a house in 2020, 2021 when rates were sub 3%. I know some people that were getting them sub 2.5 in comparison to inflation. You're making money just off of inflation because you're totally beating it at two and a half percent, but now we're back to seven, seven and a quarter. That's crushing affordability. That the interest on that over time is just massive. Yet people are still eager to buy and that's something that I think is extra concerning.
Speaker 0:And then you've got the Fed the chances of them slashing rates in this environment, specifically this political environment. I'm not going to get into politics in any of my videos. But you have to at least recognize the fact that the Fed's probably not going to be slashing rates because of the environment that we're in, and it may be related to the economy. It may also be related to politics, but in whatever case, I don't think that they're going to be slashing rates to the extent that would allow for mortgage rates to really have a dramatic drop To me. I honestly think that mortgage rates are going to kind of stay where they're at, maybe within a percent plus or minus a percent either direction. I don't see them just plummeting. If the Fed is slashing rates, then that means that the economy at large is doing poorly and they're starting to recognize that and the Fed's always behind. So I'm not really betting on that per se.
Speaker 0:But even if they do cut rates, I don't know that it's really going to impact. It may impact your ability to buy a house at a certain price, but I don't know that's really going to affect the cost of houses. Honestly, I don't know that it's really going to make a huge difference. If anything, it might influence people to pay even more money because they're just solving to a monthly payment. People really aren't solving to a purchase price they're solving to a monthly payment and what they can afford. They're going off their income, post-tax dollars, and trying to figure out what they can actually pay for. They don't really care about the big number, unless they're trying to show off, but they really care about that monthly payment and so if interest rates go down, then their monthly payment is going to stay the same for a more expensive house. So I think that's what's going to cause people to maybe spend even more money if rates were to come down.
Speaker 0:At a national level, the housing inventory is somewhere in the 30 to 40% range, lower than pre-pandemic levels. So you have this situation where we have really expensive houses, we have really expensive lending, property taxes all that stuff is really expensive. But we also have low inventory and a lot of unsatiated demand for houses. So we have this low inventory. So people are chasing. Obviously it's a lot of people chasing a small amount of goods. That makes the prices go up. It's simple supply and demand.
Speaker 0:I'll give you an example here. Just in the Milwaukee market, I mean, the median home value is up 7% year over year, but there's some statistics that I've seen that are as high as 20% increase year over year. So let's just say we'll cut it somewhere in the middle 14% or so, 15% If you're looking at that as a year over year increase. Why is that? Is it because Milwaukee's just such an amazing market that everyone just is flooding here because the winters are so awesome? Absolutely not. People are chasing affordability. We've seen some massive drops in California, in New York, even in Florida, and you look at some of those markets. Those markets had seen massive rises and now people are flooding out of those markets into more affordable places and the Rust Belt the Midwest has seen a huge resurgence as far as that goes. So I think that's playing into it. But then you're also looking at in Milwaukee, the median time on the market for a house is 19 days. It's hardly any time at all. Active listings are 1,. Actually this is Milwaukee City, to be specific, and that's still a pretty small supply given the amount of people that are living in the city of Milwaukee. And you look at the state of Wisconsin as a whole, you got eight to 10% increases as an average throughout the counties in Wisconsin, which is wild. And you can overlay that onto a lot of these Midwestern states and see a lot of the same results and I don't know that that's going to go away. I think that it may just continue to increase as people move to. These new markets and you're also looking at new construction is so limited.
Speaker 0:If you're a house builder, specifically I'm talking for starter homes, let's say a three bed, one bath ranch, something that used to be considered a starter home. Who's building those houses anymore? Nobody's building them. Nobody can afford to build them. The builders are all focusing on the more expensive, more extravagant homes, let's say $500,000 and up, and the people that are chasing the starter homes the majority of Americans, let's say the middle class, the lower class they're all chasing the same houses and no one's building new ones. The only thing they're building is more apartments.
Speaker 0:Like, for example, I rent here. I talked about that in a different video. I still rent and I'm looking at okay, if I want I've had starter homes If I want to move back into a starter type home. Right now I'm looking at $300,000, $350,000 for a very basic house that has had no treatment to it since it was built in you know whatever 1960. And that's just crazy to me. But the problem is there's just so much demand for that stuff and because the rates are so high. It's pushing people down into that price range, which was where the starter homes are falling and they're all chasing after the same goods. So you got a bunch of people that are all chasing these starter homes and obviously there's people that are looking for other houses too, but the majority of people are looking for those houses and it's just driving the prices up to astronomical levels.
Speaker 0:You throw on the tariffs, you throw on everything else that's going on in the economy and to build a starter home, I mean there's no way you could get it done for what it used to cost. Back in the day they could build houses for less than $300,000, $400,000 in a lot of cities like Milwaukee. If you overlay that on today's dollars, if it costs them $400,000 or $500,000 to build a three-bed one-bath ranch versus a five-bed two-bath house and you're within $50,000, they're going to build a bigger, more expensive house because that's going to get them their profit. There's not a lot of profit margin in these smaller houses and that's what we're seeing. No one's building them. If you look at the Midwest as a whole, the median listing in the Midwest is about $235,000. So if you compare that to a lot of these other markets out there. It's several hundred thousand dollars less than the median prices in other cities.
Speaker 0:Now my next thought on all this is that the machine wants prices to go higher. And when I say the machine, I'm talking about the lending apparatus that is the US housing market. They want things to go higher. When you look at the appraisals for these houses I'm getting, even for the properties I'm buying I'm never really having any issues with appraisals. But the thing that I've noticed is that there's people that are going out there and they're paying let's say, $50,000 over asking, and they're paying in their own cash to pay for that difference in their appraised value to what the house actually sells for. And the problem with that is, when that house sells, it's not going to show what it appraised for, it's going to show what it's sold for. And this house now becomes a comp and that comp is going to be used for other people financing houses, and it just feeds the machine. So I'll give you an example.
Speaker 0:I go try to buy a house for $500,000. There's a bunch of buyers that want it. So I say you know what I'm going to buy. The bank sends out an appraiser. The appraiser comes back and says oh man, it's actually only worth 500. Even though you offered 550, your choices are to reduce the purchase price, have the buyer cover or the seller cover it somehow, and or you're going to cover it. And so really the only choice is for you to cover, because most sellers are not going to want to reduce their price. I say I really want this house, so I'm going to cover it with my own money. So I bring $50,000 of my own money to cover the difference between the appraisal and what I offered to pay for the house. But now when that house sells that $550,000 number, the bigger number is what's going to get put into the MLS. That's what's going to get put into what the appraisers are using to make their new comps. And this house now is going to be a comp for other houses. Even though the appraisal was low, the sold value is higher and that's going to influence future sales.
Speaker 0:And so when you look at that, that's really feeding a lot of this chaos, because now the banks basically have their handcuffs off and anything goes. The appraisers are trying to do their job maybe, but if you think about it, that's kind of a flawed system because banks are going to a third party to hire out an appraiser. The appraiser is working in a way for the bank to ensure that the value is there, but they also want to get more business. So if they keep denying appraisals and the bank's losing money, they're not going to want to keep using that appraising company and, granted, they don't have a direct tie to do that. But I guarantee you if they found out that they have a real major issue with a certain appraisal company, they could get around that. So when you're looking at that, that's a huge part of this system that's just built for higher prices, just like the stock market in the US.
Speaker 0:Everything is predicated on prices continuously going higher forever, and that is a really dangerous thing. Everybody basically benefits from higher prices If you look at it. I mean larger loan sizes means larger interest payments for the bank. You're getting more tax revenue. If you're a municipality and you're charging based on the assessment, you can justify your assessment based on whatever it's sold for and or the appraisal. And when you're looking at the higher valuations for us on the selling side, now you have more equity and now that money is going to benefit those people to either take into retirement, sell it and go buy a yacht or buy themselves another house, whatever the case may be. And then if you're an agent, you know I love I've got love for agents out there. If you're an agent, you're making more money because you're getting paid on a commission basis. Most people are, some people are getting flat fees, but a lot of people are getting paid on a percentage of the actual sale price. So everybody's benefiting from higher prices, except for those buyers. Really, I think that this is just going to be a trend that continues.
Speaker 0:I don't know that I see it stopping. I know a lot of people want it to stop because they're feeling the pain and they don't know that it's going to stop because it's just chaos right now, at least in a market like mine. You may have to go to one of those hot markets that's now cooling off to try to find a decent deal eventually, but I don't think that's the time right now. A lot of people want to compare today to 2008, and I just don't really know that it shares a lot of similarities. Everybody wants it to because they want prices to come back down, but if you look at today, we have much higher interest rates today than we did in 2008 and the year surrounding it. Everybody has more equity now than they did before and sure that equity could go away.
Speaker 0:But if you look at 2008, from the peak, and say, let's 2006, 2007, 2008,. To the trough 2012, it takes a long time for this stuff to play out. This isn't the stock market. It's not going to happen overnight. So even if we do go into a couple down years or things start to come back to earth which would be great for a lot of people it's going to take a lot of time to play out. It's not going to happen overnight, I think.
Speaker 0:Then you also look at there's no four sellers. Everybody's got so much equity, even if they took a 20% haircut. A lot of people still have so much equity that they don't even care. They're looking at 30 years down the road, they're looking at 20, 10 years down the road, whatever, and they don't really care if they lose 20% in the short term because they're holding for the long term. And if you look at the rental demand, I think that's still really strong too. So there's not a lot of things that I think share similarities between the two timeframes, other than the fact that people just want prices to go down and they happen to be really high right now. The things that caused 2008 to happen were a lot of these, basically derivatives within the housing market, and I don't know that we have a lot of that. We have some of that, for sure, and we have people financing freaking burritos with, you know, with debt online. So there is some of that chaos going on, but I don't know that it's really enough to make this whole system fall apart.
Speaker 0:As far as my strategy goes, what am I doing to try to weather the storm? I've talked about it in a couple other videos, but I'm buying, like cheap single family houses, duplexes, stuff. That's pretty simple, pretty small, not exotic, not very exciting, because I think the prices for the big multifamily stuff no-transcript, not that sexy, because I think that's where affordability is going to flow to. As time goes on, people are going to continue to get priced out of these houses and they're going to face they're going to be faced with the reality that they can only afford $100,000, $150,000, $200,000 house and that's going to drive the prices of the stuff at the lower end of the market higher. The damage that we did in 2020 through COVID and to present day is not going to be reversed overnight. So I'm doubling down on that thesis and that's what I'm riding with for the long term.
Speaker 0:My closing thoughts on this would be you don't have to buy anything right now. No one's putting a gun to your head saying you need to buy a house today, but at the same time, if you're waiting for a crash, you might be waiting for a really long time. None of this stuff happens fast in real estate and if your plan is the market's going to crash by fall and I'm going to be able to go buy something, I think you're going to be disappointed If you don't have to buy something. Maybe it's okay to ride out the storm, but you used to these higher prices and hopefully you have a house that you can draw some equity from. But if you don't, then you got to double down on what's making you money, which is probably your job, and trying to stockpile cash and make good investments. That way you can buy something, because I don't know that the prices are going to come down to meet your income level. You might have to raise your savings and your investments outside of your normal day job to meet the prices, and I know a lot of people don't want to hear that, but that's kind of the data that I'm seeing right now and it may change.
Speaker 0:Like I said, even if it does change, I don't foresee a massive crash overnight. It's going to be three, four or five years, you know, to play out from the top to the bottom. So for now, I think we're just going to play the game with higher prices. That's my thoughts of today. Like I said, I had a conversation with a friend of mine and I was just like man. I couldn't believe that this place went for so much money over asking because it was already an expensive price. But that's my thoughts. I really appreciate anybody that's taking the time to sit here and listen to this whole way through. Let me know what you think. What's it look like in your market? What are your thoughts on the market in general? I know I've interacted with some people in the comments now, so I'm starting to get a couple, which is awesome. That's my favorite.